ITA No. 283 of 2006 -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 283 of 2006 Date of Decision: 24.8.2010 Commissioner of Income Tax, Faridabad ....Appellant. Versus Karambir Singh L/H of Late Shri Khushi Ram ...Respondent. CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOEL. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Ms. Urvashi Dhugga, Advocate for the appellant. None for the respondent. AJAY KUMAR MITTAL, J. 1. This appeal has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (in short “the Act”) against order dated 29.7.2005 passed by the Income Tax Appellate Tribunal, Delhi Bench “B”, New Delhi (hereinafter referred to as “the Tribunal”) in ITA No. 1477/Del/2004, for assessment year 1997-98, proposing to raise the following substantial question of law:- “Whether on the facts and in the circumstances of the case, the Hon'ble ITAT was right in law in holding that interest received on enhanced compensation is not taxable in the year of receipt, in view of the decision of the Apex Court in the case of CIT Vs. ITA No. 283 of 2006 -2- TNK Govindarjulu Chetty, despite the fact that the assessee is not following the mercantile system of accounting.” 2. Briefly stated, the facts of the case are that the agricultural land belonging to Smt. Ganga Devi was acquired by the Haryana Urban Development Authority (HUDA) on 20.3.1989. Smt. Ganga Devi died on 24.11.1991 and the matter regarding enhancement of compensation was pursued by her son and sole legal heir Khushi Ram who received enhanced compensation amounting to Rs.38,64,062/- including interest of Rs.14,72,006/- on 29.9.1996 for the period from 20.3.1989 to 19.9.1995. Khushi Ram expired on 28.7.2000 leaving behind two sons, namely, S/Shri Karambir Singh and Sushil Kumar. A notice under Section 148 of the Act was served upon Karambir Singh legal heir of late Shri Khushi Ram who filed his return of income on 26.3.2002 declaring total income of Rs.89,300/- from the bank interest. During the course of assessment proceedings, the assessee pleaded that he received the interest amounting to Rs.14,72,006/- on 29.9.1996 pertaining to the period 20.3.1989 to 19.9.1995 on delayed payment of enhanced compensation and no interest accrued in the assessment year 1997-98. Out of the total interest receipts of Rs.14,72,006/- received from HUDA, he had declared interest of Rs.2,41,312/- and Rs.1,20,656/- on accrual basis for the assessment years 1995-96 and 1996-97, respectively. The assessee claimed the benefit of spreading over interest income instead of drawing the interest income to be income of the year in which the amount was received. The Assessing Officer held that out of the total interest income of Rs.14,72,006/- received on 29.9.1996, the assessee had declared interest income of ITA No. 283 of 2006 -3- Rs.2,41,312/- and Rs.1,20,656/- only for the assessment years 1995-96 and 1996-97, respectively on accrual basis but had not declared the remaining receipt of interest of Rs.11,10,038/- in respect of the period prior to the assessment year 1995-96 by filing of income tax returns. The Assessing Officer further held that since the assessee was not maintaining any accounts, his interest income had to be taxed in the year of receipt in absence of mercantile system of accounting being followed. Being aggrieved, the assessee took the matter in appeal before the CIT (A) who vide order dated 03.02.2004 upheld the order of the Assessing Officer after referring to the judgment of this Court in Tuhi Ram v. Land Acquisition Collector and another, (1993) 199 ITR 490 and distinguishing the judgments relied upon by the assessee being CIT v. Govindarajulu Chetty (TNK), (1987) 165 ITR 231 (SC), Rama Bai v. CIT, (1991) 181 ITR 400 (SC), Krishna Rao (KS) v. CIT (1990) 181 ITR 408 and Bikram Singh v. Land Acquisition Collector, (1997) 224 ITR 551 (SC). It was held that the said judgments applied only when the assessee was following mercantile system of accounting. On further appeal by the assessee, the Tribunal vide order dated 29.7.2005 upheld the plea of the assessee and held that irrespective of the system of accounting being followed, the interest income had to be spread over on accrual basis. 3. This appeal was earlier dismissed by this Court but on further appeal, the matter has been remanded to decide the appeal in view of judgment of the Hon'ble Supreme Court in CIT v. Ghanshyam, (2009) 315 ITR 1. ITA No. 283 of 2006 -4- 4. We have heard learned counsel for the revenue. None appears for the assessee. 