Income-tax---

----Income---Accrual of income---Time of accrual---General principles-- Assessee acquiring lease of land---Agreement with builders---Builders to pay assessee guaranteed profits over a period of time---Entire profit did not accrue on date of agreement.

Income is held to accrue only when the assessee acquires a right to receive that income. In other words, income can be said to accrue on the date when the debt becomes due. Unless the right to profits comes into existence, there is no accrual of profits.

The previous year of the assesses company which was incorporated on October 29, 1970, ended on June 30, 1971. The company's main object was to acquire the business carried on by a firm, and to engage in the business of builders, general contractors, etc. The firm had been allotted the lease of a plot of land by the Maharashtra Government. The firm had to make a deposit of Rs.50,000 and a further deposit of a full year's ground rent of Rs.6 lakhs. The rent-free period of lease was to run for a period of one year only and thereafter the lease rent of Rs.6 lakhs per annum was payable to the Government. The transfer of lease in favour of the assessee-company was first executed by an agreement, dated October 3, 1970, between the partners of the firm and the promoters of the assessee-company wherein the firm agreed to make arrangements for transfer of lease in favour of the assessee for a consideration of Rs.6,75,000 subject to final measurement of the plot. A fresh agreement, dated February 6, 1971, was entered into between the firm and the newly incorporated company ratifying the terms and conditions agreed upon in the agreement, dated October 3, 1970, the purchase consideration for transfer of the lease being reduced to Rs.6,25,000. As security for payment the firm was to have a charge on one floor admeasuring 5,900 sq. ft. in the building proposed to be constructed by the assessee-company. As agreed, the firm got the lease of the plot transferred in favour of the assessee-company. On March 4, 1971, the assessee entered into an agreement with a concern who were builders. The construction work was entrusted to the said builders who reserved the right to receive the sale proceeds of the said building when constructed out of which they were to meet the cost of construction and other expenses. It was also agreed that the builders would pay the assessee a sum of Rs.8 lakhs as guaranteed profits over a period extending till December, 1973. The actual transfer of lease was to take place only after the entire construction was completed and the society in whose favour the lease of plot alongwith the building itself was to be transferred was formed. The assessee had credited to its profit and loss account the difference between the amount it was paying. to the firm for transfer of the lease and the amount it was receiving from year to year towards the guaranteed profits. The Income-tax Officer brought to tax Rs.1,75,000 which was the difference between the guaranteed profits of Rs.8 lakhs and the sum of Rs.6,25,000 payable by the assessee on March 4,1971, as, according to him, the. entire guaranteed profits of Rs.8 lakhs accrued on that date when the agreement was entered into. The Appellate Assistant Commissioner reversed the Income-tax Officer's finding that the profits of Rs.1,75,000 accrued on March 4, 1971, the date when the agreement was entered into and this was upheld by the Tribunal. On a reference:

Held, that from a plain reading of the agreement it was clear that it was the total guaranteed profits that were determined at Rs.8 lakhs. From the agreement it was also evident that the work in connection with which the guaranteed profits were to be given to the assessee was not expected to be completed immediately on execution of the agreement or within the previous year during which the agreement was executed. It was to take a number of years. It was in this context that the profits were bifurcated and different dates were fixed when the amounts became payable. The entire amount of Rs.8 lakhs did not accrue to the assessee on the date of the agreement. The profit of Rs.1,75,000 was not assessable in the assessment year 1972-73.

C.I.T. v. Ashokbhai Chimanbhai (1965) 56 ITR 42 (SC) ref.

Dr. V. Balasubramaniam with Mrs. Manjula Singh for the Commissioner.

Mrs. S. Jagtiani for the Assessee.

JUDGMENT

DR. B.P. SARAF, J: --By this reference under section 256(1) of the Income Tax Act, 1961, made at the instance of the Commissioner of Income tax, the Income-tax Appellate Tribunal has referred the following question, of law to this Court for opinion:

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the Income-tax Officer's interpretation regarding the agreement, dated March 4, 1971, was erroneous and that he was wrong in assessing a profit of Rs.1,75,000 in the assessee's hands for the assessment year 1972-73?"

