TMI Blog2023 (12) TMI 285X X X X Extracts X X X X X X X X Extracts X X X X ..... rging 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 may be sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jeopardy and 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the head Income from Other Sources. 4. In the previous year 1980-81, dispute arose between the 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 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omanji Petit Road, Bombay more particularly described in the Schedule being Ex. H hereto with all powers under Order 40 Rule 1 of the Code of Civil Procedure 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 com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade on account of the subject sub-lease rent by the Revenue. 10. The Appellant did not offer aforesaid rent for tax in its return of income for assessment year 1986-87. Thereafter, the case of the Appellant for the assessment year 1986-87 was reopened under Section 148 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would ultimately decree in the suit. The Counsel further contended that since cross suits are pending before Small Causes Court, the Revenue cannot pre-empt the decision of the Civil Court to tax rent. The Appellant relied upon the following decisions in support of the above contentions :- (i) Commissioner of Income 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 Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argeable 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. 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this that one is more appropriate than the other when applied to particular cases. The Supreme Court in the above case has recognised that there is a difference between these two terms but hastened to add that it is difficult to say that this distinction has been throughout maintained in the Act. For the purpose of section 5 the aforesaid difference between the words accrue and arise is not relevant as both are considered to convey the same 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, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent for the month July to October 1988 but the Assessee returned the cheque clarifying that tenancy was terminated. The Assessee has filed a legal suit against the lessee for vacating the premises. Hence, the right to receive rent was in dispute. It was, hence, submitted that rent could not be brought to tax. The Assessing Officer did not accept the contention of the Assessee and the matter travelled to Delhi High Court. The Delhi High Court, in para 6 proceeded on the basis that the Assessee has been 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 amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly irrelevant when the amount awarded was, in fact, realized by the Assessee. 26. In Godhra Electricity Co. Ltd. vs. CIT (1997) 225 ITR 746 (SC), the Supreme Court held that even though the Assessee Company was following mercantile system of accounting and had made entries in the books regarding enhancement charges, no real income accrued to the Assessee company in respect of those enhanced charges on account of various suits filed and pending on the right of the Assessee company to enhance the charges. 27. In CIT vs. 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 Arbitr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that case. 28. To the same effect that in case of civil disputes pending before the Court, no income accrues till the dispute is finally adjudicated, we may also refer to the following decisions:- (i) DSL Enterprises Pvt. Ltd. vs. ITO 2013 355 ITR 209 Bom. (ii) PCIT vs. Rajdarbar 2022 135 Taxmann 438 (iii) CIT vs. Sarbatain Road Runner Pvt. Ltd. 2008 3018 ITR 443 (iv) FGP Ltd. vs. CIT 2010 326 ITR 444 (v) CIT vs. Sushil Thomas Abraham 2018 93 Taxmann. Com 64 29. The principle of law as laid down in the aforesaid decisions is to the effect that if the matter is 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is concerned, they have terminated the agreement and, therefore, the Appellant has contended that there cannot be a sub-lease agreement post termination between themselves and IDBI. The right to receive Rs. 3,42,720/- under the sub-lease agreement is not a subsisting right in favour of the Appellant post the termination and which too is a subject matter of civil dispute. Hence, the Revenue is not correct in contending that irrespective of the fate of the civil suits, the Small Causes Court would never order less than Rs. 3,42,720/- to the Appellant and, therefore, the said ascertained sum is accrued to the Appellant. 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 whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had expired, but the Assessee therein terminated the lease agreement for non-payment of rent and the issue before the Court was post termination of the lease and the matter being sub-judice before the civil court, the Court held no income accrues post termination. It was on these facts that the Delhi High Court came to a conclusion that till the matter is decided by the Civil Court, there cannot be any accrual of income in favour of the Assessee. The facts of the Appellant Assessee before us are similar to that before the Delhi High Court and same supports the Appellant Assessee. 37. The test of convergence laid down by us in earlier 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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