COMMISSIONER OF INCOME-TAX VS EASTERN INVESTMENTS LTD.
1997 P T D 724
[213 I T R 334]
[Calcutta High Court (India)]
Before Ajit K. Sengupta and Nure Alam Chowdhury, JJ
COMMISSIONER OF INCOME-TAX
Versus
EASTERN INVESTMENTS LTD.
Income Tax Reference No. 125 of 1992, decided on 04/08/1993.
Income-tax---
----Income---Accrual of income---Meaning of accrual---Interest on debentures of companies---Nationalisation of companies---Notifications suspending operation of all contracts and obligations of the companies ---Assessee not able to realise interest on the debentures---Interest on debentures did not accrue to the assessee.
Income must be held to accrue at the point of time when a debt becomes due. Thus, the verb "accrue" is inter-connected with income becoming due because it is only when something becomes due to the assessee and appears crystallised as a debt in his favour that the right to receive can be said to have emerged. Until then, there is no accrual of income, as a person cannot recover which is not due and payable. Deferment of payment or the qualification of course, does not matter. If the assessee can show that either by the covenants in the contract or by any operation of law, the right to receive did not arise to the assessee and, therefore, no debt equivalent to the amount of the income in question was created in his favour, no income can accrue. It is necessary for the income to accrue that the income must be due to be paid to the assessee.
The assessee held debentures of B & Co., and K & Co. Both these companies were taken over by the State and the relevant notifications made it clear that operations of all contracts and all obligations remained suspended. The assessee was placed law in the order of priorities for discharge of the liabilities of the companies. The assessee was not able to realise any interest on the debentures in the accounting year relevant to the assessment year 1983-84. The Income Tax Officer added the interest to the total income of the assessee on the ground that it had accrued. The Commissioner of Income tax Appeals and the Tribunal deleted the addition. On a reference:
Held, that, in the present case, it was the operation of law, i.e., provisions of the Nationalisation Act which prevented the interest on the debentures becoming due. As a result of the takeover the two debtor companies the right to receive interest on debentures ceased during the relevant previous year. Accordingly, interest on debentures did not accrue to the assessee. Even assuming that the assessee had any right to claim interest after the aforesaid two debtor-companies were taken over by the concerned Government because the assessee maintains its accounts on the mercantile basis, the notional income by way of interest from debentures should not be included in the assessment. It was not arid could not be the real income of the assessee.
Calcutta Investment Co. Ltd. v. CIT (1983) 142 ITR 120 (Cal.) and E.D. Sassoon & Co. Ltd. v. CIT (1954) 26 ITR 27 (SC) ref.
A.C. Moitra and R.C. Prasad for the Commissioner.
R.N. Dutt and P.K. Malik for the Assessee
JUDGMENT
ART K. SENGUPTA, J.---In this reference under section 256 of the Income Tax Act, 1961, for the assessment year 1983-84, the following question of law has been referred to this Court:
"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that interest on debentures did not accrue or become due during the relevant accounting year and, therefore, it was not assessable in the assessment year 1983-84?"
Briefly stated the relevant facts of the case are that during the course of assessment proceedings, the Assessing Officer found that the assessee had not disclosed income on account of interest on debentures of Messrs Bird & Co. and Messrs Kumardhubi Engg. Works Ltd. although it was found that in the assessment orders for the earlier years such interest on debentures was taken on due or accrual basis. The explanation furnished by the assessee that it had lodged its claim with the prescribed authorities and as on the last date of the accounting year no decision had been taken and, therefore, interest on debentures was not taxable in the year under reference, had not been accepted by the Assessing Officer. Accordingly, he added Rs.53,858 to the total income of the assessee-company.
On appeal by the assessee, the Commissioner of Income-tax (Appeals), after considering the facts of the case and the arguments advanced on behalf of 'the assessee and the appellate order of the Tribunal in the assessee's own case for the assessment year 1980-81 took the view that the interest on debentures of the above two companies did not accrue to the assessee during the previous year relevant to the assessment year 1983-84.
Against the aforesaid order of the Commissioner of Income-tax (Appeals), the Department came up in appeal before the Tribunal. On behalf of the Department, it was argued that the Commissioner of Income-tax (Appeals) did not properly consider the assessee's right to receive interest on debentures but merely considered the financial position of the debtor company. On the other hand, the order of the Commissioner of Income-tax (Appeals) was strongly supported on behalf of the assessee.
