TMI Blog2000 (6) TMI 129X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee, with Shri Sitaramji Bhandar, a society owning64 acresof land at Karkarduma, Shahadra,Delhi. Through this agreement the AOP agreed to carry on the business of developing plots at the above64 acresof land. On29-11-1988one of the Members of AOP Shri Harbansh Singh retired and on27-4-1989, Smt. Komal Atul Aggarwal, Ms. Ananya Madhupati Singhania and Miss Rasilika Madhupati Singhania became members of the AOP raising the strength to fifteen in number, Acharya Arundev and Dev Kumar Aggarwal were also members of the aforesaid AOP. On26-5-1989Dev Kumar Aggarwal representing for himself and 13 other AOP entered into an agreement with Acharya Arundev; by which it was agreed that said project shall absolutely belong to Acharya Arundev. Neither Dev Kumar Aggarwal nor any other member of the AOP shall have any interest in respect thereof as Acharya Arundev either alone or jointly with any person shall develop the said land. Dev Kumar Aggarwal himself and on behalf of remaining members of AOP shall not be having any right, title or interest in the said project in any manner whatsoever. Acharya Arundev was also given liberty to negotiate with tenants TEXMACO and any other person having an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1990. Since you have not fulfilled your commitment, we are costrained to inform you that we shall now only wait till30-4-1990for receiving the full payment alongwith the interest and that after this date the agreement will stand no more." Kindly note, Thanking you, Very truly yours, For Devidayal Builders and Developers Sd/ Dev Kumar Aggarwal." 2.4 This letter had failed to bring any result and it appears that there were some personal discussion in between Dev Kumar Aggarwal and Acharya Arundev. A letter dated 2-5-1990 copy appearing at page 100 of the paper book, was issued by Dev Kumar Aggarwal to Acharya Arundev referring to their personal talk and about the expiry of time limit of compliance of terms and conditions of the agreement which expired on 30-4-1990. It was mentioned by Dev Kumar Aggarwal that in case Acharya Arundev pays the accrued interest for delayed payment worked out up to30-4-1990alongwith other amount within one week's time from2-5-1990, then understanding between the same shall remain intact, otherwise they will go back to their rights. It appears that nothing happened for more than two years. Afterwards the parties viz. all the 14 members of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re from the findings recorded in assessment year 1991-92. It was also submitted that appeals for assessment years 1991-92 and 1992-93 were pending before the CIT(A), Muzaffarnagar. The main submission was that no interest income had actually accrued and in alternative it was submitted that assessee was following cash system of accounting regularly for so many years and accepted by the Department then the income even if accrued, was not liable to be assessed. The assessee placed reliance on the written submission for assessment year 1991-92 as well as for assessment year 1992-93. The other plea of the assessee was that all the clauses of the agreement have not been read and in case whole of the agreement is read then the only conclusion will be that agreement dated 22-8-1989 came to an and as per clause 8 of the agreement. The amount of Rs. 11.25 crores had not been paid before20-12-1989and thus agreement no longer survives. Not only this, it was submitted that Acharya Arundev was given a concession to pay all the amount due under the said agreement by 9-5-1990 but he failed to avail that opportunity and that fact goes to prove that agreement came to an end for non-compliance of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harya Arundev recorded by the Assessing Officer was also referred to in which he admitted not to have paid any amount to members of AOP. The contention was that first agreement dated22-8-1989was no more effective and subsequent agreement dated24-9-1993provides different terms and conditions as members of AOP were to receive 3 lakh sq.ft. area of housing project at Shahadra,Delhiand50,000 sq. ft. area in the project at Bandra,Bombay. The contention was that no interest income accrued and the alternate plea was that assessee was following cash basis in respect of income from interest then the same is not taxable. These contentions of the assessee were considered and it was concluded by the learned CIT(A) that in assessment year 1990-91 assessee had declared interest income from M/s. Devidayal Tulsi Ram at Rs. 3,41,515 and that was on the basis of accrual and thus alternate plea of the assessee was not available to him. So far as first plea of the assessee was concerned, it was concluded by the CIT(A) agreement dated 22-8-1989 was very much alive as the new agreement dated 22-4-1993 contained specific averment to the effect that rights of the parties under earlier agreement will