The Judgment of the Court was delivered by
Gopalan Nambiyar, C.J:— These References had been compelled by this Court under S. 256(2) of the Income-tax Act and the Income-tax Appellate Tribunal, Cochin Bench was directed to refer the following questions of law for our determination viz:
“1. Was the Appellate Tribunal justified in holding that the assessee has maintained no books of account and, therefore, the question of adopting the mercantile method of accounting does not arise? Is the said finding based on any material or warranted on the facts of the instant case?
2. Is the finding of the Appellate Tribunal to the effect, that “the interest accrues due to the assessee on the date of award or decree of Court and therefore it becomes income of the assessee only on that date and not prior to it”, justified in law?
3. Whether on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law, in including the entire amount of Rs. 10,322/- interest for the period from 1962 to 1969, total-income of the assessee, for the in the assessment year 1970-1971?
2. The Assessee, an ‘individual’ was the owner of certain lands in Ernakulam the extent and the location of which do not appear from the record. The lands were acquired in 1962 by the State Government for the purpose of the Cochin Ship Building Yard. Compensation was awarded by the Land Acquisition Officer. The Assessee disputed the adequacy of compensation and had the mattter referred to the Sub Judge, Ernakulam. By a decree dated 29-5-1969, the Sub Judge awarded additional compensation of Rs. 25,806/- with interest at the rate of 6% from the date of dispossession, which was on 11-5-1962. In the course of the accounting year 1969-1970 (assessment year 1970-1971) the Assessee received a sum of Rs. 10,322/- as interest on the additional compensation awarded. These are the facts in ITR. No. 29 of 1977 which was treated as the main case. The facts are similar in ITR. No. 28 of 1977 which relates to a different assessee for the same assessment year 1970-1971. Enhanced compensation of Rs. 41,787 was decreed by the Sub Judge on 29-5-1969 together with interest at 6% from the date of dispossession i.e 11-5-1962. The interest received by the Assessee was Rs. 16,705/-. This was appropriated out of deposit made by the Government in Court on 20-11-1969.
3. According to the Assessees in both these references only a proportionate amount of the interest referable to the accounting year, and not the entire interest, was assessable during the year concerned. This amount, according to them, was Rs. 662/- in I.T.R 29 of 1977, and Rs. 1072/- in I.T.R 28 of 1977. Thus the question in both the references is whether the entirety of the interest on the enhanced compensation decreed by the Court during the assessment year in question should be brought into the tax net during the year itself, or had to be spread over during the period from the date of dispossession to the date of the decree. The Revenue would contend for the former position, and the Assessee, for the latter.
4. S. 5(1) of the Income-tax Act, in so far as it is material reads:
“5. Scope of Total income.—(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which—
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year; or
(c) accrues or arises to him outside India during such year”.
(The proviso and the rest of the Section omitted as unnecessary).
5. The question is when the income by way of interest on the additional compensation “accrues or arises to the Assessee, or is deemed to accrue or arise” to him. We may refer to the relevant provisions of the Land Acquisition Act. (Reference is to the Central Land Acquisition Act 1894; the provisions of the Kerala Act are similar). S. 12 of the Act provides for passing of an award by the Collector determining inter alia, the compensation which in his opinion should be allowed for the land. S. 31 of the Act provides that on making an award, the Collector shall tender payment of the compensation to the persons interested and shall pay it to them. Under S. 34 when the amount of such compensation is not paid or deposited before taking possession of the land the Collector shall pay the amount awarded with interest at the rate of 6% per annum from the time of taking possession, till date of payment or deposit. Under S. 18 of the Land Acquisition Act, a person who has not accepted the Award has a right to require the Collector to refer the matter for determination of the Court. The court, in the light of the principles indicated in Ss. 23, 24 and 25, is to make an Award showing the amount of compensation determined by it and the other particulars specified in S. 26. Under S. 28 of the Act, the Court is empowered to award interest on the excess amount of compensation at 6% from the date of dispossession till the date of payment of the excess amount in the Court. The question involved in