A.R Somnath Iyer, J.:— The question referred to us under section 256(1) of the Income-tax Act, 1961, by the Income-tax Appellate Tribunal, at the instance of the Commissioner of Income-tax, is:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the entire interest amount of Rs; 87,265 was not assessable in the assessment year 1962-63 and that only the proportionate interest referable to the assessment year 1962-63 was assessable in that year?”

2. This is how the question arises:

By a notification made on January 13, 1948, under section 4 of the Land Acquisition Act, a land owned by the assessee measuring 20,000 square yards was proposed to be acquired, and on February 19, 1949, possession was taken. The Land Acquisition Officer of the Corporation of the City of Bangalore made an award on June 2, 1949, by which he determined the compensation payable to the assessee to be a sum calculated at Rs. 2 a square yard. He also gave him the usual statutory allowance. This sum of money aggregating to Rs. 46,000 was paid to the assessee only on December 31, 1949. But there was a reference to the District Judge under section 18 of the Land Acquisition Act, and, in that reference, the District Judge enhanced the compensation to a sum calculated at Rs. 5 a square yard. From the decree made by the District Judge in that way, both the assessee and the Land Acquisition Officer appealed to the former High Court of Mysore, which, by a decree made on March 30, 1956, enhanced the compensation to a sum calculated at Rs. 7 a square yard. There was again an appeal to the Supreme Court by both the parties, and those appeals were dismissed by the Supreme Court on March 7, 1961.

3. A sum of Rs. 2,02,265 became payable to the assessee under the decree eventually made by the Supreme Court. This sum of money, which consisted of a sum of Rs. 1,15,000 which represented the compensation, and a sum of Rs. 87,265, which represented the interest, payable from the date on which delivery of possession was taken on February 19, 1949, till October 12, 1961, was paid to the claimant on October 12, 1961. In the return, which he produced in respect of the assessment year 1962-63, under the provisions of the Indian Income-tax Act, 1961, the assessee disclosed the receipt of this sum of Rs. 2,02,265, but claimed that the whole of that amount was exempt from tax on the ground that it was a capital accretion. The Income-tax Officer upheld the contention that no tax was payable in respect of the compensation amounting to Rs. 1,15,000 but negatived the plea that the interest which was received by the assessee was a capital receipt. So, the sum of Rs. 87,265, which represented the interest paid to the assessee by the Land Acquisition Officer, was taxed as a revenue receipt. The appeal preferred by the assessee to the Appellate Assistant Commissioner was dismissed, but, in the further appeal, the Income-tax Appellate Tribunal took the view that the interest paid to the assessee was taxable income, but that only so much of it which was payable during the relevant previous year could be taxed in the assessment year 1962-63. It said this:

“In each successive year after February 19, 1949, the assessee acquired the right to receive the interest for that year. Although the amount of interest that was payable to the assessee was only determined in 1961, after the judgment of the Supreme Court, still, the right to receive the interest had accrued to the assessee even much earlier. The interest that was payable to the assessee in each successive year was liable to be assessed in that year itself and the assessment of that interest cannot be postponed till the date on which the interest became ascertained or when the interest was actually paid to the assessee……. The assessee all along possessed the right to receive the interest payment from 1949 itself and, therefore, the proportionate interest referable to each successive year during the period from February 19, 1949, to October 12, 1961, was assessable in that respective year. It follows that it is only the proportionate interest that is referable to the assessment year 1962-63 that can be assessed in the hands of the assessee in this year and that the entire interest which was actually paid to the assesee in this year cannot be assessed in his hands in this year alone.”

4. On behalf of the department, Mr. Rajasekhara Murthy maintained that the Appellate Tribunal missed the true import of the decisions of the Supreme Court in Keshav Mills Ltd., v. Commissioner Of Income Tax, Bombay [1953] 23 I.T.R 230, and E.D Sassoon & Company Ltd. v. Commissioner of Income-tax [1954] 26 I.T.R 27, on which it depended as could be seen from the more recent enunciation in Commissioner Of Income Tax, Madras. v. A. Gajapathy Naidu, Madras [1964] 53 I.T.R 114 S.C..

5. The pendency of the appeals before the Supreme Court, it was said, introduced an element of uncertainty as to the compensation really claimable which denuded the High Court decrees of the attribute of finality, and the argument was constructed that the right to compensation and the interest thereon did not accrue until there was their quantification by the Land Acquisition Officer on the basis of the decisions in those appeals.

6. The proposition that the accrual of that right stood so postponed cannot be sound.

7. When the Land Acquisition Officer made his award and possession was taken, he became liable under section 34 of the Land Acquisition Act to pay interest on the amount awarded if it was not paid when possession was taken. Similarly, when the compensation was enhanced by the district judge and again by the High Court and there were directions for payment of interest under section 28, such interest became payable when those directions were made.