5. The issue that arises in this appeal for consideration is whether the interest which was received by the assessee-landowner- respondent on 29.9.1996 relating to the period 20.3.1989 to 19.9.1995 on delayed payment of enhanced compensation, is to be taxed in the assessment year 1997-98 or not. 6. We analyze the concerned provision first. Section 145 of the Act relates to method of accounting. Originally enacted, Section 145 provided that income under the head “profits and gains of business or profession” or “income from other sources” shall be computed in accordance with the method of accounting regularly followed by an assessee. Accordingly the assessee was entitled to choose any one of the following system of accountancy:- (a) cash or receipts system; or (b) mercantile or accrual system; or (c) mixed or hybrid system. 7. Finance Act 1995 with effect from 1.4.1997 relating to assessment year 1997-98 and subsequent years, substituted Section 145 which reads thus:- “145 (1). Income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall, subject to the provisions of sub- section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. ITA No. 283 of 2006 -5- (2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.” 8. Board vide circular No. 717 dated 14.8.1995 [(1995) 215 ITR St 70] explained the scope and object of the said provision as under:- “Methods of accounting and accounting standards for computing income.- 44.1 Section 145 (1) of the Income-tax Act prior to its amendment by the Finance Act, 1995, provided for computation of income from business or profession or income from other sources in accordance with the methods of accounting regularly employed by the assessee. Income is generally computed by following one of the three methods of accounting, namely, (i) cash or receipts basis, (ii) accrual or mercantile basis, and (iii) mixed or hybrid method which has elements of ITA No. 283 of 2006 -6- both the aforesaid methods. It was noticed that many assessees are following the hybrid method in a manner that does not reflect the correct income. The Finance Act, 1995, has amended section 145 of the Income-tax Act to provide that income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall be computed only in accordance with either the cash or the mercantile system of accounting, regularly employed by an assessee. The first proviso to sub- section (1) of section 145 has been deleted. 44.2 The Finance Act, 1995 has also empowered the Central Government to prescribe by notification in the Official Gazette, the accounting standards which as assessee will have to follow in computing his income under the head “Profits and gains of business or profession” or “Income from other sources”. These accounting standards will be laid down in consultation with expert bodies like the Institute of Chartered Accountants. 44.3 The amendment will take effect from Ist April, 1997 and will, accordingly, apply in relation to assessment year 1997-98 and subsequent years.” 9. The Central Government is empowered by the amended provision to specify the accounting standards which are required to be followed by an assessee for computing income under the head “Profits ITA No. 283 of 2006 -7- and gains of business or profession” or “Income from other sources”, by notifying the same in official gazette. It may be noticed that the Central Government has issued notification No. SO69(E) dated 25.1.1996 published in [(1996) 218 ITR St. 1] in exercise of power under Section 145 (2) of the Act for assessees following mercantile system of accounting. 10. On plain reading of the said Section, it is concluded that prior to amendment by Finance Act, 1995 w.e.f. 1.4.1997, assessee had option of choosing any one of the method of accountancy, i.e. (a) cash system; (b) mercantile system or (c) hybrid or mixed system. However, after the amendment, as assessee has an option to adopt either cash system or mercantile system only. Therefore, income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” is to be computed in accordance with either cash/ receipt basis; or mercantile/accrual system of accounting regularly employed by the assessee. Under cash system of accountancy, the assessee is liable to pay tax on the income on the basis of cash receipts during the year under consideration whereas under the mercantile system of accountancy, the liability of an assessee is determined according to accrual of the income relating to the assessment year in question. 11. Now, reference may be made to the judgments on which reliance has been placed by the Tribunal while deciding the appeal in favour of the assessee. In T.N.K. Govindarajul Chetty's case (supra), the assessee received compensation of Rs.5 lacs towards compensation for acquisition of property in 1949 and Rs.1,28,716/- as ITA No. 283 of 2006 -8- interest, which was received in two assessment years 1955-56 and 1956-57. It was held by the High Court that the assessee was following mercantile system of accountancy and, therefore, the interest accrued to him between the date of acquisition and date of actual payment. The Apex Court upheld the decision of the High Court and dismissed the appeal of the revenue. 12. This judgment was followed by the Apex Court in Rama Bai's case (supra). 