The reference relates to the assessment year 1972-73. The previous year of the assessee which was incorporated on October 29, 1970, and ended on June 30, 1971. The company's main object was to acquire the business carried on in the name of "Ace Builders", a firm and to engage in the business of builders, general contractors, etc. Under clause 13 of the memorandum of association of the company it could enter into any agreement for sharing of profits, union of interest, joint ventures, etc., with any other business entity. Pursuant to the above clause the company entered into an agreement with the partners of the firm, Messrs Ace Builders, to take over the entire business and in particular to get transferred in the name of the company the right of lease granted to the said firm in respect of Plot No.239 situated at Backbay Reclamation, Nariman Point, Bombay. It may be observed that the firm had been, allotted a plot of land by the Maharashtra Government by allotment letter dated March 28, 1970. As per the said letter the firm agreed to take the said plot in exchange for a previous plot allotted to it at Foreshore Road, Bombay, and agreed not to claim any compensation for the expenditure incurred in respect of the previous plot which was to be surrendered to the Government. It was stipulated in the agreement that the firm shall make an immediate deposit of Rs.50,000 and shall further deposit one year's full ground rent for the said plot which amounted to Rs.6 lakhs. The rent-free period of lease was to run for a period of one year only and thereafter the lease rent of Rs.6 lakhs per annum was payable to the Government. The transfer of lease in favour of the assessee-company was first executed by an agreement, dated October 3, 1970, between the partners of Messrs Ace Builders and the promoters of the assessee-company wherein the firm agreed to make arrangements for transfer of lease in favour of the assessee for a consideration of Rs.6,75,000 subject to final measurement of the plot. After the incorporation of the company on October 29, 1970, a fresh agreement, dated February 6, 1971, was entered into between Messrs Ace Builders and the newly incorporated company ratifying the terms and conditions agreed upon in the agreement, dated October 3, 1970, the purchase consideration for transfer of the lease being reduced to Rs.6,25,000. As security for payment the firm was to have a charge on one floor admeasuring 5,900 sq. ft. in the building proposed to be constructed by the assessee-company. As agreed, the firm got the lease of the plot transferred in favour of the assessee-company by obtaining a separate letter of allotment, dated January 14, 1971, from the Government of Maharashtra. Thereafter, on March 4, 1971, the assessee entered into an agreement with Messrs Associated Breweries and Distilleries (in which the assessee is described as the owners and Messrs Associated Breweries and Distilleries as the builders) to allow the said builders to enter upon the plot and to carry the construction work of the building as per plans approved by the Government of Maharashtra and the Bombay Municipal Corporation within the time prescribed under the agreement between the builders and the Government. The construction work was entrusted to the said builders who reserved the right to receive the sale proceeds of the said building when constructed out of which they were to meet the construction and other expenses. It was also agreed that the builders will pay the assessee a sum of Rs.8 lakhs as guaranteed profits in full satisfaction as under:

The actual transfer of lease was to take place only after the entire construction was completed and the society was formed in whose favour the lease of the plot alongwith the building itself was to be transferred.

The assessee had credited to its profit and loss account the difference between the amount it was paying to the firm of Messrs. Ace Builders for transfer of the lease and the amount it was receiving from year to year towards the guaranteed profits. In the first year ended on 30-6-1971 (the assessment year 1972-73), the assessee showed a loss of Rs.970 being establishment expenses, the account being debited and credited respectively with the sum of Rs.6,25,000 described as purchase of lease plot and lease plot at close. During the second year, i.e., previous year ended on June 30, 1972 (assessment year 1973-74), the assessee received a sum of Rs.7,10,000 towards guaranteed profits. It debited Rs.6,25,000 towards the cost of the lease plot brought forward and after deducting the cost of establishment and other expenses from the balance of Rs.85,000 the net profit of Rs30,570 was shown in the return for assessment year 1973-74. In the third year ended on June 30, 1973. i.e., assessment year 1974-75, the guaranteed profits and expenses accounted were Rs.25,000 and Rs.3,158, respectively leaving a net profit of Rs.21,841. The Income-tax Officer brought to tax Rs.1,75,000 which was the difference between the guaranteed profits of Rs.8 lakhs and the sum of Rs.6,25,000 payable by the assessee as on March 4, 1971, as, according to him, the entire guaranteed profits of Rs.8 lakhs accrued on that date when the agreement was entered into and not on the various dates specified therein.

On appeal, the Appellate Assistant Commissioner on a perusal of the agreement, dated March 4, 1971, between the assessee and the builders which provided for payment of guaranteed profits of Rs.8 lakhs on different dates speed in clause 9 of the agreement itself, held that as the difference between Rs.8 00,000 being the minimum guaranteed profits receivable by the assessee and Rs.6,25,000 being the amount which the assessee had to pay to the firm of Messrs Ace Builders had been offered by the assessee for taxation on receipt basis, there was no loss to the Revenue by following such a basis, the taxation rate for the assessee-company being the same. The Appellate Assistant Commissioner also held that there was, no sale effected on March 4, 1971, when the building agreement was entered into. The Appellate Assistant Commissioner, therefore, reversed the Income-tax Officer's finding that the profit of Rs.1,75,000 accrued on March 4, 1971, the date when the agreement was entered into.

