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TMI Blog2016 (1) TMI 935X X X X Extracts X X X X X X X X Extracts X X X X ..... ks executed by the Contractor is unsatisfactory. Therefore, aggrieved by the action of DGNP, the assesse contractors referred the matter to the Arbitrator as per the Arbitration clause in the contract agreement. The arbitrator passed arbitration award on 31.3.2000 and the matter was decided in favour of the assesse contractor by awarding an amount of Rs. 7.99 crores along with an interest of Rs. 9.75 crores. Aggrieved by the arbitration award, the DGNP challenged the arbitration award before the District court, Visakhapatnam. The Hon'ble District Court, Visakhapatnam vide its order dt.10.12.2002 confirmed the arbitration award passed by the arbitrator. Subsequently, the assessee company filed an execution petition before the district court, Visakhapatnam for an amount of Rs. 14.14 crores. Meanwhile, the DGNP preferred an appeal before the Hon'ble High Court of Andhra Pradesh against the order of the District court. The Hon'ble High Court of Andhra Pradesh vide its order dated 1.4.2003 passed an interim order and directed the DGNP to deposit a sum of Rs. 4,77,81,305/- with the principal district judge, Visakhapatnam, pending disposal of the case. The Hon'ble Andhra P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 11.3.2010 declaring loss of Rs. 2,57,409/-. The case was taken up for scrutiny. During the course of assessment proceedings, the assessing officer noticed that the assessee has not offered the interim amount received on account of arbitration award to tax, issued a show cause notice and asked to explain why the amount of award received for both the assessment years i.e. 2005-06 & 2008-09 should not be treated as its income. In response to show cause notice, the assessee submitted that it had withdrawn the amounts as per the directions of the Hon'ble High Court of Andhra Pradesh by furnishing equal amount of security. Therefore, the same is treated as liability in the books of accounts of the assessee company as the arbitration proceedings was not final at the time of receipt of amount. Further, it is submitted that till date the issue has not reached finality and the entire amount is disputed, because the DGNP have filed further appeal against the order of the arbitration. The assesse, further, submitted that in the event of the judgement goes against the assessee before the Supreme Court/Andhra Pradesh High Court, the disputed amount should be paid back to the principals. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. Appellant submits that the Commissioner of Income Tax (Appeals) is not justified in holding that the proceedings initiated under section 148 are valid and attracted in the case of the appellant. 2.a. Appellant submits that the Commissioner of Income Tax (Appeals) is not justified in holding that the Interim amount received amounting to Rs. 3.00 crores by way of withdrawal against deposit pending dispute in respect thereof before hon'ble Court of Law, is liable to be taxed on receipt basis, the same not having accrued at all to the appellant and only being a contingent receipt. 2.b. Without prejudice to the ground urged under 2.a. above, appellant prays that the Interim amount received amounting to Rs. 3.00 crores is only a capital receipt not liable to levy of income tax treating the same as a revenue receipt. 2.c. Without prejudice to the above Grounds urged under 2.a. and 2.b. above, appellant submits that the Commissioner of Income Tax (Appeals) is not justified in rejecting the contention of the appellant that interim award comprising of interest element should be subjected to levy f income tax on accrual basis only but not on receipt basis. 3. Appellant submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts cannot be taxed in the year under consideration on receipt basis. The A.R. in support of his arguments relied upon the following judgements: 1. CIT Vs. Yatindra & Company (2005) 149 Taxman 281 2. Hindustan Housing & Land Development Trust Vs. CIT (1986) 161 ITR 524. 3. CIT Vs. Devata Chandraiah & Sons (1985) 154 ITR 893 (AP) 4. CIT Vs. Abdul Mannan Shah Mohammed (2001) 248 ITR 614 (Bombay) 5. CIT Vs. Janata Cooperative Sugar Mills Ltd. (1998) 233 ITR 635 6. DSL Enterprises Pvt. Ltd. Vs. NC Chandratre Vs. ITO & others (2013) 84 DTR (Bom) 451 7. Commissioner of Wealth Tax Vs. Nand Lal Mohan Lal etc. (2010) 232 CTR 185 8. CIT Vs. Sarvatra Road Runners Pvt. Ltd. (2008) 301 ITRnm 443. 7. On the other hand, the Ld. D.R. strongly supported the orders of the CIT(A). The Ld. D.R. further argued that the A.O. has rightly reopened the assessment, as there is a sufficient material before the A.O. to form a belief that income chargeable to tax has been escaped assessment from the information that the assessee has received interim amount. The D.R. further submitted that as far as the taxability of arbitration amount is concerned, in view of the judgements of the Hon'bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he validity of reopening. Therefore, we upheld the reopening of the assessment and reject the grounds raised by the assessee. 