The Tribunal upheld the order of the Commissioner of Income-tax (Appeals) and dismissed the departmental appeal with the following observations:
"We have considered the rival submissions. We find that the issue is directly covered by the decision of the Tribunal in the assessee's case for the assessment year 1982-83 (supra). We nave gone through the said appellate order of the Tribunal and we are in full agreement with the decision therein. Since the facts of the case and the issue involved in the present appeal are identical as in the assessment year 1982-83 adjudicated upon by the Tribunal as mentioned above and respectfully following the said appellate order, we confirm the order of the learned Commissioner of Income Tax (Appeals)."
At the hearing before us, the contentions urged before the Tribunal have been reiterated. The facts ace not in dispute. Messrs Bird & Co. was nationalised in 1980 under the Bird & Co. Ltd. (Acquisition and Transfer of Undertakings and Other Properties) Act, 1980, which had come into force on October 25, 1980. In terms of section 16 of the said Act every person having any claim against Messrs Bird & Co. Ltd. was required to prefer such claim before the Commissioner of Payments appointed under the said Act. The right of claiming interest on debentures by the respondent ceased after the specified date, i.e., January 1, 1980. Therefore, no interest could be said to have accrued after that date. The assessee had lodged its claim with the Commissioner of Payments on January 25, _ 1982, for interest outstanding for a period of three years and ten months ending on January 31, 1982, but the claim was yet to be adjudicated upon. As a matter of fact, the Commissioner of Payments by a letter, dated April 4, 1990, addressed to the assessee intimated that the funds given by the Central Government at the disposal of the Commissioner of Payments with respect to Messrs Bird & Co. Ltd. for discharging the liabilities of that company had exhausted in disposing of the claims of higher categories against that company and, accordingly, the claim preferred by the assessee was disposed of under clause (c) of section 17 read with subsection (2) of section 18 of the Act mentioned above. Accordingly, nothing was paid to the assessee. Section 17(c) of the said Act provides that the question of discharging any liability with regard to a matter specified in a lower category shall arise only if a surplus is left after meeting all the liabilities specified in the immediately higher category. Section 18(2) provides that if, on as examination of the claims, the Commissioner is of the opinion that the amount paid to him under the Act is not sufficient to meet the liabilities specified in any lower category, he shall not be required to examine the claims in respect of such lower category.
As regards Kumardhubi Engineering Works Ltd., the company was closed down in September, 1979, due to acute financial difficulties and no interest on debentures had been received by the assessee after November 30, 1977. Subsequently, the company was taken over by the Government of Bihar on August 10, 1983, by and under the Kumardhubi Engineering Works Ltd. (Acquisition and Management) Act, 1982. The Act provided for the appointment of Commissioner of Payments before whom every person having a claim against the said company was required to file such claim and all rights including the right of interest on debentures ceased on March 7, 1982, being the appointed date in the case of the assessee.
It, therefore, appears that both Messrs Bird & Co. and Messrs Kumardhubi Engineering Works Ltd., have been taken over by the State and the relevant notifications make it clear that operations of all contracts and all obligations remained suspended. It is evident that there was definitely an element of uncertainty as to the receipt of the interest income from each of the companiesinasmuch as the assessee was placed lower down in the order of priorities for the discharge of the liabilities of the concerned company.
In this case, the debts became very much doubtful in view of the taking over the undertakings of the debtor companies and placing all the claims of the assessee in such a category that it was not at all possible to realise any amount from the concerned Commissioner of Payments. In fact, this is the case with regard to Bird & Co. Our attention has been drawn to a decision of this Court in Calcutta Investment Co. Ltd. v. CIT (1983) 142 ITR 120. In that case, for the assessment year 1974-75, the relevant accounting period being the calendar year 1973, the assessee, which followed the mercantile system of accounting, claimed before the Income Tax Officer that a sum of Rs.55,000, being interest on loans advanced by the assessee to a company was not brought into the accounts of that year on-due basis as the financial condition of the debtor-company was very-bad and there was no prospect of realisation of the principal and interest since the Government had taken over the management of the company and had by notification, dated May 18, 1972, declared the company to be a relief undertaking under the provisions of the West Bengal Relief Undertakings Special Provisions Act, 1972, and the operation of all contracts including obligations and liabilities accruing thereunder were suspended by the notification. The Income Tax Officer rejected the claim of the assessee on the ground that as the assessee was maintaining accounts on the mercantile system the assessee could not omit to bring into account the interest on the only ground that the debt was doubtful and hence included the amount in the total income of the assessee. The Appellate Assistant Commissioner and, on further appeal, the Tribunal, upheld the order of the Income Tax Officer. There a Division Bench of this Court held that, in view of the fact that the Government had taken over the management of the debtor-company and the company was declared to be a relief undertaking by the notification of the Government, dated May 18, 1972, and all its liabilities were kept under suspension, it could not be said that the interest on the loan continued to accrue in the assessment year 1974-75. Moreover, the Tribunal had, in its order for the earlier year, disallowed the assessee's claim on the ground that the notification of the Government was published only in the year 1972. Therefore, the interest was not liable to be included in the assessment of the assessee on due basis for the assessment year 1974-75.
