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TMI Blog2008 (9) TMI 92X X X X Extracts X X X X X X X X Extracts X X X X ..... (Cal) and in the decision of Hamilton and Co. Pvt. Ltd. Vs. Commissioner of Income Tax [1992] 194 ITR 391(Cal). The reference has been made to resolve the conflict between the said two decisions of the Hon'ble Division Bench. The matter has been referred before the Larger Bench to resolve the conflict in respect of the said two decisions. 2. The question relates to whether additional or extra rent attributable to preceding years of account which could not be taxed under Section 22 of the Act should be taxed under the head "income from other sources". The said question was decided by the Hon'ble Division Bench in the case of Hamilton and Co. Pvt. Ltd. [1992] 194 ITR 391(Cal) when Their Lordships observed ( page 394): "The question is whether the arrears of rent relating to another previous year are taxable as income from house property of the later previous year in which they were received. If the arrears of rent of past years are not part of the annual rent of the year of account in which such arrears are received, then the only rational interference should be that the annual rent or annual rents of the past year or years to which they pertain can be brought to ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there can be no difficulty; it conveys a clear and definite meaning, and I can think of no expression which makes its meaning plainer than the word 'receiving' itself. The words 'accrue' and 'arise' also are not defined in the Act. The ordinary dictionary meanings of these words have got to be taken as the meanings attaching to them. 'Accruing' is synonymous with 'arising' in the sense of springing as a natural growth or result. The three expressions 'accrues', 'arises' and 'is received' having been used in the section, strictly speaking 'accrues' should not be taken as synonymous with 'arises' but in the distinct sense of growing up by way of addition or increase or as an accession or advantage; while the word 'arises' means comes into existence or notice or presents itself. The former connotes the idea of a growth or accumulation and the latter of the growth or accumulation with a tangible shape so as to be receivable. It is difficult to say that this distinction has been throughout maintained in the Act and perhaps the two words seem to denote the same idea or ideas very similar, and the difference only lies in this that one is more appropriate than the other when applied to pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise expressed debitum in praesenti, solvendum in futuro; See W. S. Try Ltd. v. Johnson [1946] 1 All ER 532 (CA) and Webb v. Stenton, Garnishees, (11 QB 518). Unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he had acquired a right to receive the income or that income has accrued to him. The word 'earned' even though it does not appear in section 4 of the Act has been very often used in the course of the judgments by learned judges both the High Courts as well as the Supreme Court. (Vide CIT v. Ahmedbhai Umarbhai and Co. [1950] 18 ITR 472 (SC) and CIT v. K.R.M.T.T. Thiagaraja Chetty and Co. [1953] 24 ITR 525 (SC). It has also been used by the Judicial Committee of the Privy Council in Commissioners of Taxation v. Kirk [1900] AC 588. The concept, however, cannot be divorced from that of income accruing to the assessee. If income has accrued to the assessee it is certainly earned by him in the sense that he has contributed to its production or the parent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be paid on the basis of the agreement entered into by the parties. A claim made by a landlord for enhancement of rent cannot, thus, be said to be an amount receivable within the meaning of section 23(1) of the Act. A claim or a demand by itself does not come within the purview of the word "income received or receivable" and keeping in view the provision of section 5 of the Income-tax Act there cannot be any doubt whatsoever such income either received or deemed to be received, accrued or arose or is deemed to accrue or arise to him or accrues or arises in India or accrues or arises outside India during the previous year. An agreement entered into between the parties in terms whereof the quantum of rent is determined with retrospective effect, in our considered view, does not come within the purview of any of the provisions of section 5 aforementioned." 8. It is true that a system of accountancy followed by the assessee may be a relevant factor, but even in a mercantile system of accounting income would be assessed in respect of such amount which the assessee had a right to receive and/or became accrued. A mere claim or a mere demand cannot be treated as an income within the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant assessment year and, therefore, there cannot be any question of escapement of income of the assessee for the said year and, hence, the Assessing Authority cannot have any reason to believe that any income of the assessee for representing the enhanced rent for the Assessment Year 1989-90 has escaped assessment. 