HOPE (INDIA) LTD. VS COMMISSIONER OF INCOME-TAX
2001 P T D 248
[238 I T R 740]
[Calcutta High Court (India)]
Before S. B. Sinha and D.P. Sircar‑I, JJ
HOPE (INDIA) LTD. (NOW PODDAR UDYOG LTD.)
versus
COMMISSIONER OF INCOME‑TAX
Income‑tax Reference No.206 of 1993, decided on 07/04/1999.
Income‑tax‑‑‑
‑‑‑‑Income‑‑‑Accrual of income‑‑House property‑‑‑Assessment maintaining accounts on mercantile system‑‑‑Tenants agreeing to pay enhanced rent with retrospective effect‑‑‑No accrual in year of account‑‑‑Enhanced rent agreed to after close of previous year‑‑‑Not to be assessed as "income from house property" of that year‑‑‑Indian Income Tax Act, 1961, Ss.5, 22 & 23.
Although, tile system of accounting adopted by the assessee may be a relevant factor, even in the mercantile system of account only such amounts can be assessed which, the assessee had a right to receive or which had accrued. A mere claim or a mere demand without anything else is not income within the meaning of section 5 of the Income Tax Act, 1961. A practical approach in the matter must also be taken. An assessment of income cannot be reopened after a lapse of many years. While determining such question, it must be borne in mind that a claim may fructify only after a lapse of many years because of pendency thereof in a Court of law and/or prolonged negotiation between the parties. A tenant. is not bound to pay rent at an enhanced amount only because the landlord claims the same.
The assessee‑company maintained its books of account on the mercantile system. It was the owner of a 2/3rd share in a certain property occupied by tenants, some of which were Government Departments. For the assessment year 1984‑85, the Assessing Officer, being of the view that the fair market value of the property being. much higher than the actual rent received, computed the fair rent and the assessee's 2/3rd share out of it. On appeal, the Commissioner (Appeals) held that the tenants had been occupying the premises for more than 15 years and the provisions of the West Bengal Premises Tenancy Act being ‑ applicable, any upward revision of rent would not be permissible except with the mutual agreement between the parties. Efforts, however; were being made by the assessee and the Government Departments who occupied a portion of the premises for enhancement of rent. The Commissioner of Income‑tax (Appeals), therefore, directed the Assessing Officer to recompute the income from house property. The Department preferred an appeal. The Tribunal found that on various dates in the years 1986 and 1987, the Government Departments in question had agreed to pay an enhanced rent with effect from 1982 and hence directed the Income‑tax Officer to recompute the income from house property on the basis of the enhanced rent sanctioned and agreed to be paid by the various tenants and to determine the income in accordance with law. On a reference:
Held, that the Government Departments agreed to enhance the rent with retrospective effect from 1982, and, thus, the parties were not ad idem in their mind as regards the actual quantum of rent payable to the assessee by its tenants and, thus, the actual amount was not ascertainable. Under the West Bengal Premises Tenancy Act, the rent has to be paid on the basis of the agreement entered into by the parties. A claim made by a landlord for enhancement of rent cannot, thus, be said to be an amount ""receivable" within the meaning of section 23(l) of the Act. A claim or a demand by himself does not come within the purview of the words "income received or receivable". An agreement entered into between the parties in terms whereof the quantum of rent is determined with retrospective effect does not come within the purview of any of the provisions of section 5 of the Income Tax Act, 1961. The Tribunal was not justified in directing the Assessing Officer to recompute the income from the house property on the basis of enhanced rent sanctioned and agreed after the close of the previous year to be paid by the various tenants and to determine the income under the head "income from house property".
E.D. Sassoon & Co, Ltd. v. CIT,(1954) 26 ITR 27 (SC) rel.
