Allahabad H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount of Rs. 1,07,957 had not accrued to the assessee and could not be taxed as its income for the asst. yr. 1975-76 ?

Counsel Appeared

V.K. Rastogi, for the Revenue : None, for the Assessee

R.R. MISRA, J.:

The Tribunal, Allahabad Bench, Allahabad, has referred the following question of law for the opinion of this Court :

” Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount of Rs. 1,07,957 had not accrued to the assessee and could not be taxed as its income for the asst. yr. 1975-76 ? “

2. The relevant facts are as under : The assessee is a firm selling chaff-cutting machines at its head office and fertilizer at its branch at Sultanpur. The dispute relates to the asst. yr. 1975-76. The accounting year of the assessee for the said assessment year was the financial year 1974-75. During the said accounting year, the assessee had maintained its accounts on the mercantile basis. During the course of scrutiny of the account books, the ITO noticed that the assessee had deposited Rs. 1,07,957 in a post office savings bank account which had been pledged to the District Magistrate, Sultanpur. In reply to the queries put by the ITO, the assessee replied that the selling price of fertilizer was raised by the Government of India w.e.f. June 1, 1974. Later on, the U.P. Government, however, issued an Ordinance saying that the stock of fertilizer which the dealers held as on May 31, 1974, will have to be sold at the old rates. The fertilizer dealers, however, challenged this Ordinance of the U.P. Government unsuccessfully before the High Court. Aggrieved against the said judgment of the High Court, the dealers filed an appeal before the Supreme Court. In the appeals as filed by the said fertilizer dealers, the Supreme Court passed the following interim order on September 23, 1974 : “Sale of fertilizers may be made by the appellants-petitioners on permits issued by the Officer concerned at the new rates. The excess price in respect of the fertilizers which were in possession of the appellants before 1st June, 1974, should be deposited by the appellants with the District Magistrate concerned within a fortnight after the sale. The amount shall remain in deposit in a separate account (with the District Magistrate). The appellants undertook to maintain the accounts in respect of such sales. “

3. In pursuance of the aforesaid interim order dated September 23, 1974, the assessee also sold its old stocks from November 9, 1974, to December 12, 1974, i.e., within the relevant accounting period. The amount of the difference between the old and new rates of the said stocks of fertilizer as sold was in the sum of Rs. 1,07,957. As directed, this amount was deposited by the assessee in accordance with the order of the Supreme Court in a post office savings bank account which was pledged with the District Magistrate, Sultanpur, and was reflected in the account books of the assessee as such in the said accounting period.

The claim of the assessee was that the aforesaid amount of Rs. 1,07,957 realised by the assessee in terms of the interim order of the Supreme Court did not represent the income of the assessee as the assessee could not be held to be the owner of this amount. The IT authorities negatived the aforesaid claim of the assessee by holding that the said extra amount as realised by the sale of the fertilizer at the enhanced price was definitely the accrued income of the assessee and was taxable as such. Before the Tribunal, the parties reiterated their rival contentions. The Tribunal, however, agreed with the viewpoint of the assessee and allowed the appeal of the assessee by its order dated March 26, 1977. At the instance of the CIT, it has referred the abovementioned question under s. 256(1) of the IT Act, 1961, for the opinion of this Court.

We have heard Sri V. K. Rastogi, learned standing counsel appearing on behalf of the CIT. Nobody has appeared on behalf of the assessee. The argument advanced by learned standing counsel was that in the present case the assessee had not given up his claim to the disputed amount because an appeal against the judgment of the High Court was pending before the Supreme Court. As such, the IT authorities were right in law in taxing the amount in question. In support of his submission, he also placed reliance on two decisions of the Calcutta High Court in James Finlay & Co. vs. CIT (1981) 22 CTR (Cal) 289 : (1982) 137 ITR 698 and the case of CIT vs. Bhartiya Steel Industries (1986) 56 CTR (Cal) 70 : (1987) 164 ITR 388, According to him, it was the real income of an assessee which was liable to be taxed. For this proposition, he relied upon a decision of the Supreme Court in the case of State Bank of Travancore vs. CIT (1986) 50 CTR (SC) 290 : (1986) 158 ITR 102. We shall advert to these authorities relied upon by standing counsel in the latter part of this judgment to show that these cases do not touch at all upon the controversy involved in the present case.

