Commissioner of Income Tax v. L. Venkatapathy — 1984 DIGILAW 37 (MAD)

Judgment :- RAMANUJAM J. At the instance of the Revenue, the following common question has been referred to this court for its opinion by the Income-tax Appellate Tribunal. "Whether, on the facts and in the circumstances of the case, the entire interest income received by the assessee on the enhanced compensation cannot be assessed to tax on receipt basis and only the proportionate interest referable to the assessment years 1969-70 and 1970-71 alone can be brought to tax ?" * The assessee with his three brothers owned lands in Uppilipalayam village in Coimbatore District. The Government acquired some of these lands in three separate proceedings on the basis of three separate notifications under section 4(1) of the Land Acquisition Act, 1894, issued on April 17, 1957, January 20, 1961, and April 16, 1969. The compensation originally fixed was enhanced by courts and the assessee, as a result of the order passed by the courts, was entitled to receive interest on the enhanced compensation and the interest received on enhanced compensation was Rs. 33, 000 for the assessment year 1969-70 and Rs. 15, 799 for the assessment year 1970-71. Since the assessee had not maintained books of account and had actually received these amounts in the assessment years 1969-70 and 1970-71, the Income-tax Officer assessed these amounts on receipt basis for the assessment years 1969-70 and 1970-71. The assessee filed an appeal before the Appellate Assistant Commissioner contending that the interest should have been assessed on accrual basis and not on receipt basis. The Appellate Assistant Commissioner agreed with the assessee's contention and held that the interest accrues each year and is payable as such after possession was taken from the assessee and, therefore, the interest income was assessable on accrual basis and not on receipt basis and that the interest on accrual basis works out to Rs. 1, 484 for the assessment year 1969-70 and Rs. 3, 313 for the assessment year 1970-71The Revenue took the matter in appeal to the Income-tax Appellate Tribunal contending that as no regular system of accounting was followed by the assessee, the best method by which the interest income can be brought to assessment was on receipt basis and that the Income-tax Officer was fully justified in assessing the interest on enhanced compensation on receipt basis for the assessment years 1969-70 and 1970-71. The assessee's contention before the Tribunal was that the entire interest received on the enhanced compensation could not be assessed in the assessment years 1969-70 and 1970-71 on receipt basis and that they have to be spread over the various years in which they had accrued and that as the interest accrues each year, only the proportionate interest referable to the assessment years 1969-70 and 1970-71 alone can be brought to tax. On these rival contentions, the Tribunal had held that since the interest is payable only where the owner is deprived of his property and the payment of compensation is deferred and since the benefit which the owner lost from the acquired property is a benefit accruing in each year which is compensated by way of interest under section 34, the interest accrues year after year after dispossession of the land under the Land Acquisition Act and that the proportionate interest referable to the assessment years 1969-70 and 1970-71 alone can be brought to tax on accrual basis. In support of the said view, the Tribunal relied on the following decisions: CIT v. V Sampangiramaiah and CIT v. Dr. Sham Lal Narula. Aggrieved by the order of the Tribunal, the Revenue has sought and obtained a reference on the question set out above. Before the assessing authority, the assessee seems to have contended that the interest income is a capital receipt and, therefore, it cannot be brought to charge. The Income-tax Officer has, however, rejected the contention and held that the interest income is clearly a revenue receipt and as such taxable. He also referred to the fact that in the case of the assessee's brothers who received similar interest, the same has been offered for assessment and taxed on receipt basis. Before the Appellate Assistant Commissioner, the assessee has again reiterated his contention that the interest income is a capital receipt but the Appellate Assistant Commissioner held that it is only a revenue receipt relying on the decision of the Supreme Court in T N K Govindarajulu Chetty's case However, the Appellate Assistant Commissioner upheld the assessee's contention that the interest income is to be charged on accrual basis and not on receipt basis relying on the decision of the Punjab and Haryana High Court in the case of Dr. Sham Lal Narula. Sham Lal Narula. When the matter was taken to the Tribunal, it agreed with the view taken by the Appellate Assistant Commissioner relying on the decisions in CIT v. V Sampangiramaiah and CIT v. Dr. Sham Lal Narala. The view taken by the Tribunal is that in all cases where interest is payable on enhanced compensation, it accrues year after year after the assessee was deprived possession of the land under the provisions of the Land Acquisition Act and, therefore, the interest income can be assessed only on accrual basis irrespective of the fact whether the assessee maintains accounts on cash basis or on mercantile basis. The question is whether the view taken by the Tribunal can be legally sustainedIn this case, the Tribunal has given a specific finding that the assessee has not maintained any books of account and that he had actually received sums of Rs. 33, 000 in the assessment year 1969-70 and Rs. 15, 799 in the assessment year 1970-71. However, it has chosen to accept the contention of the assessee that interest income has to be taxed only on accrual basis and the method of accounting followed by the assessee is