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TMI Blog2023 (12) TMI 285X X X X Extracts X X X X X X X X Extracts X X X X ..... sources provides for charging to income tax, income of every kind which is not chargeable for income tax under any of the heads specified in Section 14, items A to E. The Appellant is a company governed by the Indian Companies Act, 1956 (now Companies Act, 2013) and maintains its books of accounts on mercantile basis. Section 5(1)(b) of the Act provides for scope of total income to include all income which accrues or arises or is deemed to accrue or arise in India during such year. The words accrue or arise have different meanings attributed to them while the former connotes the idea of a growth or accumulation, the latter connotes the idea of crystallization of the former into a definite sum that can be demanded as a matter of right. A person does not have a legal right to receive the income by merely earning of income. Although, earning of income is a necessary pre-requisite for accrual of income, mere earning of income without right to receive the same does not suffice. A person may be said to have earned his income in the sense that he has contributed to its production by rendering service and the parenthood of the income can be traced to him but in order that the income that m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd sub-judice before the Small Causes Court. The Appellant had informed the Revenue and the IDBI that the garnishee proceedings are illegal because post-termination no rent is due and payable by IDBI to the Appellant. This fact has been missed out by the Tribunal in coming to its conclusion. Even otherwise, merely because a party to a civil dispute to protect its rights makes a payment to the Income Tax Department pursuant to garnishee proceedings, it would not amount to subsistence or existence of the sub-lease agreement between the Appellant and the IDBI for bringing to tax Rs. 3,42,720/- per annum as income for the assessment year under considerations. In our view, the Tribunal has not correctly appreciated the facts of the Appellant's case and the effect of the civil dispute pending between the Appellant and the IDBI on the income tax proceedings. Revenue is not justified in bringing to tax sum as accrued income for the assessment year 1986-87 and for the other years, which are subject matter of appeal before this Court in appeal. - G.S. KULKARNI JITENDRA JAIN, JJ. For the Appellant : Ms. Shobha Jagtiani, a/w. Ms. Sneha Agicha, i/by D.M. Haresh Co., For the Respondent : M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Appellant and the IDBI for various breaches alleged to have been committed by the IDBI. This led to the Appellant terminating the sub-lease agreement on 14th September 1981, and, thereafter, the Appellant refused to accept the rent from IDBI post-termination. In the year 1981, IDBI filed a Declaratory Suit No. 4560 of 1981 in the Small Cause Court and on 13th October 1981 obtained injunction against the Appellant from terminating the sub-lease agreement. On 19th March 1984, the Revenue issued a garnishee notice to IDBI under Section 226(3) of the Income Tax Act (for short the Act ) with respect to outstanding tax arrears of the Appellant directing IDBI to pay the rent to the Income-tax department. The Appellant informed the Revenue by letter dated 16th July 1984, that since the sub-lease agreement has been terminated, there was no rent due and payable by IDBI to the Appellant and, consequently, the garnishee proceedings are illegal. The copy of this letter was also sent to IDBI under a cover of letter dated 31st July 1984. Also the Appellant by its letter dated 9th October 1985 and 14th July 1986 addressed to the IDBI reiterated about the termination recording that IDBI should n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e with power to take possession thereof and also to construct and complete construction thereon. (g) that pending the hearing and final disposal of the above suit, the Defendants, their servants and agents should be restrained by an order and injunction of this Honourable Court from in any manner dealing with or disposing off or selling or alienating or encumbering or parting with possession thereof or inducting any third party in the said Rear Tower building or any portion thereof or from entering into any agreements for any of the purposes as aforesaid. (h) that pending the hearing and final disposal of the above suit the Defendants, their servants, and agents should be restrained by an order and injunction of this Honourable Court from in any manner using the access from Peddar Road (Dr. G. Deshmukh Marg) for entering into the said Rear Tower Building or the land under the said Sub-Lease. (i) that the Defendants should be ordered and decreed to pay to the Plaintiffs a sum of Rs. 6,18,750/- per month as compensation for wrongful use and occupation and enjoyment of the Plaintiffs property being the Rear Tower Building and the land sub-demised from the date of the suit till vacant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 48 of the Act for assessing the subject sub-lease rent, which the Appellant had not offered for tax in its return of income for the said assessment year. 11. On 20th March 1989, an assessment order under section 143 read with section 148 of the Act for the assessment year 1986-87 came to be passed and the rent on account of sub-lease agreement of the Appellant with IDBI amounting to Rs. 3,42,720/- was added as income of the Appellant. In the assessment order, the Assessing Officer records submissions of the Appellant that since the sub lease agreement with the IDBI has been terminated and a suit is filed against it, no amount is due from IDBI as lease rent and, therefore, question of taxing the same does not arise. The Assessing Officer, however, rejected the said contention on the ground that sub lease agreement exists for the relevant assessment year 1986-87 on the ground that the Appellant itself has admitted that it had filed a suit against the IDBI for termination of sub-lease agreement and, therefore, the matter was sub-judice. 