6. Let us now advert to the relevant provisions of the IT Act, 1961 (hereinafter referred to as ” the Act “). Sec. 4 of the Act is the charging section. Under this section, income-tax is chargeable for any assessment year in accordance with the provisions of the Act in respect of the total income of the previous year of every person. The relevant portion of s. 5 of the Act reads as follows : “5. Scope of total income.—(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which— (a) is received or is deemed to be received in India in such year by … such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year … ” As held by the Delhi High Court in the case of Addl. CIT vs. Netar Krishna Sahgals Pvt. Ltd. (1983) 34 CTR (Del) 376 : (1983) 141 ITR 681, all receipts do not constitute income and do not come within the ambit of the Act. To the same effect are also the observations of the Supreme Court in the case of Keshav Mills Ltd. vs. CIT (1953) 23 ITR 230, wherein it had been observed that mere receipt of income is not the sole test of chargeability. Sec. 4(1)(a) of the Indian IT Act, 1922 (now s. 5(1)(a) of the Act), is concerned with cases of actual receipt and not with cases of paper receipt. What has got to be examined is that such receipt of income refers to the first occasion when the recipient gets the money under his own control.

In the present case, we had seen that the money in question was never received by the assessee at all inasmuch as the said amount of Rs. 1,07,957 remained in deposit in the post office savings bank account and pledged to the District Magistrate, Sultanpur. The assessee admittedly did not have any control over the said money. Hence, in our view, it cannot be said that the aforesaid test of ” receipt of income ” was satisfied in the present case. In other words, the disputed amount was never received by the assessee at all.

9. Neither the word ” income ” nor the words ” is received accrues and ” arises ” have been defined in the Act. The Privy Council in the case of CIT vs. Shaw Wallace & Co. (1932) ILR 59 Cal 1343, attempted a definition of the term ” income ” in the following words: “Income, their Lordships think…… connotes a periodical monetary return ‘ coming in ‘ with some sort of regularity or expected regularity from definite sources. “

10. Mukerji J. has defined these terms in Rogers Pyatt Shellac & Co. vs. Secretary of State for India (1925) 1 ITC 363 at page 371 as follows : ” Now what is income ? The term is nowhere defined in the Act …… In the absence of a statutory definition, we must take its ordinary dictionary meaning…… The policy of the Act is to make the amount taxable when it is paid or received either actually or constructively. ‘Accrues’, ‘arises’ and ‘is received ‘ are three distinct terms. So far as receiving of income is concerned, there can be no difficulty ; it conveys a clear and definite meaning and I can think of no expression which makes its meaning plainer than the word ‘receiving ‘ itself. The words ‘ accrue ‘ and arise’ also are not defined in the Act…’ Accruing’ is synonymous with arising ‘ in the sense of springing as a natural growth or result. The three expressions ” accrues ‘ ‘ arises’ and ‘is received ‘ having been used in the section, strictly speaking ‘accrues ‘ should not be taken as synonymous with ‘arises ‘ but in the distinct sense of growing up by way of addition or increase or as an accession or advantage; while the word ‘arises ‘ means comes into existence or notice or presents itself. The former connotes the idea of growth or accumulation and the latter of the growth or accumulation with a tangible shape as to be receivable.”

11. The observations of Lord justice Fry in the case of Colquhoun vs. Brooks (1888) 21 QBD 52 at 59 were also quoted by Mukerji J. in the aforesaid case of Rogers Pyatt Shellac and Co. (1925) 1 ITC 363 as follows: ” In the first place, I would observe that the tax is in respect of profits or gains arising or accruing ‘. I cannot read those words as meaning ‘received by ‘. If the enactment were limited to profits and gains ‘ received by ‘ the person to be charged, that limitation would apply as much to all Her Majesty’s subjects as to foreigners residing in this country. The result would be that no income tax would be payable upon profits which accrued but which were not actually received, although profits might have been earned in the kingdom and might have accrued in the kingdom. I think, therefore, that the words ‘arising or accruing ‘ re general words descriptive of a right to receive profits. “

12. These observations of Lord justice Fry were later on also quoted with approval in a later decision of the Supreme Court including the leading case of the Supreme Court in E.D. Sassoon & Company Ltd. vs. CIT (1954) 26 ITR 27 at page 51.

