1. In these appeals by the revenue common grounds have been raised as the facts of the case in all the years are identical. The appeals by the revenue is that the Commissioner (Appeals) erred in holding that the claim of the assessee that it was neither receiving nor the money was accrued to the assessee in respect of the lease rent, was correct.
This is the first common ground of appeal. The facts of the case are discussed below.
2. For the assessment year 1973-74, the assessment was made earlier by the ITO under Section 144 which was reopened under Section 146 and ultimately the order was passed under Section 143(3) of the Income-tax Act, 1961 ('the Act'). In the order of assessment, the ITO indicated that the assessee is a company and the accounts were maintained on mercantile basis. The assessee in compliance with the notice under Section 143(2) made written submission to explain the return. It was stated that the assessee-company gave away its plant and machinery on lease to Amrit Paper Mills (P.) Ltd. for ten years on a rent of Rs. 10,000 per month from 12-1-1971. It was also noted that the lessee started neglecting payment of rent on certain grounds. A case was instituted being Title Suit No. 423 of 1973 before the Court of Subordinate Judge at Howrah, praying for temporary injunction which was allowed as prayed by the lessee who was allowed to stay till the questions formulated for reference to arbitration were determined. It was also noted that there was no order for payment of arrear or current rent to the lessor. Thereafter, the assessee-company filed a civil revision application (CR No. 3520 of 1974) before the Hon'ble High Court praying, inter alia, for rent, which was yet to be decided.
Accordingly, the assessee's representative submitted before the ITO that in view of decisions of several Courts, the lease income had not accrued and the assessee had not shown the income and, therefore, the question of inclusion of rental income did not arise. According to the assessee, the lease rent income would be determined only as and when the matter is decided by the Court.
3. The ITO pointed out that the assessee was following the mercantile system of accounting and once the lease agreement was signed by both the parties, it should be presumed that the income from the lease rent definitely accrued irrespective of the fact that the assessee got it or not. The ITO mentioned that in respect of several claims and counter-claims, the assessee and the lessee company had gone before the Court not to determine the status as lessor or lessee but to come to an agreement for receipt of arrear rent as well as getting back the plant and machinery by the assessee. He noted that the relation between the lessor and the lessee had not become fluid out of the above situation.
He pointed out that the lower Court gave injunction not to collect the arrear of lease rent, but in no way finally decided regarding the final payment. He mentioned that though the decision of the Hon'ble High Court is still awaited, the lease deed remains operative and the rent would continue to accrue to the assessee. He, therefore, included the accrued lease rent of Rs. 10,000 per month which was treated as income of the assessee from other sources.
4. On similar reasons and facts, the assessments for the assessment years 1976-77, 1977-78 and 1980-81 were completed under Section 143(3) by the ITO.5. The assessee took up the matter before the Commissioner (Appeals) and objected to the findings of the ITO. It was pointed out that for the assessment year 1975-76, the predecessor Commissioner (Appeals) has passed the order on 8-2-1979 in the case of the assessee in which the assessment order for that year was set aside. Copy of the order of the Hon'ble High Court dated 24-7-1981 was also placed before the Commissioner (Appeals). The Commissioner (Appeals) considered different aspects of the matter. He was of the view that the order of the Hon'ble High Court is of crucial importance in which it was observed that the liability of the lessee to pay arrear rent was now part of the dispute raised and that in view of the arbitration agreement, it was not for the Court to decide the said dispute but to leave it for the arbitration to do so as and when the application under Section 20 of the Arbitration Act was disposed of and reference was made to the arbitration. Pending this, the Hon'ble High Court ordered that the lessee would deposit to the Court of Subordinate Judge every month monthly rent in terms of the agreement subject to the results of the proceedings under Section 20. The Commissioner (Appeals) has also noted that the Court has clearly observed that the amount deposited would remain in the Court and neither of the party would be entitled to withdraw the amount except with the order of the Court and until disposal of the proceedings under Section 20. The Commissioner (Appeals), therefore, concluded that from the above judgment, the claim of the assessee that it was neither receiving any money nor the money was not accruing to the assessee in respect of the lease rent, was correct. The Commissioner (Appeals), therefore, agreed with his predecessor that the position of the lessor and the lessee was extremely fluid and that the receipt of the lease rent is dependent on the finding of the Court. He, therefore, directed the ITO to consider the issue regarding the taxability of the lease rent after the decision of the Court is finally known. Hence, these appeals by the revenue under consideration.