these References is with respect to the interest awarded by the Court under S. 28 of the Land Acquisition Act (S. 30 of the Kerala Act). It will be noted that while under S. 34 the liability to pay interest is obligatory, the same is only discretionary under S. 28 of the Act. Also, it is only if the claimant invokes a reference to the Court, and the Court is satisfied about the conditions mentioned in S. 28, that it is given the discretion of awarding interest on the excess amount. In the light of these statutory provisions, the question falls to be considered when the income—interest—can be said to “accrue” within the meaning of S. 5 of the Act. That expression is not defined by the Act; and its meaning and content must be judged in the dictionary sense and according to the judicial acceptation of the term. In E.D Sassoon and Company Ltd. v. Commissioner of Income-tax, Bombay City (26 ITR. 27), the S. company (The E.D Sassoom & Company Ltd.) were the managing agents of the U. Company. It was entitled to receive as remuneration a commission of certain per cent per annum on the annual net profits of the U. Company, which was due to them on 31st March of every year. On 1st December, 1943, the S. Company assigned to A their office as managing agents and all their rights and benefits under the managing agency agreement and the consideration received by them was transferred by them to the capital reserve account. The accounts of the managing agency commission payable to the managing agents for the calendar year 1943 were made up in 1944 and paid to A in 1944. The question was whether in the assessment year 1944-1945 A was liable to pay tax on the accrual basis on the whole of the commission or whether the tax was payable by A and the S. companies on proper apportionment being made between them of the amount received by A. The majority judgment held that A was liable to pay tax on the whole commission and that the commission was not liable to be apportioned between S. and A in proportion to the service rendered by each of them, as managing agents. In discussing the question, the Court examined when income can said to have accrued as used in Income-tax Act. The Court observed: “Neither the word “income” nor the words “is received”, “accrues” and “arises” have been defined in the Act……”. The Court then noticed that Mukerji, J. in the decision in Rogers Pyatt Shellac & Co. v. Secretary of State for India (1925 (1) ITC. 363) had defined these terms. According to that learned Judge “accruing” is synonymous with ‘arising’ in the sense of springing as a natural growth or result. The learned Judge further observed:
“It is clear, however, as pointed out by Fry, L.J, in Colquhoun v. Brooks (1888) 21 Q.B.D 52 at 59) this part of the decision not having been affected by the reversal of the decision by the House of Lords (1889) 14 App. Cas. 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 time when the income becomes receivable and connote a character of the income which is more or less inchoate.” (p. 50)
6. Having extracted the above quotation, the Supreme Court pointed out that to the same effect were the observations of Justice Satyanarayana Rao in Commissioner of Income-tax, Madras v. Anamallais Timber Trust Ltd., (18 I.T.R 333 at 342) and of Mukerji J. in Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai & Co. Bombay) 18 I.T.R 472). In the light of the above discussion the Supreme Court summarised the position thus:
“……It is clear therefore that income may accrue to an assessee without the actual receipt of the same. If 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 acquired a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise expressed debitumin praesenti, solvendum in futuro; (See W.S Try Ltd. v. Johnson (Inspector of Taxes) (1946 (1) All E.R 532 at 539) and Webb v. Stenton, Garnishees (11 Q.B.D 517 at 522, 527). Unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him.” (p. 50)
7. Lower down, it was stated:
“………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 any income has accrued to him.”
8. For the Assessee it is argued that the excess compensation with the interest thereon is in lieu of the dispossession of the property, and therefore, the right accrued from the date of dispossession. For the Revenue, on the other hand, the contention is that for acquisition provisions for payment of compensation and for award of interest are made in Ss. 11 and 34 which we have noticed. The question of excess compensation can arise only if proceedings by way of reference are pursued; and even then, the right to award interest on excess compensation under S. 28 is discretionary in the Court. This being the position, Counsel for the Revenue argued that the right to interest on excess compensation does not “accrue” or arise on the date of dispossession. We may examine the decisions cited on either side.
