High Court Of Delhi
Pal Properties (I) (P) Ltd. vs. CIT & Anr.
Sections 4, 5, 194-I, Explanation
Asst. year 1990-91, 1991-92
S.B. Sinha, C.J. & A.K. Sikri, J.
IT Appeal No. 97 of 2001
21st December, 2001
M.S. Syali with Satyen Sethi & Manu K. Giri, for the Applicant : R.D. Jolly with Ms. Prem Lata Bansal, for the Respondent
S.B. SINHA, C.J. :
The substantial questions of law which have been raised and are required to be answered in this appeal are :
(i) Whether the Tribunal was right in law in holding that damages or any part thereof for illegal occupation of the premises accrued to the appellant though the claim therefor was yet to be adjudicated finally and was pending disposal before the Honâble High Court ?
(ii) Whether the Tribunal is right in law in holding that the amount received by the appellant under interim order of the Honâble High Court, dt. 6th Jan., 1993, relevant to asst. yr. 1993-94 is taxable on month to month basis in asst. yrs. 1990-91 and 1991-92 as relatable thereto ?
2. The appeal is for asst. yr. 1990-91 and the first question for asst. yr. 1991-92 rotates around a single issue. Briefly stated the facts of the case on the issue are : The assessee entered into lease agreement on 26th Nov., 1979, with M/s Arya Dharma Seva Sangh, for the lease of the 1st floor premises, Flat No. H-72, Connaught Circus, New Delhi, together with right of entrance passage and other easements of the said premises for 114 months at a rent of Rs. 1,000 per month. This lease deed was renewable at the desire of the tenant. The assessee entered into sublease vide lease deed dt. 18th Aug., 1981, with the Traders Bank. The Traders Bank regularly paid the rent till 1988 at the rate of Rs. 24,201.75 p. p.m. On nationalization, the Bank of Baroda took over the possession of the premises from Traders Bank. On 15th June, 1989, this sublease expired. Since the Bank of Baroda, after taking over for Traders Bank failed to pay the rent to the assessee, the assessee vide its letter dt. 11th Jan., 1989, terminated the tenancy agreement w.e.f. 31st Jan., 1989, on the ground of non-payment of rent. After 11th Jan., 1989, the assessee received a letter from the Bank dt. 6th Jan., 1989, along with a cheque dt. 19th Dec., 1988, for Rs. 96,807 representing the rent for the months of July to October, 1988. The assessee vide its letter dt. 13th Jan., 1989, returned the cheque clarifying that tenancy was terminated vide its letter dt. 11th Jan., 1989. Though the assessee terminated the tenancy agreement and returned some of the cheques received towards rent, rental income was shown in the return of income for the asst. yr. 1989-90 and for three months i.e., from 1st April, 1989, to 30th June, 1989, in its return of income for the asst. yr. 1990-91. The AO while framing assessment for the asst. yr. 1990-91, under s. 143(3) called upon the assessee to explain as to why the rent for the period after 30th June, 1989, was not offered for taxation. It was explained on behalf of the assessee that the tenancy was valid till 30th June, 1989, and thereafter the assessee was not entitled to receive rent. It was also explained that the assessee had filed legal suit against the bank for vacation of the premises. As the right to receive the rent was in dispute, it was submitted on behalf of the assessee that the same could not be brought to tax. Before the AO the assessee relied on the decision of the apex Court in the case of CIT vs. Hindustan Housing and Land Development Trust (1986) 58 CTR (SC) 179 : (1986) 161 ITR 524 (SC) : TC 39R.624. The AO deputed the inspector who reported that the bank was regularly paying rent to the assesseecompany. The AO thereafter included in the total income the rent of 12 months at the rate of Rs. 24,201.75p per month instead of three months as shown by the assessee for the asst. yr. 1990-91, and for 12 months for the asst. yr. 1991-92. The decision of the AO was confirmed by the learned CIT(A) for both the assessment years.