12. The aforesaid assessment order was challenged in appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come Tax Vs. Vimla D. Sonwane Ors., (1995) 212 ITR 489 (Bom); (ii) Pal Properties (I) Pvt. Ltd. Vs. Commissioner of Income Tax, (2002) 254 ITR 687 (Delhi); (iii) P. Mariappa Gounder (Dead) by LRs. Vs. Commissioner of Income Tax, Madras, (1998) 3 SCC 552; (iv) Godhra Electricity Co. Ltd. Vs. Commissioner of Income Tax, 225 ITR 746 (SC); (v) Commissioner of Income Tax, West Bengal-II, Calcutta Vs. Hindustan Housing and Land Development Trust Ltd., (1986) 161 ITR 524 (SC). C. Submissions of the Respondent/Revenue : 15. Per contra, learned Counsel for the Respondent supported the order passed by the Assessing Authority and confirmed by the Appellate Authorities to contend that revenue would be justified in making an addition of Rs. 3,42,720/-. The Respondent contended that whether the suit pending before the Small Causes Court is allowed in favour of the Appellant or dismissed against the Appellant, in either case the Small Causes Court would atleast order IDBI to pay Rs. 3,42,720/- p.a. towards the use and occupation of the property of the Appellant since the property is in possession of the IDBI. Therefore, it is contended that sum of Rs. 3,42,720/- is chargeable to tax under the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng such year. 19. The words accrue or arise have different meanings attributed to them while the former connotes the idea of a growth or accumulation, the latter connotes the idea of crystallization of the former into a definite sum that can be demanded as a matter of right. For determining the point of time of accrual, two factors are relevant. The first is a qualitative factor and second is a quantitative factor. The qualitative factor is relatable to the terms of the agreement or conduct of the parties for determining when the legal right to receive income emerges. The quantitative factor is relatable to the exact sum in respect of which the qualitative factor of legal right to receive is applied. These two factors have no order of priority between them. When both converge, there is a legal right to receive a certain sum of money as income. Such convergence determines a point of time of accrual. In order that income may be said to have accrued at a particular point of time, it must have ripened into a debt at that time, that is to say, the Assessee, should have acquired a right to receive payment at that moment, though the receipt itself may take place later. There must be a deb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e meaning. In the Act, the two words are used synonymously with each other to denote the same idea or ideas very similar, and the difference lies only in this that one is more appropriate than the other, when applied, to a particular case. 21. The Calcutta High Court, in the case of CIT vs. Bharat Petroleum Corporation Ltd. 1993 202 ITR 492 (Cal), observed that the amount can accrue or arise to the Assessee if the Assessee acquires a legal right to receive the amount or, conversely, the said amount has become legally due to the Assessee from the Assessee s debtor. The mere raising of claim or bill does not create any legally enforceable right to receive the same. 22. In CIT, Gujarat vs. Ashokbhai Chimanbhai 1965 AIR 1343, the Supreme Court observed that when the right to receive the income becomes vested in the Assessee, it can be said to have accrued or arise. 23. In the case of CIT vs. Vimla D. Sonwane Ors. 1995 212 ITR 489 (Bom), the Assessee, co-owner of a plot, gave on lease one plot at Rs. 9 lakhs per year to M/s. Poonam Hotels Pvt. Ltd. and other plot to M/s. Punjab Co-operative Housing Society at Rs. 6 lakhs per year. Both the lessees filed proceedings for fixing of standar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following the mercantile system of accounting. In para 9, the Delhi High Court observed that upon termination of tenancy, the tenant no longer remains a tenant but becomes a trespasser and for the purpose of the eviction the Assessee had filed a suit and claimed a decree for rent and mesne profit. In the suit, the Assessee claimed Rs. 70,000/- per month by way of damages, which was higher than the actual rent payable at Rs. 24,000/- and the said sum has become payable to the landlord. The Delhi High Court observed that the mesne profits are a composite sum payable by the lessee, who becomes the trespasser upon the termination of the lease and mesne profits are unascertained amounts of money. They do not constitute a debt. The High Court further observed that lis between the parties is pending adjudication, the fate thereof is unknown. It is further