The Commissioner Of Income Tax-I, Chandigarh v. M/S Chandigarh Construction Co. (P) Ltd

-1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 446 of 2006 Date of Decision: 22.2.2011 The Commissioner of Income Tax-I, Chandigarh Versus M/s Chandigarh Construction Co. (P) Ltd. ....Appellant. ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL.HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Ms. Urvashi Dhugga, Senior Standing Counsel,for the appellant. AJAY KUMAR MITTAL, J. 1.Since the Registry has not been able to send the files ofthis case on account of the fire incident in the concerned Branch,learned counsel for the revenue has furnished photo copies of the paperbooks which are taken on record and the same are treated asreconstructed files of the appeal. 2.This appeal has been filed at the instance of the revenueunder Section 260A of the Income Tax Act, 1961 (in short “the Act”)against the order dated 27.2.2006 passed by the Income Tax AppellateTribunal, Chandigarh Bench “B”, Chandigarh in ITA No. 296/Chandi/2005, relating to the assessment year 1998-99, claiming the followingsubstantial question of law:- “Whether on the facts and circumstances of the case, theITAT is right in law in restoring the issue back to the file ofCIT(A) for fresh decision after the receipt of finalcompensation award and interest thereon, when theassessee itself had disclosed income on the subjectinterest in the return of income and whether the AssessingOfficer has to wait till the final disposal by the final courtbefore the interest already accrued and received is taxed?”3.Put shortly, the facts necessary for adjudication as pleadedin the appeal are that the assessee-company was engaged in civilconstruction and filed its return on 16.2.1999 for the assessment year1998-99 declaring an income of Rs.6,01,740/-. The assesseedisclosed the payment of Rs.40,80,577/- towards interest received fromthe Executive Engineer. From the said payment, the tax was deductedat source at the rate of 23% i.e. Rs.9,24,630/-. Out of the aforesaidamount of Rs.40,80,577/-, a sum of Rs.38,15,007/- was declared to bein the nature of business receipts on which the assessee had appliedthe presumptive rate of 8% under Section 44AD of the Act, therebydeclaring an income of Rs.3,05,206/- under the head 'business'. Thebalance of Rs.2,96,568/- (Rs.2,65,500/- on account of interest onsecurities and Rs.31,068/- from FDR interest) was declared by theassessee under the head 'income from other sources' as arising fromsecurities. The Assessing Officer vide order dated 26.2.2001 whiletreating the amount of Rs.40,80,577/- as business income, assessedthe income of the assessee at Rs.40,99,645/-. Feeling aggrieved, theassessee filed an appeal before the Commissioner of Income Tax (Appeals) [in short “the CIT(A)”]. The CIT(A) held that the interest ofRs.38,15,007/- was not taxable in the year under consideration and theaward amount is to be taxed in the year of its finality. Against the orderof the CIT(A), the revenue approached the Tribunal who vide orderdated 27.2.2006 restored the matter to the CIT(A) for fresh decisionafter the receipt of the final award and interest thereon. This gave riseto the revenue to approach this Court by way of instant appeal. 4.We have heard learned counsel for the revenue. 5.The point for consideration in this appeal is whether theamount received by the assessee in pursuance of an award of theArbitrator which had not attained finality being still under challengebefore a Court would be exigible to tax. 6.The Tribunal by relying upon the decision of the Apex Courtin Commissioner of Income Tax v. Hindustan Housing and LandDevelopment Trust Ltd. [1996] 161 ITR 524 had held that where thelis is pending, the amount does not accrue or arise to the assessee.The issue was decided in favour of the assessee and the appeal of therevenue was dismissed. 7.Learned counsel for the revenue placed reliance upon thefollowing decisions to submit that the amount was taxable:- 4.We have heard learned counsel for the revenue. 5.The point for consideration in this appeal is whether theamount received by the assessee in pursuance of an award of theArbitrator which had not attained finality being still under challengebefore a Court would be exigible to tax. 6.The Tribunal by relying upon the decision of the Apex Courtin Commissioner of Income Tax v. Hindustan Housing and LandDevelopment Trust Ltd. [1996] 161 ITR 524 had held that where thelis is pending, the amount does not accrue or arise to the assessee.The issue was decided in favour of the assessee and the appeal of therevenue was dismissed. 7.Learned counsel for the revenue placed reliance upon thefollowing decisions to submit that the amount was taxable:- I.Commissioner of Income-Tax v. ThirumalaiswamyNaidu and Sons, [1998] 230 ITR 534 (SC);Naidu and Sons, [1998] 230 ITR 534 (SC); II.Commissioner of Income-Tax v. United ProvincesElectric Supply Company, [2000] 244 ITR 764 (SC);Electric Supply Company, [2000] 244 ITR 764 (SC); III.Commissioner of Income-Tax v. Polyflex (India) Pvt.Ltd., [2001] 251 ITR 527 (Kar); and Ltd., [2001] 251 ITR 527 (Kar); and IV.Commissioner of Income-Tax v. Smt. M. SarojiniDevi, [2001] 250 ITR 759 (AP).” 8.It is not in dispute that the assessee is following mercantilesystem of accountancy. The mercantile system of accountancyenvisages accrual or arising of income or deemed to accrue or ariseduring the year in question. 9.The apex Court in Hindustan Housing and Development Trust's case (supra) on which Tribunal has based its decision, wasdealing with the case relating to a limited company which wasmaintaining its accounts on mercantile system. The land of theassessee company had been acquired and the arbitrator had made hisaward on 29.7.1955 granting compensation to the assessee. However,the same was disputed by the State in the appeal where the companywas permitted to withdraw the amount deposited by the StateGovernment on furnishing bond for refunding the amount in the event ofappeal being allowed, treating the dispute to be real and substantial.The apex Court held that in such a situation no absolute right to receivethe compensation at that stage had accrued to the assessee and,therefore, extra amount of compensation of Rs.7,24,914/- was notincome accruing or arising to the assessee. The assessee had beenfollowing mercantile system and in those facts, the Hon'ble SupremeCourt held it not to be an accrual or arising of income. 10.Applying the aforesaid principles to the present case,where admittedly assessee is following the mercantile system ofaccountancy, the income shall accrue or arise to the assessee onfinalization of the lis and therefore, no infirmity or illegality is noticed in the order of CIT(A) as affirmed by the Tribunal. 11.A perusal of the judgment on which revenue has placedreliance shows that in those cases, the matter under consideration waswith respect to cessation of liability under Section 41 of the Act. Thesaid pronouncements, thus, do not advance the case of the revenue. 12.In view of the above, the question of law is answeredagainst the revenue and in favour of the assessee. The appeal isdismissed. (AJAY KUMAR MITTAL) JUDGE February 22, 2011gbs (ADARSH KUMAR GOEL) JUDGE