10. Dr. Debi Pal, Learned Senior Advocate appearing on behalf of the appellant, submitted that in the case of Hope India Ltd. reported in [1999] 238 ITR 740, the Division Bench of the Calcutta High Court considered the question as to whether arrears of rent as a result of the enhancement of rent subsequent to an agreement with retrospective effect, the enhanced rent can be treated to be the income liable to tax for the past years in respect of which the enhancement has been allowed with retrospective effect. In the said case the question before the Division Bench was as follows(page 743):- "Whether, on the facts and in the circumstances of the case, and an interpretation of the documents in respect of rent at 2/3rds of the house property at 18, Rabindra Sarani, Calcutta, for the assessment year 1984-85 and Section 23(1) of the Income Tax Act, 1961, the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of Section 5 of the Act. 12. Dr. Pal further contended that the Division Bench considered the earlier decision of the Division Bench of the Calcutta High Court in the case of Hamilton's case reported in [1992]194 ITR 391. The High Court referred to the question in Hamilton's case [1992]194 ITR 391(Cal) at page 747. The question in the Hamilton's case[1992]194 ITR 391(Cal) was as follows (page 392):- "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the additional or extra rent attributable to preceding years of account which could not be taxed under Section 22 of the Act should, instead, be taxed under the head 'income from other sources'." 13. The Division Bench in Hope India's case [1999] 238 ITR 740 (Cal) points out that the question which has been raised in Hope India's case [1999] 238 ITR 740 (Cal) was not at all the question in the case of Hamilton's case [1992] 194 ITR 391(Cal). It will appear that in Hamilton's case [1992] 194 ITR 391(Cal) it was assumed that the additional or extra rent which could not be taxed under Section 22 of the Act should, instead, be taxed under the head 'income from other sour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... andmark decision on the question as to when income can be said to be accrue or arise which is equated with the concept of income receivable. In E.D Sassoon Ltd. Vs. CIT [1954] 26 ITR 27 at page 50 the Supreme Court quotes with approval the decision of the Special Bench of the Calcutta High Court in Rogers Pyatt Shellac Co. Vs. Secretary of State, reported in [1925] 1 ITC 365(Cal); AIR 1925 Cal. 34 observed that the word 'accrue' and 'arise' also are not defined in the Act. The Supreme Court thereafter held that two words 'accrue' and 'arise' are used in contradiction to the word 'receive' and indicate a right to receive. They represent a state anterior to the point of time when the income becomes receivable and connote a character of the income which is more or less inchoate. The Supreme Court, therefore, at page 51 of the judgment held that the income may accrue or arise to an assessee, if the assessee acquires a right to receive the income during the previous year, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic concept is that he must have acquired a right to receive the income. Keeping in view the aforesaid princ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her sources as they retain the character of income from house property. It is also difficult to include arrears of rent in the relevant years as they were not receivable during those years. Therefore, it is proposed to insert a new Section 25B in the Income-Tax Act to provide that if any arrears or rent, other than what has already been taxed under Section 23, are received in a subsequent year, the same will be taxed in the year of receipt whether the property is owned by the assessee in the year of receipt or not. A deduction of sum equal to one-fourth of such amount of rent shall be allowed towards repairs and collection of rent. The proposed amendment will take effect from 1 st April, 2001 and will accordingly apply in relation to assessment year 2001-02 and subsequent years." 15. Dr. Pal further contended that the Memorandum also pointed out that before the introduction of Section 25B the arrears of rental income from house property could not be taxed under the head 'income from house property' nor could it be taxed under the head 'income from other sources'. To obviate such difficulty the said Section 25B was introduced. However, the Memorandum also pointed out that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 89-90, the question of escapement of income does not arise at all and the condition precedent for the assumption of jurisdiction under Section 147 of the Act does not exist and the writ Court can always quash such a notice. The Supreme Court in catena of cases had quashed the notice under Section 147 when the Assessing Authority had no jurisdiction to issue the said notice as the condition precedent for the assumption of jurisdiction did not exists and was not satisfied. 19. He further contended that if the Assessing Authority has no jurisdiction to reopen the proceeding as the enhanced rent could not be treated as the income for the assessment year 1989-90. The notice and subsequent assessment also have been quashed and he relied upon the case reported in Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191(SC) at page 208. Therefore, Dr. Pal submitted that since the notice issued under Section 147 of the said Act was not satisfied, the assessment pursuant to the said notice was issued, quashed by the order. 20. On the contrary, Mr. D. K. Shome, Learned Senior Advocate appearing on behalf of the respondent in the matter, submitted that the challenge in this Mandamus App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and reject the other". It was further contended on behalf of the appellant that "there was no inconsistency in the view taken by the subsequent Division Bench presided over by Justice S. B. Sinha". 26. Mr. Shome further pointed out that the sole question of law in Hamilton's case [1992] 194 ITR 391(Cal) at page 392 is as follows :- "Whether, on the facts and the circumstances of the case, the tribunal was right in holding that the additional or extra rent attributable two preceding years of account which could not be taxed under Section 22 of the Act should, instead, be taxed under the head "income from other sources"." 