Commissioner Of Income Tax, Faridabad v. Karambir Singh L/H Of Late Shri Khushi Ram

ITA No. 283 of 2006 -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 283 of 2006 Date of Decision: 24.8.2010 Commissioner of Income Tax, Faridabad Versus ....Appellant. Karambir Singh L/H of Late Shri Khushi Ram ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL.HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Ms. Urvashi Dhugga, Advocate for the appellant. None 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”) againstorder dated 29.7.2005 passed by the Income Tax Appellate Tribunal,Delhi Bench “B”, New Delhi (hereinafter referred to as “the Tribunal”) inITA No. 1477/Del/2004, for assessment year 1997-98, proposing toraise the following substantial question of law:- “Whether on the facts and in the circumstances ofthe case, the Hon'ble ITAT was right in law in holdingthat interest received on enhanced compensation isnot taxable in the year of receipt, in view of thedecision of the Apex Court in the case of CIT Vs. TNK Govindarjulu Chetty, despite the fact that theassessee is not following the mercantile system ofaccounting.” 2.Briefly stated, the facts of the case are that the agriculturalland belonging to Smt. Ganga Devi was acquired by the Haryana UrbanDevelopment Authority (HUDA) on 20.3.1989. Smt. Ganga Devi diedon 24.11.1991 and the matter regarding enhancement of compensationwas pursued by her son and sole legal heir Khushi Ram who receivedenhanced compensation amounting to Rs.38,64,062/- including interestof Rs.14,72,006/- on 29.9.1996 for the period from 20.3.1989 to19.9.1995. Khushi Ram expired on 28.7.2000 leaving behind two sons,namely, S/Shri Karambir Singh and Sushil Kumar. A notice underSection 148 of the Act was served upon Karambir Singh legal heir oflate Shri Khushi Ram who filed his return of income on 26.3.2002declaring total income of Rs.89,300/- from the bank interest. During thecourse of assessment proceedings, the assessee pleaded that hereceived the interest amounting to Rs.14,72,006/- on 29.9.1996pertaining to the period 20.3.1989 to 19.9.1995 on delayed payment ofenhanced compensation and no interest accrued in the assessmentyear 1997-98. Out of the total interest receipts of Rs.14,72,006/-received from HUDA, he had declared interest of Rs.2,41,312/- andRs.1,20,656/- on accrual basis for the assessment years 1995-96 and1996-97, respectively. The assessee claimed the benefit of spreadingover interest income instead of drawing the interest income to beincome of the year in which the amount was received. The AssessingOfficer held that out of the total interest income of Rs.14,72,006/-received on 29.9.1996, the assessee had declared interest income of Rs.2,41,312/- and Rs.1,20,656/- only for the assessment years 1995-96and 1996-97, respectively on accrual basis but had not declared theremaining receipt of interest of Rs.11,10,038/- in respect of the periodprior to the assessment year 1995-96 by filing of income tax returns.The Assessing Officer further held that since the assessee was notmaintaining any accounts, his interest income had to be taxed in theyear of receipt in absence of mercantile system of accounting beingfollowed. Being aggrieved, the assessee took the matter in appealbefore the CIT (A) who vide order dated 03.02.2004 upheld the order ofthe Assessing Officer after referring to the judgment of this Court inTuhi Ram v. Land Acquisition Collector and another, (1993) 199ITR 490 and distinguishing the judgments relied upon by the assesseebeing CIT v. Govindarajulu Chetty (TNK), (1987) 165 ITR 231 (SC),Rama Bai v. CIT, (1991) 181 ITR 400 (SC), Krishna Rao (KS) v. CIT(1990) 181 ITR 408 and Bikram Singh v. Land AcquisitionCollector, (1997) 224 ITR 551 (SC). It was held that the said judgmentsapplied only when the assessee was following mercantile system ofaccounting. On further appeal by the assessee, the Tribunal vide orderdated 29.7.2005 upheld the plea of the assessee and held thatirrespective of the system of accounting being followed, the interestincome had to be spread over on accrual basis. 3.This appeal was earlier dismissed by this Court but onfurther appeal, the matter has been remanded to decide the appeal inview of judgment of the Hon'ble Supreme Court in CIT v. Ghanshyam,(2009) 315 ITR 1. 4.We have heard learned counsel for the revenue. None appears for the assessee. 5.The issue that arises in this appeal for consideration iswhether the interest which was received by the assessee-landowner-respondent on 29.9.1996 relating to the period 20.3.1989 to 19.9.1995on delayed payment of enhanced compensation, is to be taxed in theassessment year 1997-98 or not. 6.We analyze the concerned provision first. Section 145 ofthe Act relates to method of accounting. Originally enacted, Section145 provided that income under the head “profits and gains of businessor profession” or “income from other sources” shall be computed inaccordance with the method of accounting regularly followed by anassessee. Accordingly the assessee was entitled to choose any one ofthe following system of accountancy:- (a) cash or receipts system; or (b) mercantile or accrual system; or (c) mixed or hybrid system. 