13. The Hon'ble Supreme Court in Krishna Rao's case (supra), on an appeal filed by the assessee relied upon its decision in Rama Bai's case and accepted the same by holding that the interest on enhanced compensation awarded under the Land Acquisition Act, 1894 (in short “1894 Act”) cannot be taxed in a lump sum but has to be spread over on annual basis. 14. The issue in Bikram Singh's case (supra) was regarding taxability of interest received on delayed payment of compensation assessed under 1894 Act. It was held to be revenue receipt exigible to tax but the same was to be spread over the period for which payment was made in view of earlier judgment of the Apex Court in Rama Bai's case and Krishna Rao's case. 15. Division Bench of this Court in Tuhi Ram's case (supra) was seized of the matter relating to constitutionality of provisions whereby agricultural land situated within eight kilometers of municipality were treated to be capital asset and held to be exigible to capital gains under the Act. This Court while upholding the vires of Section 2 (14)(iii) of the Act had laid down that income by way of interest received had to ITA No. 283 of 2006 -9- be spread over all the assessment years to which it related for the purpose of income tax from the time it became due. Reliance was placed on the judgment of Apex Court in Rama Bai, Krishna Rao and Govindarajulu Chatty's cases. 16. After examining the aforesaid case law, it is discerned that in all these cases, the assessee had adopted mercantile system of accountancy and it was no where recorded therein that the assessee was following cash system of accountancy. It was authoritatively held in such circumstances that the interest received had to be spread over all the years to which it related to. 17. Now we advert to decision of the Apex Court in Ghansham's case on the basis of which the matter has been remanded to this Court for considering its effect on the decision of the case. Hon'ble Supreme Court was dealing with the issue relating to assessability of capital gains to income tax under the provisions of Section 45 (5) of the Act. Section 45 was amended by the Finance Act, 1987 w.e.f. 1.4.1988 where under sub-section (5) was inserted as an overriding provision. It was held that the enhanced compensation under the 1894 Act arises and is payable at multiple stages and, therefore, compensation is treated as “deemed income” at the time when it is received and taxed on receipt basis. This is notwithstanding the cases where enhanced compensation may be in dispute in pending appeal and claimant had been permitted to withdraw the amount conditionally. It was further held that interest under Section 28 of 1894 Act is a part of enhanced value of the land and forms part of compensation and is accordingly, exigible to tax in the year of receipt. However, it was ITA No. 283 of 2006 -10- observed that interest under Section 34 of 1894 Act on account of delayed payment of enhanced compensation is also income but its nature is different. 18. Having noticed the legal position, its applicability to the present case may be examined. The assessee herein, had received total interest of Rs.14,72,006/- on 29.9.1996 relating to the period 20.3.1989 to 19.9.1995 and in case the system of accountancy being followed was mercantile, the same ought to have formed part of taxable income from assessment years 1989-90 to 1996-97. The assessee had disclosed interest income of Rs.2,41,312/- for assessment year 1995-96 and Rs.1,20,656/- for assessment year 1996-97 whereas balance amount of Rs.11,10,038/- was not brought within the ambit of taxation for other years. This amply shows that the assessee was not following mercantile system of accounting otherwise, the same would have formed part of taxable income from assessment years 1989-90 to 1994- 95 as well on accrual basis. Further, the assessee is an agriculturist and in the absence of any material that the mercantile system was being followed, it shall be concluded that he was following cash system. Once that is so, the amount of interest received on 29.9.1996 on account of delayed payment of enhancement compensation would fall under Section 34 of 1894 Act and form part of income from other sources. It shall be taxable in the year of receipt and shall be exigible to income tax in the assessment year 1997-98. The judgment of this Court as well as of the Apex Court do not come to the rescue of the assessee. The reliance of the Tribunal on the Apex Court decisions, therefore, cannot be upheld. The order passed by the Tribunal, thus, is ITA No. 283 of 2006 -11- legally unsustainable. 19. In view of the above, the substantial question proposed is answered in favour of the revenue and against the assessee. 20. Accordingly, the appeal is allowed and the order of the Tribunal is set aside. (AJAY KUMAR MITTAL) JUDGE August 24, 2010 (ADARSH KUMAR GOEL) gbs JUDGE