1986 (2) TMI 119 - AT - Income Tax

Summary

Issues Involved:
1. Whether the sum of Rs. 1,21,139 was a trading receipt.
2. Whether the sum of Rs. 1,24,051 was assessable as income of the assessee for the assessment year 1981-82 on receipts basis.

Issue-wise Detailed Analysis:

1. Trading Receipt:
The first issue revolves around whether the sum of Rs. 1,21,139 received by the assessee qualifies as a trading receipt. The assessee, a contractor, had completed a contract with the State of Rajasthan and later claimed additional amounts due to disputes. The arbitrator awarded the assessee Rs. 1,21,139 as compensation for the work done, which was later contested by the State Government. The Civil Judge made the award the rule of Court, but the High Court stayed the execution of this judgment, requiring the amount to be deposited in Court. The assessee withdrew the amount by furnishing a bank guarantee. The Income Tax Officer (ITO) taxed this amount as income for the assessment year 1981-82, arguing that the assessee followed a cash system of accounting, making the receipts taxable in the year received. The CIT(A) upheld this view, stating that the right to receive the amount accrued when the award was made the rule of Court, and the subsequent appeal did not suspend this right. However, the Accountant Member of the Tribunal disagreed, asserting that the amount was burdened with encumbrances due to the ongoing litigation, making it a tentative receipt rather than income. The Judicial Member, on the other hand, believed the amount constituted income as the assessee had deposited it in a fixed deposit, indicating ownership.

2. Assessable Income:
The second issue concerns whether the sum of Rs. 1,24,051, representing interest awarded by the arbitrator, was assessable as income for the assessment year 1981-82. The ITO included this amount in the assessee's income, arguing that under the cash system of accounting, receipts become income when received. The CIT(A) agreed, stating that the interest accrued when the award was made the rule of Court, and the subsequent appeal did not affect this accrual. The Accountant Member, however, contended that the interest was also burdened with encumbrances due to the ongoing litigation, making it a tentative receipt. The Judicial Member believed the interest was taxable as the assessee had received it.

Conclusion:
The third Member of the Tribunal sided with the Accountant Member, concluding that the amounts received by the assessee were burdened with encumbrances due to the ongoing litigation, making them tentative receipts rather than income. The High Court's stay order and the requirement for a bank guarantee indicated that the assessee's right to the amounts was contingent on the outcome of the litigation. Therefore, the amounts could not be taxed as income for the assessment year 1981-82. The matter was referred back to the regular Bench for disposal in accordance with the majority opinion.