observed that there cannot be said that only because the claim of the Assessee by way of mesne profit denotes a higher amount of the rent, same can be divided into two parts, as has been sought to be done by the Tribunal. The Delhi High Court applied the ratio of CIT vs. Hindustan Housing and Land Development Trust (1986) 161 ITR 524 (S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hindustan Housing and Land Development Trust (1986) 161 ITR 524 (SC) , following question arose before the Supreme Court: Whether on the facts and in the circumstances of the case, the extra amount of compensation amounting to Rs. 7,24,914 was income arising or accruing to the assessee during the previous year relevant to the assessment year 1956-57. In this case, the Assessee s land was acquired by the State Government and the Land Acquisition officer awarded a sum of Rs. 24,97,295/- as the compensation payable to the Assessee. The Assessee was not satisfied with the amount of compensation preferred an appeal before the Arbitrator. The Arbitrator made an award dated 29th July 1955 fixing the amount of compensation at Rs. 30,16,787/- on account of the permanent acquisition of the land. Thus, in addition to the original amount of compensation further compensation was awarded amounting to Rs. 5,13,624/- and on which he directed interest at the rate of 5% per annum from January 8, 1953, the date of acquisition upto the date of payment. The State Government filed an appeal against the said award to the High Court. During the pendency of the appeal, the State Government deposited Rs. 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pending before the judicial forum and pending adjudication if certain amount is deposited in the said judicial forum or the amount is allowed to be withdrawn by the party, the consistent view in such a scenario taken by the Courts is that till the case is decided finally by the judicial forum, it cannot be said that the Assessee has acquired a right to receive the income for the purposes of Section 5 of the Income Tax Act, 1961. 30. The common thread running through all the above judicial pronouncements is that the time of accrual for taxing income gets postponed till the dispute is adjudicated by the Civil Court. 31. Considering the principles as discussed in the decisions referred hereinabove, we need to examine whether sub-lease rent of Rs. 3,42,720/- sought to be taxed accrues or arises to the Appellant in the assessment year 1986-87. It is not disputed by the Revenue that the cross-suits filed by the Appellant and the IDBI against each other are pending as of today before the Small Causes Court. It is also not disputed that the Appellant has not accepted the rent from IDBI post termination of the sub-lease agreement in the year 1981. The Appellant, in its suit for eviction, h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In our view, this would amount to pre-empting the decision to be rendered by the Small Causes Court in the cross-suits filed by the Appellant and IDBI. 33. In our view, one cannot tax the amount having not accrued to the Assessee and not received by an Assessee on an assumption and presumption that in future the Small Causes Court will at least order the said sum in favour of the Appellant. The determination of the amount payable by the IDBI to the Appellant as prayed for by the Appellant in its suit is to be determined by the Small Causes Court and it is as and when the Court passes a final decree that one can say that right to receive the sum decreed by the Small Causes Court as having accrued to the Appellant. Till then, the right to receive any sum by the Appellant is in jeopardy and sub-judice before the Small Causes Court. 34. The Appellant has fairly made a statement before this Court, that in the year when the Small Causes Court would decree the amount, the issue of taxability of the sum received, as per the decree would be examined in the year of decree and they would not contend that same is income of assessment year 1986-87 for which the present appeals are filed and sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lier part of the present judgment fails in assessment year 1986-87 so as to result into accrual of income, since there is neither any ascertainment of rent nor there exists any right in present on account of termination of agreement and the disputes pending before the Small Causes Court. 38. The Tribunal has misconstrued the prayers made by the Appellant before the Small Causes Court and had wrongly come to a conclusion that the Appellant has not waived his right to receive the rent. The prayer made by the Appellant in the suit before the Small Causes Court are to be treated as claim (pending adjudication) made by the Appellant for adjudication before the Small Causes Court and not waiver of right. In our view, any such observation of the Tribunal would amount to involving upon the adjudication of the civil dispute between the Appellant and the IDBI by the Income Tax Appellate Tribunal, which is not permissible and beyond the jurisdiction of the Income Tax Appellate Tribunal. Secondly, the Tribunal has observed that the consideration was paid by the IDBI. This is not correct. The Appellant had returned the cheques, which were given by IDBI, since the Appellant had terminated the su ..... X X X X Extracts X X X X X X X X Extracts X X X X
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