3. M.S. Syali, the learned counsel for the assessee, vehemently urged that the Revenue authorities had erred in including the rent for 9 months and 12 months, respectively, in assesseeâs income for asst. yrs. 1990-91 and 1991-92, respectively. It was submitted by the learned counsel that the assessee was following cash method of accounting in respect of the rent received. He further pointed out that both the Revenue authorities had failed in appreciating the adoption of this method of accounting and had wrongly mentioned that the books of accounts were maintained by the assessee on the basis of mercantile system of accounting. He pointed out that the rental income in the earlier years was not assessed under the head “Income from house property” because of the fact that the assessee was not the owner of the said property. It was pointed out by him that the income recorded in earlier years was also assessed accordingly. He pointed out that when the bank failed to pay the rent in accordance with the terms of the lease deed, a suit for possession and recovery was filed before the Honâble Delhi High Court claiming compensation therein as under : (a) Rent for the period July, 1988, to May, 1989, i.e., for 11 months at the rate of Rs. 24,201.75p. p.m. totalling Rs. 2,66,219.35p. (b) Compensation for the period 1st June, 1989, to 31st July, 1991, i.e., 26 months at the rate of Rs. 70,000 per month as the market value of the premises on 1st June, 1989, was approximately Rs. 70,000 per month and since then it had further gone up, totalling Rs. 18,20,000. Referring to para. 18 of the suit filed before the High Court, the learned counsel pleaded that the assesseeâs total claim of Rs. 2,66,219.25p. was towards the rent received from July, 1988, to May, 1989, and of Rs. 18,20,000 was towards compensation from 1st June, 1989, to 31st July, 1991. The learned counsel explained that the lease deed entered into with the bank was for a specified period and had expired in May, 1989, and there was no provision contained in the deed for its further renewal at the choice of the bank. He, therefore, pleaded that even if it was presumed for the sake of argument that the assessee was maintaining its accounts on mercantile system of accounting, the assessee had no right to receive the rent from the bank after the expiry of the said lease deed. It was explained by him that there was a distinction between cases where the right to receive payment was in dispute and it was not a question of merely quantifying the amount to be received and the cases where the right to receive payment was admitted and the quantification of the amount payable was then to be determined. He pleaded that the assessee had no right to receive payment and thus the rent was not taxable. He also submitted that the disputed amount could not be taxed.
On the other hand, contention of the learned counsel for the respondent is that the assessee had filed suit for the vacation of the property as also for the compensation at the rate of Rs. 70,000 per month, for the period after the expiry of lease agreement. He pointed out that the compensation of Rs. 70,000 per month included rent of Rs. 24,000 and odd which was in accordance with the agreement with the bank though the lease had expired in the month of May 1989 and the balance amount, was attributed to the damages as claimed by the assessee. He further pointed out that the AO had taxed only the portion attributable to the rent at the rate of Rs. 24,000 and odd per month and not the balance of around Rs. 46,000 per month towards damages. It was further pointed out by the learned counsel for the respondent that the assessee was maintaining its accounts on mercantile system of account, as was evident from the order of the AO itself, wherein a specific finding to this effect had been given. As the assessee was following the mercantile system of accounting, the learned counsel submitted that the income becomes taxable when the assessee acquires the right to receive same, irrespective of the fact that whether it was received or not.
For the purpose of disposal of this appeal, we will proceed on the basis that the assessee had been following the mercantile system of accounting.
In the instant case, it is accepted that the provisions of Delhi Rent Control Act are not applicable and the relationship of the landlord and the tenant is governed by the provisions of the Transfer of Property Act. Sec. 105 of the Transfer of Property Act is as follows : Sec. 105 Lease defined.âA lease of immovable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions, to the transferor by the transferee, who accepts the transfer on such terms. Lessor, lessee, premium and rent defined.âThe transferor is called the lessor, the transferee is called the lessee, the price is called the premium, and the money, share, service or other thing to be so rendered is called the rent.
It is beyond any cavil of doubt that rent is payable by a lessee to his landlord so long the lease subsists. It is accepted that the lease by and between the appellant and M/s Traders Bank came to an end w.e.f. 31st Jan., 1989. Upon valid termination of tenancy, the tenant no longer remains a tenant but becomes a trespasser. For the purpose of his eviction, the appellant herein filed a suit and also claimed a decree for mesne profits. Rent and mesne profit connote two different meanings. Mesne profit is defined in s. 2(12) of the CPC to mean : “Mesne profits” of property means those profits which the person in wrongful possession of such property actually received or might with ordinary diligence have received therefrom, together with interest on such profits, but shall not include profits due to improvements made by the person in wrongful possession.”
In suit No. 2669/91, the appellant claimed a sum of Rs. 70,000 per month by way of damages. The learned Tribunal noticed that as the claim for mesne profit was calculated at Rs. 70,000 per month which was higher then the actual rent payable at Rs. 24,000, the said sum of Rs. 24,000 becomes taxable, as being payable by lessee to the landlord. Mesne profit is a composite sum. Damages payable by an erstwhile lessee, who becomes a trespasser upon termination of the lease, is an unascertained amount of money. It does not constitute a debt. Various factors may be taken into consideration by a Court as regards determination of the mesne profit/damages payable by the defendant to the plaintiff. Such an unascertained sum is not and cannot be said to have become a debt payable to the assessee by his erstwhile tenant.