immaterial. We are not, however, inclined to agree with this extreme contention that section 145 of the Incometax Act, 1961, deals with the method of accounting. Sub-section (1) of section 145 says that the income chargeable under the head "Income from other sources" shall be computed in accordance with the method of accounting regularly employed by the assessee. Sub-section (2) says that where the Income-tax Officer is not satisfied about the correctness or where no method of accounting has been regularly employed by the assessee, the Income-tax Officer may make an assessment in the manner provided in section 144. Since admittedly in this case the assessee has not followed any method of accounting, the assessment has necessarily to be made by the Income-tax Officer on best judgment basis. Section 56 deals with the income from other sources. Since admittedly in this case the assessee has not followed any method of accounting, the assessment has necessarily to be made by the Income-tax Officer on best judgment basis. Section 56 deals with the income from other sources. Sub-section (1) of that section says that income of every kind which is not to be excluded from the total income under the Act shall be chargeable to income-tax under the head "Income from other sources", if it is not chargeable to income -tax under any of the heads specified in section 14, items A to E. Having regard to the above provisions in section 56, the income by way of interest on compensation can only be assessed as income from other sources. If there is no method of accounting as in this case, the Income-tax Officer is free to choose his own basis and manner of assessment. In the case of Mewar Industries Ltd. v. CIT, a distinction has been made between a trader and non-trader with reference to the method of accounting. A similar distinction has also been made in Whitworth Park Coal Co. Ltd. v. IRC. In the latter case, the House of Lords has laid down that where no method of accounting has been regularly employed, a non-trader cannot be assessed, generally speaking, under section 56 under the head "Income from other sources" in respect of money which he has not received. In the former case, the court had held that if no method of accounting has been regularly employed, a non-trader can be assessed only on receipt basis. As pointed out by Rowlatt J. in Leigh v. IRC [1927] 11 TC 590 (KB), for income-tax purposes receivability without receipt is nothing and this principle applies to a restricted number of cases where the provisions of the Act or the assessee's method of accounting requires receipt as the solid test of taxability. Therefore, it is stated by the Revenue that the receivability or accrual cart be adopted only in cases where the assessee's method of accounting required accrual as the test of taxability. Therefore, it is stated by the Revenue that the receivability or accrual cart be adopted only in cases where the assessee's method of accounting required accrual as the test of taxability. If in cases where the receivability or accrual does not apply, the income cannot be brought to charge if it has not been receivedSection 13 of the Indian Income-tax Act, 1922, corresponding to section 145 of the 1961 Act came up for consideration before the Supreme Court in Keshav Mills Ltd. v. CIT where the court held that in dealing with the method of accounting, section 13 is an integral part of the computation of the total income by the assessee and, therefore, it is compulsory on the incometax authorities as well when computing the total income to accept the mode of accounting regularly adopted by the assessee except in cases where the proviso to section 13 is applicable. The proviso to section 13 corresponds to subsection (2) of section 145 of the 1961 Act. Therefore, where no method of accounting is regularly employed by the assessee, the Income-tax Officer can proceed to compute the income on any basis of accounting he chooses. In Witworth Park Coal Co. Ltd. v. IRC a distinction has been made, as already stated, between a trader and a non-trader with reference to the method of accounting and how the computation has to be made with reference to the income of a non-trader as could be seen from the following passages (P. 533). "The word 'income' appears to me to be the crucial word, and it is not easy to say what it means. The word is not defined in the Act and I do not think that it can be defined. There are two different currents of authority. It appears to me to be quite settled that in computing a trader's income account must be taken of trading debts which have not yet been received by the trader. The price of goods sold or services rendered is included, in the year's profit and loss account although that price has not yet been paid. One reason may be that the price has already been earned and that it would give a false picture to put the cost of producing the goods or rendering the services into his accounts as an outgoing but to put nothing against that until the price has been paid. One reason may be that the price has already been earned and that it would give a false picture to put the cost of producing the goods or rendering the services into his accounts as an outgoing but to put nothing against that until the price has been paid. Good accounting practice may require some exceptions, I do not know, but the general principle has long been recognised. And if in the end the price is not paid, it can be written off in a subsequent year as a bad doubt. But the position of an ordinary individual who has no trade or profession is quite different., He does not make up a profit and loss account. Sums paid to him are his income, perhaps subject to some deductions, and it would be a great hardship to require him to pay tax on sums owing to him but of which he cannot yet obtain payment. Moreover, for him there is nothing corresponding to