13. Later, Shah J., speaking for their Lordships of the Supreme Court in CIT vs. Ashokbhai Chimanbhai (1965) 56 ITR 42 at page 45, has stated the proposition thus: ” Under the IT Act, income is taxable when it accrues, arises or is received, or when it is by fiction deemed to accrue, arise or is deemed to be received. Receipt is not the only test of chargeability to tax ; if income accrues or arises it may become liable to tax. For the purpose of this case, it is unnecessary to dilate upon the distinction between income ‘accruing ‘ and ‘arising’. But there is no doubt that the two words are used to contra distinguish the word ‘receive’. Income is said to be received when it reaches the assessee : when the right to receive the income becomes vested in the assessee, it is said to accrue or arise. ” (Emphasis* supplied).

14. Thus income can be said not to have resulted at all if there is neither accrual nor receipt of income. For the purposes of the Act, income can be said to be received when it reaches the assessee but it can be said to have ” accrued” or “arisen” only when the right to receive the said income becomes vested in the assessee.

15. It is, therefore, also clear that income may accrue to an assessee without the actual receipt of the same. The said income can be received later on provided the assessee has got a right to receive the said income. In the aforesaid case of E. D. Sassoon and Company Ltd. (supra) of the report, the Supreme Court has emphasised this aspect of the matter by saying: ” The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise expressed debitum in Praesenti, solvendum in futuro (emphasis supplied): see W. S. Try Ltd. vs. Johnson (Inspector of Taxes) (1946) 1 All ER 532 at 529 and Webb vs. Stenton and Others, Garnishees (1883) 11 QBD 518 at 522, 527. Unless and until there is created in favour of the assessee a debt due by somebody, it cannot be said that he has acquired a right to receive the income or that income has accrued to him. “

16. The question to be considered in the present case is when did the income or right to receive payment in dispute accrue or arise. According to the Oxford English Dictionary, the meaning of the word ” accrue ” is ” “to fall as a natural growth or increment ; to come as an accession or advantage “. The word ” arise ” is defined as ” to spring up, to come into existence “. The words ” accrue ” and ” arise. ” do not mean actual receipt of profits or gains. Both these words are used in contradistinction to the word ” receive ” and indicate a right to receive.

17. Thus, it is manifest that if an assessee acquires a right to receive the income, the income can be said to accrue to him though it may be received later on. In the present case, therefore, what is to be examined is as to whether the assessee had any right to the disputed amount until the case was decided by the Supreme Court. Having regard to the observations of the Supreme Court quoted above in the case of E. D. Sassoon & Company Ltd. (supra), it is clear that unless and until there is created in favour of an assessee a debt due by somebody, it cannot be said that he has acquired a right to receive the income or that income has accrued to him.

18. The decision of a Full Bench of the Calcutta High Court in Banchharam Majumdar vs. AdyanathBhattacharjee (1909) ILR 36 Cal 936, throws considerable light on the connotation of the word ” debt “. Jenkins C. J. defined that word thus (p. 939); ” I take it to be well established that a debt is a sum of money which is now payable or will become payable in future by reason of a present obligation. “

19. Mookerjee J. quoted the following passage with approval from the judgment of the Supreme Court of California in People vs. Arguello (1869) 37 Calif 524 (p. 941 at 36 ILR) : ” Standing alone, the word ‘debt ‘ is as applicable to a sum of money which has been promised at a future day as to a sum now due and payable. If we wish to distinguish between the two, we say of the former that it is a debt owing, and of the latter that it is a debt due. In other words, debts are of two kinds: solvendum in praesenti and solvendum in futuro (emphasis supplied…) … A sum of money which is a certainty and in all events payable is a debt, without regard to the fact whether it be payble now or at a future time. A sum payable upon a contingency, however, is not a debt, or does not become a debt, until the contingency has happened. “

20. This passage brings out with clarity the essential characteristics of a debt. It also indicates that a debt owing is a debt payable in future. It also distinguishes a debt from a liability for a sum payable upon a contingency.