Amar Nath Khandelwal v. CIT (1980) 126 ITR 322 (Delhi); Babulal Raj Garhia, In re: (1936) 4 ITR 148 (Cal.); CIT v. Ahmedbhai Umarbhai & Co. (1950) 18 ITR 472 (SQ; CIT v. Alagappan (M.R.); (1987) 164 ITR 690 (Mad.); CIT v. Anamallais Timber Trust Ltd. (1950) .18 ITR 333 (Mad.); CIT v. Ashokbhai Chimanbhai (1965) 56 ITR 42 (SQ; CIT v. Burlop Commercial (Pvt.) Ltd. (1988) 173 ITR 522 (Cal.); CIT v. Chanchani Brothers (Contractors) (Pvt.) Ltd. (1986) 161 ITR 418 (Pat.); CIT v. Dalmia (R.) (1987) 163 ITR 517 (Delhi); CIT v. Dalmia (R.) (1987) 163 ITR 519 (Delhi) (Appex. I); CIT v. Dalmia (R.) (1987) 163 ITR 524 (Delhi) (Appex. II); CIT v. Gajapathy Naidu (A.) (1964) 53 ITR 114 (SQ; CIT v. Hindustan Housing and Land Development Trust Ltd. (1986) 161 ITR 524 (SQ; CIT v. Nadiad Electric Supply Co. Ltd. (1971) 80 ITR 650 (Bom.); CIT v. Probhabati Bansali (1983) 141 ITR 419 (Cal.); CIT v. Simplex Concrete Piles (India) (Pvt.) Ltd. (1989) 179 ITR 8 (Cal.); CIT v. Thiagarja Chetty (K.R.M.T.T.) & Co. (1953) 24 ITR 525 (SC); Commissioner of Taxation v. Kirk (1990) AC 588 (PC);. Colquhoun v. Brooks (1888) 21 QBD 52 (CA)‑‑On appeal (1889) 14 App,. Cas. 493 (HL); Dodgson, In re:(1 Drew 440); Hamilton & Co. (Pvt.) Ltd. v. CIT (1992) 194 ITR 391 (Cal.); Hayward v. James 29 LJ Ch.822; IRC v. Pakenham (96 LJ KB 882 (CA)‑‑‑On appeal (1928) AC 252 (HL); Jamnadas Prabhudas v. CIT (1951) 20 ITR 160 (Bom.); Krishnalal Seal. and Golap Sundari Dassi v. CIT (1932) 6 ITC 293 (Cal); Leigh v. IRC (43 TLR 528); Mariappa Counder (P) v. CIT (1998) 232 ITR 2 (SQ; Madgul Udyog v. CIT (1990) 184 ITR 484 (Cal.); Ondal Investments Co. Ltd. v: CIT (1979) 116 ITR 143 (Cal.); Rogers Pyatt Shellac & Co. v. Secretary of State for India (1925) 1 ITC 363; AIR 1925 Cal. 34; Seth Pushala Mansinghka (P.) Ltd. v. CIT (1967) 66 ITR 159 (SQ; Webb v. Stenton (1883) 11 Q.BD 518 (CA); West v. Miller (1868) LIZ. 6 Eq.59 and W.S. Try Ltd. v. Johnson (Inspector of Taxes) (1946) 1 All ER 532 (CA) ref.
N.K. Poddar, Senior Advocate, and D. Mitra for the Assessee
J. C. Saha and P.K. Bhowmick for the Commissioner
JUDGMENT
S.B. SINHA, J.‑‑‑This reference under section 256(1) of the Income Tax Act, 1961, has been made by the income‑tax Tribunal, Bench‑C, Calcutta, in respect of the following question:
"Whether, on the facts and in the circumstances of the case, and an interpretation of the documents in respect of rent at 2/3rds of the house property at 18, Rabindra Sarani, Calcutta, for the assessment year 1984‑85 and section 23(1) of the income Tax Act, 1961, the Tribunal was justified in law in directing the Assessing Officer to recompute the Income from the aforesaid house property on the basis of enhanced rent sanctioned and agreed after the close of the previous year to be paid by the various tenants and to determine the income under the head 'Income from house property'?"