a trader writing off bad debts in a subsequent year, except perhaps the right to get back tax which he has paid in error."The court has further observed (p. 533). " The case has often arisen of a trader being required to pay tax on something which he has not yet received and may never receive, but we were informed that there is no reported case where a non-trader has had to do this whereas there are at least three cases to the opposite effect-Lambe v. IRC [1934] 18 TC 212 ; Dewar v. IRC 1935 (2) KB 351 ; 51 TLR 536 ; 19 TC 561 (CA) and Grey v. Tiley [1932] 16 TC 414 (CA), and I would also refer to what was said by Lord Wrenbury in St. Lucia Usines and Estates Co. Ltd. v. St. Lucia (Colonial Treasurer) 1924 AC 508 (PC). I certainly think that it would be wrong to hold now for the first time that a non-trader to whom money is owing but who has not yet received it must bring it into his incometax return and pay tax on it. Lucia Usines and Estates Co. Ltd. v. St. Lucia (Colonial Treasurer) 1924 AC 508 (PC). I certainly think that it would be wrong to hold now for the first time that a non-trader to whom money is owing but who has not yet received it must bring it into his incometax return and pay tax on it. And for this purpose I think that the company must be treated as a non-trader, because the Butterley case 1957 AC 32 (HL) makes it clear that these payments are not trading receipts." * Therefore, in cases where no method of accounting is regularly employed by an assessee, the method of computation will generally depend on the question as to whether the assessee is a trader or a non-trader. If interest income has been received by a non-trader who is not expected to adopt regular method of accounting, assessment can be made on receipt basis and not on accrual basis. The decision of the Supreme Court in CIT v. Chunilal V Mehta and Sons P Ltd. throws some light on this question. In that case, the assessee held the managing agency of a public limited company and under the managing agency agreement, the assessee was to continue as managing agents for a minimum period of 21 years. However, the directors of the managed company passed a resolution on April 23, 1951, terminating the services of the assessee as managing agents. There was a dispute about the compensation payable to the assessee. The assessee filed a suit claiming damages at the rate of Rs. 6, 000 p.m. for the unexpired period of agency. The suit was decreed for Rs. 2, 34, 000 on November 17, 1955, and the assessee received the amount in December, 1955. It was contended before the incometax Officer that as it maintained accounts on the mercantile system and the amount had become due even in 1951, the same could not be taxed in the assessment year 1956-57 during which the compensation was received. The Income-tax Officer rejected the assessee's contention and finalised the assessment on receipt basis. When the matter went before the Tribunal, it, however, held that the compensation became due to the assessee on April 23, 1951, when the managing agency was terminated and, therefore, the same cannot be assessed in the assessment year 1956-57 on receipt basis. The Income-tax Officer rejected the assessee's contention and finalised the assessment on receipt basis. When the matter went before the Tribunal, it, however, held that the compensation became due to the assessee on April 23, 1951, when the managing agency was terminated and, therefore, the same cannot be assessed in the assessment year 1956-57 on receipt basis. The High Court held that the compensation became due to the assessee on April 23, 1951, when the managing agency was terminated and, therefore, the same cannot be assessed in the assessment year 1956-57 on receipt basis. The High Court held that the compensation amount was not taxable in the year 1956-57 but the interest thereon could be taxed in that year. When the matter was taken to the Supreme Court, the Supreme Court, agreeing with the High Court, hold that the assessee's right to get compensation arose on April 23, 1951, when the resolution terminating the managing agency was passed and, therefore, it cannot be assessed in the year 1956-57, when the amount was actually received as the assessee was maintaining the mercantile system of accounting. The Supreme Court had also affirmed the view taken by the High Court that so far as the interest on the compensation is concerned, it has to be assessed only in the year 1956-57 when it was actually received. The decision in T N. K Govindarajulu Chetty v. CIT to which one of us was a party and also the decision in CIT v. M K KR. Muthukaruppan Chettiar to which also one of us was a party, appear to be relevant in this regard. In the first case, it has been pointed out that where a statute brings to charge certain income, its intention is to enforce the charge at the earliest point of time, that if the income had accrued earlier and the assessee treats it as taxable during the year of accrual, it is not open to the Revenue to treat it as an income in the year of receipt in a case where the assessee follows the mercantile basis of accounts and that in order to ascertain the method of accounting adopted by the assessee, it is not necessary to cut up the various sources, profits and gains and find out the method adopted in relation to each source of income. That was also case relating to the interest payments arising out of the delayed payment of the compensation for the lands acquired. The court held that the liability to pay interest would arise when the compensation amount due to the assessee had not been paid in each of the relevant years and the method of accounting of the assessee being mercantile, the accrual of interest will have to be spread over the years between the date of acquisition and the date of actual payment. This decision proceeds on the basis that interest income received by a trader