21. In this connection, the Supreme Court has summarised the position in the case of Kesoram Industries & Cotton Mills Ltd. vs. CWT (1966) 59 ITR 767 at 784 thus : ” A debt is a present obligation to pay an ascertainable sum of money, whether the amount is payable in praesenti or in futuro ; debitum in praesenti, solvendum in futuro (emphasis* supplied). But a sum payable upon a contingency does not become a debt until the said contingency has happened. “

22. After quoting the observations of justice Bhagwati in the case of E.D. Sassoon & Co. Ltd. (supra) the Supreme Court has in the case of CIT vs. Hindustan Housing and Land Development Trust Ltd. (1986) 161 ITR 524 at 527, reiterated the said principles and has held that unless and until there is a debt created in favour of an assessee due by somebody, it cannot be said that he has acquired a right to receive the income. In the aforesaid case of CIT vs. Hindustan Housing and Land Development Trust Ltd. (supra) although the award was made by the arbitrator on July 29, 1955, enhancing the amount of compensation payable to the assessee on account of compulsory acquisition of land, the entire amount was in dispute in the appeal filed by the State Government. On this aspect of the matter in the aforesaid case of Hindustan Housing and Land Development Trust Ltd. (1986) 161 ITR 524 (SC), the Supreme Court has observed at page 527 thus : ” Indeed the dispute was regarded by the Court as real and substantial, because the assessee was not permitted to withdraw the sum of Rs. 7,36,691 deposited by the State Government on April 25, 1956, without furnishing a security bond for refunding the amount in the event of the appeal being allowed. There was no absolute right to receive the amount at that stage. If the appeal was allowed in its entirety, the right to payment of the enhanced compensation would have fallen altogether… The case compares rather with CIT vs. Jai Parkash Om Parkash Co. Ltd. (1961) 41 ITR 718 (Punj). The very foundation of the claim made by the assessee was in serious jeopardy and nothing would be due if the appeal was decided against the assessee “

23. Thus, a mere claim to income without an enforceable right thereto cannot be regarded as accrued income for the purposes of the Act.

24. In the case of CIT vs. Chodavaram Co-operative Sugars Ltd. (1985) 49 CTR (AP) 295 : (1987) 163 ITR 420, the Andhra Pradesh High Court has decided the controversy which is more akin to the present case. In that case, the assessee, a sugar mill, had filed a writ petition before the Supreme Court questioning the validity of the Levy Sugar Supply (Control) Order, 1972, on the grounds that the Government had no power to fix the price in respect of levy sugar and that the assessee should be permitted to sell the sugar at the rates existing prior to the introduction of the Control Order which was in excess of the price fixed by the Control Order. The Supreme Court passed a conditional order permitting the assessee to collect the price of sugar at the rate existing prior to the introduction of the Control Order but directed the assessee to deposit in a separate account the difference in price collected and to furnish a bank guarantee of an equal amount to the Registrar of the Supreme Court. The assessee collected the difference and also furnished the bank guarantee to the Registrar pending the final decision of the Supreme Court on the writ petition. Eventually, the Supreme Court dismissed the writ petition and upheld the

validity of the Control Order. Consequently, the assessee had to refund the excess collections to the constituents from whom they were collected. Before the IT authorities, the assessee contended that the excess collections could not be treated as a trading receipt. The ITO rejected the claim of the assessee and assessed the excess collections as income. The AAC allowed the appeal of the assessee. The Tribunal affirmed the order of the AAC. On a reference, the Andhra Pradesh High Court held as follows (p. 424): ” We consider that the Tribunal was justified in its conclusion that the amount of Rs. 8,76,277 did not partake of the nature of a trading receipt and on that ground itself the amount fell to be excluded from the total income of the assessee. It may be pointed out that the right to collect the amount in excess of the price fixed by the control order was saddled with the obligation to deposit the amount in a separate account and the assessee is always held accountable for the excess collection, pending decision of the Supreme Court. “

25. In view of what has been stated above, therefore, it is crystal clear that on the admitted facts of the present case, till the claim of the assessee is decided by the Supreme Court, it could not be said that there was in existence a right in favour of the assessee to receive the amount in question and that, therefore, a debt was created in favour of the assessee. In our opinion, therefore, the Tribunal was right in law in holding that on the facts of the present case, the assessee did not acquire a right to receive the disputed amount nor can the said amount be taxed as income ” accrued ” or ” arisen ” to the assessee.