The assessment year involved to this reference is 1984‑85. The facts leading to the said reference are as follows:
The assessee maintains its books of account by adopting the mercantile system of accounting. A sum of Rs.49,85,648 was shown towards rent received by it from the tenants of the house property. known as "Poddar Court" situated at 18, Rabindra Sarani, Calcutta. The assessee is the owner of 2/3rds share in the said property. Tote final determination of annual valuation of the Calcutta Municipal Corporation was 'under revision. The Assessing Officer upon invoking the provisions of section 23(1) of the Income‑tax Act, took the view that the annual value of the property shall be deemed to be the sum for which the property might reasonably be expected to be let from year to year. However, the Assessing Officer was of the view that the fair market annual value of the property being much higher than the actual rent received which was not fair and reasonable in comparison to rent receivable in the locality for other premises similarly situated. He took the view that the assessee could reasonably expect to receive a higher rent than actually revised. The Assessing Officer further stated that in some cases the assessee received rent at the rate of Rs.8.50 per sq. ft. per month and as per its own admission in Suit No.C‑794 of 1987 filed in this Court, wherein rent at the rate of Rs.8.46 per sq. ft. was claimed as a fair and reasonable rent. Allegedly, one tenant; Overseas Communication Services have been paying, rent at the rate of Rs.8 per sq. ft. per month with effect from 1982 and the Post and Telegraph Department occupies some space situated in the same locality was paying the rent at the rate of Rs.9 per sq. ft. with effect from 1982. The Assessing Officer, therefore, computed the fair rent to be Rs.8.50 per sq. ft. and the fair market value thereof was assessed at Rs.4,38,62,652 out of which the 2/3rds share of the assessee was determined at Rs.2,92,41,768. To the said amount, a sum of Rs.16,307 was added as rent for car parking and godown. The Commissioner of Income‑tax (Appeals), however, assessed the annual value of the property at Rs.49,35,648 including rent for car parking and godown in the basement. Up to the assessment year 1983‑84 assessment was made on the basis of actual rent but the said authority found that the tenants have been occupying the Premises for more than 15 years and the provision of the West Bengal Premises Tenancy Act being applicable, and any upward revision of rent would not be permissible except with the mutual agreement between the parties. Efforts, however, have been made by the landlord and the Government Departments who occupied a portion of the premises for enhancement of rent. The Commissioner of Income‑tax (Appeals), therefore, directed the Assessing Officer to recompute the income from the house property. The Department preferred an appeal thereagainst. The Appellate Tribunal held:
"On a careful consideration of the facts of the case, we find that the order of the Commissioner of Income‑tax (Appeals) cannot be upheld. The assessment made in respect of, earlier years, cannot be taken as the basis in the present assessment year as there is no res judicata in income‑tax proceedings. Each assessment year is independent of the other. Further the annual letting value as assessed by the Calcutta Corporation was much lower than the actual rent received or receivable cannot be accepted as the basis to accept the actual rent received by the assessee m view of the fact that certain Central Government Departments who occupied a portion of the assessee's house property had only agreed to pay substantially higher rent from September, 1982. The argument that the tenants had been occupying the premises for more than 15 years and under the provision of the West Bengal Premises Act, any upward revision of the rent was not permissible except with the mutual agreement between the parties also cannot be fully accepted in view of the fact that the major tenants, i.e., the Central Government Departments, had duly agreed to pay the enhanced rent as stated above. The contention that the assessee made a claim which was not a legally enforceable right and it was merely an inchoate right is also not fully acceptable for the reasons stated above, i.e., the enhanced rent agreed to be paid by the tenants, namely, the Central Government departments. It may be that there are many tenants and, only a few "tenants agreed to pay enhanced rent but the fact remains that substantial increase in the rent was agreed to by the Income‑tax Department, Central Excise and Accountant‑General Office with effect from September; 1982, at various rates.
From the letters of the above Departments copies of which were filed at pages 35 to 37 of the paper book it is clearly shown that although the enhanced rents were agreed to be paid in September, 1986, March, 1987 and April, 1987, the enhancement of the rent were effective from September 1, 1982 and September 27, 1982. The Accountant‑General. West Bengal, as per letter, dated September 2, 1986, had agreed to pay enhanced rent at Rs.8.46 per sq. ft. with effect from September 1, 1982. The arrears of the rent from September 1, 1982 to August 31, 1985, was also paid on October 16, 1985, amounting to Rs.1,37,43,243. The Income‑tax Department as per letter, dated April 1, 1987, had sanctioned the enhanced rent at the rate of Rs.3.51 per sq. ft. per month' from September 1, 1982 to December 31, 1983, and at the rate of Rs.5.57 per sq. ft. from January 1, 1984, onwards as recommended by the Hiring Committee (C.P.W.D.). From the above, it is clear that the enhanced rent by the above three Departments particularly covered the previous year relevant to the present assessment year under consideration. i.e., 1984‑85. It has, therefore, to be held that income from the aforesaid house property has to be assessed on actual rent received by the assessee. It may be also pointed out that the actual sum for which a property is being let may be taken into consideration as a piece of evidence in arriving at a reasonable rent, but it is not decisive or conclusive as there can be many factors affecting the fixation of the rent. For this proposition, reliance may be placed on the decision of the Calcutta High Court in the case of Babulal Raj Garhia. In re:(1936) 4 ITR 148. It may also be stated that the total consideration paid by a tenant may not necessarily be the annual value in the year of account. For this proposition, reliance may be placed on the decision of the Calcutta High Court in the case of Krishnalal Seal and Golap Sundari Dassi (1932) 6 ITC 293, 297; (1933) ILR 60 Cal. 357. It has also been held in the following cases that the annual municipal valuation may be taken a prima facie correct but it is not conclusive."
