Punjab & Haryana H.C : interest received on enhanced compensation is not taxable in the year of receipt

High Court Of Punjab & Haryana

CIT vs. Karambir Singh

Assessment Year : 1997-98

Section : 5

Adarsh Kumar Goel And Ajay Kumar Mittal, JJ.

ITA No. 283 Of 2006

August 24, 2010

JUDGMENT

Ajay Kumar Mittal, J. – This appeal has been preferred by the Revenue under section 260A of the Income-tax Act, 1961 (in short “the Act”) against order dated July 29, 2005, passed by the Income-tax Appellate Tribunal, Delhi Bench “B”, New Delhi (hereinafter referred to as “the Tribunal”) in I. T. A. No. 1477/Del/2004, for the assessment year 1997-98, proposing to raise the following substantial question of law :

“Whether, on the facts and in the circumstances of the case, the hon’ble Income-tax Appellate Tribunal was right in law in holding that interest received on enhanced compensation is not taxable in the year of receipt, in view of the decision of the apex court in the case of CIT v. T. N. K. Govindarajulu Chetty [1987] 165 ITR 231 , despite the fact that the assessee is not following the mercantile system of accounting ?”

2. Briefly stated, the facts of the case are that the agricultural land belonging to Smt. Ganga Devi was acquired by the Haryana Urban Development Authority (HUDA) on March 20, 1989. Smt. Ganga Devi died on November 24, 1991, and the matter regarding enhancement of compensation was pursued by her son and the sole legal heir, Khushi Ram, who received enhanced compensation amounting to Rs. 38,64,062 including interest of Rs. 14,72,006 on September 29, 1996, for the period from March 20, 1989, to September 19, 1995. Khushi Ram expired on July 28, 2000, leaving behind two sons, namely, S/Shri Karambir Singh and Sushil Kumar. A notice under section 148 of the Act was served upon Karambir Singh the legal heir of the late Shri Khushi Ram who filed his return of income on March 26, 2002, declaring total income of Rs. 89,300 from the bank interest. During the course of the assessment proceedings, the assessee pleaded that he received the interest amounting to Rs. 14,72,006 on September 29, 1996, pertaining to the period March 20, 1989, to September 19, 1995, on delayed payment of enhanced compensation and no interest accrued in the assessment year 1997-98. Out of the total interest receipts of Rs. 14,72,006 received from the HUDA, he had declared interest of Rs. 2,41,312 and Rs.1,20,656 on accrual basis for the assessment years 1995-96 and 1996-97, respectively. The assessee claimed the benefit of spreading over interest income instead of drawing the interest income to be income of the year in which the amount was received. The Assessing Officer held that out of the total interest income of Rs. 14,72,006 received on September 29, 1996, the assessee had declared interest income of Rs. 2,41,312 and Rs. 1,20,656 only for the assessment years 1995-96 and 1996-97, respectively, on accrual basis but had not declared the remaining receipt of interest of Rs. 11,10,038 in respect of the period prior to the assessment year 1995-96 by filing of income-tax returns. The Assessing Officer further held that since the assessee was not maintaining any accounts, his interest income had to be taxed in the year of receipt in the absence of the mercantile system of accounting being followed. Being aggrieved, the assessee took the matter in appeal before the Commissioner of Income-tax (Appeals) who, vide order dated February 3, 2004, upheld the order of the Assessing Officer after referring to the judgment of this court in Tuhi Ram v. Land Acquisition Collector [1993] 199 ITR 490 and distinguishing the judgments relied upon by the assessee being CIT v. T. N. K. Govindarajulu Chetty [1987] 165 ITR 231 (SC), Rama Bai v. CIT [1990] 181 ITR 400 (SC), K. S. Krishna Rao v. CIT [1990] 181 ITR 408 (SC) and Bikram Singh v. Land Acquisition Collector [1997] 224 ITR 551 (SC). It was held that the said judgments applied only when the assessee was following the mercantile system of accounting. On further appeal by the assessee, the Tribunal, vide order dated July 29, 2005, upheld the plea of the assessee and held that irrespective of the system of accounting being followed, the interest income had to be spread over on accrual basis.

3. This appeal was earlier dismissed by this court but on further appeal, the matter has been remanded to decide the appeal in view of the judgment of the hon’ble Supreme Court in CIT v. Ghanshyam (HUF) [2009] 315 ITR 1 (SC).

