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M/S. P.G & W. Sawoo Pvt. Ltd. & Anr. (S) v. Assistant Commissioner Of Income Tax & Ors. (S)
Factual and Procedural Background
The appellant-assessee owned premises that had been let to the Government of India. Although the original rent was Rs 4.00 per sq. ft. per month, the Government’s Estate Manager issued a letter dated 29-03-1994 enhancing the rent to Rs 8.11 per sq. ft. per month with effect from 01-09-1987, subject to execution of a fresh lease and the assessee’s acceptance. The assessee accepted the terms by letter dated 30-03-1994.
For Assessment Year (AY) 1989-1990 (the 21-month period 01-07-1987 to 31-03-1989) the assessment had been completed. In 2004 the Revenue issued a notice under Section 148 of the Income-tax Act, 1961 (“the Act”) to reopen that concluded assessment on the ground that additional income had retrospectively accrued because of the enhanced rent. The assessee challenged the notice; the High Court upheld the Revenue’s action. The present appeal before the Supreme Court concerns the validity of that Section 148 notice.
Legal Issues Presented
- Whether, in law, any income from the enhanced rent “accrued” or “arose” to the assessee during the previous year relevant to AY 1989-1990.
- Consequently, whether the notice issued under Section 148 of the Act to reopen the concluded assessment for AY 1989-1990 was without jurisdiction.
Arguments of the Parties
Appellant-Assessee’s Arguments
- Under Sections 5, 22 and 23 of the Act and the principles laid down in E.D. Sassoon & Co. Ltd. v. CIT, no income can be said to have accrued or arisen until there is a vested right to receive it.
- No such right existed during the relevant previous year; the right arose only in 1994 when the Government communicated the enhancement and the assessee accepted it.
- Because no income was receivable during AY 1989-1990, the Section 148 notice is without jurisdiction.
Respondent-Revenue’s Arguments
- The enhancement letter expressly fixed 01-09-1987 as the effective date; therefore the additional rent is retrospectively receivable for AY 1989-1990.
- The retrospective character of the enhancement means the income must be treated as having accrued in that year, justifying reassessment under Section 148.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| E.D. Sassoon & Co. Ltd. v. CIT, (1954) 26 ITR 27 (SC) | Income accrues only when a vested right to receive it exists. | Primary authority relied upon to hold that no income accrued during AY 1989-1990 because the right to receive enhanced rent arose only in 1994. |
| CIT v. Shaw Wallace & Co., ILR (1932) 59 Cal 1343; 1932 SCC OnLine PC 16 | Meaning of “income” as periodic monetary return from a definite source. | Cited to reinforce what constitutes “income” under the Act. |
| Rogers Pyatt Shellac & Co. v. Secretary of State for India, (1925) 1 ITC 363; 1924 SCC OnLine Cal 67 | Distinction between “accrues”, “arises” and “is received”. | Quoted to explain that accrual implies a right to receive, anterior to actual receipt. |
| Colquhoun v. Brooks, (1888) LR 21 QBD 52 (CA) | “Arising or accruing” describes a right to receive profits, not actual receipt. | Used to demonstrate that accrual depends on the existence of such a right. |
| CIT v. Anamallais Timber Trust Ltd., (1950) 18 ITR 333; 1949 SCC OnLine Mad 336 | Approval of Rogers Pyatt Shellac’s analysis of accrual. | Cited as further judicial endorsement of the right-to-receive test. |
| CIT v. Ahmedbhai Umarbhai & Co., 1950 SCR 335; 18 ITR 472 | Same principle: income accrues when a debt is owed to the assessee. | Referenced to affirm the necessity of a debt owed (debitum in praesenti, solvendum in futuro). |
| W.S. Try Ltd. v. Johnson (Inspector of Taxes), (1946) 1 All ER 532 (CA) | Concept of a present debt payable in future. | Quoted in support of the requirement of a vested right. |
| Webb v. Stenton (Garnishees), (1883) LR 11 QBD 518 | Elaboration of the vested-right principle. | Used illustratively to show that income cannot accrue without a debt owed. |
Court's Reasoning and Analysis
The Supreme Court treated the matter as turning solely on the concept of “accrual” of income. Relying heavily on E.D. Sassoon and allied authorities, the Court reiterated that income is chargeable only when during the previous year the assessee has an enforceable right to receive it—i.e., a “debitum in praesenti, solvendum in futuro.”
