THE COMMR. OF INCOME TAX-I CHD. V. M/S CHD. CONSRUCTION CO. PVT. LTD., CHD.

ITA/446/2006

AI Insights

The case revolves around the taxation of interest income received by M/s Chandigarh Construction Co. (P) Ltd. from the Executive Engineer, which was part of a compensation award for land acquisition. The primary legal question was whether this interest income should be taxed in the year it was received, despite the fact that the compensation award was still under dispute in court. The Income Tax Appellate Tribunal had previously restored the matter to the Commissioner of Income Tax (Appeals) for a fresh decision post-receipt of the final award and interest, which led the revenue to appeal to the High Court. The High Court, referencing a Supreme Court decision, concluded that the income from the disputed award did not accrue to the assessee until the dispute was resolved, thus not taxable in the year it was received.

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 719073 (HC-CHANDIGARH)
• Appeal Type: Others
• Pronouncement Date: 22-02-2011
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax v. Hindustan Housing and Land Development Trust Ltd., Commissioner of Income-Tax v. Thirumalaiswamy Naidu and Sons, Commissioner of Income-Tax v. United Provinces Electric Supply Company, Commissioner of Income-Tax v. Polyflex (India) Pvt. Ltd., Commissioner of Income-Tax v. Smt. M. Sarojini Devi
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Assessee Lawyers: URVASHI DHUGGA
• Keywords: Assessment Year 1998-99; Business receipts; Income from other sources; Income Tax; Interest Accrual; Interest income; Tax deducted at source; Final Compensation Award
• Section: 44AD; 260A; 41

Judgement Text

"ITA No. 446 of 2006 -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 446 of 2006 Date of Decision: 22.2.2011 The Commissioner of Income Tax-I, Chandigarh ....Appellant. Versus M/s Chandigarh Construction Co. (P) Ltd. ...Respondent. CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOEL. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Ms. Urvashi Dhugga, Senior Standing Counsel, for the appellant. AJAY KUMAR MITTAL, J. 1. Since the Registry has not been able to send the files of this case on account of the fire incident in the concerned Branch, learned counsel for the revenue has furnished photo copies of the paper books which are taken on record and the same are treated as reconstructed files of the appeal. 2. This appeal has been filed at the instance of the revenue under Section 260A of the Income Tax Act, 1961 (in short “the Act”) against the order dated 27.2.2006 passed by the Income Tax Appellate Tribunal, Chandigarh Bench “B”, Chandigarh in ITA No. 296/Chandi/ 2005, relating to the assessment year 1998-99, claiming the following substantial question of law:- ITA No. 446 of 2006 -2- “Whether on the facts and circumstances of the case, the ITAT is right in law in restoring the issue back to the file of CIT(A) for fresh decision after the receipt of final compensation award and interest thereon, when the assessee itself had disclosed income on the subject interest in the return of income and whether the Assessing Officer has to wait till the final disposal by the final court before the interest already accrued and received is taxed?” 3. Put shortly, the facts necessary for adjudication as pleaded in the appeal are that the assessee-company was engaged in civil construction and filed its return on 16.2.1999 for the assessment year 1998-99 declaring an income of Rs.6,01,740/-. The assessee disclosed the payment of Rs.40,80,577/- towards interest received from the Executive Engineer. From the said payment, the tax was deducted at source at the rate of 23% i.e. Rs.9,24,630/-. Out of the aforesaid amount of Rs.40,80,577/-, a sum of Rs.38,15,007/- was declared to be in the nature of business receipts on which the assessee had applied the presumptive rate of 8% under Section 44AD of the Act, thereby declaring an income of Rs.3,05,206/- under the head 'business'. The balance of Rs.2,96,568/- (Rs.2,65,500/- on account of interest on securities and Rs.31,068/- from FDR interest) was declared by the assessee under the head 'income from other sources' as arising from securities. The Assessing Officer vide order dated 26.2.2001 while treating the amount of Rs.40,80,577/- as business income, assessed the income of the assessee at Rs.40,99,645/-. Feeling aggrieved, the assessee filed an appeal before the Commissioner of Income Tax ITA No. 446 of 2006 -3- (Appeals) [in short “the CIT(A)”]. The CIT(A) held that the interest of Rs.38,15,007/- was not taxable in the year under consideration and the award amount is to be taxed in the year of its finality. Against the order of the CIT(A), the revenue approached the Tribunal who vide order dated 27.2.2006 restored the matter to the CIT(A) for fresh decision after the receipt of the final award and interest thereon. This gave rise to the revenue to approach this Court by way of instant appeal. 4. We have heard learned counsel for the revenue. 5. The point for consideration in this appeal is whether the amount received by the assessee in pursuance of an award of the Arbitrator which had not attained finality being still under challenge before a Court would be exigible to tax. 6. The Tribunal by relying upon the decision of the Apex Court in Commissioner of Income Tax v. Hindustan Housing and Land Development Trust Ltd. [1996] 161 ITR 524 had held that where the lis is pending, the amount does not accrue or arise to the assessee. The issue was decided in favour of the assessee and the appeal of the revenue was dismissed. 7. Learned counsel for the revenue placed reliance upon the following decisions to submit that the amount was taxable:- I. Commissioner of Income-Tax v. Thirumalaiswamy Naidu and Sons, [1998] 230 ITR 534 (SC); II. Commissioner of Income-Tax v. United Provinces Electric Supply Company, [2000] 244 ITR 764 (SC); III. Commissioner of Income-Tax v. Polyflex (India) Pvt. Ltd., [2001] 251 ITR 527 (Kar); and ITA No. 446 of 2006 -4- IV. Commissioner of Income-Tax v. Smt. M. Sarojini Devi, [2001] 250 ITR 759 (AP).” 8. It is not in dispute that the assessee is following mercantile system of accountancy. The mercantile system of accountancy envisages accrual or arising of income or deemed to accrue or arise during the year in question. 9. The apex Court in Hindustan Housing and Development Trust's case (supra) on which Tribunal has based its decision, was dealing with the case relating to a limited company which was maintaining its accounts on mercantile system. The land of the assessee company had been acquired and the arbitrator had made his award on 29.7.1955 granting compensation to the assessee. However, the same was disputed by the State in the appeal where the company was permitted to withdraw the amount deposited by the State Government on furnishing bond for refunding the amount in the event of appeal being allowed, treating the dispute to be real and substantial. The apex Court held that in such a situation no absolute right to receive the compensation at that stage had accrued to the assessee and, therefore, extra amount of compensation of Rs.7,24,914/- was not income accruing or arising to the assessee. The assessee had been following mercantile system and in those facts, the Hon'ble Supreme Court held it not to be an accrual or arising of income. 10. Applying the aforesaid principles to the present case, where admittedly assessee is following the mercantile system of accountancy, the income shall accrue or arise to the assessee on finalization of the lis and therefore, no infirmity or illegality is noticed in ITA No. 446 of 2006 -5- the order of CIT(A) as affirmed by the Tribunal. 11. A perusal of the judgment on which revenue has placed reliance shows that in those cases, the matter under consideration was with respect to cessation of liability under Section 41 of the Act. The said pronouncements, thus, do not advance the case of the revenue. 12. In view of the above, the question of law is answered against the revenue and in favour of the assessee. The appeal is dismissed. (AJAY KUMAR MITTAL) JUDGE February 22, 2011 (ADARSH KUMAR GOEL) gbs JUDGE "