26. Let us now take stock of the case cited by learned standing counsel appearing for the CIT. In the case of James Finlay & Co. vs. CIT (supra) the question that precisely fell for consideration was the place of accrual of income. Further, in that case, no evidence was produced by the assessee that he had waived his right to the income. In the case before us, a different situation operates. Here, the assessee still claims his right to the income and the same is pending adjudication before the Supreme Court.

27. In the case of CIT vs. Bhartiya Steel Industries (supra), the bills of the assessee were not disputed by the Railways at any stage. On the other hand, the Railways had made a counter-claim under the agreement on the basis of damages alleged to have been suffered by the Railways on account of late supply of sleepers. The dispute in the said case related to the counter-claim of the Railways.

28. The third case cited by learned standing counsel is the case of State Bank of Travancore vs. CIT (1986) 158 ITR 102 (SC). The assessee in that case was a subsidiary of the State Bank of India. It maintained its accounts on the mercantile system of accounting. In the course of its banking business, it used to charge interest on advances, including interest on advances which had become extremely doubtful of recovery and which it termed as ” sticky advances ” by debiting the concerned parties. In the case of interest on ” sticky advances “, the assessee credited the interest to a separate account known as ” Interest Suspense Account “. Instead of carrying it to the profit and loss account, the appellant claimed that having regard to the bad and deteriorating financial condition of the parties concerned, the recovery of even the principal amounts of the debt had become improbable and doubtful and as such the interest thereon although debited in the account books in ” Interest Suspense Account ” was not the real income of the assessee and was not taxable in its hands. Both the Tribunal as well as the High Court negatived the claim of the assessee. The Supreme Court upheld the decision of the High Court on the view that after the close of the accounting year, the appellant, without giving up the interest, which it could have, as a bad debt, did not offer it for taxation but carried it to ” Interest Suspense Account “. Carrying certain amount which had accrued as interest without treating it as a bad debt and by keeping it in a suspense account, it could not be said that the said amount was not the income of the assessee. It was ultimately held that the interest on ” sticky advances ” was rightly treated as income which has accrued to the appellant. The first question referred in the case of State Batik of Travancore (supra) was as to whether the amounts representing interest on ” sticky advances ” was the income of the assessee. On this question, in the majority opinion at page 146 of the report, the Supreme Court has observed as follows : ” In our view, therefore, the concept of real income cannot be so used as to make accrued income non-income simply because after the event of accrual, the assessee neither decides to treat it as a bad debt nor claims deductions under s. 36(2) of the Act, but still enters the same with a diminished hope of recovery in the suspense account.’ ..Extension of the concept of real income to this field to negate accrual after the amount had become payable is contrary to the postulates of the Act. “

29. Thereafter, at page 152, it was ultimately held: ” The concept of reality of the income and the actuality of the situation are relevant factors which go to the making up of the accrual of income but once accrual takes place and income accrues, the same cannot be defeated by any theory of real income. “

It has been ultimately held by the Supreme, Court in the above case that once income accrues, the same cannot be defeated by any theory of real income. If this is done, it will defeat the very object and the provisions of the statutory enactment. Ultimately, it was held in that case that the income bad accrued to the assessee. The same was thus a case where a converse position operated. In this view of the matter, we do not see, is to how the said case helps the Iearned standing counsel for the Revenue at all. Thus, in our opinion, the cases relied upon by learned standing counsel are of no relevance to the controversy involved in the present case.

In the result, we would answer the question referred to us in the affirmative and affirm the view taken by the Tribunal. Since nobody has appeared on behalf of the assessee, there shall be no order as to costs. The costs of learned standing counsel are assessed at Rs. 300.

[Citation : 171 ITR 417]