2011 (2) TMI 144 - HC - Income Tax

Presumptive rate of tax - Turnover - Inclusion of Interest income - Business income vs. other sources - The assessee disclosed the payment of Rs.40,80,577/- towards interest received from the Executive Engineer. From the said payment, the tax was deducted at source at the rate of 23% i.e. Rs.9,24,630/-. Out of the aforesaid amount of Rs.40,80,577/-, a sum of Rs.38,15,007/- was declared to be in the nature of business receipts on which the assessee had applied the presumptive rate of 8% under Section 44AD of the Act, thereby declaring an income of Rs.3,05,206/- under the head business . The balance of Rs.2,96,568/- (Rs.2,65,500/- on account of interest on securities and Rs.31,068/- from FDR interest) was declared by the assessee under the head income from other sources as arising from securities. The Assessing Officer vide order dated 26.2.2001 while treating the amount of Rs.40,80,577/- as business income, assessed the income of the assessee at Rs.40,99,645/ - Held that - the Apex Court in Commissioner of Income Tax v. Hindustan Housing and Land Development Trust Ltd. 1986 -TMI - 5944 - SUPREME Court had held that where the lis is pending, the amount does not accrue or arise to the assessee - Decided in the favour of the assessee

Summary

Issues:
1. Taxability of amount received by the assessee in pursuance of an award of the Arbitrator pending finality.
2. Interpretation of mercantile system of accountancy in relation to accrual of income.
3. Comparison of legal precedents on taxability of disputed amounts.

Issue 1:
The appeal raised the question of whether the amount received by the assessee in pursuance of an award of the Arbitrator, which had not attained finality due to being under challenge before a Court, should be subject to taxation. The Tribunal, citing the decision in Commissioner of Income Tax v. Hindustan Housing and Land Development Trust Ltd., held that when a dispute is pending, the amount does not accrue or arise to the assessee. Consequently, the appeal of the revenue was dismissed in favor of the assessee.

Issue 2:
The assessment involved consideration of the mercantile system of accountancy followed by the assessee. Under this system, income is deemed to accrue or arise during the relevant year. The apex Court's decision in Hindustan Housing and Development Trust's case was referenced, where it was established that no absolute right to receive compensation had accrued to the assessee until finalization of the dispute, despite following the mercantile system. The judgment affirmed that income accrues to the assessee upon finalization of the matter, supporting the order of the CIT(A) as upheld by the Tribunal.

Issue 3:
The revenue relied on various legal precedents, including Commissioner of Income-Tax v. Thirumalaiswamy Naidu and Sons, Commissioner of Income-Tax v. United Provinces Electric Supply Company, Commissioner of Income-Tax v. Polyflex (India) Pvt. Ltd., and Commissioner of Income-Tax v. Smt. M. Sarojini Devi, to argue for the taxability of the amount in question. However, the court distinguished these cases, noting that they primarily dealt with the cessation of liability under Section 41 of the Act, which did not align with the circumstances of the present case. Consequently, the question of law was decided against the revenue, and the appeal was dismissed in favor of the assessee.