not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itions of agreement dated22-8-1989go to show that time was the essence of the contract which has been specifically mentioned in clause 6 of memorandum of understanding copy of which is appearing at pages 91 to 93 of the paper book. This memorandum of understanding had been made part of the, agreement dated22-8-1989and thus binding on the parties. Once, according to learned counsel for the assessee, time is made essence of the agreement then promisee viz., Acharya Arundev was expected to fulfil the part of contract and in case he failed necessary consequences as provided under section 55 of the Indian Contract Act, 1872 shall apply and according to that an agreement is voidable at the option of promisee viz., Dev Kumar Aggarwal on behalf of the members of the AOP. The learned counsel submitted further that this option was exercised by the said Dev Kumar Aggarwal who served a notice dated 5-4-1990 giving concession to Acharya Arundev to clear the amount as terms and conditions of agreement dated 22-8-1989 by 30-4-1990 otherwise agreement will come to an end. This clearly proves that the agreement dated22-8-1989remains no more alive, nor any terms and conditions of the said agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted that what is taxable is real income and not any hypothetical/theoretical notional income. In support of this contention reliance has been placed on the decision of Hon'ble Supreme Court in the case of Godhra Electricity Co. Ltd v. CIT [1997] 225 ITR746 inwhich principle of real income had been discussed at length. Their Lordships, according to learned counsel, have started with the famous case of CIT v. Shoorji Vallabhdas Co. [1962] 46 ITR 144 (SC) in which the concept of real income was defined for the first time. Their Lordships further took into consideration the decision in the case of Morvi Industries Ltd. v. CIT [1971] 82 ITR 835 (SC) and the ratio of decision in the case of CIT v. Birla Gwalior (P.) Ltd. [1973] 89 ITR 266 (SC) and also considered the decision in the case of Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521 (SC) and that of State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC) and concluded that no income accrued to the assessee. The learned counsel pointed out the facts of that case in belief that said assessee-company was the successor of LSC company which authorised to generate and supply electricity to the consumers in Godhra area and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee was maintaining hybrid system of accounting and interest income from various firms was being shown on cash basis, and example was given in respect of interest income from, M/s. Devidayal Tulsi Ram which was shown on cash basis. The learned counsel submitted that Assessing Officer as well as the CIT(A) have rejected this contention of the assessee for no good reasons inspite of bare facts. Our attention was drawn to page 130 of the paper book which is summarised analysis of running deposit account of M/s. Devidayal Tulsiram with the assessee and the amount of interest was credited but on cash basis in assessment years 1990-91 and 1991-92. The contention was that assessee's plea should have been allowed on this point. 3.5 The last contention of the learned counsel was that assessee's case stands on better footings as assessee had not shown any entry in its books of account in respect of alleged accrued interest income from Acharya Arundev nor Department has brought anything on record to show that Acharya Arundev had shown that amount in his books of account as payable to assessee. On the basis of this it cannot be said that any interest income alleged to have accrued to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remained no more alive is misconceived. The learned D.R. submitted that in case first agreement came to an end as pleaded by assessee, there was no justification for making the terms and conditions of first agreement as enforceable. Further, the Department is supposed to find out whether income accrued on the basis of that agreement which admittedly came into existence in between the parties and whose terms and conditions remained, intact in subsequent agreement dated 24-9-1993 and for that the terms and conditions clearly go to show that assessee alongwith other members of AOP was entitled to get interest in case of default committed by Acharya Arundev in payment of Rs. 11.25 crores to members of AOP. Acharya Arundev committed default and thus right to receive the interest accrued and in case assessee or other members of AOP are not proceeding to recover the amount, it amounts relinquishment of the legal right on their part and that move cannot be allowed as the same will tantamount to deprive the Revenue of its dues and such a move has not been appreciated by Their Lordships in the case of Morvi Industries Ltd. Once an income accrues as per mercantile system of accounting, being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as