7.Finance Act 1995 with effect from 1.4.1997 relating toassessment year 1997-98 and subsequent years, substituted Section145 which reads thus:- “145 (1). Income chargeable under the head “Profitsand gains of business or profession” or “Income fromother sources” shall, subject to the provisions of sub-section (2), be computed in accordance with eithercash or mercantile system of accounting regularlyemployed by the assessee. -5- (2)The Central Government may notify in theOfficial Gazette from time to time accountingstandards to be followed by any class of assesseesor in respect of any class of income. (3)Where the Assessing Officer is not satisfiedabout the correctness or completeness of theaccounts of the assessee, or where the method ofaccounting provided in sub-section (1) or accountingstandards as notified under sub-section (2), have notbeen regularly followed by the assessee, theAssessing Officer may make an assessment in themanner provided in section 144.” 8.Board vide circular No. 717 dated 14.8.1995 [(1995) 215ITR St 70] explained the scope and object of the said provision asunder:- -5- (2)The Central Government may notify in theOfficial Gazette from time to time accountingstandards to be followed by any class of assesseesor in respect of any class of income. (3)Where the Assessing Officer is not satisfiedabout the correctness or completeness of theaccounts of the assessee, or where the method ofaccounting provided in sub-section (1) or accountingstandards as notified under sub-section (2), have notbeen regularly followed by the assessee, theAssessing Officer may make an assessment in themanner provided in section 144.” 8.Board vide circular No. 717 dated 14.8.1995 [(1995) 215ITR St 70] explained the scope and object of the said provision asunder:- “Methods of accounting and accounting standards forcomputing income.- 44.1 Section 145 (1) of theIncome-tax Act prior to its amendment by theFinance Act, 1995, provided for computation ofincome from business or profession or income fromother sources in accordance with the methods ofaccounting regularly employed by the assessee.Income is generally computed by following one of thethree methods of accounting, namely, (i) cash orreceipts basis, (ii) accrual or mercantile basis, and(iii) mixed or hybrid method which has elements of both the aforesaid methods. It was noticed thatmany assessees are following the hybrid method in amanner that does not reflect the correct income. TheFinance Act, 1995, has amended section 145 of theIncome-tax Act to provide that income chargeableunder the head “Profits and gains of business orprofession” or “Income from other sources” shall becomputed only in accordance with either the cash orthe mercantile system of accounting, regularlyemployed by an assessee. The first proviso to sub-section (1) of section 145 has been deleted. 44.2 The Finance Act, 1995 has also empoweredthe Central Government to prescribe by notification inthe Official Gazette, the accounting standards whichas assessee will have to follow in computing hisincome under the head “Profits and gains of businessor profession” or “Income from other sources”.These accounting standards will be laid down inconsultation with expert bodies like the Institute ofChartered Accountants. 44.3 The amendment will take effect from Ist April,1997 and will, accordingly, apply in relation toassessment year 1997-98 and subsequent years.” 9.The Central Government is empowered by the amendedprovision to specify the accounting standards which are required to befollowed by an assessee for computing income under the head “Profits ITA No. 283 of 2006 and gains of business or profession” or “Income from other sources”, bynotifying the same in official gazette. It may be noticed that the CentralGovernment has issued notification No. SO69(E) dated 25.1.1996published in [(1996) 218 ITR St. 1] in exercise of power under Section145 (2) of the Act for assessees following mercantile system ofaccounting. 10.On plain reading of the said Section, it is concluded thatprior to amendment by Finance Act, 1995 w.e.f. 1.4.1997, assessee hadoption of choosing any one of the method of accountancy, i.e. (a) cashsystem; (b) mercantile system or (c) hybrid or mixed system. However,after the amendment, as 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. 11.Now, reference may be made to the judgments on whichreliance has been placed by the Tribunal while deciding the appeal infavour of the assessee. In T.N.K. Govindarajul Chetty's case (supra),the assessee received compensation of Rs.5 lacs towardscompensation for acquisition of property in 1949 and Rs.1,28,716/- as ITA No. 283 of 2006 interest, which was received in two assessment years 1955-56 and1956-57. It was held by the High Court that the assessee was followingmercantile system of accountancy and, therefore, the interest accruedto him between the date of acquisition and date of actual payment. TheApex Court upheld the decision of the High Court and dismissed theappeal of the revenue. 