The Tribunal below referred to the decisions in Jamnadas Prabhudas v. CIT (1951) 20 ITR 160 (Bom.), CIT v. Dalmia (R.) (1987) 163 ITR 517 (Delhi), CIT v. Dalmia (R.) (1987) 163 ITR 519 (Delhi) (Appex. I). CIT v. Dalmia (R.) (Decd.) (1987) 163 ITR 524 (Delhi) (Appex. II) and CIT v. Alagappan (M.R.) (1987) 164 ITR 690 (Mad.), as also the decision of this 'Court in Hamilton & Co.(Pvt.) Ltd: v. CIT (1992) 194 ITR 391 (Cal.) and held that the claim of the assessee that the arrear rent received in the subsequent year was offered for taxation and in view of the said fact there was no justification not to accept the income from house property as shown by the assessee. The Income‑tax Officer, therefore, was directed to recompute the income from house property on the basis of the enhanced rent sanctioned and agreed to be paid by the various tenants and to determine the income in accordance with law.
Mr. N.K. Poddar, learned counsel appearing on behalf of the petitioner, inter alia, submitted that enhancement of rent on a subsequent date with retrospective effect cannot be assessed for the year from which they had been determined. According to learned counsel, the decision of this Court in Hamilton & Co. (Pvt.) Ltd. v. CIT (1992) 194 ITR 391, had wrongly been relied upon by the learned Tribunal inasmuch as the question involved in this, reference did not strictly arise therein. Mr. Poddar would urge that keeping in view the amendments made in the provisions of section 23 of the Income‑tax Act, income which did not accrue or had been received or had been received or receivable in terms of the contract entered into by and between the landlord and the tenants cannot be said to be an income accrued in the particular year by reason of agreement entered into by and between the parties for` the purpose of enhancement of rent with retrospective effect. In support of his aforementioned submission reliance had been placed on CIT v. Prabhabati Bansali (1983) 141 ITR 419 (Cal.), Madgul Udyog v. CIT (1990) 184 ITR 484 (Cal.), E.D. Sassoon & Co. Ltd. v. CIT (1954) 26 ITR 27 (SC), CIT v. Gajapathy Naidu (A.) (1964) 53 ITR 114 (SC); CIT v. Hindustan Housing and Land Development Trust Ltd. (1986) 161 ITR 524 (SC), Mariappa Gounder (P.) v. CIT (1998) 232 ITR 2 (SC), Ondal Investments Co. Ltd. v. CIT (1979) 116 ITR 143 (Cal.), CIT v. Simplex Concrete Piles (India) (Pvt.) Ltd. (1989) 179 ITR 8 (Cal.); Amar Nath Khandelwal v. CIT (1980) 126 ITR 322 (Delhi), CIT v. Ashokbhai Chimanbhai (1965) 56 ITR 42 (SC), CIT v. Chanchani Brothers (Contractors) (Pvt.) Ltd. (1986) 161 ITR 418 (Patna), CIT v. Burlop Commercial (Pvt.) Ltd. (1988) 173 ITR 522 (Cal.) and CIT v. Nadiad Electric Supply Co. Ltd. (1971) 80 ITR 650 (Bom. ).
Mr. Saha, learned counsel appearing on behalf of the Revenue, on the other hand, supported the findings of the Income‑tax Appellate Tribunal. Learned counsel submits that the decision of a Division Bench of this Court in Hamilton's case (1992) 194 ITR 391, is binding on this Bench which had been relied upon by the Tribunal below for purpose of arriving at a finding that the enhanced rent received with retrospective effect must be held to be an income received or receivable in the assessment year in question.