6. It is submitted by the learned departmental representative that the Commissioner (Appeals) erred in coming to the above conclusion in spite of the fact that the lease rent had already accrued to the assessee every month during the years under consideration, on the basis of the lease agreement executed by both the parties. It is stressed that the assessee was maintaining accounts on mercantile basis. It is also submitted that in fact, relationship between the assessee and the above company as lessor and lessee was not in the state of fluid as observed by the Commissioner (Appeals) as, in fact, the dispute in the pending suit is regarding recovery of rent and settlement of counter-claims by the lessee against the assessee. According to the learned departmental representative, the assessee has got the right to receive the rental income and, therefore, the income had already accrued under the terms of the agreement and as such, the ITO was justified in including such lease income in the computation of the assessment for the years under appeal.
7. The second ground of appeal by the revenue is also required to be taken up simultaneously, which is common to all the years. In the second ground of appeal, it is contended that the Commissioner (Appeals) erred in giving the above direction regarding the issue of taxability of the lease rental only after the decision of the Court is finally known in view of the clear provisions of Section 153(2A) of the Act. It is submitted by the learned departmental representative that in view of the clear requirements of this section, the ITO would not be able to wait till the final decision of the Court is known, as such, fresh assessments would have to be made not later than 31-3-1988. It is, therefore, urged that on the facts of the case, the order of the Commissioner (Appeals) cannot be sustained and may be reversed and those of the ITO may be restored.
8. The learned representative of the assessee supports the order of the Commissioner (Appeals). It is submitted that the present Commissioner (Appeals) has given the direction as done by the predecessor Commissioner (Appeals) for the assessment year 1975-76 in the case of the assessee as mentioned above. The assessee has also filed different papers in support of the submissions in the statement of facts for the assessment year 1973-74 amongst other things at item 1, it is stated that the order of the Commissioner (Appeals) for the earlier year was accepted by the department inasmuch as it was not taken up before the higher authorities by the department and, therefore, the ITO while passing the assessment order in question, failed to take into consideration the order of the Commissioner (Appeals) passed earlier.
It is clarified further that the lessee company denied to pay the lease rent to the assessee and in fact, the said lessee filed counter-claims against specific non-performance of the certain terms of the agreement.
It is also submitted that the matter is pending before arbitration and that according to the direction given in the judgment, the amount could not be withdrawn. It is pointed out that according to the lessee, the counter claims against the assessee will be about Rs. 38 lakhs. The assessee's learned Counsel, therefore, submits that the question of taxability or otherwise could be considered after the passing of a decree. In this connection, reference is made to the decision as in Addl. CIT v. Ganesh Das [1981] 129 ITR 467 (AIL), Salig Ram Kanhaya Lal v. CIT [1982] 133 ITR 915 (Punj. & Har.) and Chooharmal Wadhuram v.CIT[ 1968] 69 ITR 88 (Guj.). In the circumstances, it is urged that the lease rent for the years under consideration has not accrued although the assessee mainta ned mercantile method of accounting. It is submitted, therefore, that the order of the Commissioner (Appeals) may be sustained.
9. We have heard both the sides and have gone through the orders of the authorities below for our consideration. We have also gone through the different papers placed by the assessee before us including the lease deed and supplementary deeds in respect of the lease. From the lease deed, it is seen that originally, it was stipulated that the monthly lease rent was payable at Rs. 12,500 which was reduced to Rs. 10,000 per month from February 1972. The mode of payment was also specified that the same would be payable by the 10th day of the month for which the same shall be due. In other words, the lease rent became due to the assessee every month during the subsistence of the lease. The ITO, as indicated earlier, has noted that the method of accounting by the assessee was mercantile. This finding by the ITO remains uncontroverted. In the circumstances, it cannot be said that the lease rents have not become due or accrued to the assessee from month to month during the years under consideration. But the contention of the assessee, however, before the authorities below was that there was a dispute and the lessee filed the suit against the assessee to show cause why arbitration agreement should not be filed as contained in the original lease deed. The case of the assessee is also that due to the disputes and difference which has arisen between the assessee and the lessee company, the lessee started neglecting payment of rent and also breached certain conditions of the lease agreement and that on the lessor's pointing out such breaches, the lessee filed a suit in the Court of the Subordinate Judge of Howrah seeking temporary injunctions to prohibit the lessor from re-entering the factory premises. It is also stated that the assessee filed a revision petition before the Hon'ble High Court claiming, inter alia, payment of rent which was withheld by the lessee. In such circumstances, it is urged on behalf of the assessee that the ITO went wrong in stating that the lease rent was taxable during the years under appeal on the ground that the method of accounting followed by the assessee was mercantile. It is reiterated before us that due to the legal position, relation between the assessee aad the lessee has become fluid and the verdict of the Hon'ble High Court is being awaited. It is submitted, therefore, that on these premises, the order of the Commissioner (Appeals) who followed the order of the predecessor Commissioner (Appeals) for the earlier year, was quite proper and reasonable and the same requires to be sustained.