The verb "accrue" creates difficulty, more so, as the Act does not define it. But the difficulty has been resolved by case-law. The landmark in case-law on the import of this work is the decision of the Supreme Court in E.D. Sassoon & Co. Ltd. v. CIT (1954) 26 ITR 27. The Supreme Court laid down that income must be held to accrue at the point of time when a debt becomes due. Thus, the verb "accrue" is interconnected with income becoming due because it is only when something becomes due to the assessee and appears crystallized as a debt in his favour that the right to receive can be said to have emerged. Until then, there is no accrual of income, a person cannot recover what is not due and payable. Deferment of payment or the quantification of course, does not matter.
In E. D. Sassoon & Co. Ltd.'s case (1954) 26 ITR 27 (SC), the question was when the commission for managing agency linked with annual net profits of the managed company accrues or arises. We are not directly concerned with the facts in that case, but the principle that was laid down in that case is of use. The concept of "income accruing" as a whole was considered by the Supreme Court and the substance of the long decision can be summed up in a sentence that accruing means becoming due. The observations at pages 51 and 52 of the Reports 26 ITR would make it clear:
....in order that the income can be said to have accrued to or earned by the assessee, it is not only necessary that the assessee must have contributed to its accruing or arising by rendering services or otherwise. But he must have created a debt in his favour. A debt must have come into existence and he must have acquired a right to receive the payment. Unless and until his contribution or parenthood is effective in bringing into existence a debt or a right to receive the payment or in other words, a debitum in praesenti, solvendum in futureo it cannot be said that any income has accrued to him. "
That income accrues only where a right to receive arises; alternatively a debt becomes due to the assessee is re-emphasised by the Supreme Court in the further observations at page 52 of the Reports 26 ITR:
"They had no doubt rendered services as managing agents of the companies for the broken period is. But unless and until they completed their performance, viz., .the completion of the definite period of service of a year which was a condition precedent to their being entitled to receive the remuneration or commission stipulated thereunder no debt payable by the companies was created in their favour and they had no right to receive any payment from the companies. No remuneration or commission could, therefore, be said to have accrued to them . ... "
Thus, if the assessee can show that either by the covenants in the contract or by any operation of law, the right to receive did not arise to the assessee and, therefore, no debt equivalent to the amount of the income in question was created in his favour, no income can accrue. It is necessary for the income to accrue that the income must be due to be paid to the assessee.
In the present case, as we have seen, it is the operation of law, i.e., the provisions of the Nationalization Act, which prevented the interest on the debenture becoming due. And the assessee has no enforceable right even though the other factors that are necessary for the production of the income are there.
As would appear from the facts found by the Tribunal because of the takeover of the two debtor-companies the right to receive interest on debentures ceased during the relevant previous year. Accordingly, interest on debentures did not accrue to 'the assessee. Even assuming that the assessee had any right to claim interest after the aforesaid two debtor-companies were taken over by the concerned Government because the assessee maintains accounts on mercantile basis, the notional income by way of interest from debentures should not be included in the assessment. It is not and cannot be the real income of the assessee, 'The claim of the assessee against the aforesaid two debtor-companies could not have only been considered after the higher categories, of. claims were satisfied. In one of the cases, that is to say, Bird & Co., it hats been intimated that nothing would be payable by the Commissioner of Payments to the assessee. For the foregoing reasons, m our view, the Tribunal came to the correct conclusion that no part of the interest on debentures should be included in the assessment.
We therefore answer the question in the affirmative and in favour of the assessee.
There will be no order as to costs.
NURE ALAM CHOWDHURY, J. ---I agree
M. B. A./1156/FC. Order accordingly.