The questions involved in this reference are interesting ones. From the statement of facts of the case as referred to hereinbefore, it is evident that the Assessing Officer as also the Income‑tax Appellate Tribunal had proceeded on the basis that rent at an enhanced amount with retrospective effect would render income assessable for the assessment year in question. For the purpose of appreciating the point at issue, it is relevant to note the provisions of sections 2, 5, 14, 22 as they stood as also subsection (1) of section 23 as amended in the year 1984. Section 17(1) (sic) of the Act reads thus:
"Any rent actually received by the assessee in the financial year in respect of house property consisting of any building or lands appurtenant thereto of which the assessee to that financial year or any other financial year, shall be chargeable to tax under the head 'Income from house property'. "
As indicated hereinbefore the Tribunal below has relied, for arriving at aforementioned finding, on the Division Bench decision of this Court in Hamilton & Co. (Pvt.) Ltd.'s case (1992) 194 ITR 391. In that case the question raised was in the following terms (page 392):
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the additional or extra rent attributable to preceding years of account which could not be taxed under section 22 of the Act should, instead, be taxed under the head 'Income from other sources'?"
It is now a well‑settled principle of law that a decision is an authority for what it decides and not what can logically be deduced therefrom. The main question which was required to be determined in the aforementioned case was as to whether any additional or extra rent attributable to preceding years would be entitled to tax under the head "Income from other sources". The questions which have been raised in the instant case had, therefore, not been raised in the case at all. The learned Judges, however, upon considering the provision of sections 22 and 23 of the Income‑tax Act held (page 395):
"The receipt of arrears of rent cannot, by any stretch of imagination, be said to have shed their character as rent from property and to have ceased to be liable to tax as income from house property. The simple case is that the rent of a past year increased retrospectively shall be the annual rent of such past year or years but riot the annual rent of the year in which it is received consequent upon subsequent increase.
This position squarely fits in with the scheme of taxation of 'income from house property'. Section 22 says that the measure of income from house property is its annual value. The annual value is to be determined in accordance with the provisions of section 23. Subsection (1) of section 23, by virtue of the amendment with effect from the assessment year 1976‑77, has two limbs, clause (a) and clause (b). Clause (a) says that the annual value is the sum for which the property might reasonably be expected to be let from year to year, clause (b) covers a case where the property is let and the annual rent is in excess of the sum for which the property might reasonably be expected to be let from year to year. To our mind, this clause (b), a later insertion by the Taxation Laws (Amendment) Act, 1975, is meant to cover a case where the rent for a year actually received by the owner is in excess of the lawful rent which is known as fair rent or standard rent under the various rent control legislations. It does not cover a case where a person receives in a year of account rent for a period larger than the year of account."
Upon taking into consideration the Explanation appended to section 23(1) as inserted by reason of the Taxation Laws (Amendment) Act, 1975, as also upon consideration of the circular issued by the Board, it was further held (Page 398):
"But the legal position is that such arrears of rent are the annual re, or part of the annual rent of the year or years to which the arrea?rs relate by virtue of the definition of the annual rent in Explanation below section 23 and not really the income of the year of receipt under the head ' income from other sources'."
There cannot be any doubt that certain observations had been made in the said decision but such observations, in our considered opinion, must be understood to have been rendered in the fact situation of that case. Those observations were not required to be made keeping in view the questions raised in the said reference and, thus, the same even does not partake of the character of obiter dictum.
With a view to consider the question involved in this reference it is Profitable to note the meaning of the word "receivable" as defined in Balck's Law Dictionary, sixth edition, 1268 and Stroud's Judicial Dictionary, fourth edition, 2280, which are:
"Black's Law Dictionary. ‑‑‑That which is due and owing a person or company (e.g., account receivable). In book keeping the name of an account which reflects a debt due.
Stroud's Judicial Dictionary. ‑‑‑(I) 'I myself should have held that the words 'receivable' and 'payable' were the same thing, and that both were equivalent to "vested", but I am happy to find that the judgment of the M.R. in Hayward v. James (29 L.J. Ch. 822) expresses exactly the same conclusion' (per Malins V.C., West v. Miller. (1868) Lr 6 Eq.59) See further Watson Eq. (2nd Ed.) 1228.
(2) 'Receivable' may be construed as 'received' (Wins. Exs. (12th Ed.) 689, citing Re Dodgson, I Drew, 440). In that case there was a gift over if any member of a class died 'before receiving' his share held, that that phrase meant 'before being entitled to receive.'
(3) Under section 5 of the Income‑tax Act, 1918 (c. 40); see IRC v. Pakenham, 96 LJKB 882 (CA), affirmed (1928) AC 252 (H L); Leigh v. IRC, 43 TLR 528."
