(a) Income-tax---

----Income---Accrual of income---Time of accrual---Accounting---Mercantile system of accounting---Decree of High Court on 30-3-1979, awarding compensation to assessee---Income accrued on date of decree.

(b) Income-tax---

----Special deduction---New industrial undertaking---Industrial company-- Company engaged in construction of buildings---Not an industrial company---Not entitled to deduction---Indian Income Tax Act, 1961, S.80-J.

(c) Income-tax---

----Assessment -Limitation---Computation of limitation---First day must be excluded.

(d) Income-tax---

----Income or capital---Contract entered into in course of business Compensation for termination of contract---Revenue receipt.

A construction work of building, etc., cannot be said to be a manufacturing process and a company engaged in such construction work is not an industrial company. It is not entitled to the deduction under section 80-J of the Income Tax Act, 1961.

CIT v. N.C. Budharaja & Co. (1993) 204 ITR 412 (SC) fol

Where a statutory period runs "from" a named date "to" another, or the statute prescribes some period of days or weeks or months or years within which some act has to be done, although the computation of the period must, in every case, depend on the intention of Parliament as gathered from the statute, generally the first day of the period will be excluded from the reckoning, and consequently, the last day will be included.

When once it is found that a contract was entered into in the ordinary course of business, any compensation received for its termination would be a revenue receipt, irrespective of whether its performance was to consist of a single act or a series of acts spread over a period.

The assessee undertook contract work for the Military Engineering Service. It maintained its accounts on the mercantile system and its accounting year was the financial year, i.e. from April 1 to March 31. Under its-contract certain goods were to be supplied to it and on the failure of the Military Department, it had to get them and in doing so incurred expenditure. When the amount was claimed by the assessee-company it, was disputed by the Department. This led to a reference to arbitration in terms of the contract. In the arbitration proceeding, the arbitrator awarded compensation holding that when the assessee-company spent the amount it was entitled to receive the same amount. The matter was taken up to the Delhi High Court and ultimately the Delhi High Court confirmed the award. The decree was given by the High Court on March 30, 1979. The assessee contended that the amount accrued to it on March 30, 1979, due to the decree given by the Delhi High Court and as such the said amount was not liable to be assessed in the assessment year 1980-81. However, the Assessing Officer did not accept the contention of the assessee-company. According to the Assessing Officer, the awarded amount accrued to the assessee-company not on March 30, 1979, that is, the date on which the Delhi High Court gave the decision against the arbitration award but on September 14, 1979, when the actual compensation money along with interest was received by the assessee-company. The assessee also contended that the assessment for 1980-81 completed on March 23, 1984, on the basis of the return submitted on March, 23, 1983, was barred by limitation. The Tribunal held that the assessment was not barred by limitation but the date of accrual of the compensation was March 30, 1979. On a reference:

Held, (i) that the amounts receivable by the assessee in accordance with arbitration award relating to execution of contract works under the MES Authorities was a revenue receipt.

CIT v. Rai Bahadur Jairam Valji (1959) 35 ITR 148 (SC) applied.

(ii) that the receipt of payment is not the guiding factor to determine the date of accrual of income under the mercantile system of accountancy ; it is only when the amount becomes due. In the present case, the amount became due on the final decision of the High Court of Delhi.

Morvi Industries Ltd. v. CIT (1971) 82 ITR 835 (SC) and CIT v. Sikaria Sons & Co. (1995) 216 ITR 440 (Gauhati) applied.

(iii) that assessment is permissible within one year from the date of tiling of the return. In the present case, the return was filed on March 23, 1983, and assessment was made on March 23, 1984. While computing the period of one year the first day is to be excluded. Hence, the assessment was not barred by limitation.

G.K. Joshi for the Commissioner.

Dr. A.K. Saraf and K.K. Gupta for the Assessee.

JUDGMENT

D. N. BARUAH, J.---In this reference under section 256(1) of the Income Tax, Act, 1961 (for the short "the Act"), the following four questions have been referred for the opinion of this Court:

"(1) Whether under the facts and circumstances of the case, the Tribunal did not err in facts as well as in law in holding that the date of accrual of compensation amount is March 30, 1979. and not September 14, 1979?

(2) Whether, under the facts and circumstances of the case, the Tribunal did not err in facts as well as in law in holding that the assessee as an industrial company?

(3) Whether, on the facts and circumstances of the case, the Tribunal was correct in holding that the assessment for the assessment year 1980-81 completed on March 23, 1984, on the basis of the return of income submitted on March 23, 1983, was not barred by limitation?

(4) Whether, on the facts and circumstances of the case, the Tribunal was correct holding that the amounts receivable by the assessee in accordance with arbitration award relating to execution of contract works under MES Authorities were not capital receipt exempt from tax?"

The first two questions have been referred at the instance of the Revenue and the remaining two questions at the instance of the assessee.

