1986 (7) TMI 10 - SC - Income Tax

Appeal dismissed: additional arbitrator compensation not taxable as income when entitlement genuinely disputed on appeal

Commissioner of Income-Tax, West Bengal II Versus Hindustan Housing And Land Development Trust Limited

SC dismissed the appeal, holding that the additional compensation awarded by an arbitrator did not arise or accrue as income in the relevant year because ... Taxability of extra compensation - Acquisition of land - additional compensation received - Whether, the extra amount of compensation was income arising or accruing to the assessee during the previous year relevant to the assessment year 1956-57 ? - HELD THAT:- In the present case, although the award was made by the arbitrator on July 29, 1955, enhancing the amount of compensation payable to the assessee, the entire amount was in dispute in the appeal filed by the State Government. Indeed, the dispute was regarded by the court as real and substantial, because the assessee was not permitted to withdraw the sum deposited by the State Government on April 25, 1956, without furnishing a security bond for refunding the amount in the event of the appeal being allowed. There was no absolute right to receive the amount at that stage. If the appeal was allowed in its entirety, the right to payment of the enhanced compensation would have fallen altogether. Khan Bahadur Ahmed Alladin & Sons [1968 (11) TMI 31 - ANDHRA PRADESH HIGH COURT] and Topandas Kundanmal [1976 (3) TMI 9 - GUJARAT HIGH COURT] were relied on by the Gujarat High Court in Addl. CIT v. New Jehangir Vakil Mills Co. Ltd. [1979 (2) TMI 100 - GUJARAT HIGH COURT] for reaffirming that it was on the final determination of the amount of compensation that the right to such income in the nature of compensation would arise or accrue and till then there was no liability in praesenti in respect of the additional amount of compensation claimed by the owner of the land. It is unnecessary to refer to all the cases cited before us. It is sufficient to point out that there is a clear distinction between cases such as the present one, where the right to receive payment is in dispute and it is not a question of merely quantifying the amount to be received, and cases where the right to receive payment is admitted and the quantification only of the amount payable is left to be determined in accordance with settled or accepted principles. We are of the opinion that the High Court is right in the view taken by it and, therefore, this appeal must be dismissed. Issues:1. Whether the extra amount of compensation is taxable as income during the relevant assessment yearRs.2. Determining the point at which income accrues to an assessee for taxation purposes.Analysis:The case involves a limited company dealing in land that had certain plots requisitioned and later permanently acquired by the State Government. The issue revolves around the taxation of the extra compensation amounting to Rs. 7,24,914 during the assessment year 1956-57. The dispute arose when the Income-tax Officer treated this amount as business income of the assessee, considering it to have accrued at the date of the arbitrator's award. The Appellate Tribunal, however, held that while the compensation was a trading receipt, it did not accrue as income during the relevant previous year. The High Court also ruled in favor of the assessee, leading to the appeal at the Supreme Court.The Supreme Court delved into the legal principles governing the accrual of income for taxation purposes. Referring to past judgments, the court emphasized that income accrues when there is a debt owed by somebody, creating a right to receive profits. In this case, the court highlighted that the entire compensation amount was in dispute due to the pending appeal by the State Government. The assessee was not entitled to the deposited amount without providing security, indicating the uncertainty of receiving the sum. The court distinguished this case from others where the liability was clear and only the quantification remained. It stressed that income tax is not levied on a mere right to receive compensation; there must be a tangible obligation to pay an ascertained amount for income to accrue.Further, the court referenced judgments by other High Courts, such as the Gujarat High Court, which reiterated that the right to enhanced compensation only arises upon final determination of the amount. Until then, there is no enforceable right to a specific sum of compensation. The court emphasized the distinction between cases where the right to payment is in dispute, as in the present case, and cases where only the quantification of the amount is pending. Ultimately, the Supreme Court upheld the High Court's decision, dismissing the appeal and affirming that the extra compensation did not accrue as income during the relevant assessment year.In conclusion, the judgment clarifies the legal principles regarding the accrual of income for taxation purposes, emphasizing the need for a definite obligation to pay an ascertained amount for income to accrue. The case highlights the importance of final determination in cases where the right to receive payment is in dispute, reaffirming that income only accrues upon such final determination.