4. We have heard learned counsel for the Revenue. None appears for the assessee.

5. The issue that arises in this appeal for consideration is whether the interest which was received by the assessee-landowner respondent on September 29, 1996, relating to the period March 20, 1989, to September 19, 1995, on delayed payment of enhanced compensation, is to be taxed in the assessment year 1997-98 or not.

6. We analyse the concerned provision first. Section 145 of the Act relates to the method of accounting. Originally enacted, section 145 provided that income under the head “Profits and gains of business or profession” or “Income from other sources” shall be computed in accordance with the method of accounting regularly followed by an assessee. Accordingly, the assessee was entitled to choose any one of the following system of accountancy :

(a) cash or receipts system ; or

(b) mercantile or accrual system ; or

(c) mixed or hybrid system.

7. The Finance Act, 1995, with effect from April 1, 1997, relating to assessment year 1997-98 and subsequent years, substituted section 145 which reads thus :

“145.(1) Income chargeable under the head ‘Profits and gains of business or profession’ or ‘Income from other sources’ shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.

(2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income.

(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.”

8. The Board, vide Circular No. 717, dated August 14, 1995 ([1995] 215 ITR (St.) 70, 103), explained the scope and object of the said provision as under :

“Methods of accounting and accounting standards for computing income

44.1 Section 145(1) of the Income-tax Act prior to its amendment by the Finance Act, 1995, provided for computation of income from business or profession or income from other sources in accordance with the methods of accounting regularly employed by the assessee. Income is generally computed by following one of the three methods of accounting, namely, (i) cash or receipts basis, (ii) accrual or mercantile basis, and (iii) mixed or hybrid method which has elements of both the aforesaid methods. It was noticed that many assessees are following the hybrid method in a manner that does not reflect the correct income. The Finance Act, 1995, has amended section 145 of the Income-tax Act to provide that income chargeable under the head ‘Profits and gains of business or profession’ or ‘Income from other sources’ shall be computed only in accordance with either the cash or the mercantile system of accounting, regularly employed by an assessee. The first proviso to sub-section (1) of section 145 has been deleted.

44.2 The Finance Act, 1995, has also empowered the Central Government to prescribe by notification in the Official Gazette, the accounting standards which an assessee will have to follow in computing his income under the head ‘Profits and gains of business or profession’ or ‘Income from other sources’. These accounting standards will be laid down in consultation with expert bodies like the Institute of Chartered Accountants of India.

44.3 The amendment will take effect from 1st April, 1997, and will, accordingly, apply in relation to the assessment year 1997-98 and subsequent years.”

9. The Central Government is empowered by the amended provision to specify the accounting standards which are required to be followed by an assessee for computing income under the head “Profits and gains of business or profession” or “Income from other sources”, by notifying the same in the Official Gazette. It may be noticed that the Central Government has issued Notification No. S. O. 69(E), dated January 25, 1996, published in [1996] 218 ITR (St.) 1 in exercise of the power under section 145(2) of the Act for assessees following the mercantile system of accounting.

10. On a plain reading of the said section, it is concluded that prior to the amendment by the Finance Act, 1995, with effect from April 1, 1997an assessee had option of choosing any one of the methods of accountancy, i.e., (a) cash system ; (b) mercantile system, or (c) hybrid or mixed system. However, after the amendment, an assessee has an option to adopt either the cash system or the 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 the cash/receipt basis ; or the mercantile/accrual system of accounting regularly employed by the assessee. Under the 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.

11. Now, reference may be made to the judgments on which reliance has been placed by the Tribunal while deciding the appeal in favour of the assessee. In T. N. K. Govindarajulu Chetty’s case [1987] 165 ITR 231 (SC), the assessee received compensation of Rs. 5 lakhs towards compensation for acquisition of property in 1949 and Rs. 1,28,716 as interest, which was received in the two assessment years 1955-56 and 1956-57. It was held by the High Court that the assessee was following the mercantile system of accountancy and, therefore, the interest accrued to him between the date of acquisition and the date of actual payment. The apex court upheld the decision of the High Court and dismissed the appeal of the Revenue.