The apex Court in E.D. Sassoon & Co. Ltd. v. CIT (1954) 26 I T R 27, had the occasion to consider the meaning of the words, "accrue?, arises", and "is received", in the context of the definition of income. The apex Court held (page 50):
"Now what is income? The term is nowhere defined in the Act?.In the absence of a statutory definition we must take its ordinary dictionary meaning‑‑'that which comes in as the periodical produce of one's work, business, lands or investments (considered in reference to its amount and commonly expressed in terms of money); annual or periodical receipts accruing to a person or corporation' (Oxford Dictionary). The word clearly implies the ideal of receipt, actual or constructive. The policy of the Act is to make the amount taxable when it is paid or received either actually or constructively. 'Accrue', 'arises' and 'is received' are three distinct terms. So far as receiving of income is concerned there can be no difficulty; it conveys a clear and definite meaning, and I can think of no expression which makes its meaning plainer than the word 'receiving' itself. The words 'accrue' and 'arise' also are not defined in the Act. The ordinary dictionary meanings of these words have got to be taken as the meanings attaching to them. 'Accruing' is synonymous with 'arising' in the sense of springing as a natural growth or result. The three expressions 'accrues', 'arises' and 'is received' having been used in the section, strictly speaking 'accrues' should not betaken as synonymous with 'arises' but in the distinct sense of growing up by way of addition or increase or as an accession or advantage; while the word 'arises' means comes into existence or notice or presents itself. The former connotes the idea of a growth or accumulation and the latter of the growth or accumulation with a tangible shape so as to be receivable. It is difficult to say that this distinction has been throughout maintained in the Act and perhaps the two words seem to denote the same idea or ideas very similar, and the difference only lies in this that one is more appropriate than the other when applied to particular cases. It is clear, however, as pointed out by Fry, L.J., in Colquhoun v Brooks (1888) 21 QBD 52,59 (this part of the decision not having been affected by the reversal of the decision by the House of lards (1889) 14 AC 493) that both the words are used in contradistinction to the Word 'receive' and indicate a right to receive. They represent a state anterior` to the point of tune when the income becomes receivable and connote a character of the income which is more or less inchoate.
One other matter need to be referred to in connection with the section. What is sought to be taxed must be income and it cannot be taxed unless it has arrived at a stage when it can be called 'income'.
The observations of Lord Justice Fry quoted above by Mukherji, J., were made in Colquhoun v. Brooks (1888) 21 QBD 52 while construing the provisions of 16 and 17 Victoria Chapter 34 Section 2, Schedule 'D'. The words to be construed there were 'profits or gains, arising or accruing' and it was observed by Lord Justice Fry at pate 59:
'In the first place, I would observe .that the tax is in respect of 'profits or gains arising or accruing'. I cannot read those words as meaning 'received by.' If the enactments were limited to profits and gains 'received by' the person to be charged, that limitation would apply as much to all tier Majesty"s subjects as to foreigners residing in this country. The result would be that no, income‑tax would be payable upon profits which accrued but which were not actually received, although profits 'might have been earned in‑ the kingdom and might have accrued in the kingdom. I think, therefore, that the words 'arising or accruing' are general words descriptive of a right to receive profits':
To the same effect are the observations of Satyanarayana Rao, J., in CIT v. Anamallais Timber Trust Ltd. (1950) 18 ITR 333 (Mad.), and Mukherjea, J in CIT v. Ahmedbhai Umarbhai & Co., Bombay '(1950) 18 ITR 472 (SC), where this passage from the judgment of ‑. Mukerji, J., in Rogers Pyatt Shellac & Co. v. Secretary of State for India (1925) 1 ITC 365 (Cal.) is approved arid adopted. It is clear therefore, that income may accrue to an assessee without the actual receipt of the same. It' the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is‑that he must have required a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise' expressed debitum in praesenti, solvendum in futuro; See W.S. Try Ltd. v. Johnson (Inspector of Taxes) (1946) 1 All ER 532 (CA)‑and Webb v. Stenton, Garnishees, 11 QBD 518. Unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he had acquired a right to receive the income or that income has accrued to him.
