Legal ownership and accrual principles governed taxability of sale balance, rent, interest, and later receipts.
Under the mercantile system, the unpaid balance of sale consideration accrued when the right to receive it arose and was taxable, as it was recoverable as a debt and not shown to be unrealizable. For income from property, legal ownership under section 9, not mere possession or ability to let out the premises, determined taxability; rental income from bungalows remained assessable in the transferor's hands until conveyance. Interest charged on the unpaid purchase price was also taxable as an accretion to income. Amounts later received under earlier sale agreements were taxable in the years of receipt, consistent with the accounting method regularly employed and the entries in the assessee's books.
Issues: (i) whether the unpaid balance of the sale price accrued to the assessee and was taxable in the relevant assessment year; (ii) whether rental income from bungalows in the possession of intending purchasers, before execution of conveyance, was assessable in the assessee's hands; (iii) whether interest credited on the unpaid purchase price was includible in the assessee's income; and (iv) whether later realisations of sale proceeds relating to earlier agreements were taxable in the years of receipt.
Issue (i): whether the unpaid balance of the sale price accrued to the assessee and was taxable in the relevant assessment year.
Analysis: The assessee had switched to the mercantile system for the relevant year. Under that system, income is taxable on accrual and not merely on actual receipt. The unpaid balance of the consideration had arisen under the conveyances and was recoverable by the assessee as a debt due. There was no material to show that the balance was unrealisable or had no face value.
Conclusion: The entire unpaid balance accrued and was rightly included in the assessee's income.
Issue (ii): whether rental income from bungalows in the possession of intending purchasers, before execution of conveyance, was assessable in the assessee's hands.
Analysis: For income from property, liability under section 9 turns on ownership. The purchasers were in possession and could let out the bungalows, but they had no conveyance and no legal title. The provision taxes the owner on the bona fide annual value of the property, and the statutory scheme points to legal ownership rather than mere control or ability to earn rent. As the assessee retained ownership until conveyance, the rental income remained taxable in its hands.
Conclusion: The rental income was assessable in the assessee's hands.
Issue (iii): whether interest credited on the unpaid purchase price was includible in the assessee's income.
Analysis: Since the assessee continued to be the owner until execution of the sale deeds, it was entitled to charge interest on the unpaid balance. The interest was a legitimate accretion to the assessee's income and could not be excluded merely because possession had been given earlier.
Conclusion: The interest was rightly included in the assessee's income.
Issue (iv): whether later realisations of sale proceeds relating to earlier agreements were taxable in the years of receipt.
Analysis: The amounts were actually received in the relevant previous years and were shown as such in the assessee's accounts. They had not accrued earlier when the agreement to sell was entered into, because the assessee then kept its accounts on the cash basis. Once received in the years in question, they were taxable according to the method of accounting regularly employed and the entries in the assessee's own books supported assessment in those years.
Conclusion: The amounts were taxable in the years of receipt.
Final Conclusion: The reference was answered wholly against the assessee and in favour of the Revenue, with the assessee held taxable on the disputed sale balance, rental income, interest, and later receipts.
Ratio Decidendi: For income from property under section 9, ownership means legal ownership, while income governed by the mercantile system accrues when the right to receive it arises and later receipts are taxable in the years in which they are actually received and recorded in the assessee's accounts.