9. Counsel for the Assessee relied strongly on the decision of the Madras High Court in T.N.K Govindarajulu Chetty v. C.I.T (87 I.T.R 22). The Assessee-firm had purchased a property known as “Lutterals Gardens” on April 2, 1943. That was requisitioned by the Government of India in January 1944, under the Defence of India Act and ultimately acquired by the Government of Madras under the Requisitioned Land (Continuance of Powers) Act 1947. The compensation payable was fixed at Rs. 2,40,000/-. Dissatisfied with the amount, the assessee sought a reference to the Arbitrator the Chief Judge of the Court of Small Causes, Madras, who fixed the compensation at Rs. 3,67,666/- with interest at 6% per annum from 24th May 1949 (the date of the notification for acquisition). Against the award of the Arbitrator, the Assessee filed appeal to the High Court. It resulted in the further enhancement of compensation to Rs. 5,00,000/-. On this basis a total sum of Rs. 6,28,716/- was paid to the Assessee of which Rs. 2,54,885/- was paid in the accounting year ended 13th April 1955 and the balance of Rs. 3,73,831/- was paid during the year ended 12th Aprils 1956. In the assesement of the firm for the years 1955-1956 and 1956-1957 the Income-tax Officer took the view that Rs. 1,28,716/- included in the total compensation, represented the interest, and as such had to be treated as income. This was apportioned in the two years in proportion to the total receipts, as Rs. 50,592/- for 1955-1956 and Rs. 78,124/- for the year 1956-1957. The Assessee's contention was that the entire amount represented compensation, and as such was a capital receipt and no part of it was liable for assessment as income. Alternatively, it was contended that the amount had to be apportioned and assessed in the respective years to the extent to which interest was relatable. The Appellate Assistant Commissioner rejected the main contention as to capital receipt, but accepted the alternative contention. Against the rejection of the main contention the Assessee appealed to the Tribunal. The Revenue also appealed, objecting to the apportionment of the interest. The Tribunal accepted the main contention of the Assessee, and held that the amount was capital receipt and was not liable to tax. It did not consider the alternative contention. On a reference the matter came up before the High Court. The High Court held that the amounts represented interest on the debt due by the Government and was therefore taxable as income (vide 52 ITR. 867). It left the question of apportionment to be gone into afresh. The Assessee took the matter to the Supreme Court. The Supreme Court in Govindaraj Chetty v. Commissioner of Income-tax (66 ITR. 465) upheld the decision of the Madras High Court that interest received was income, and was taxable. The next stage was regarding the apportionment of interest. The Tribunal held that the income need not be apportioned and assessed in the respective years and confirmed the pro rata allocation made by the Income-tax Officer. The Assessee appealed on the ground that only the portion relatable to interest during the respective years could be assessed to tax. It was this question that fell to be considered in 87 ITR. 22. Dealing with that question the Madras High Court examined the system of accounting. It referred to Thyagaraja Chetty's case (24 ITR. 525) where the Supreme Court had stated that it was a fallacy to say that profits did not accrue until they are actually computed, and that computation of profits cannot possibly suspend their accrual, and quantification is not a condition precedent to the accrual of the right to income. Reference was made to Sassoon & Co.'s case (26 ITR. 27), which had re-stated the same principle. In the light of the above principles the Madras High Court observed:
“In this case the assessee has acquired a right in praesenti against the Government to get the compensation for the land acquired even on the date of the notification, and to get interest on the amount of compensation if payment of the same it postponed for some reason or other. From the mere fact that the amount of compensation was fixed ultimately by this Court, it cannot be said that the liability to pay either the compensation or the interest thereon arose only on the date of such fixation”. (p. 27).
10. The decision seems to take the view that the right to interert arises, and income by way of interest accrues, on the date of the notification for acquisition. The decision of the Mysore High Court in Commissioner of Income-tax v. Sampangiramaiah (69 ITR. 159) was referred and followed. The Court ultimately concluded that the entire amount of interest cannot be taxed as income in the two assessment years on the basis of receipt and that the income had to be spread over the respective years to the extent to which they should be deemed to have accrued in those years. The Mysore Case, referred to by the Madras High Court is Commissioner of Income-tax v. Sampangiramaiah (69 ITR. 159). The land of 20,000 square yards was acquired under a notification on 13-6-1948; the award at Rs. 2/- a square yard was on 2-6-1949. Rs. 46,000/- (inclusive of solatium) was paid to the assessee on 31-12-1949; the District Judge enhanced the compensation under S. 18 to Rs. 5/- a square yard; the High Court further enahanced to Rs. 7/- a square yard which the Supreme Court sustained by decree dated 7-3-1961. Rs. 2,02,265/- was payable to the assessee which included Rs. 87,266/- as interert from date of dispossession 19-2-1949, till payment on 12-10-1961. The question that arose before the Mysore High Court was whether entire interest was assessable in 1962-1963 or only proportionate interest referrable to the assessment year. The argument advanced for the assessee is thus noticed:
“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 Thyagaraja Chetty & Company ((1953) 24 ITR. 525) and Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax that the accrual of income which has become due does not wait until its quantification.” (p. 162)
11. The argument was answered thus:
“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 enahanced 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.
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.
So, the premise that the right to no part of the interest was born until the Land Acquisition Officer made his arithametic after the Supreme Court disposed of the appeals, cannot have the support of reason.