executed in which it was agreed that hence-forth said development project shall absolutely belong to Acharya Arundev who will develop that plot either alone or jointly with another person of his liking. Acharya Arundev shall pay to Dev Kumar Aggarwal a sum of Rs. 11.50 crores as per time schedule mentioned therein and time was made essence of the contract and in default Dev Kumar Aggarwal was made entitled to receive interest @ 4 per cent p.m. It appears further that in pursuance of this memorandum of understanding an agreement was executed on 22-8-1989 inwhich it is admitted by Dev Kumar Aggarwal for himself and on behalf of 13 members of AOP that he had received Rs. 25 lakhs and Rs. 2 crores before execution of the said agreement and remaining amount was to be paid by 30-12-1989 and finally by 28-2-1990, otherwise in case of default an interest @ 4 per cent p.m. was to be paid. It is also on record that said Acharya Arun Dev failed to honour the commitment of payment as per time schedule and it is now admitted fact that Rs. 25 lakhs alone were paid by him and not Rs. 2 crores as mentioned in the said agreement dated 22-8-1989 as Department has also accepted this preposition th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Under these facts it is to be concluded as to whether any income accrued to the assessee and if so whether it was real income in the terms used byApex Courtand different High Courts. 5.1. Before we come to the concept of accrual of income or in that context real income, it will be be-fitting to examine as to what is the fate of the earlier agreement as learned counsel for the assessee had argued that time was essence of the contract in the agreement dated 22-8-1989 and failure to perform his part of contract by Acharya Arundev had brought that agreement to an end and no right accrued to assessee or any other member of AOP. 5.2 So far as concept of time as essence of the contract is concerned, section 55 of the India Contract Act gives out the effect of delay to perform contract at fixed time and we are reproducing the relevant portion of section 55 which reads as under: "55. Effect of failure to perform at fixed time, in contract in which time is essential-- When party to a contract promises to do a certain thing at or before a specified time, or certain things, at or before specified times, and fails to do any such thing at or before the, specified time, the contract, or so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch had been made part of the agreement dated22-8-1989, the time had been made the essence of the contract. The first requirement of Section 55 that intention of the parties to make time as the essence of the contract should be expressed in writing and in unmistakable language is fulfilled in this case. Not only this the penalty clause was also there as in case of default the interest will be payable by Acharya Arundev and it has been concluded that in the case of Sankal vs. Joit Ram 1949 B 193, appearing at page349 inthe sixth Edition of Commentary of Dutt by A.C. Sen on Indian Contract Act, 1972 that time has been held to be of essence of the contract because the amount due was carrying interest. Further, it is to be pointed out that Dev Kumar Aggarwal on behalf of 14 members of AOP had transferred the development rights of64 acresof land taken over by AOP from Shri Sitaram Ji Bhandar to Acharya Arundev and in lieu thereof agreed to receive Rs. 11.50 crores. It was purely a mercantile contract and as a general rule time had been made of essence of the contract in mercantile contract. The reason for this general rule is obvious as a mercantile contract is not always an isolated tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use 2.3 reads as under: "2.3 Nothing contained in this agreement shall affect the rights of the first party in terms of Agreement dated22nd August, 1989to receive payments, until the terms and conditions of this agreement dated24 September, 1993are fulfilled in toto." 5.9 Aperusal of this clause shall show that no doubt the new agreement will not be going to affect the rights of the first party to receive payment in pursuance of the first agreement but that has been made subject to fulfilment of all the terms and conditions of new agreement dated24-9-1993. It again shows that members of AOP will resort to recover the amount as per agreement dated22-8-1989if terms and conditions of new agreement remain to be fulfilled. This condition makes' the earlier agreement as contingent agreement because right of members of AOP is made conditional subject to fulfilment of the terms and conditions of new agreement dated 24-9-1993 and that contingent agreement can be enforced for specific performance if that condition remains to be fulfilled. The very inference out of this is that if terms and conditions of the new agreement are not fulfilled by Acharya Arundev and Growth Techno Project Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of argument, the agreement dated22-8-1989is still existing and enforceable, the next question will be whether assessee earned any income, much less real income, which can be taxed under the Income-tax Act. The assessee was having a mere right to claim the amount of Rs. 11.25 crores and interest for the period of default. It has come on record and not controverted by the Department that assessee or other members of AOP have not been paid any amount by Acharya Arundev till the date of hearing because Acharya Arundev could not proceed with the development project transferred by AOP in lieu of the above referred to amount and he failed to get the possession over the land though eleven years have since passed. 