The facts for the purpose of answering these questions may be stated as follows:

The assessee is a company with limited liability, incorporated under the Companies Act. The assessee-company follows the mercantile system of accountancy. The accounting year of the assessee was the financial year, that is, from April 1, to March 31. The relevant accounting year ended on March 31, 1979. For the said assessment year, the assessee-company filed its return of income on April 24, 1983, disclosing a total income of Rs.990 only. However, the Assessing Officer after making various disallowances and additions completed the assessment at a total income of Rs.4,57,410. While making the assessment, the Assessing Officer made addition of Rs.11,09,441 which amount was received by the assessee company by way of compensation on the basis of a decision given by the Delhi High Court in Suit No.1186-A of 1978 and 1-A No.537 of 1979 passed on March 30, 1979, in connection with the contract work executed by the assessee in Military Engineering Service. The assessee-company claimed that the aforesaid amount was a capital amount and in fact the same accrued to the assessee-company on March 30, 1979, due to the decree given by the Delhi High Court and as such the said amount was not liable to be assessed in the assessment year 1980-81. However, the Assessing Officer did not accept the contention of the assessee-company. According to the Assessing Officer, the awarded amount accrued to the assessee-company not on March 30, 1979, that is, the date on which the Delhi High Court gave the decision against the arbitration award but on September 14, 1979, when the actual compensation money along with interest was received by the assessee-company. The Assessing Officer also did not accept the claim of the assessee-company that the compensation was a capital receipt and, therefore, it was exempted from tax. The assessee-company further claimed allowance under section 80-J of the Act taking it to be an "industrial company"; this claim, was also turned down by the Assessing Officer. The Assessing Officer did not consider the assessee as "industrial company", because basically it was carrying on the business of contract.

Being dissatisfied the assessee-company preferred an appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income tax (Appeals) also dismissed the, appeal. Situated, thus, the assessee-company preferred yet another appeal before the Income-tax Appellate Tribunal. The Tribunal held that the date of accrual of compensation amount was on March 30, 1979, the date on which the Delhi High Court gave the verdict regarding compensation and not on the date of receipt of the compensation, that is, on September 14, 1979., However, the Tribunal held that the assessee-company was an "industrial company". Regarding the limitation the Tribunal held that it was not barred by limitation. The Tribunal also held that the amount in question was a revenue receipt and not a capital receipt. hence, the present reference as stated above.

We have heard Mr. G.K. Joshi, learned senior standing counsel for the Revenue, and Dr. A.K. Saraf, learned counsel for the assessee-company.

Regarding the first question Dr. Saraf submits that in a mercantile system of accountancy, the income is taken to be on the date on which it became due and not the date when the amount is received, in this case as per the terms of the contract certain goods were to be supplied by the Department and upon failure to do so the assessee-company had to supply those materials by paying money. When the amount was claimed by the assessee-company it, was disputed by the Department. This led to a reference to an arbitration proceeding in terms of the contract. In the arbitration proceeding, the arbitrator awarded the compensation holding that when the assessee-company spent the amount it was entitled to receive the same amount. The matter was taken up to the Delhi High Court and ultimately the Delhi High Court confirmed the award given by the arbitrator in the arbitration proceedings. Mr. Joshi has strenuously argued that the date on which the amount was received was the date of income of the assessee -company. Dr. Saraf, has disputed the same. It is well-settled that in a mercantile system of, accountancy the date when the amount becomes due should be taken as the date of income and not on the date on which the amount was received. Dr. Saraf has drawn out attention to a decision of this Court in CIT v. Sikaria Sons & Co. (1995) 216 ITR 440. In the said decision, this Court observed thus:

"These records show that the claim of the assessee was disputed by the Army Purchase Organisation and the dispute was ultimately settled by the High Court several years later. In the light of these facts, the view taken by the Tribunal that it cannot be said that the assessee had acquired the right to receive the amount even when the supplementary bill was submitted and the mere filing of a claim cannot give rise to a right to receive the amount, appears to be correct. "

In the above case, after the award, was given by the arbitrator and before the order was passed by the High Court, a supplementary bill was raised in terms of the award given by the arbitrator. This Court held that the date, of submission of the supplementary bill could not be the date when the amount became due nor it was on the date when the award was, made by the arbitrator. As per the said decision the money became due only when it was finally decided by the High Court. Dr. Saraf has also drawn our attention to a decision of the apex Court in Morvi Industries Ltd. v. CIT (1971) 82 ITR 835. In this case also the apex Court had the occasion to consider "the due date". The apex Court after discussing the entire aspects of the matter held thus:

"The dictionary meaning of the word 'accrue' is 'to come as an accession, increment, or produce: to fall to one by way of advantage: to fall due'. The income can thus be said to accrue when it becomes due. The postponement of the date of payment has a bearing only in so far as the time of payment is concerned, but it does not affect the accrual of income. The moment the income accrues, the assessee gets vested with the right to claim that amount even though it may not be immediately."