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 S. 4(1)(b)(i) of the Income-tax Act, 1922, so long as that Act was in force, and, of S. 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.”
(The passages above quoted are from the Tribunal's Judgment, with which the High Court recorded its agreement), (underlining ours)
12. The question was answered in favour of the Assessee. It is to be noted that in the passage that we have underlined the High Court treats the interest on excess compensation as having accrued only under the executable decree dated 28-2-1951, and not on the date of notification for acquisition or date of dispossession. In Commissioner of Income-tax, Patiala v. Dr. Sham Lal Narula (84 ITR. 625), the notification for acquisition was on 21-6-1950. On 11-10-53 a withdrawal notification was issued, which was challenged in the High Court and quashed by judgment dated 14-2-1955. Possession was taken on 15-10-1951. The Collector's award was on 30-9-1955. On reference the compensation was enhanced (date of decree does not appear). In ultimate analysis, the assessee was entitled to Rs. 48,660/- as interest. This was paid in the year previous to the Assessment year 1956-1957. The Tribunal held (See Judgment of the Tribunal as quoted in the judgment at p. 629 of 84 ITR. 625) that the right to receive interest was determined by the judgment of the High Court daled 14-2-1955 and could be regarded as having accrued on that date. It held that Rs. 42,577.50 being interest for 1951-1952 to 54-55 accrued prior to 31-3-55 and only Rs. 6082.50 had accrued during the Assessment year. The Punjab and Haryana High Court followed the Mysore view and gave an additional reason in support of it, as follows:
“However, we wish to stress the provisions of S. 34 of the Land Acquisition Act. These provisions were noticed by the learned Judges of the Mysore High Court, but there is an additional reason which we must mention in support of the conclusion at which the learned Judges of the Mysore High Court arrived for the view which has prevailed with the Tribunal. Under S. 34, the right to recover interest arises the moment the owner is deprived of his property under the Land Acquisition Act. The rate at which he is entitled to interest is also specified. The reason for this is obvious. The owner of the property after his dispossession under S. 17 of the Land Acquisition Act is deprived of the income from the same. This does not happen if the possession is taken under S. 16 of the said Act. It is for this reason that S. 34 made a special provision for payment of interest from the date he is deprived of possession without payment of compensation so that the interest on such compensation, compensates him for the loss of income which would have accrued to him if the possession had been taken after making the award under S. 16 and after payment of compensation. Interest is only payable where an owner is deprived of his property and the payment of its compensation is deferred. Therefore, it is obvious that the benefit which he was to acquire from the property or land was benefit accruing every year which is compensated by way of interest under S. 34. If this is kept in view there is no difficulty in understanding the decisions of the Mysore High Court. The interest is definitely accruing each year and is payable as such after the possession is taken from the owner.”
13. This judgment again does not regard the right to interest as arising on date of S. 4 notification. Perhaps such was its effect, as only the judgment of the High Court dated 14-2-1955 stabilised the S. 4 notification, which was till then in jeopardy. In Khan Bahadur Ahmed Alladin & Sons v. Commissioner of Income-tax (74 ITR. 651), Chief Justice Jaganmohan Reddy, speaking for the Division Bench of the Andhra High Court, had occasion to examine when the right to receive excess compensation decreed by the Court can be said to arise. The Assessee in that case had purchased an estate from the Government of India a portion of which was subsequently acquired under the Land Acquisition Act on June 23, 1954. By an Award dated 10th December, 1954, the Collector fixed the compensation at Rs. 1,24,131/-. This was paid on 22-3-1956. On reference the civil court enhanced the compensation by Rs. 99,245/- by judgment dated 12th July, 1956. The Income-tax Officer assesed the amount of enhanced compensation for the year 1957-1958 but the Appellate Assistant Commissioner directed him to re-open the assessment for the assessment year 1956-1957 as the award was on 10th December, 1954. The Income-tax Officer, on re-assessment, included the additional compensation also for the assessment for 1955-1956. The Appellate Tribunal held that the lands formed the stock-in-trade of the assessee's business and that the enhanced compensation accrued on 23rd June, 1954 when the land was taken possession of by the Collector. The learned Chief Justice after noticing the relevant decisions bearing on the question involved, held:
“In our view, unless the amount of compensation actually becomes payable or enforceable, it cannot be said to accrue or deemed to accrue. On the date when the Collector awarded the compensation, it is only that amount which had accrued or deemed to accrue, whether in fact paid or not. But by no stretch of the words in S. 4(1)(b)(i), could it be said that the right to enhanced compensation, which has not yet been accepted by the proper forum, namely, the Court, has also become payable on the date when the original compensation became payable, for being included in that year of assessment. The enhanced compensation accrues only when it becomes payable, i.e when the Court accepts the claim. As has been stated earlier a mere claim by the Assessee, after taking of possession of the land, at a particular rate or for a certain sum is not compensation. It must not be forgotten that, even if a court has awarded enhanced compensation there is a right of appeal by the Government to the High Court, and the High Court may either disallow that claim or reduce the compensation. As against that judgment there is a further right of appeal to the Supreme Court. The assessee also can appeal against the insufficiency of the enhanced compensation. Can it be said that the final determination by the highest court of the compensation would entitle the Income-tax Officer, notwithstanding the period of limitation fixed under the Income-tax Act, to reopen the assessment in which he had included the initial compensation awarded by the Collector and recompute the entire income on the basis of the final compensation? We do not think there can be any justification for such a proposition. On a proper construction of the terms “accrue” or “arise”, we are of the view that such an interpretation cannot be placed. The interpretation given by us does not affect the interests of the revenue. At the same time, it safeguards the assessee and prevents harassment. To hold otherwise would be contrary to the provisions of law.”
14. The principle of this decision was applied in regard to interest by the Andhra High Court in Commissioner of Income-tax v. Smt. Sankari Manickaymma (105 ITR. 172). The logic underlying the extension appears tempting enough.
15. We have given the matter our careful attention. The arguments appear so nicely and evenly balanced, that a choice is not altogether easy. On the one side is the view that acquisition proceedings start the trail which may blow up in stages, of dispossession, award, payment, reference to court, excess compensation and interest, and so on; and once the spark had been lighted at one end, the avenue is open till the end, although it may not travel to the bitter end. This, however, according to this view, would not prevent the right ‘arising’ or ‘accruing’. On the other view the mere prospect of making a reference and earning excess compensation and interest, cannot be regarded as a right or income ‘arising’ or ‘accruing’, when riddled with many imponderables, such as the actual making of the reference, the award of excess compensation, and the further award of interest thereon. It appears to us that income by way of interest on excess compensation under S. 28 of the Central Act (30 of the Kerala Act) cannot be regarded as having “accrued” or be “deemed to have accrued” from the moment of dispossession or of the notification under S. 4. At these stages, it cannot invariably be predicated that the Assessee would file an application for reference in the court for excess compensation, or that the court would enhance the compensation; of even if it does so, that it would award interest on the excess compensation. In an allied sphere, considering the provisions of the General Clauses Act, with respect to the expression “right… accrued”, and ‘vested right’, it has been ruled that a mere right to take advantage of the provisions of a statute, without anything done to effectuate that right, is not a “right…accrued” within the meaning of the section-see for instance the discussion in Narayanaswami v. Inspector of Police (AIR. 1949 Mad. 307) (paras. 37, 38, 92, 93, 132, 133). We think that the right to interest on the excess compensation can be said to arise, and income by way of such interest can be said to accrue, only, when the court, decrees interest while awarding excess compensation. This seems to follow from the exposition in Sassoon's case (26 ITR. 27), which we have noticed earlier. The principle is also stated by the Mysore High Court in 69 ITR. 159 in the passage that we have emphasized. Chief Justice Jagan Mohan Reddy's statement of the principle with respect to excess compensation, in Khan Bahadur Ahmed Alladin & Sons v. Commissioner of Income-tax (74 ITR. 651), is appealing and the same consideration should apply to interest on excess compensation. The right to excess compensation and to interest thereon cannot be said to “arise” or accrue, on the date of dispossession, much the less, as the date of the S. 4 notification. On these dates the prospect of a reference and its outcome are alike uncertain, and even if the claimant succeeds on reference in the first instance before the Court, the State's right of appeal throws, as the Chief Justice points out, a further element of fluctuation in the scale. We are unable to accept the contrary ruling of the Madras High Court in 87 ITR. 22, or of the Punjab and Haryana High Court in 84 ITR. 625. We answer the questions referred in these two references in the affirmative i.e, in favour of the Revenue and against the Assessee. There will be no order as to costs.
16. A copy of this judgment under the signature of the Registrar and the seal of the Court, will be communicated to the Tribunal, as required by law.