10. We have gone through the orders of the authorities below along with other papers placed before us for consideration. As indicated earlier, in the assessment order the method of accounting followed by the assessee was shown as on mercantile basis. The lease agreement also stipulated the payment of lease rent by the 10th of every month by which the rent was due. In other words, the assessee as a lessor has a legal right which is enforceable or recognisable which, in fact, in the present case is an ascertainable claim which can be enforced according to law. Of course, enforceability by legal process is subject to certain qualifications, particularly in the present case, the lessee made counter-claims against the assessee on the strength of the contentions that there were breaches of the terms of the contract for which the lessee had to make payments on account of various terms. But even then on the facts of the present case it cannot be said that the assessee has not been vested with the right to claim the lease rent. In the case of any assessee following mercantile system of accounting, even interest on loan when due, accrues and becomes assessable even if the same has not been received. This is the view of the Hon'ble Allahabad High Court in the case of Balraj Virmani v. CIT [1974] 97 ITR 69, on the facts of that case.
11. Tt may be useful to refer to the decision of the Hon'ble Supreme Court in the case of CIT v. Jai Parkash Om Parkash Co. Ltd. [1964] 52 ITR 23 in which the assessee who maintained accounts on mercantile basis, entered into a forward contract for sale of certain quantity of goods at a particular rate and within a specified date. The price of the goods soon thereafter fell down and the purchaser cancelled the contract before the due date but that there the assessee refused to accept the cancellation. That the assessee instituted a suit for recovery and the trial Court decreed the amount and on the date of the assessment order an appeal was pending before the concerned High Court.
The ITO included the amount involved in the total income of the assessee, which was excluded by the Tribunal on the ground that the liability was still being in dispute, the sum in question could not be said then to have accrued. Reference under Section 62(2) of the Act was rejected. On appeal by the department, the Hon'ble Supreme Court directed that the Tribunal should refer the case as a point of law was involved. In another case of Morvi Industries Ltd. v. CIT [1971] 82 ITR 835 (SC) on the facts of that case, it was held that the mercantile system of accounting differs substantially from the cash system. Under the mercantile system credit entries are made in respect of amounts due immediately, they become legally due and before they are actually received and where the accounts were kept on mercantile system, profits and gains are credited though they are actually not received and the entries thus made really show nothing more than an accrual or arising out of the said profit at the material time. It was also held that the income accrued and it becomes due and the postponement of payment does not effect the accrual of income and that the fact that the amount of income is not subsequently received by the assessee would not also detract from or efface the accrual of the income, although non-receipt may in appropriate cases be a valid ground for claiming deduction. On the facts of the present case before us, as indicated earlier, the monthly lease rent became payable for every month as per the terms of the lease deed. The lease rent has thus accrued to the assessee. In our opinion, the conclusion of the Commissioner (Appeals) that the receivability of the lease rent is dependent upon the finding of the Court, is not correct, in view of the ratio in the case of Morvi Industries Ltd. (supra). Of course, in the present case, there is postponement of receipt of the lease rent by the assessee. But as held in the above cited case, postponement of payment would not affect the accrual of income. In this view of the matter, following the ratio in the case of Morvi Industries Ltd. (supra), we are of the opinion that the order of the Commissioner (Appeals) on this point common to all these years cannot be supported. But we have also to keep in mind all the contentions made before us that the lessee has lodged a counter-claim that it had incurred expenditure on behalf of the assessee as a lessor, in respect of certain items of repairs, damages, etc. According to the assessee's learned Counsel such counter-claims of the assessee against the assessee would be more than Rs. 38 lakhs. Of course, this matter is pending for adjudication. As indicated in the case of Morvi Industries Ltd. (supra), non-receipt may in the appropriate case be a valid ground for claiming deduction at the material time. In this view of the matter, the consolidated order of the Commissioner (Appeals) on the point is reversed and those of the ITO for the years under consideration, are restored.
