Commissioner of Income Tax vs Smt. Burfi

Ajay Kumar Mittal, J.—This appeal has been preferred by the revenue u/s 260A of the Income Tax Act, 1961 (in short "the Act") against the order dated 24-11-2006 passed by the Income Tax Appellate Tribunal, Delhi Bench T, New Delhi (hereinafter referred to as "the Tribunal") in ITA No. 1415/Del/2005 for the assessment year 2002-03 proposing following substantial question of law:

Whether, on the facts and circumstances of the case, the Honble Tribunal is right in holding that assessment of interest cannot be made until the matter is finally settled by the High Court, in contradiction with the judgment of Honble jurisdictional High Court of Punjab & Haryana following the judgment of Aapex Court in the case of Rama Bai and Others Vs. Commissioner of Income Tax, Andhra Pradesh Hyderabad and Others, whereby interest on enhanced compensation is to be taxed on accrual basis irrespective of the pendency of appeal in higher Courts in respect of enhanced compensation (and in the case of CIT v. Naresh Kumar IT Appeal No. 176 of 2005 and CIT v. Dilbagh Singh IT Appeal No. 177 of 2005, respectively) ?

Facts necessary for adjudication as narrated in the appeal may be noticed. The Assessee received enhanced compensation at Rs. 1,12,828 and interest on enhanced compensation amounting to Rs. 97,753 during the year in question. She filed return on 8-10-2002 declaring nil income and agricultural income at Rs. 25,000. On 22-4-2003, notice u/s 148 of the Act was issued and in pursuance thereto, the Assessee filed return of income on 14-11-2003 declaring the same income as disclosed in the earlier return. The assessing officer under the provisions of Section 45(5)(b) of the Act held the enhanced compensation to be taxable. The interest on the enhanced compensation was also brought to be tax. Accordingly, the assessing officer completed the assessment at Rs. 2,10,581 plus agricultural income of Rs. 25,000. Feeling aggrieved, the Assessee filed an appeal before the Commissioner (Appeals) (in short "the Commissioner (Appeals)") who vide order dated 31-1-2005 deleted the additions made by the assessing officer. On appeal by the revenue, the Tribunal vide order dated 24-11-2006 while partly allowing the appeal of the revenue held that amount received on account of enhanced compensation was taxable in the year of receipts. Regarding interest received by the Assessee, the Tribunal upheld the order of the Commissioner (Appeals) in principle. Hence, the present appeal by the revenue.

We have heard learned Counsel for the parties and perused the record.

Learned Counsel for the revenue submitted that the Assessee was following cash system of accountancy as is evident from the assessment order and, therefore, the interest for delayed payment of compensation which was received by the Assessee in the year relating to the assessment year in question was taxable. According to the revenue, even if the matter regarding compensation was in dispute, the same would not make any difference in view of the method of accountancy being followed by the Assessee. Learned Counsel further submitted that the Tribunal had erred in relying upon Apex Court decisions in Commissioner of Income Tax, West Bengal-II, Calcutta Vs. Hindustan Housing and Land Development Trust Ltd., and Rama Bai and Others Vs. Commissioner of Income Tax, Andhra Pradesh Hyderabad and Others, as these were the cases where the Assessee was following mercantile system of accountancy.

On the other hand, learned Counsel for the Assessee relied upon the judgments in Hindustan Housing & Land Development Trust Ltd. and Smt. Rama Bais cases (supra) in support of his submission. He further submitted that till the question regarding right to receive compensation had not crystallized, no income was taxable and the Tribunal had rightly decided the issue in favour of the Assessee.

We have given our thoughtful consideration to the respective submissions of learned Counsel for the parties.

Finance Act, 1995 with effect from 1-4-1997 relating to assessment year 1997-98 and subsequent years, substituted Section 145, according to which Assessee has an option to adopt either cash system or mercantile system only. Therefore, income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" is to be computed in accordance with either cash/receipt basis; or mercantile/accrual system of accounting regularly employed by the Assessee. Under cash system of accountancy, the Assessee is liable to pay tax on the income on the basis of cash receipts during the year under consideration whereas under the mercantile system of accountancy, the liability of an Assessee is determined according to accrual of the income relating to the assessment year in question.

We may now advert to the judgment of the apex court in Hindustan Housing & Land Development Trust Ltd. case (supra) on the basis of which the Tribunal had adjudicated the issue in favour of the Assessee. In that case, the Assessee-company was following mercantile system of accountancy whose certain lands were compulsorily acquired by the Government. Award was announced by the Land Acquisition Collector granting Rs. 24,97,249 as compensation and thereafter arbitrator had fixed the quantum of compensation at Rs. 30,10,873. State Government had challenged the award of the arbitrator by filing an appeal before the High Court and during the pendency of the said appeal, an amount of Rs. 7,36,691 deposited by the Government in that appeal was allowed to be withdrawn by the company on furnishing a security bond which was credited by it in its books of accounts. The question then arose in that case was whether this amount which was received by the company in pursuance to the arbitrators award which was in dispute in appeal filed by the State Government, could the same be treated to be Assessees income during the previous year when the same was received. The Honble Supreme Court in those facts held that the amount so received by the Assessee was not exigible to tax as there was no absolute right to receive the amount at that stage. If the appeal was allowed by the High Court, the extra amount of compensation of Rs. .7,24,914 was to be returned. Further, under mercantile system of accountancy an amount would not be liable to be taxed till it has accrued as income.

Reference is also made to judgment of the Honble Supreme Court in Smt. Rama Bais case (supra) where the Assessee was following mercantile system of accountancy, it was held that the interest on enhanced compensation awarded under the Land Acquisition Act, 1894 (in short "1894 Act") cannot be taxed in a lump sum but has to be spread over as income had accrued on yearly basis.

However, the position with regard to receipt of interest on account of delayed payment received u/s 34 of the Land Acquisition Act, 1894 (in short "1894 Act") would be different where the Assessee is following j cash system of accountancy. In cash system of accountancy, the income is taxed in the year of receipt and since the Assessee had received the amount during the year in question, the same was taxable in they assessment year 2002-03. Further, under cash system it cannot be said that the Assessee had not received any income from interest u/s 34 of the 1894 Act.

In view of the above, the substantial question proposed is answered in favour of the revenue and against the Assessee.

Accordingly, the appeal is allowed and the order of the Tribunal is set aside.