12.This judgment was followed by the Apex Court in RamaBai's case (supra). 13.The Hon'ble Supreme Court in Krishna Rao's case(supra), on an appeal filed by the assessee relied upon its decision inRama Bai's case and accepted the same by holding that the intereston enhanced compensation awarded under the Land Acquisition Act,1894 (in short “1894 Act”) cannot be taxed in a lump sum but has to bespread over on annual basis. 14.The issue in Bikram Singh's case (supra) was regardingtaxability of interest received on delayed payment of compensationassessed under 1894 Act. It was held to be revenue receipt exigible totax but the same was to be spread over the period for which paymentwas made in view of earlier judgment of the Apex Court in Rama Bai'scase and Krishna Rao's case. 15.Division Bench of this Court in Tuhi Ram's case (supra)was seized of the matter relating to constitutionality of provisionswhereby agricultural land situated within eight kilometers of municipalitywere treated to be capital asset and held to be exigible to capital gainsunder 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 thepurpose of income tax from the time it became due. Reliance wasplaced on the judgment of Apex Court in Rama Bai, Krishna Rao and Govindarajulu Chatty's cases. 16.After examining the aforesaid case law, it is discerned thatin all these cases, the assessee had adopted mercantile system ofaccountancy and it was no where recorded therein that the assesseewas following cash system of accountancy. It was authoritatively held insuch circumstances that the interest received had to be spread over allthe years to which it related to. 17.Now we advert to decision of the Apex Court inGhansham's case on the basis of which the matter has beenremanded to this Court for considering its effect on the decision of thecase. Hon'ble Supreme Court was dealing with the issue relating toassessability of capital gains to income tax under the provisions ofSection 45 (5) of the Act. Section 45 was amended by the Finance Act,1987 w.e.f. 1.4.1988 where under sub-section (5) was inserted as anoverriding provision. It was held that the enhanced compensation underthe 1894 Act arises and is payable at multiple stages and, therefore,compensation is treated as “deemed income” at the time when it isreceived and taxed on receipt basis. This is notwithstanding the caseswhere enhanced compensation may be in dispute in pending appealand claimant had been permitted to withdraw the amount conditionally.It was further held that interest under Section 28 of 1894 Act is a part ofenhanced value of the land and forms part of compensation and isaccordingly, exigible to tax in the year of receipt. However, it was observed that interest under Section 34 of 1894 Act on account ofdelayed payment of enhanced compensation is also income but itsnature is different. observed that interest under Section 34 of 1894 Act on account ofdelayed payment of enhanced compensation is also income but itsnature is different. 18.Having noticed the legal position, its applicability to thepresent case may be examined. The assessee herein, had receivedtotal interest of Rs.14,72,006/- on 29.9.1996 relating to the period20.3.1989 to 19.9.1995 and in case the system of accountancy beingfollowed was mercantile, the same ought to have formed part of taxableincome from assessment years 1989-90 to 1996-97. The assessee haddisclosed interest income of Rs.2,41,312/- for assessment year 1995-96and Rs.1,20,656/- for assessment year 1996-97 whereas balanceamount of Rs.11,10,038/- was not brought within the ambit of taxationfor other years. This amply shows that the assessee was not followingmercantile system of accounting otherwise, the same would haveformed part of taxable income from assessment years 1989-90 to 1994-95 as well on accrual basis. Further, the assessee is an agriculturistand in the absence of any material that the mercantile system wasbeing followed, it shall be concluded that he was following cash system.Once that is so, the amount of interest received on 29.9.1996 onaccount of delayed payment of enhancement compensation would fallunder Section 34 of 1894 Act and form part of income from othersources. It shall be taxable in the year of receipt and shall be exigibleto income tax in the assessment year 1997-98. The judgment of thisCourt as well as of the Apex Court do not come to the rescue of theassessee. The reliance of the Tribunal on the Apex Court decisions,therefore, cannot be upheld. The order passed by the Tribunal, thus, is ITA No. 283 of 2006 legally unsustainable. 19.In view of the above, the substantial question proposed isanswered in favour of the revenue and against the assessee. 20.Accordingly, the appeal is allowed and the order of the Tribunal is set aside. (AJAY KUMAR MITTAL) JUDGE August 24, 2010gbs (ADARSH KUMAR GOEL)JUDGE