2015 (10) TMI 1010 - HC - Income Tax

Accrual of income - Taxability of enhanced award pronounced by the arbitrator - whether is to be taxed during the previous year, relevant to the assessment year in which the finality of the decision of the Hon ble High Court of Andhra Pradesh, is delivered? - Whether the Appellate Authorities were correct in holding that the interim award of ₹ 80 lakhs received by the assessee pursuant to the order of Hon ble Andhra Pradesh High Court on 16/11/2001 and 24/12/2001 is not liable to tax during the current assessment year 2002-03 as the same had not accrued and the same will be liable to tax only when the final award is passed by the Andhra Pradesh High Court ? Held that - As emerges from the judgment of COMMISSIONER OF INCOME TAX , WEST BENGAL II VS . HINDUSTAN HOUSING AND LAND DEVELOPMENT TRUST LTD 1986 (7) TMI 10 - SUPREME Court when an assessee receives money, either under an award or by a decree of the court, or under an award passed by the arbitrator, if the amount paid to him is not in dispute, then that amount represents his income. He should offer it to tax in the previous year of the date of payment of the said amount. But if the amount due to him is in dispute and it is subject-matter of a litigation and during the pendency of the litigation, if any interim order is made for payment of the said amount, the said payment is subject to the final result of the said proceedings. In the event the assessee looses the legal battle, the amount received by way of interim payment, has to be repaid. The amount to which he is entitled to, out of the disputed amount, would crystallize only when the litigation ends and payment is made after the finality of the litigation, then that amount is to be offered to tax in the previous year of the date of payment. Merely because by virtue of an interim order, with or without conditions, some payment is made for the purpose of Income tax Act, it would not constitute income and therefore there is no liability to pay tax on the day such interim payment is received. Therefore, in the instant case, the assessee is liable to pay the amount covered under the cheques, only after a final conclusion of the dispute before the Andhra Pradesh High Court, as rightly held by the Appellate Authorities. Substantial question of law is answered in favour of the assessee and against the Revenue.

Summary

Issues:
1. Taxability of amount received by the assessee in pursuance of an arbitrator's award.
2. Interpretation of when income accrues for taxation purposes.
3. Applicability of tax liability on interim payments during pending litigation.

Analysis:

Issue 1: Taxability of amount received by the assessee in pursuance of an arbitrator's award
The Revenue appealed against the Tribunal's decision, arguing that the amount received by the assessee in response to the arbitrator's award should be taxed in the assessment year when the High Court's decision is finalized. The Tribunal and the First Appellate Authority had ruled in favor of the assessee, stating that the amount is not taxable until the finality of the decision by the High Court of Andhra Pradesh.

Issue 2: Interpretation of when income accrues for taxation purposes
The High Court analyzed various judgments, emphasizing that income tax is not levied on a mere right to receive compensation. Income accrues only when there is a tangible obligation to pay an ascertained amount. The court cited the case of COMMISSIONER OF INCOME TAX, WEST BENGAL - II VS. HINDUSTAN HOUSING AND LAND DEVELOPMENT TRUST LTD, highlighting that enhanced compensation accrues when it becomes payable, i.e., when the court accepts the claim.

Issue 3: Applicability of tax liability on interim payments during pending litigation
The court clarified that if the amount due to the assessee is in dispute and subject to litigation, any interim payment made during the proceedings is contingent upon the final outcome of the litigation. The court held that interim payments do not constitute income for tax purposes until the litigation concludes, and the final payment is made. Therefore, the assessee is only liable to pay tax on the amount covered under the cheques after the final conclusion of the dispute before the Andhra Pradesh High Court.

In conclusion, the High Court dismissed the Revenue's appeal, stating that the substantial question of law favored the assessee. The court affirmed that the amount received by the assessee was not taxable until the final resolution of the dispute before the High Court.