need not always be assessed on receipt basis and that if there is a statutory liability to pay interest, it can be assessed on accrual basis. In the second case, the court was concerned with a certain refund to which the assessee became entitled by way of excess tax paid. Though the refund became due on June 5, 1965, as per section 244 of the Income-tax Act, 1961, the refund was actually granted only on June 16, 1971. The interest of Rs. 77, 844 payable on the delayed refund was paid on September 24, 1971, in the assessment year 1972-73. The assessee's claim that the interest related to the assessment years 1966-67 to 1972-73 and only a sum of Rs. 2, 632 which had accrued in the assessment year 1972-73 was assessable in that assessment year was negativated by the Income-tax Officer but was upheld by the Appellate Tribunal. When the matter reached this court, this court held that where there is a statutory liability, the method of accounting is not quite relevant, and, in such a case, the time of accrual alone should be taken as the basis for assessment and, therefore, the Tribunal was right in its view that only Rs. 2, 632 accrued during the assessment year in question and, hence, it was only this amount that should be included for assessment. It is found that the said decision is based on the fact that the liability to pay interest is a statutory liability fastened on the assessee by section 244 of the Income-tax Act which is in mandatory form. Section 34 of the Land Acquisition Act, which provides for payment of interest on the amount of compensation awarded, uses the expression. "the Collector shall pay the amount awarded with interest thereon at the rate of 6 per cent. Section 34 of the Land Acquisition Act, which provides for payment of interest on the amount of compensation awarded, uses the expression. "the Collector shall pay the amount awarded with interest thereon at the rate of 6 per cent. per annum from the date of taking possession" * The same view has been taken in Joyanarayan Panigrahi v. CIT and CIT v. Santi Devi. In Joyanarayan Panigrahi v. CIT the Orissa High Court has held on more or less similar circumstances that the Income-tax authorities are not justified in including the amount of interest income in the year of receipt but it should be spread over the various earlier years on accrual basis. According to the court, the legal position is settled that if income has accrued during any particular year, it is not open either to the assessee or to the Income-tax Officer to take that income into consideration in any other year, that the right to receive interest under the Land Acquisition Act is based on the concept that the owner of the land entitled to receive compensation is kept out of the land by being dispossessed and has not received the compensation representing the market value of such land and that interest accrues during the intervening period between the dispossession on one side and payment of compensation on the other as a result of the statutory provisions and that the right to receive interest was not contingent but absolute and only the amount thereof awaited quantification. CIT v. Santi Devi also is a similar one. In that case, the assessee's land was acquired in 1950 and a sum of Rs. 1.4 lakhs was paid as compensation. In 1961, a sum of Rs. 86, 208 was paid as interest on the compensation under section 34 of the Land Acquisition Act. The question arose whether the entire sum of Rs. 86, 208 was assessable in the assessment year 1962-63 when the amount was actually received. The Calcutta High Court had held that the entire amount of interest of Rs. 86, 208 received during the assessment year 1962-63 was not liable to be assessed in that year and only a proportionate amount which pertained to the relevant previous year should be assessed in that yearOn the facts of this case, we are of the view that the principle laid down by this court in CIT v. M. K KR.. 86, 208 received during the assessment year 1962-63 was not liable to be assessed in that year and only a proportionate amount which pertained to the relevant previous year should be assessed in that yearOn the facts of this case, we are of the view that the principle laid down by this court in CIT v. M. K KR.. Muthukaruppan Chettiar will have to apply as the payment of interest on the compensation is statutory liability which is not conditional but absolute. As soon as the lands are acquired, the assessee gets the right to compensation as also interest if there is a delay in payment of the compensation under section 34 of the Land Acquisition Act. Whatever be the method of accounting, the amount accrues to the assessee under the statute. Therefore, the interest income should be deemed to accrue to the assessee year after year after the acquisition has taken place as the assessee has been deprived of his land by compulsory acquisition. The distinction sought to be made by the learned counsel for the Revenue is that since the assessee has not maintained any accounts, he should be taken to be a non-trader and that in the cases of non-traders, interest income can be assessed on cash basis. We are not inclined to accept the said contention for the reason that the decisions in Whitworth Park Coal Co. Ltd. v. IRC and Mewar Industries Ltd. v. CIT dealt with cases arising out of contract and not in respect of interest income arising out of a statutory liability. The decision in CIT v. Chunilal V Mehta & Sons (P.) Ltd. also related to a case where the court awarded interest on damages for wrongful termination of the managing agency agreement which cannot be said to be a statutory liability. The principle of those decisions cannot, therefore, apply to the case on hand. In this view, we have to agree with the decision of the Tribunal in this case. The question referred is, therefore, answered in the affirmative and against the Revenue.