In the said decision, the apex Court also held as under:

"It is well-known that the mercantile system of accounting differs substantially from the cash system of book-keeping. Under the cash system, it is only actual cash receipts and actual cash payments that are recorded as credits and debits; whereas under the mercantile system, credit entries are made in respect of amounts due immediately they become legally due and before they are actually received."

From the above two decisions it is abundantly clear that the receipt of payment is not the guiding factor to determine the date of accrual of income under the mercantile system of accountancy it is only when the amount becomes due. In the present case; the amount became due on the final decision of the High Court of Delhi. Therefore, we answer question No. l in the affirmative, in favour of the assessee and against the Revenue.

Regarding question No.2 the facts available in the paper book indicate that the assessee-company undertook to carry out construction works on contract basis. The construction of building like that of dam, etc., cannot be said to be an industrial undertaking. In this connection, Mr. Joshi has drawn our attention to a decision of the apex Court in CIT v. N.C. Budharaja & Co (1993) 204 ITR 412. While discussing this aspect of the matter, the apex Court observed that the word "production" or "produce" when used in juxtaposition with the word "manufacture", takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all by products, intermediate products and residual products, which emerge in the course of manufacture of goods. The Court observed thus:

"Would any person who has constructed a dam say that he has manufactured an article or that he has produced an article? Obviously not If a dam is an article, so would be a bridge, a road, an underground canal and a multi-storeyed building. To say that all of them fall within the meaning of the word 'articles' is to overstrain the language beyond its normal and ordinary meaning. It is equally difficult to say that the process of constructing a darn is a process of manufacture or a process of production. It is true that a dam is composed of several articles; it is composed of stones, concrete, cement, steel and other manufactured articles like gates, sluices, etc. But to say that the end product, the dam, is an article is to be unfaithful to the normal connotation of the work. A dam is constructed; it is no manufactured or produced. The expressions ' manufacture' and 'produce' are normally associated with movable articles and goods, big and small---but they are never employed to denote the construction activity of the nature involved in the construction of a dam or for that matter a bridge, a road, or a building. "

From the said decision of the apex Court it is abundantly clear that a construction work of building. etc. cannot be said to be a manufacturing process and if it is not the manufacturing process, the company cannot be said to be "industrial company". In view of this, we answer question No.2 in the negative in favour of the Revenue and against the assessee.

Regarding the third question Mr. Joshi submits that the Tribunal was justified in holding that it was not barred by limitation. The assessment is permissible within one year from the date of filing of the return. In the present case, the return was filed on March 23, 1983, and assessment was made on March 23, 1984. The contention of Dr. Saraf is that this is barred by one day. It is a well-settled principle of law that while computing the particular period, the first day is to be excluded. Section 9 of the General Clauses Act, 1897, gives an idea about commencement and termination of time. The relevant portion of section 9 of the General Clauses Act is extracted below:

"In any (Central Act) or Regulation made after the commencement of this Act, is shall sufficient, for the purpose of including the first in a series of days or any other period of time, to use the word 'from', and, for the purpose of including the last in a series of days or any other period of time, to use the word ' to'. "

In Maxwell on the Interpretation of Statutes, Twelfth Edition, at page 309, it is stated as follows:

"Whether a statutory period runs 'from' a named date 'to' another, or the statute prescribes some period of days or weeks or months or years within which some act has to be done, although the computation of the period must in every case depend on the intention of Parliament as gathered from the statute, generally the first day of the period will be excluded from the reckoning, and consequently the last day will be included. "

Therefore, from the above it is clear that while computing the period of one year the first day is to be excluded. In view of this, in our opinion, the assessment was not barred by limitation. Accordingly, we answer the question No.3 in the affirmative against the assessee and in favour of the Revenue.

The last question referred to is whether the amount received is a capital receipt or a revenue receipt. The assessee-company in order to complete the work supplied certain materials for the completion of the work, which under the terms of the contract it was the duty of the department to supply. In the arbitration proceeding compensation was awarded for the costs incurred by the assessee-company. This was "affirmed by the Delhi High Court. In our opinion, this was a revenue expenditure so far as the assessee is concerned because it was a part of the business. In this connection, a reference may be made to a decision of the apex Court in CIT v. Rai Bahadur Jairam Valji (1959) 35 ITR 148. In the said case, the apex Court held (head note):

"When once it is found that a contract was entered into in the ordinary course of business, any compensation received for its termination would be a revenue receipt, irrespective of whether its performance was to consist of a single Act or a series of Acts spread over a period. "

In view of the above we answer question No.4 in the affirmative, in favour of the Revenue and against the assessee.

A copy of this judgment under the signature of the Registrar and the Seal of the High Court shall be transmitted to the Income-tax Appellate Tribunal.

M.B.A./1597/FC Reference answered.