Although the enhancement letter purported to operate retrospectively from 01-09-1987, the Court held that the right to receive the enhanced rent did not vest until 1994, when (a) the Estate Manager issued the enhancement letter and (b) the assessee accepted its terms. The retrospective wording could not create an earlier accrual because, before 1994, no debt was owed to the assessee and no enforceable claim existed. Consequently, no income from the enhanced rent accrued or arose during AY 1989-1990.
Because the essential jurisdictional condition for invoking Section 148—income escaping assessment—was absent, the notice was ultra vires. The High Court’s contrary view was therefore unsustainable.
Holding and Implications
APPEAL ALLOWED; SECTION 148 NOTICE QUASHED; HIGH COURT ORDER SET ASIDE.
Direct Impact: The reassessment proceedings for AY 1989-1990 cannot continue, restoring the assessee’s original assessment for that year.
Broader Implications: The judgment simply re-affirms existing jurisprudence on when income “accrues” and does not create new doctrine; future cases will continue to apply the vested-right test when considering retrospective receipts.
Order
1. Leave granted. Heard the learned counsel for the parties and perused the relevant material.
2. The short question that arises for determination in this appeal is the validity of the notice issued under Section 148 of the Income Tax Act (for short “the Act”) seeking to reopen the concluded assessment of the appellant assessee for Assessment Year 1989-1990 (for the period of 21 months commencing on 1-7-1987 and ending on 31-3-1989).
3. The income in question being income from house property is liable to be computed in accordance with the provision of Sections 22 and 23 of the Act. The premises belonging to the appellant was let out on rent to the Government of India. The rent was enhanced from Rs 4.00 to Rs 8.11 per square foot per month effective from 1-9-1987. The said enhancement of rent was made by a letter dated 29-3-1994 of the Estate Manager of the Government of India. The said letter makes it clear that the enhancement was subject to conditions including execution of a fresh lease agreement and communication of acceptance of the conditions incorporated therein. Such acceptance was communicated by the appellant by letter dated 30-3-1994.
4. The contention of the assessee before us is that having regard to the provisions of Sections 5, 22 and 23 of the Act and the decision of this Court in E.D. Sassoon & Co. Ltd. v. CIT (1954) 26 ITR 27 (SC), no income accrued or arose and no annual value which is taxable under Sections 22 and 23 of the Act was received or receivable by the assessee at any point of time during the previous year corresponding to Assessment Year 1989-1990. Hence, the impugned notice seeking to reopen the assessment in question is without jurisdiction or authority of law.
5. To controvert the aforesaid contention on behalf of the appellant assessee, the respondent Revenue contends before us that the enhancement of rent is retrospective i.e. from 1-9-1987 and, therefore, the income must have to be understood to have been received in the said Assessment Year i.e. 1989-1990.
6. The issue is capable of resolution within a short compass. A reading of the decision of this Court in E.D. Sassoon (1954) 26 ITR 27 (SC) would go to show that the income to be chargeable to tax must accrue or arise at any point of time during the previous year. This Court in E.D. Sassoon (1954) 26 ITR 27 (SC) has held in categorical terms that income can be said to have accrued or arisen only when a right to receive the amount in question is vested in the appellant assessee. The following extract from the judgment in E.D. Sassoon (1954) 26 ITR 27 (SC) amply illustrates the above position: (ITR pp. 49-51)
“The word “earned” has not been used in Section 4 of the Income Tax Act. The section talks of “income, profits and gains” from whatever source derived which (a) are received by or on behalf of the assessee, or (b) accrue or arise to the assessee in the taxable territories during the chargeable accounting period. Neither the word “income” nor the words “is received”, “accrues” and “arises” have been defined in the Act. The Privy Council in CIT v. Shaw Wallace & Co. ILR (1932) 59 Cal 1343 at p. 1352, (1931-32) 59 IA 206, 1932 SCC OnLine PC 16 attempted a definition of the term “income” in the words following: (SCC OnLine PC)
‘… Income, their Lordships think, in the Income Tax Act, connotes a periodical monetary return “coming in” with some sort of regularity, or expected regularity, from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall.’