6. Mr. R.D. Jolly, the learned counsel appearing on behalf of the respondent, however, has placed strong reliance upon s. 194-I of the IT Act and supported the order passed by the learned Tribunal. Sec. 14-I is in the following terms : “194-I Rent. Any person, not being an individual or an HUF, who is responsible for paying to any person any income by way of rent, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate ofâ (a) fifteen per cent, if the payee is an individual or an HUF; and (b) twenty per cent in other cases : Provided that no deduction shall be made under this section where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited to be paid during the financial year by the aforesaid person to the account of, or to, the payee, does not exceed one hundred and twenty thousand rupees. Explanation.âFor the purposes of this section,â (i) “rent” means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of any land or any building (including factory building), together with furniture, fittings and the land appurtenant thereto, whether or not such building is owned by the payee; (ii) where any income is credited to any account, whether called “suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.”
7. It is well settled that definition of an expression used for one purpose, cannot be applied for another purpose. Explanation appended to the aforementioned provision whereupon Mr. Jolly placed strong reliance, begins with expressions “for the purposes of this section”. Sec. 194-I provides for deduction of income-tax by the tenant while paying rent to the landlord. The said provision has got nothing to do with taxability of income as provided for under ss. 4 and 5 of the IT Act. Sec. 4 of the IT Act reads thus : 4(1) Where any Central Act enacts that income- tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person: Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly. (2) In respect of income chargeable under sub-s. (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act. Sec. 194-I does not govern the provisions of accrual of income. It is also not a case where the tenant bank had deducted the amount of tax as provided for under s. 194-I from the rental payment to the appellant. In the instant case, the claim of the appellant against his erstwhile tenant is pending. The lis between the parties being pending adjudication, the fate thereof is unknown. In a given case, having regard to the delay in disposal of the matter, the parties may arrive at a settlement in terms whereof the landlord may give up his right of mesne profit or even pay some amount from his pocket. It, therefore, cannot be said that only because the claim of the appellant by way of mesne profit denotes a higher amount of the rent, the same can be divided into two parts, as has been sought to be done by the Tribunal.
8. In CIT vs. Hindustan Housing and Land Development Trust Ltd. (supra), the apex Court has made distinction between the cases where the right to receive payment is in dispute and it is not a question of merely quantifying the amount to be received and cases where the right to receive payment is admitted and the quantification only of the amount payable is left to be determined in accordance with settled or accepted principles. The apex Court referred to the earlier decision of the Andhra Pradesh High Court dealing with the taxability of compensation received under the Land Acquisition Act in Khan Bahadur Ahmed Alladin & Sons vs. CIT (1969) 74 ITR 651 (AP) : TC 39R.1661 wherein it was held that where the land has been taken over by the Government, the right of the owner to compensation was an inchoate right until the compensation had been actually determined and had become payable. The said decision has been considered by the apex Court in P. Mariappa Gounder vs. CIT (1998) 149 CTR (SC) 322 : (1998) 232 ITR 2 (SC) : TC S39.3530 wherein the Court has even proceeded on the basis that even if a decree has been passed allowing mesne profit, if the same is required to be quantified in terms of O. 29, r. 12 CPC, the same would not be an accrued income, holding : “On the date when the Collector awarded the compensation, it is only that amount which had accrued or deemed to accrue, whether in fact paid or not. But by no stretch of the words in s. 4(1) (b)(i), could it be said that the right to enhanced compensation, which has not yet been accepted by the proper forum, namely, the Court, has also become payable on the date when the original compensation became payable, for being included in that year of assessment. The enhanced compensation accrues only when it becomes payable, i.e., when the Court accepts the claim. As has been stated earlier, a mere claim by the assessee, after taking of possession of the land, at a particular rate or for a certain sum is not compensation. It must not be forgotten that, even if a Court has awarded enhanced compensation, there is a right of appeal by the Government to the High Court, and the High Court may either disallow that claim or reduce the compensation. As against that judgment there is a further right of appeal to the Supreme Court. The assessee also can appeal against the insufficiency of the enhanced compensation. Can it be said that the final determination by the highest Court of the compensation would entitle the ITO, notwithstanding the period of limitation fixed under the IT Act, to reopen the assessment in which he had included the initial compensation awarded by the Collector and recompute the entire income on the basis of the final compensation? We do not think there can be any justification for such a proposition. On a proper construction of the terms âaccrueâ or âariseâ, we are of the view that such an interpretation cannot be placed. The interpretation given by us does not affect the interests of the Revenue. At the same time, it safeguards the assessee and prevents harassment. To hold otherwise would be contrary to the provisions of law.” Yet again, recently in CIT vs. United Provinces Electric Supply Co. (2000) 160 CTR (SC) 248 : (2000) 244 ITR 764 (SC), it has been held that where partial payment has been made towards compensation which has been accepted, the same would become taxable. Such is not the position here inasmuch as during the relevant assessment years, no amount was accepted by the appellant from its tenant.