8. It was suggested to us by Mr. Swaminathan for the assessee that the right to the whole of the compensation and interest which eventually becomes payable is born when an acquisition starts, and, in any event, when possession is taken, and dependence was placed on the statement of the law by the Supreme Court in Commissioner of Income-tax v. K.R.M.T.T Thiagaraja Chetty & Company [1953] 24 I.T.R 525 and Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax [1966] 59 I.T.R 767 S.C. that the accrual of income which has become due does not wait until its quantification.

9. But the question in this reference is, whether the right to the whole of the interest accrued only when it was paid. If it did not, and if the interest in respect of the period which commenced on April 1, 1961, and expired on October 12, 1961, was all that accrued during the relevant preceding year and the interest in respect of the antecedent period had accrued earlier, whatever may be the points of time when there was such accrual, the Appellate Tribunal's view would be irreproachable.

10. Now, when possession was taken by the Land Acquisition Officer, he became liable to pay interest until the amount awarded by him was paid, and the assessee acquired the right to recover it from him. The direction of the District Judge for the payment of interest on the enhanced compensation, which, his decree made on February 28, 1951, incorporated, produced the right to recover such interest at least on the date of that decree. Then again, when compensation was further enhanced by the former High Court of Mysore which made a similar direction for the payment of interest on such enhanced compensation, all that interest which that amount so earned from February 19, 1949, became immediately due and payable under an executable decree.

11. It is difficult to understand how the pendency of the appeal before the Supreme Court could arrest the accrual of that income. It did not. It is admitted that during the pendency of the appeals before the Supreme Court, there was no stay of execution. Even if there was, its impact on accrual is debatable.

12. So, the premise that the right to no part of the interest was born until the Land Acquisition Officer made his arithmetic after the Supreme Court disposed of the appeals, cannot have the support of reason.

13. There was thus a complete acquisition of the right to recover the accumulated interest on the amount awarded by the Land Acquisition Officer when possession was taken, and on the enhancement, when the appropriate decree made such enhancement and to subsequent interest so long as it ran but was not paid. Such interest became income which accrued in the year in which it became so recoverable within the meaning of section 4(1)(b)(i) of the Income-tax Act, 1922, so long as that Act was in force, and, of section 5(1)(b) of the Income-tax Act, 1961, when that Act commenced to operate. The attribution of the whole of that interest to the year of receipt is manifestly impossible.

14. The omission by the assessee to include the interest which had so accrued to him in the returns of the earlier years cannot yield the deduction that he chose to treat the interest as the income of the year in which he received it. Indeed, no such theory was evolved at any stage. On the contrary, it should be remembered that the contention of the assessee has all along been that no part of the interest was a revenue receipt and it is not unintelligible that it is due to that reason that there was an omission to disclose the interest which had accrued due when he produced the returns for the earlier years.

15. The principle on which the finding of the Tribunal rested, was that which emerges from the decision of the Supreme Court in E.D Sassoon & Company Ltd. v. Commissioner of Income-tax, in which it was observed:

“‘The computation of the profits whenever it may take place cannot possibly be allowed to suspend their accrual.….’

What has however got to be determined is whether the income, profits or gains accrued to the assessee and in order that the same may accrue to him it is necessary that he must have acquired a right to receive the same or that a right to the income, profits or gains has become vested in him though its valuation may be postponed or though its materialisation may depend on the contingency that the making up of the accounts would show income, profits or gains.”

16. This enunciation continues to be the law and stands in no way impaired by the subsequent decision in Commissioner Of Income Tax, Madras. v. A. Gajapathy Naidu, Madras, on which Mr. Rajasekhara Murthy depends.

17. If this was the principle by the application of which the Tribunal deduced its conclusion, very little could be said in criticism of the attribution made by it.

18. But Mr. Rajasekhara Murthy asks us to say that even if the right to interest had accrued to the assessee periodically during the many years which preceded the assessment year 1962-63, so long as the assessee did not maintain his accounts on the mercantile basis, the interest received by him during the previous year relating to the assessment year 1962-63, could be taxed during that assessment year. In support of this argument, he depended upon the observations in Gajapathy Naidu's case, in which there was an explanation of the familiar rule that income is taxable when it accrues or is earned, if the assessee's accounts are maintained on the mercantile basis, and when it is received, if the method of accounting is the cash system. But this elucidation does not take the department far enough. The mercantile system which, when regularly employed, credits income immediately after it becomes due and recoverable, dispenses, in a proper case, with further proof, that it then accrued, while the cash system which displays the choice of the assessee to treat the income as having arisen when it was received, regulates computation accordingly. And, in the case before us, in which the Appellate Tribunal did not find that the method of accounting employed was the one or the other, the income became taxable when it became legally due and recoverable, for, it is then that it accrued. That being so, we must answer the question referred to us in favour of the assessee, and our answer is that the Appellate Tribunal was right in holding that the entire interest amount of Rs. 87,265 was not assessable in the assessment year 1962-63 and that only the proportionate interest referable to the assessment year 1962-63 was assessable in that year.

19. The assessee will get his costs in this reference. Advocate's fee Rs. 250.