27. Mr. Shome further pointed out that the sole question of law in Hope India's case [1999] 238 ITR 740 (Cal) at page 743 is as follows :- "Whether, on the facts and in the circumstances of the case, and an interpretation of the documents in respect of rent at 2/3rds of the house property at 18, Rabindra Sarani, Calcutta, for the Assessment Year 1984-85 and Section 23 (1) of the Income-Tax Act 1961, the income from the aforesaid house property on the basis of enhanced rent sanctioned and agreed after the close of the previous year to be paid by the vario ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled on the sole ground that retrospective increase of rent cannot amount to escapement of income. 33. It is submitted that the present reference is strictly not necessary in view of the fact the questions of law sought to be answered in Hamilton's case [1992] 194 ITR 391(Cal) were different and that each case must be understood and limited to the facts of that case as observed by S. B. Sinha, J. in Hope India's case [1999] 238 ITR 740 (Cal) itself. 34. Mr. Shome further contended that Chapter II deals with basis of charge. Section 4 is the charging section, whereas Section 5 is the computation provision. Section 5 refers to "received, deemed to be received, accrues, arises or deemed to accrue or arise". The deeming provisions are built into Section 2 (45) read with Section 5. Section 22 refers to "annual value of property" whereas Section 22 is the charging provision, Section 23 is the computation provision which deals with determination of annual value. Section 23 (1) (a) refers a notional concept of rent as it states that the sum for which the property might reasonably be expected to let from year to year. Section 23 (1) (b) refers to actual rent received or receivable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred before the Special Bench by the Hon'ble Division Bench on the ground that there is a direct conflict of judgment between two Division Benches and, accordingly, the Hon'ble Division Bench thought it fit and referred the matter before the Larger Bench so that the principle of the subject can be laid down. 40. It is also to be noted that Dr. Pal at that point of time tried to distinguish the said judgment in the Hamilton's case [1992] 194 ITR 391(Cal) with the judgment of Hope (India) Ltd. [1999] 238 ITR 740 (Cal) and submitted that there is no inconsistency in the view taken by the subsequent Division Bench in the Hope (India) Ltd. case [1999] 238 ITR 740 (Cal) and in this subsequent decision the Hon'ble Division Bench duly considered the judgment delivered in the Hamilton's case [1992] 194 ITR 391(Cal) and, according to Dr. Pal, the judgment in Hope (India) Ltd.'s case [1999] 238 ITR 740 (Cal) holds the field. 41. We have also heard the learned Counsel for the parties extensively and after going through the said decisions of the Hon'ble High Court and after taking into consideration the facts of this matter, it appears to us that in Hamilton's case [1992] 194 ITR 391(C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was no inconsistency in the view taken by the Hon'ble Division Bench and further in Hope India's case [1999] 238 ITR 740 (Cal) the Hon'ble Division Bench also considered the judgment delivered in Hamilton's case [1992] 194 ITR 391(Cal) and he further contended before the Hon'ble Division Bench that the amendments which had been brought about in Section 25B was expressly made prospective with effect from 1 st April, 2001. 42. Therefore, we answer the reference as follows : 43. We do not find that there is any conflict in those two judgments. 44. Before we part, we do find that the moot question in this matter that the notice issued under Section 147 of the said Act whether issued by the department is without jurisdiction and further the said question would only apply in a case where the Assessing Authority has reason to believe that there has been any escapement of income. 45. According to Dr. Pal, the enhanced rent cannot be treated as income of the Assessment Year 1989-1990. Therefore, the question of escapement of income does not arise at all and the condition precedent for the assumption of jurisdiction under Section 147 of the Act does not exist and, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf assessment tax with interest u/s. 234B and 234C of the I.T. Act has been deposited both for the assessment years 1993-94 and 1994-95, the assessee will not incur any further liability on account of interest for those two years." 48. It further appears that the assessment was completed under Section 143(1) of the Act by accepting the Assessee's Return and intimation was duly sent to the assessee. Thereafter the Assistant Commissioner of Income Tax after recording the reasons issued the notice under Section 147 of the said Act. The reasons which were stated are as follows : "Reasons recorded for initiating proceeding U/s. 147. The assessee company in deriving its income mainly from house property. The Major portion of its - building at 4, Brabourne Road, Calcutta in occupied by Government of India through Estate Manager. The Government has enhanced rent from Rs. 4/- per Sq. ft. to Rs. 8/- per Sq. ft. with retrospective effect from 1-09-1987 on 19-3-94 as per Assessee's letter dated 25-4-94 placed on record. This has resulted in escapement of income for Assessment Year 1989-90 to the time of Rs. 33,46,000/- Issue notice under Section 148 read with Section 147 (a) immediatel ..... X X X X Extracts X X X X X X X X Extracts X X X X
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