Mukerji, J., has defined these terms in Rogers Pyatt Shellac & Co. v. Secy. of State for India (1925) 1 ITC 363 at p. 371, 1924 SCC OnLine Cal 67: (SCC OnLine Cal)
‘… Now what is income? The term is nowhere defined in the Act. … In the absence of a statutory definition we must take its ordinary dictionary meaning — “that which comes in as the periodical produce of one's work, business, lands or investments (considered in reference to its amount and commonly expressed in terms of money); annual or periodical receipts accruing to a person or corporation” (Oxford Dictionary). The word clearly implies the idea of receipt, actual or constructive. The policy of the Act is to make the amount taxable when it is paid or received either actually or constructively. “Accrues”, “arises” and “is received” are three distinct terms. So far as receiving of income is concerned, there can be no difficulty; it conveys a clear and definite meaning, and I can think of no expression which makes its meaning plainer than the word “receiving” itself. The words “accrue” and “arise” also are not defined in the Act. The ordinary dictionary meanings of these words have got to be taken as the meanings attaching to them. “Accruing” is synonymous with “arising” in the sense of springing as a natural growth or result. The three expressions “accrues”, “arises” and “is received” having been used in the section, strictly speaking “accrues” should not be taken as synonymous with “arises” but in the distinct sense of growing up by way of addition or increase or as an accession or advantage; while the word “arises” means comes into existence or notice or presents itself. The former connotes the idea of a growth or accumulation and the latter of the growth or accumulation with a tangible shape so as to be receivable. It is difficult to say that this distinction has been throughout maintained in the Act and perhaps the two words seem to denote the same idea or ideas very similar, and the difference only lies in this that one is more appropriate than the other when applied to particular cases. It is clear, however, as pointed out by Fry, L.J. in Colquhoun v. Brooks (1888) LR 21 QBD 52 (CA) [this part of the decision not having been affected by the reversal (1889) LR 14 AC 493 (HL) of the decision by the House of Lords] that both the words are used in contradistinction to the word “receive” and indicate a right to receive. They represent a stage anterior to the point of time when the income becomes receivable and connote a character of the income which is more or less inchoate.
One other matter need be referred to in connection with the section. What is sought to be taxed must be income and it cannot be taxed unless it has arrived at a stage when it can be called “income”.’
The observations of Lord Justice Fry quoted above by Mukerji, J. were made in Colquhoun v. Brooks (1888) LR 21 QBD 52 (CA) while construing the provisions of 16 and 17 Victoria Chapter 34, Section 2, Schedule ‘D’. The words to be construed there were “profits or gains, arising or accruing” and it was observed by Lord Justice Fry at QBD p. 59:
‘In the first place, I would observe that the tax is in respect of “profits or gains arising or accruing”. I cannot read those words as meaning “received by”. If the enactment were limited to profits and gains “received by” the person to be charged, that limitation would apply as much to all Her Majesty's subjects as to foreigners residing in this country. The result would be that no income tax would be payable upon profits which accrued but which were not actually received, although profits might have been earned in the kingdom and might have accrued in the kingdom. I think, therefore, that the words “arising or accruing” are general words descriptive of a right to receive profits.’
To the same effect are the observations of Satyanarayana Rao, J. in CIT v. Anamallais Timber Trust Ltd. (1950) 18 ITR 333 at p. 342, 1949 SCC OnLine Mad 336 and Mukherjea, J. in CIT v. Ahmedbhai Umarbhai & Co. 1950 SCR 335 at p. 389, (1950) 18 ITR 472, where this passage from the judgment of Mukerji, J. in Rogers Pyatt Shellac & Co. v. Secy. of State for India (1925) 1 ITC 363 at p. 371, 1924 SCC OnLine Cal 67 is approved and adopted. 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 debitum in praesenti, solvendum in futuro. [See W.S. Try Ltd. v. Johnson (Inspector of Taxes) (1946) 1 All ER 532 at p. 539 (CA) and Webb v. Stenton Garnishees (1883) LR 11 QBD 518 at pp. 522.] 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.”
(emphasis in original)
7. Viewed from the aforesaid perspective, it is clear that no such right to receive the rent accrued to the assessee at any point of time during the assessment year in question, inasmuch as such enhancement though with retrospective effect, was made only in the year 1994. The contention of the Revenue that the enhancement was with retrospective effect, in our considered view, does not alter the situation as retrospectivity is with regard to the right to receive rent with effect from an anterior date. The right, however, came to be vested only in the year 1994.
8. In the light of the foregoing discussions, it has to be held that the notice seeking to reopen the assessment for Assessment Year 1989-1990 is without jurisdiction and authority of law. The said notice, therefore, is liable to be interfered with and the order 2008 SCC OnLine Cal 670, (2009) 1 CHN 777 of the High Court set aside. We order accordingly. Consequently, the appeal is allowed.
9. Needless to say, the present adjudication is confined to the question of jurisdiction to issue the notice under Section 148 of the Act for reopening the assessment for Assessment Year 1989-1990. No opinion on the rights and liabilities of the parties in respect of the receipt in question with regard to any subsequent year(s) has been dealt with by us and we make it clear that the same will be governed by the relevant provisions of the Act.
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