Commissioner Of Income Tax, Faridabad v. Ajay Kumar Mittal, J

ITA No. 356 of 2007 -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 356 of 2007 Date of Decision: 1.9.2010 Commissioner of Income Tax, Faridabad Versus Smt. Burfi ....Appellant. ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL.HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Ms. Urvashi Dhugga, Advocate for the appellant. Mr. Tribhuvan Dahiya, Advocate for the respondent. AJAY KUMAR MITTAL, J. 1.This appeal has been preferred by the revenue underSection 260A of the Income Tax Act, 1961 (in short “the Act”) againstthe order dated 24.11.2006 passed by the Income Tax AppellateTribunal, Delhi Bench 'I', New Delhi (hereinafter referred to as “theTribunal”) in ITA No. 1415/Del/2005 for the assessment year 2002-03proposing following substantial question of law:- “Whether, on the facts and circumstances of thecase, the Hon'ble ITAT is right in holding thatassessment of interest cannot be made until thematter is finally settled by the High Court, incontradiction with the judgment of Hon'ble jurisdictional High Court of Punjab & Haryanafollowing the judgment of Apex Court in the case ofCIT Vs. Rama Bai (181 ITR 400) whereby interest onenhanced compensation is to be taxed on accrualbasis irrespective of the pendency of appeal in highercourts in respect of enhanced compensation. [ITANo. 176 of 05 and ITA No. 177 of 05 in the case ofCIT, Faridabad Vs. Naresh Kumar and CIT,Faridabad Vs. Dilbagh Singh, respectively}?” 2.Facts necessary for adjudication as narrated in the appealmay be noticed. The assessee received enhanced compensation atRs.1,12,828/- and interest on enhanced compensation amounting toRs.97,753/- during the year in question. She filed return on 8.10.2002declaring nil income and agricultural income at Rs.25,000/-. On22.4.2003, notice under Section 148 of the Act was issued and inpursuance thereto, the assessee filed return of income on 14.11.2003declaring the same income as disclosed in the earlier return. TheAssessing Officer under the provisions of Section 45(5)(b) of the Actheld the enhanced compensation to be taxable. The interest on theenhanced compensation was also brought to be taxable. Accordingly,the Assessing Officer completed the assessment at Rs.2,10,581/- plusagricultural income of Rs.25,000/-. Feeling aggrieved, the assesseefiled an appeal before the Commissioner of Income Tax (Appeals) [inshort “the CIT (A)”] who vide order dated 31.1.2005 deleted theadditions made by the Assessing Officer. On appeal by the revenue,the Tribunal vide order dated 24.11.2006 while partly allowing the appeal of the revenue held that amount received on account ofenhanced compensation was taxable in the year of receipts. Regardinginterest received by the assessee, the Tribunal upheld the order of theCIT (A) in principle. Hence, the present appeal by the revenue. 3.We have heard learned counsel for the parties and perusedthe record. 4.Learned counsel for the revenue submitted that theassessee was following cash system of accountancy as is evident fromthe assessment order and, therefore, the interest for delayed paymentof compensation which was received by the assessee in the yearrelating to the assessment year in question was taxable. According tothe revenue, even if the matter regarding compensation was in dispute,the same would not make any difference in view of the method ofaccountancy being followed by the assessee. Learned counsel furthersubmitted that the Tribunal had erred in relying upon Apex Courtdecisions in Commissioner of Income Tax, West Bengal v.Hindustan Housing and Land Development Trust Ltd., [1986] 161ITR 524 and Rama Bai v. CIT, [1991] 181 ITR 400 as these were thecases where the assessee was following mercantile system ofaccountancy. 5.On the other hand, learned counsel for the assessee reliedupon the judgment in Hindustan Housing and Land DevelopmentTrust Ltd and Rama Bai's cases (supra) in support of his submission.He further submitted that till the question regarding right to receivecompensation had not crystalized, no income was taxable and theTribunal had rightly decided the issue in favour of the assessee. 6.We have given our thoughtful consideration to therespective submissions of learned counsel for the parties. 7.Finance Act 1995 with effect from 1.4.1997 relating toassessment year 1997-98 and subsequent years, substituted Section145, according to which assessee has an option to adopt either cashsystem or mercantile system only. Therefore, income chargeableunder the head “Profits and gains of business or profession” or “Incomefrom other sources” is to be computed in accordance with either cash/receipt basis; or mercantile/accrual system of accounting regularlyemployed by the assessee. Under cash system of accountancy, theassessee is liable to pay tax on the income on the basis of cashreceipts during the year under consideration whereas under themercantile system of accountancy, the liability of an assessee isdetermined according to accrual of the income relating to theassessment year in question. 8.We may now advert to the judgment of the Apex Court inHindustan Housing & Land Development Trust Limited's case(supra) on the basis of which the Tribunal had adjudicated the issue infavour of the assessee. In that case, the assessee-company wasfollowing mercantile system of accountancy whose certain lands werecompulsorily acquired by the Government. Award was announced bythe Land Acquisition Collector granting Rs.24,97,249/- as compensationand thereafter arbitrator had fixed the quantum of compensation atRs.30,10,873/-. State Government had challenged the award of thearbitrator by filing an appeal before the High Court and during thependency of the said appeal, an amount of Rs.7,36,691/- deposited by the Government in that appeal was allowed to be withdrawn by thecompany on furnishing a security bond which was credited by it in itsbooks of accounts. The question then arose in that case was whetherthis amount which was received by the company in pursuance to thearbitrator's award which was in dispute in appeal filed by the StateGovernment, could the same be treated to be assessee's income duringthe previous year when the same was received. The Hon'ble SupremeCourt in those facts held that the amount so received by the assesseewas not exigible to tax as there was no absolute right to receive theamount at that stage. If the appeal was allowed by the High Court, theextra amount of compensation of Rs.7,24,914/- was to be returned.Further, under mercantile system of accountancy an amount would notbe liable to be taxed till it has accrued as income. 9.Reference is also made to judgment of the Hon'bleSupreme Court in Rama Bai's case where the assessee was followingmercantile system of accountancy, it was held that the interest onenhanced compensation awarded under the Land Acquisition Act, 1894(in short “1894 Act”) cannot be taxed in a lump sum but has to bespread over as income had accrued on yearly basis. 10.However, the position with regard to receipt of interest onaccount of delayed payment received under Section 34 of the LandAcquisition Act, 1894 (in short “1894 Act”) would be different where theassessee is following cash system of accountancy. In cash system ofaccountancy, the income is taxed in the year of receipt and since theassessee had received the amount during the year in question, thesame was taxable in the assessment year 2002-2003. Further, under ITA No. 356 of 2007 cash system it cannot be said that the assessee had not received anyincome from interest under Section 34 of the 1894 Act. 11.In view of the above, the substantial question proposed isanswered in favour of the revenue and against the assessee. 10.However, the position with regard to receipt of interest onaccount of delayed payment received under Section 34 of the LandAcquisition Act, 1894 (in short “1894 Act”) would be different where theassessee is following cash system of accountancy. In cash system ofaccountancy, the income is taxed in the year of receipt and since theassessee had received the amount during the year in question, thesame was taxable in the assessment year 2002-2003. Further, under ITA No. 356 of 2007 cash system it cannot be said that the assessee had not received anyincome from interest under Section 34 of the 1894 Act. 11.In view of the above, the substantial question proposed isanswered in favour of the revenue and against the assessee. 12.Accordingly, the appeal is allowed and the order of the Tribunal is set aside. (AJAY KUMAR MITTAL) JUDGE September 01, 2010gbs (ADARSH KUMAR GOEL)JUDGE