5.13 So far as phrase "real income" is concerned, it has not been defined any where in the Act. Under Income-tax Act, income chargeable to tax is the income that is received or is deemed to be received in the previous year relevant to the year in which assessment is made or the income that accrues or arises or is deemed to accrue or arise inIndia. The concept of "real income theory" had been subject-matter of the scrutiny before different High Court as well as theApex Court. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into consideration the decision ofApex Courtin the case of Poona Electric Supply Co. Ltd. in which it was held that income-tax is a tax on the real income i.e. the profit arrived at on commercial principle subject to the provisions of Income-tax Act. 5.16 Their Lordships also considered the view of Apex Court in the case of Morvi Industries Ltd. in which Their Lordships have taken into consideration about the concept of relinquishment of income earned on accrual basis but Their Lordships have also observed that real question for decision was whether the income had really accrued or not. This is not hypothetical accrual of income that has got to be taken into consideration but the real accrual of the income. 5.17 Their Lordships further considered the ratio of decision in the case of State Bank of Travancore and quoted with approval the observation of Hon'ble Chief Justice appearing at page 154. The observation relates to notion of real income. His Lordships has observed that when and how does an income accrue and what are the consequences that follow from accrual of income are well settled. The accrual must be real taking into account the actuality of the situation. Whether an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... new agreement is in existence and the Department is expected to watch the execution of this agreement so far as members of AOP and Acharya Arundev as well as Company is concerned about their respective obligations and rights. The assessee will be getting a right to claim the amount if Acharya Arundev and Company do not fulfil their part of contract in handing over 3 (three) lakh sq.ft. area in housing project, Karkarduma, Shahadra and50,000 sq. ft. area in housing project Bandra, Worli,Bombayin reasonable time, as no time limit is admittedly given in the new agreement. The Department may proceed with the members of the AOP as and when any part of agreement is fulfilled or in case of non-fulfilment still Department will be examining the circumstances of giving rise to the accrual of real income or not. But in view of the facts discussed above, no income accrued to the assessee in the assessment years under consideration on the basis of earlier agreement or new agreement. 5.20 The other alternative argument of the learned counsel for the assessee was that assessee was showing interest income on cash basis and not on accrual basis and instance of M/s. Devidayal Tulsi Ram was referr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lhi/90 ground Nos. 1 to 9 stand decided in favour of the assessee in view of our findings given in paras 2 to 15.20 above. Ground Nos. 7 to 12 relate to charging of interest under sections 234B and234Cof the Act. Identical issue has been decided by us in ITA No. 1930/ Delhi/98 vide para 6 above. The Assessing Officer is direct to quantify the charging of interest if any while giving effect to the appellate order. Rest of the grounds raised have not been pressed and the same stand rejected accordingly. In view of above, ITA No. 1931/Delhi/98 is partly allowed. 8. InITA No. 5906/Delhi/98 ground Nos. 1 to 7 stand decided in favour of assessee in view of our findings recorded in paras 2 to 5.20 above. 8.1 Next ground raised in this appeal relates to addition on account of low withdrawals at Rs. 42,500. While completing the assessment the Assessing Officer noted that withdrawals for household expenses at Rs. 17,500 were not sufficient. Rejecting the explanation furnished by the assessee the Assessing Officer made an addition of Rs. 42,500 on account of low withdrawal for household expenses for the assessment year under consideration. In appeal the CIT(A) confirmed the action of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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