12. This judgment was followed by the Apex Court in Rama Bai’s case [1990] 181 ITR 400.

13. The Hon’ble Supreme Court in Krishna Rao’s case [1990] 181 ITR 408, on an appeal filed by the assessee relied upon its decision in Rama Bai’s case [1990] 181 ITR 400 and accepted the same by holding that the interest on enhanced compensation awarded under the Land Acquisition Act, 1894 (in short “the 1894 Act”), cannot be taxed in a lump sum but has to be spread over on annual basis.

14. The issue in Bikram Singh’s case [1997] 224 ITR 551 (SC) was regarding taxability of interest received on delayed payment of compensation assessed under the 1894 Act. It was held to be revenue receipt exigible to tax but the same was to be spread over the period for which payment was made in view of earlier judgment of the apex court in Rama Bai’s case [1990] 181 ITR 400 and Krishna Rao’s case [1990] 181 ITR 408.

15. The Division Bench of this court in Tuhi Ram’s case [1993] 199 ITR 490 was seized of the matter relating to constitutionality of provisions whereby agricultural lands situated within eight kilometers of municipality were treated to be capital asset and held to be exigible to capital gains under the Act. This court while upholding the vires of section 2(14)(iii) of the Act had laid down that income by way of interest received had to be spread over all the assessment years to which it related for the purpose of income-tax from the time it became due. Reliance was placed on the judgment of the apex court in Rama Bai’s case [1990] 181 ITR 400 and Krishna Rao’s case [1990] 181 ITR 408 and T. N. K. Govindarajulu Chetty’s case [1987] 165 ITR 231 (SC).

16. After examining the aforesaid case law, it is discerned that in all these cases, the assessee had adopted the mercantile system of accountancy and it was nowhere recorded therein that the assessee was following cash system of accountancy. It was authoritatively held in such circumstances that the interest received had to be spread over all the years to which it related to.

17. Now, we advert to the decision of the apex court in Ghansham’s case [2009] 315 ITR 1 on the basis of which the matter has been remanded to this court for considering its effect on the decision of the case. The hon’ble Supreme Court was dealing with the issue relating to assessability of capital gains to income-tax under the provisions of section 45(5) of the Act. Section 45 was amended by the Finance Act, 1987, with effect from April 1, 1988, where under sub-section (5) was inserted as an overriding provision. It was held that the enhanced compensation under the 1894 Act arises and is payable at multiple stages and, therefore, compensation is treated as “deemed income” at the time when it is received and taxed on receipt basis. This is notwithstanding the cases where enhanced compensation may be in dispute in pending appeal and claimant had been permitted to withdraw the amount conditionally. It was further held that interest under section 28 of the 1894 Act is a part of enhanced value of the land and forms part of compensation and is accordingly, exigible to tax in the year of receipt. However, it was observed that interest under section 34 of the 1894 Act on account of delayed payment of enhanced compensation is also income but its nature is different.

18. Having noticed the legal position, its applicability to the present case may be examined. The assessee herein, had received total interest of Rs.14,72,006 on September 29, 1996, relating to the period March 20, 1989, to September 19, 1995, and in case the system of accountancy being followed was mercantile, the same ought to have formed part of taxable income from the assessment years 1989-90 to 1996-97. The assessee had disclosed interest income of Rs. 2,41,312 for the assessment year 1995-96 and Rs. 1,20,656 for the assessment year 1996-97 whereas the balance amount of Rs. 11,10,038 was not brought within the ambit of taxation for other years. This amply shows that the assessee was not following mercantile system of accounting otherwise the same would have formed part of taxable income from the assessment years 1989-90 to 1994-95 as well on accrual basis. Further, the assessee is an agriculturist and in the absence of any material that the mercantile system was being followed, it shall be concluded that he was following the cash system. Once that is so, the amount of interest received on September 29, 1996, on account of delayed payment of enhancement compensation would fall under section 34 of the 1894 Act and form part of income from other sources. It shall be taxable in the year of receipt and shall be exigible to income-tax in the assessment year 1997-98. The judgment of this court as well as of the apex court do not come to the rescue of the assessee. The reliance of the Tribunal on the apex court decisions, therefore, cannot be upheld. The order passed by the Tribunal, thus, is legally unsustainable.

19. In view of the above, the substantial question proposed is answered in favour of the Revenue and against the assessee.

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

[Citation : 337 ITR 159]

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