9. The next issue, arises for our consideration is whether the CIT(A) is right in confirming the additions made by the A.O. towards interim amount received on account of arbitration award. The factual matrix of the case is that the assessee was awarded contract by the DGNP in the year 1991. There was a dispute cropped up between the parties, therefore, the DGNP has cancelled the contract. Aggrieved by the decision of the DGNP, the assessee has referred the matter to the arbitration. The arbitrator vide his order dated 31.3.2010 decided the issue in favour of the assessee and awarded an amount of Rs. 7.99 crores along with interest of Rs. 9.75 crores. The DGNP has challenged the arbitration order before the district court. The district court vide its order dated 22.10.2002 confirmed the arbitration award and dismissed the appeal filed by the DGNP. The DGNP filed further appeal against the order of the district court, before the Hon'ble A.P. High court. Mean time the assessee company filed a execution petition before the Hon'ble A.P. High Court. The H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court. The Hon'ble A.P. High Court neither stayed the operation of the arbitration award nor granted any stay for further proceedings. Therefore, until the arbitration amount is finally ascertained or determined, the amount received by the assessee cannot be considered as income in the year of receipt. Therefore, in our view, it would be taxable as a business income in the previous year in which the said amount is finally determined. It is a trite law that income can be held to be accrued, only when the assessee acquires absolute right to receive the said income. In the instant case, the court allowed the assessee to withdraw the portion of arbitration amount with a condition that the assessee should furnish adequate security to cover the amount and also on furnishing the personal guarantee of the Directors. Therefore, in our opinion, the amount received by the company after furnishing security and also on the condition of a personal guarantee of Directors is only a liability and not a income. Accordingly, the withdrawal of the amount by the assessee is contingent in nature, because there is always a possibility of the said amount being refunded by the assessee in the event ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the assessment year 2005-06 & 2008-09. 13. The A.R. of the assessee contended that the assessing officer has observed that the assessee is following mercantile system of accounting. Under mercantile system of accounting, all income and expenditures should be recognized when the income is accrued. Therefore, the impugned amount received by the assessee is not taxable for the year under consideration, because the impugned amounts were not accrued in both the assessment years. If at all it is taxable, it should be taxed in the year 2010-11, when the arbitration award was passed. We find force in the arguments of the Ld. A.R. that, the A.O. himself admitted that the assesse is following mercantile system of accounting, therefore, these receipts cannot be taxed on receipt basis. The correct date is to be reckoned for recognizing the said receipt is, when the arbitration award is passed i.e. on 13.3.2010 which comes under the assessment year 2010-11. Therefore, in our opinion, if at all the amount is taxable, it can be taxed either in the year of arbitration award was passed or in the year the arbitration proceedings was finally upheld by the High court i.e. assessment year 2015-16. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee counsel. The assessee counsel, at the time of hearing relied upon plethora of case laws in support of his contentions. The A.R. relied upon the judgment of Hon'ble Supreme Court in the case of Hindustan Housing and Land Development Trust Vs. CIT 161 ITR 524, wherein the Hon'ble Court observed as under: "Held, affirming the decision of the High Court, that although the award was made by the arbitrator on July 29,1955, enhancing the amount of compensation payable to the respondent, the entire amount was in dispute in the appeal filed by the State Government. And the dispute was regarded by the court as real and substantial because the respondent was not permitted to withdraw the amount deposited by the State Government without furnishing a security bond for refunding the amount in the event of the appeal being allowed. There was no absolute right to receive the amount at that stage. If the appeal were allowed in its entirety, the right to payment of enhanced compensation would have fallen altogether. The extra amount of compensation of Rs. 7,24,914/- was not income arising or accruing to the respondent during the previous year relevant to the assessment year 1956-57. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the fixed deposit placed with Indian Bank. (Para 11) The interest on the fixed deposit does not represent a crystallised entitlement of the assessee during the financial year in question. The assessee would have an indefeasible entitlement in respect of the principal amount of Rs. 65 crores as well as the interest earned only if the proceedings which are pending in regard to the challenge to the arbitral award conclude in its favour. Unless those proceedings attain finality, the assessee would be subject to a possible order of restitution not merely in respect of the principal amount of Rs. 65 crores, but also the interest which has been generated on the amount withdrawn in view of the mandate of S. 144 of the CPC, 1908 to provide restitution if a decree is modified in appeal. In that view of the matter, it would be wholly unreasonable to deduct tax at source on an amount which has not accrued to the assessee as income during the financial year in question, the entitlement of the assessee being contingent on the outcome of the challenge to the arbitral award. Moreover, it has also not been disputed on behalf of the assessee and its fairly conceded by counsel for the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alf of the agriculturist principals and the same did not constitute trading receipts in the hands of the assessee. In any event, since the assessee followed the mercantile system of accounting which created a liability to repay the sales tax to its principals, as and when it was refunded, the same could not be included in its income." 20. Now coming to the case laws relied upon by the Ld. DR. The Ld. DR relied upon the Hon'ble Supreme Court judgement in the case of CIT Vs. Ghansham (HUF) (2009) 315 ITR 1. The Hon'ble Supreme Court in the above case held as under: "Under s. 45(1), profits or gains arising from the transfer of a capital asset effected in the previous year is taken to be the income of the previous year in which the transfer took place and such profits are chargeable to tax under the head "Capital gains". However, it was noticed that in cases where capital gains accrued or arose by way of compulsory acquisition, the additional compensation stood awarded in several stages by different appellate authorities which necessitated rectification of the original assessment at each stage. To provide for rectification of the assessment of the year in which capital gain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t subject to adjustment, if any, under s. 155(16), later on. Hence, the year in which enhanced compensation is received is the year of tax ability. Consequently , even in cases where pending appeal , the Court/Tribunal/authority before which appeal is pending, permits the claimant to withdraw against security or otherwise the enhanced compensation (which is in dispute), the same is liable to be taxed under s. 45(5). This is the scheme of s. 45(5) and s. 155(16). Even before the insertion of s. 45(5)(c) and s. 155(16) w.e.f. 1st April, 2004, the receipt of enhanced compensation under s. 45(5)(b) was taxable in the year of receipt which is only reinforced by insertion of cl. (c) because the right to receive payment under the 1894 Act is not in doubt. CIT vs. Ghanshyam (HUF) (judgment of the Punjab & Haryana High Court dt. 16th May, 2007 in IT Appeal No. 222 of 2005), Chandiram & Ors. Vs. CIT (2008) 217 CTR (P&H ) 113 and CIT vs. Dehradun Tea Co.(judgment of the Uttaranchal High Court dt. 23rd March, 2007 in IT Appeal No. 117 of 2003) set aside; CIT vs. Hindustan Housing & Land Development Trust Ltd. (1986) 58 CTR (SC) 179 : (1986) 161 ITR 524 (SC) distinguished. 21. The Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment year to the financial year, in which the decree was passed, even though the amount under the decree may not have been actually paid or received by the assessee. In the scheme of the IT Act, i.e. taxable event is on 'accrual of income" and not on actual receipt thereof. Pendency of litigation in respect of an amount or price due has no relevancy so far as the taxability of such accrued income is concerned. The likelihood of the income being reduced in the subsequent assessment year as a result of the litigation may give rise to resort to other remedies available in the Act for rectification and refund of the tax, but on that ground it cannot be held that no income had accrued to the assessee for the relevant assessment year. The liability to pay income-tax arises in the relevant financial year on accrual of income in that year and if the income is ascertainable and quantified, it can be brought to tax in the relevant assessment year. Therefore, in the facts and circumstances of this case, the Tribunal was not justified in holding that no income accrued to the assessee under s. 41(2) of the IT Act in the asst. yr. 1970- 71.- CIT vs. Sheshappa Hegde (1984) 39 CTR (Kar) 17 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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