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Commissioner Of Income-Tax v. Smt. Vimla D. Sonwane And Others.
Summary of Opinion — V.A. Mohta, J.
Factual and Procedural Background
The reference under section 256(1) of the Income-tax Act, 1961 was made by the Commissioner, Nagpur. The assessees are co-owners of plots H-1, H-2 and H-3 of Shivsagar Estate, Worli, Bombay. Plot H-1 was leased to Messrs. Punam Hotel P. Ltd. at Rs. 9 lakhs per year; plots H-2 and H-3 were leased to Messrs. Punjab Co-operative Housing Society Ltd. at Rs. 6 lakhs per year. Both lessees filed proceedings for fixation of standard rent under the Bombay Rents, Hotel and Lodging House Rates Control Act, 1947 in the Small Causes Court, Bombay. The assessees included actual rent receipts under "Income from other sources" in their returns and did not maintain regular books nor follow the mercantile system of accounting. The Income-tax Officer added the lease money to total income on an accrual basis; the Appellate Assistant Commissioner sustained the additions; the Tribunal quashed the additions, holding there was no justification for taxing the lease rent on accrual basis. Two questions were referred for the Court's opinion.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in holding that the lease rent from the properties was to be assessed in the hands of the assessee on receipt basis?
- Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in holding that the Income-tax Officer was under no obligation to tax the lease rent on accrual basis and he had the option to tax it on receipt basis as well?
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. Sheela K. Singhee | The Tribunal had approached the case from a correct perspective (as indicated by reference to ITA No. 72 of 1984 decided at Nagpur). | The Court noted this earlier decision but held that that aspect was not decisive of the present matter. |
| CIT v. Hindustan Housing and Land Development Trust. Ltd., [1986] 161 ITR 524 | That an amount under real and substantial dispute in a court cannot be included as income on accrual basis. | Applied to conclude that lease money in dispute before the Small Causes Court did not accrue for tax purposes and thus could not be taxed on accrual basis. |
| K. Bankers v. CIT, [1974] 94 ITR 107 | Income from lease money assessed as "income from other sources" permits the assessee to adopt any system of accounting for that source, including different systems for different sources. | Applied to support that the assessee could follow cash/receipt basis for lease rent and the Department could not compel the mercantile (accrual) system. |
Court's Reasoning and Analysis
The Court reasoned that the right to receive the agreed lease money was in jeopardy because proceedings for fixation of standard rent were pending in the Small Causes Court; consequently there was neither factual accrual nor deemed accrual of the lease income. The income from the lease was characterised as falling under "Other sources." The assessees did not maintain regular books nor adopt the mercantile system; the choice of accounting system rests with the assessee and the Department cannot compel adoption of the mercantile system. The Court relied on precedent that amounts under real and substantial dispute cannot be included on an accrual basis and on authority that income from lease money may be accounted for by any method, including differing methods across sources. On that basis the Court upheld the Tribunal's approach and held that the income could not be taxed on accrual basis.
Holding and Implications
Both questions are answered in the affirmative and in favour of the assessees.
Direct effect: the lease rent in the facts and circumstances of this case could not be taxed on an accrual basis and was to be treated on receipt basis; the Income-tax Officer was not obliged to tax it on accrual basis. No order as to costs.
V.A Mohta, J.:— “Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in holding that the lease rent from the properties was to be assessed in the hands of the assessee on receipt basis?
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in holding that the Income-tax Officer was under no obligation to tax the lease rent on accrual basis and he had the option to tax it on receipt basis as well?”
3. The above two questions are referred for the opinion of this court under section 256(1) of the Income-tax Act, 1961 (for short “the Act”), at the instance of the Commissior er, Nagpur.
4. The assessees are some of the co-owners of plots Nos. H-1, H-2 and H-3 of Shivsagar Estate, Anrie Besant Road, Worli, Bombay. Plot No. H-1 was given on lease to Messrs. Punam Hotel P. Ltd. at Rs. 9 lakhs per year and plots Nos. H-2 and H-3 to Messrs. Punjab Co-operative Housing Society Ltd. at Rs. 6 lakhs per year. Both the lessees have filed proceedings for fixation of standard rent under the Bombay Rents, Hotel and Lodging House Rates Control Act, 1947, in the Small Causes Court, Bombay. The assessees earned income also from other sources. They included the actual receipts of rent under the head “Income from other sources” in their return of income.
5. The assessees do not maintain regular account books and do not follow the mercantile system of accounting. The Income-tax Officer added the lease money in the total income on accrual basis on the basis of agreed rent. The Appellate Assistant Commissioner maintained the additions. But the Tribunal quashed those additions holding that there was no justification for adding income from lease rent on accrual basis.
6. Against the aforesaid background it seems very clear to us that the Tribunal has approached the case from absolutely the correct perspective. No wonder, applications for reference arising out of the orders passed by the Tribunal in the case of other co-owners were not earlier pressed by the Commissioner. ITA No. 72 of 1984 decided on January 12, 1987, at Nagpur (Bharucha and Mohta JJ. - CIT v. Sheela K. Singhee).
7. But that aspect is not decisive of the matter.
8. The right to receive the agreed lease money was in jeopardy because of pendency of proceedings for fixation of standard rent in a court of law. There was thus neither factual accrual nor deemed accrual. Income arising out of the lease of the plots falls in assets under the head “Other sources”. Option regarding adoption of system of accounting is with the assessee and not with the Income-tax Department. The assessee is indeed free even to follow different methods of accounting for income from different sources in an appropriate case. The Department cannot compel the assessee to adopt the mercantile system of accounting. As a matter of fact, it was not adopted. Under the circumstances, the income from lease rent could not be taxed on accrual basis.
9. In the case of CIT v. Hindustan Housing and Land Development Trust. Ltd., [1986] 161 ITR 524, the Supreme Court has ruled that the amount which is under real and substantial dispute in a court cannot be included as income on accrual basis. In the case of K. Bankers v. CIT, [1974] 94 ITR 107, the Allahabad High Court has held that since income from lease money falls to be assessed as income from other sources, it was open to the assessee to follow any system of accounting in respect of that source. It is further held that the assessee may follow even different systems of accounting in respect of different sources.
10. Under the circumstances, both these questions are answered in the affirmative and in favour of the assessees. No order as to costs.
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