9. In CIT vs. Smt. Vimla D. Sonwane (1994) 75 Taxman 335 : (1995) 212 ITR 489 (Bom) : TC S.18, V.A. Mohta, J, as the learned Chief Justice then was, observed: “4. The right to receive agreed lease money was in jeopardy because of the pendency of proceedings for fixation of standard rent in a Court of law. There was, thus, neither factual accrual nor deemed accrual. Income arising out of lease of plot falls in assets under the head âIncome from other sourcesâ. Option regarding adoption of system of accounting is with the assessee and not with the IT Department. The assessee is indeed free even to follow different methods of accounting for income from different sources in an appropriate case. The Department cannot compel the assessee to adopt the mercantile system of accounting. As a matter of fact, it was not adopted. Under the circumstances, the income from lease rent could not be taxed on accrual basis.”
10. In Godhra Electricity Co. Ltd. vs. CIT (1997) 139 CTR (SC) 564 : (1997) 225 ITR 746 (SC) : TC S39.3525, the apex Court held that : The Tribunal had rightly held that the claim at the increased rates as made by the assesseecompany on the basis of which necessary entries were made, represented only hypothetical income, and the impugned amount âas brought to tax by the ITO did not represent income which had really accrued to the assessee-company during the relevant previous years.
11. In CIT vs. OPN Arunachala Nadar (1983) 36 CTR (Mad) 282 : (1983) 141 ITR 620 (Mad) : TC 17R.267, it has been held : One other question which has been referred to us in this case relates to another item of deduction claimed by the assessee, which was disallowed by the ITO in the first instance, but subsequently allowed by the appellate authorities. The claim for allowance related to the mesne profits decreed in the partition suit as payable by the assessee to his erstwhile partner, John Samuel. The mesne profits, as ascertained by the Court, amounted to Rs. 8,000. It is needless to say that this amount related to past mesne profits, of more than one year. The ground on which the ITO refused to allow this amount to be deducted in the computation of the profits for the subsequent account year with which we are now concerned was that they related to 1957 and onwards and cannot, therefore, come in for deduction during any subsequent years, let alone in the account year in question relevant to 1962-63. Both the AAC and the Tribunal took a different view. They held that it was not possible to envisage any liability on the part of the assessee for payment of mesne profits until the Court gave a decree against him in that regard. They further held that the liability for mesne profits accrued only after the judgment was rendered against the assessee in the partition suit. Accordingly, they held that the claim for allowing deduction of mesne profits was properly laid by the assessee as arising or accruing only in the year in which the judgment was rendered against the assessee. We did not hear such argument from learned counsel for the Department on this question. There may be a limited class of cases in Income-tax law where the theory of relation back may be applied both for the purpose of fixing the year of receipt of income and for the purpose of determining the year for allowance of expenditure. But, in this case, the very peculiar conception of mesne profits can be consistent only with the position that the person in possession is in unlawful occupation of property which actually produces or is capable of producing profits. So long as the assessee in this case was claiming that he was in lawful occupation not only of his own half share of the salt pans, but also of the half share belonging to John Samuel, he could not, consistent with that stand, be expected to claim an allowance in his income-tax assessments of a deduction in respect of the so-called mesne profits as having accrued year by year. It is only when the Court gave its verdict on the unlawful nature of his possession that the income accruing from the half share of lands took upon itself the character of mesne profits. Therefore, it was only when the judgment was rendered in this regard that the liability itself has properly accrued. We, therefore, agree with the conclusion of the Tribunal that the sum of Rs. 8,000 was properly allowable in the year of account relevant to the asst. yr. 1962-63. Since we have answered both the questions in this reference in favour of the assessee, the Department will pay the assesseeâs costs. Counselâs fee Rs. 500.
The decisions referred to hereinbefore, in no uncertain terms, clearly show that the mesne profit which is yet to be determined, does not come within the purview of an accrued income for the purpose of ss. 4 and 5 of the IT Act.
In that view of the matter, question No. 1 must be answered in favour of the assessee and against the Revenue. As a logical corollary, the question No. 2 must also be answered in favour of the assessee and against the Revenue. However, we may place on record that after a period of two years, by an interim order passed by the Court, some amount had been directed to be paid to the assessee herein which the assessee had shown in its return without prejudice to his rights and contentions. We do not intend to express any opinion on merits so far as the contention of the assessee is concerned that despite the same, the income accrued by it, is not taxable.
The appeal is disposed of accordingly.
[Citation : 254 ITR 687]