The word 'earned' even though it does not appear in section 4 of the Act has been very often used in the course of the judgments by learned Judges both in the High Courts as well as the Supreme Court. (Vide CIT v. Ahmedbhai Umarbhai & Co, Bombay (1950) 18 ITR 472 (SC) and CIT v. K.R.M.T.T. Thiagaraja Chetty & Co. (1953) 24 ITR 525 (SC). It has also been used by the Judicial Committee of the Privy Council in Commissioners of Taxation v. Kirk (1900) AC 588. The concept however, cannot be divorced from that of income accruing to the assessee. If income has accrued to the assessee it is certainly earned by him in the sense that he has contributed to its production or the parenthood of the income can be traced to him. But 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 futuro it cannot be said that arty income has accrued to him. The mere expression 'earned' in the sense of rendering the services, etc., by itself is of no avail."
Unfortunately the decision of the apex Court in Sassoon's case (19541 26 ITR 27 had not been considered in Hamilton's case (1992) 194 ITR 392 (Cal.) nor probably in the facts of the said case was it required to be considered.
In CIT v. A. Gajapathy Naidu (1964) 53 ITR 114 (SC), while following Sassoon's case (1954) 26 ITR 27 (SC), it was held (page 119):
"For that purpose, the correct item may be taken into consideration in the matter of assessment. But strictly speaking even in those cases there is no reopening of the accounts of the assessee, but a reassessment is made or the mistake is corrected on the basis of the actual income accrued or received by the assessee. We do not see any relevancy' of the question of reopening of accounts in considering the question when an assessee acquired aright to receive an amount. "
It was further observed (page 121):
"There, during the accounting period April 1, 1945, to March 31‑, 1946, the assessee entered, into a contract with, and supplied fruits and bullock carts to, the military authorities at two different places at rates fixed by the agreement. The assessee incurred a loss and he submitted a petition for review under the terms of the agreement. On November 6, 1947, the military authorities sanctioned the payment of an additional sum which was paid to the assessee on February 17 and 24, 1948. The income‑tax department sought to include this additional sum in the assessment for the accounting year 1945‑46. The High Court held that until the order of review the only right that the assessee had was to claim the money payable at the rates laid down in the agreement 'itself and that the additional amount became payable to the assessee not by virtue of any right conferred by the agreement, but because of the order passed in review directing the payment of the amount and thus, creating a right to this amount in favour of the assessee."
Yet again. in CIT v. Hindustan Housing and Land Development Trust Ltd. (1986) 161 ITR 524, the apex Court made a clear distinction between the cases where the right to receive payment is in dispute and it is not a question of quantifying the amount to be received, and cases where the right to receive payment is admitted and the qualification only of the amount payable is left to be determined in accordance with settled or accepted principles.
In the instant case, as indicated hereinbefore, the Government Departments agreed to enhance the rent with retrospective effect from 1982, and, thus, the parties were not ad idem in their mind as regards the actual quantum of rent payable to the assessee by its tenants and, thus, the actual amount was not ascertainable. Fair rent, keeping in view the provisions of the West Bengal Premises Tenancy Act, has to be determined and till such'. fair rent is determined, actual rent has to be paid by the tenants. Although the said provisions have no application in case the Government is the tenant the rent has to be paid on the basis of the agreement entered into by the parties. A claim made by a landlord for enhancement of rent cannot, thus, be said to be an amount received within the meaning of section 23(1) of the Act. A claim or a demand by itself does not come within the purview of the word "income received or receivable" and keeping in view the provision of section 5 of the Income‑tax Act there cannot be any doubt whatsoever such income either received or deemed to be received, accrued or arose or is deemed to accrue or arise to him or accrues or arises in India or accrues or arises outside India during the previous year.
An agreement entered into between the parties in terms whereof the quantum of rent is determined with retrospective effect, in our considered view, does not come within the purview of any of the provisions of section 5 aforementioned.
In P. Mariappa Gounder v. CIT (1998) 232 ITR 2, the apex Court while considering a claim to mesne profits held that determination of the said claim could be ascertained only from the date of order of the trial Court and not earlier.
In Ondal Investments Co. Ltd. v. CIT (1979) 116 ITR 143, the Calcutta High Court clearly found that a defence against an anticipated demand for refund was not a minimum royalty, such claim of the assessee having contractual basis or foundation.
In CIT v. Simplex Concrete Piles (I.) (Pvt.) Ltd. (1989) 179 ITR 8 (Cal.) Sengupta, J. who has passed the judgment in Hamilton's case (1992) 194 ITR 391 (Cal.) himself, when a question as regards authority to withhold an amount by way of retention money arose, held that the assessee had no right to claim any part of the retention money till the verification of satisfactory execution of the contract. The learned Judge while arriving at the said decision relied upon Seth Pushala Mansinghka (P.) Ltd. v. CIT (1967 66 ITR 159 (SC) for the purpose of considering the definition of the words "accrue and 'arise" in the context of the word "receive".