12. In view of what we have decided above relating to the first ground of appeal by the revenue, the second ground of appeal would become academic. Nevertheless, we have to deal with the same in view of the provisions of Section 153(2A) which was brought into effect from 1-4-1971. The provisions of Section 153(2A) are absolute. A bar has been put on the assessing authorities to make assessment after the expiry of the period mentioned therein. This is in regard to assessment proceedings relating to the assessment years 1971-72 and onwards. The assessment years before us are the assessment years 1973-74 and onwards. Prior to the insertion of this sub-section there was no time limit for passing order to give effect to the directions or orders of the appellate authorities or the Courts as held by the Hon'ble Bombay High Court in the case of Ramkrishna Ramnath v. G. Lakshmi Narasimhan, ITO [1970] 77 ITR 456 and as decided by the Hon'ble Supreme Court in the case of CIT v. National Taj Traders [1980] 121 ITR 535. The bar of limitation was removed where there was a finding or a direction in appeal. This is the view of the Hon'ble Supreme Court in the case of Daffadar Bhagat Singh & Sons v. ITO [1969] 71 ITR 417.
13. The above decisions, of course, were rendered in the context of the cases relevant to the assessment years prior to 1-4-1971. But with the insertion of Section 153(2A), the position has been altered, apparently the Commissioner (Appeals) overlooked the statutory requirements of this section in giving the direction to the ITO in the present case to decide the issue regarding the taxability of the lease rental after the decision of the Court is finally known. The apprehension of the learned departmental representative is that in view of the provisions of Section 153(2A), the ITO may not be in a position to pass orders for inclusion of such amount of rent after 31-3-1988, as according to the learned departmental representative, the litigation which is pending may take more time to be finally decided by the Court. In our opinion, this apprehension is legitimate, as the revenue will be put to loss, if fresh assessment as directed by the Commissioner (Appeals) has to be kept pending and which may not be able to be disposed of by 31-3-1988.
In this connection we may refer to the decision of the Hon'ble Supreme Court in the case of ITO v. M.K. Muhammed Kunhi [1969] 71 ITR 815. At this juncture it is necessary also to refer to a decision of the Hon'ble Andhra Pradesh High Court in the case of ITO v. Khalid Mehdi Khan (Minor) [19771 110 ITR 79, in which amongst other things, the provisions of Section 153(2A) and Section 244 of the Act were dealt with and considered. At page 83 (middle portion), it was observed that it is obvious that the provisions contained in Sub-section (2A) shall have to be an additional factor which the Tribunal has to take into consideration while passing an order of stay or other interlocutory order pending the appeal before it. It was also observed in that decision that it is always open to the department to bring to the notice of the Tribunal particular difficulties, if any, which would be faced in case collection is stayed and the Tribunal will of course shall consider such plea keeping in view the ratio of the decision in the case of M.K. Muhammed Kunhi (supra).
14. Thus, in view of the legal position as dealt with by the different Courts mentioned above, it would not be appropriate for the Commissioner (Appeals) to direct the ITO to consider the issue of taxability of the lease rent after the decision of the Court is finally known, which may go beyond 31-3-1988.
15. The contentions of the assessee amongst other things are also that the ITO should have followed the decisions of the predecessor the Commissioner (Appeals) who gave a similar direction for the other assessment years not presently before us, on the basis of which the present Commissioner (Appeals) has given similar directions. In our opinion, this contention cannot be, accepted as in taxation, the principle of res judicata cannot be applied. In this connection we may refer to the decision of the Hon'ble Calcutta High Court in the case of Namdang Tea Co. Ltd. v. CIT [1982] 138 ITR 326, at page 333 (middle portion) in which it was held that it is now well settled that the decision of the ITO or a Tribunal in regard to a particular year does not operate as res judicata for the subsequent year.
16. Thus, the order of the Commissioner (Appeals) impugned before us for all the years is reversed and those of the ITO is restored.