The Revenue went in appeal against the order of the Appellate Assistant Commissioner. The contention of the Revenue before the Tribunal was that as the assessee was following the mercantile system of accounting, under the agreement, dated March 4, 1971, it was entitled to the guaranteed profits of Rs.8,00,000 on that date. Its further contention was that the entire amount of Rs.8,00,000 accrued to the assessee on the date when the agreement was entered into between the assessee and Messrs Ace Builders on March 4, 1971, and became subject to tax on that date. The contention of the assessee, on the other hand, was that by the agreement, dated March 4,1971, the builder was only given a licence to enter and construct the building and the assessee was entitled to the guaranteed profits which the builder was obliged under the agreement to pay to the assessee on different dates mentioned in the agreement. The amounts accrued to the assessee only on dates when they fell due as per the terms of the agreement. Before that date the assessee had no enforceable right. It was also contended before the Tribunal that .the assessee had offered the amount received by it for the assessment year on receipt basis. A sum of Rs.6,25,000 fell due to the assessee in the previous year ending on June 30, 1972, but the assessee received a sum of Rs.7,10,000. Thus, some amount was received even before it was due. The assessee offered the entire amount received for assessment. So, even if the income is taken on accrual basis also, in the assessment year 1972-73, as per the agreement, it will not bring any change in the computation of income because nothing accrued during that year. The submissions of the assessee found favour with the Tribunal. The Tribunal considered the agreement, dated March 4, 1971, between the assessee and the builder and referring to clause 9 thereof held that the guaranteed profits were scheduled to be paid in different instalments on, different dates before December 31, 1973. It was also observed that though the building was completed in December, 1975, the amount was paid on the due dates. The Tribunal did not agree with the finding of the Income-tax Officer that the entire guaranteed profits accrued to the assessee on March 4, 1971, i.e., the date of the agreement and approved the finding of the Appellate Assistant Commissioner. The Commissioner sought for reference of the question of law to this Court and, accordingly, the Tribunal has referred the aforesaid question to this Court for opinion.

We have heard counsel for the Revenue as well as the assessee at length. Though the building agreement was not annexed to the paper book, an agreed copy thereof was taken on record by consent of both parties as it was felt that it will be a waste of time to direct the Tribunal to forward the same to this Court by way of an additional statement.

The sole question that arises for consideration is when did the amount of Rs.8,00,000 accrue to the assessee? Did the entire amount accrue to the assessee on the date of the agreement that is March 4, 1971, or on different dates as mentioned in clause 9 of the agreement? We have carefully gone through the agreement. The agreement, as is evident from clause 10 thereof, is in effect an agreement in the nature of a joint venture. By this the owners agreed to join the builders in executing any agreement that may be entered into between the purchasers of the premises and the builders and also to guarantee the performance of contract or implementation of the construction scheme to be carried out by the builders for the purchasers of the premises. It was also agreed by the owners to execute such deeds, documents or writings as may be required by the builders in connection with the completion of the contract. Clause 9 of the agreement is relevant for the purpose of determining the controversy before us. This clause contemplates payment of a sum of Rs.8 lakhs as guaranteed profits to the assessee in full satisfaction on or before the dates mentioned therein. Clause 9 is set out below:

"9. After the said building is completed the builders shall out of the sale proceeds of the said building or the tenements therein reimburse and appropriate all costs, charges and expenses incurred by the builders in relation to the construction of the said building and also pay to the owners a sum of Rs.8,00,000 (rupees eight lakhs only), as guaranteed profits in full satisfaction on or before the dates mentioned hereunder, namely:

If there is any surplus left, the builders shall be entitled to appropriate the sums in full towards their profits in the construction work and commission on sale of tenements. The builders shall be bound to pay the said sum of Rs.8,00,000 to the owners irrespective of the fact whether there is any profit available for such payment of Rs.8,00,000, the said profit being guaranteed by the builders."

From a plain reading of this clause it is clear that it was the total guaranteed profit that was determined at Rs.8 lakhs. From the agreement it is also evident that the work in connection with which the guaranteed profits were to be given to the assessee was not expected to be completed immediately on execution of the agreement or within the previous year during which the agreement was executed. It was to take a number of years. It is in this context that the profits were bifurcated and different dates were fixed when the amounts became payable. A sum of Rs.85,000 was paid before execution of the agreement. A sum of Rs.1,00,000 was to be paid before April 1,1971. A further amount of Rs.1,50,000 was to be paid before May 1, 1971. Another amount of Rs.3,50,000 was to be paid before May 1, 1972. Thereafter, other amounts mentioned in the said clause were payable before the dates mentioned therein. There is no doubt that the entire amount did not become due to the assessee on the execution of the agreement. The assessee had no right to claim the amount from the builders or to enforce the claim before the date specified in the agreement. In such a situation it is difficult to accept the submission of the Revenue that the entire amount of Rs.8 lakhs accrued to the assessee immediately on execution of the agreement. The principles to determine as to when the income is said to have accrued or arisen are already well-settled by a catena of decisions of the Supreme Court and need no reiteration. It is well settled that the income is held to accrue only when the assessee acquires a right to receive that income. In other words, or to say it differently, income can be said to accrue on a date when the debt becomes due. As observed by the Supreme Court in C.I.T. v. Ashokbhai Chimanbhai (1965) 56 ITR 42), unless the right to profits comes into existence there is no accrual of profits. In the instant case, in the face of the clear agreement between the parties contained in clause 9 of the agreement, it cannot be said that the entire amount of Rs.8 lakhs accrued to the assessee on the date of the agreement.

In view of the foregoing discussion, we answer the question referred to us in the affirmative and in favour of the assessee. In the facts and circumstances of the case, we make no order as to costs.

M.B.A./28/T.EReference answered.