In Amar Nath Khandelwal v. CIT (1980) 126 ITR 322 (Delhi) where a question as to whether a bill for commission became payable, it was held that the income accrued only when it was accepted.
In CIT v. Ashokbhai Chimanbhai (1965) 56 ITR 42 (SC) a similar finding had been arrived at in a case involving division of partnership assets by way of partition upon following Sassoon's case (1954) 26 ITR 27 (SC).
The Patna High Court had also taken a similar view in CIT v., Chanchani Brothers (Contractors) (Pvt.) Ltd. (1986) 161 ITR 418 in a case where the assessee which used to maintain its books of account on mercantile system claimed certain amount in relation to extra work. It was found that the amount received later on could not be added to the assessee's income for the assessment year for which such claim had been made.
In CIT v. Burlop Commercial (Pvt.) Ltd. (1988) 173 ITR 522, a Division Bench of this Court while considering as to whether the amount of damages which had later on been assessed could be held to be an income during the assessment year in which the same had been made and keeping in view the fact that the contract was void ab initio held (page 525):
"In the mercantile system of accounting, the amount in question could be included on the credit side as income only if it had accrued, either in fact or in law. Mere effort on the part of the assessee‑company to realise the amount by sending the bill or filing a suit for its recovery, will not, in law, make it an income which has accrued in the year in question. If the effort succeeded, then it could be said that the amount the assessee has actually received would be liable to be treated as its income during the year in which it was received. In such a case, the receipt would not be on the basis of any right vesting in the assessee‑company under the contract, but on the basis of its actual receipt. It would be liable to be brought to tax in the year the money was actually received. Since the right to this amount did not arise or accrue at all, it could not be held that merely because the assessee followed the mercantile system of accounting, the income accrued in the year in which the breach of contract took place."
In CIT v. Nadiad Electric Supply Co. Ltd. (1971) 80 1TR 650, the Bombay High Court, in a case where bills were sent for excess amount and entries for such amounts made in accounts but less amount was legally due, held that the assessee was under no obligation to credit in its books of account, even though they were maintained on the mercantile system, any amount for the electricity supplied by it to the municipality calculated at any rate other than the rate of 19 paise per unit and the only amount which could be brought to tax in this connection was the amount calculated at the rate of 19 paise per unit.
It was further observed that sending the bills amounted merely to making a claim for the amount mentioned in the bill; and the mere sending of bills did riot create a legal enforceable right in the assessee‑company, nor a corresponding legal enforceable obligation on the municipality.
The decisions referred to hereinbefore, thus, in clear terms lay down the law that although a system of accountancy adopted by, the assessee may be a relevant factor, but even in a mercantile system of accounting income would be assessed in respect of such amount which the assessee had a right to receive and/or became accrued. A mere claim or a mere demand without anything else is not income within the meaning of section 5 of the Income?-tax Act. A practical approach in the matter must also be taken. An assessment of income cannot be reopened after a lapse of many years. While determining such question, it must be borne in mind that a claim may fructify only after a lapse of many years because of pendency thereof in a Court of law and/or prolonged negotiation between the patties. A tenant is not bound to pay at an enhanced amount only because the landlord claims the same.
The rent, in. view of the provision of the Transfer of Property Act as also the Rent Control Act must be held to mean such amount payable by a tenant in favour of a landlord which has been agreed upon or which has been determined as fair rent by the Rent Controller. Even in a case of assessment of fair rent, the same may be assessed with retrospective effect. Such fair rent may be determined by the Rent Controller after a long lapse ‑of years and, thus. in such circumstances, income having not accrued only in this year when the amount was received or became receivable. Some amount of certainty, thus, in our opinion, should come into being. The answer to the question thus, should be rendered in the negative.
For the reasons aforementioned, we answer the question referred by the learned Tribunal before us for our opinion in the negative, i.e., in favour of the assessee and against the Revenue. There will be no order as to costs.
Let a xerox copy of this order countersigned by the A.R. (C) may he sent to the Income‑tax Appellate Tribunal.
D.P. SIRCAR‑1, J.‑‑‑I agree.
M.B.AI149/FC???????????
Reference answered.