SooperKanoon Citation | sooperkanoon.com/75290 |
Court | Income Tax Appellate Tribunal ITAT Delhi |
Decided On | Oct-31-2006 |
Judge | D Singh, R Sharma |
Reported in | (2007)106TTJ(Delhi)448 |
Appellant | Rama Associates Ltd. |
Respondent | Deputy Commissioner of Income Tax |
Excerpt:
1. this is an appeal filed by the assessee against the order of the cit dt. 30th march, 2005 for the asst. yr. 1999-2000, passed under section 263 of the it act, 1961 wherein following grounds have been raised by the assessee: 1. that the order under section 263 dt. 30th march, 2005 as passed by the learned cit, delhi is arbitrary, unjust and illegal on various factual and legal grounds including the following: (a) the learned cit had no jurisdiction to invoke section 263 of the it act, 1961 because the learned ao had passed the assessment order under section 143(3)/147 dt. 28th march, 2003 after proper application of mind. (b) the learned cit is incorrect in holding that the ao had not decided upon the issues raised by her in her notice under section 263 clearly and that the view taken by the ao in the assessment order dt. 28th march, 2003 was in violation of the law. (c) the observations of the learned cit in last para at p. 2 of her impugned order regarding the insurance claim are factually incorrect and legally untenable. she is wrong in presuming that the right to receive insurance claim was not in dispute. she has not brought any evidence on the record to show that an amount of rs. 1,48,06,977 though credited in the p&l a/c had actually accrued due to the appellant. this amount neither represented a receipt in the hand of the appellant nor it constituted taxable income of the year under appeal. (d) the following observations of the learned cit in para 7 are incorrect: as regards, the underassessment of value of property at delhi, the assessee has itself agreed that a mistake had crept into the assessment order in not taxing the notional interest on security deposit. (e) provisions of section 263 of the it act, 1961 in terms had no application to the facts of this case. (f) various observations made by the learned cit in the impugned order are either incorrect or are legally untenable. 2. that the impugned order under section 263, dt. 30th march, 2005 as passed by the learned cit being unjust and illegal deserves to be cancelled and the order of the learned ao deserves to be restored on the issues raised by the learned cit. 3. that the learned cit was wholly unjustified in directing the ao to make fresh assessment by bringing to tax the insurance claim of rs. 1,48,06,977 and notional rent @ 12.5 per cent on security deposit in respect of property at delhi. 4. that the appellant reserves its right to add, amend/modify the grounds of appeal.2. rival contentions have been heard and record perused. in the course of proceedings under section 263 of the act, the cit observed that during the year as per the p&l a/c a sum of rs. 1,48,09,977 was shown credited under the head "other income" on account of insurance claim.while computing the taxable income the assessee company reduced the taxable income by rs. 1,48,69,997 on account of insurance claim on the pretext that it was not taxable during the year as the matter was sub judice. note 7 of notes to the accounts revealed that the assessee company claimed insurance amounting to rs. 4,22,94,263 relating to losses lodged with the insurance company whereas the company has accounted for a sum of rs. 1,48,69,997 on accrual basis. thus the claim of deduction was wrongly allowed by the ao. it was also noticed that the ao while framing the order added back 12.5 per cent of rs. 2 crores of security deposit in respect of property in mumbai as the value of interest-free security leaving a balance of rs. 1 crore on account of property at delhi. thus, the value of property at delhi was underassessed. the cit observed that as regards the underassessment of value of property at delhi, the assessee has itself agreed that a mistake had crept into the assessment order in not taxing the notional interest on security deposit. the cit held that it is clear that the impugned assessment order is erroneous and prejudicial to the interest of revenue as it failed to apply the provisions of the act correctly.therefore, the said order was cancelled under section 263 of the it act, 1961. the ao was directed to make fresh assessment and bring to tax the insurance claim of rs. 1,48,06,977 and notional rent @ 12.5 per cent on security deposit on property at delhi after allowing proper and reasonable opportunity to the assessee.3. it was vehemently argued by the learned authorised representative, shri o.p. sapra, that the learned cit had no jurisdiction to invoke section 263 because the reassessment order as passed under section 143(3)/147 dt. 28th march, 2003 was after proper application of mind.the learned cit overlooked to appreciate that in the computation of income filed with the return, copy at p. 24 admittedly, the assessee had deleted the amount of rs. 1,48,46,997 credited to p&l a/c vide sch.14 under the head 'other income' copy at p. 40 with the following specific narration: less : item credited to p&l a/c. insurance claim not taxable during the year as the matter is sub judice and the claim has not been settled (kindly see note no. 7 of the notes on account.) 4. learned authorised representative has drawn our attention to para 7 of sch. 21 forming part of audited balance sheet filed along with the return of income which reads as under: in note no. 6 forming part of the accounts of the year ended 31st march, 1998, it was mentioned that the insurance claim of rs. 4,22,94,263 relating to losses lodged with insurance company have not been accounted for and also losses against claim amounting to rs. 63,40,155 had not been accounted for. now management on the basis of legal opinion obtained by it has decided to account for 50 per cent of the insurance claim income equivalent to rs. 2,11,47,132 after adjusting losses of rs. 63,40,155 though such claims are not yet accepted by the insurance company. however, the case is still pending with national consumer disputes redressal commission, new delhi.5. as per learned authorised representative, the issue of insurance claim has been examined by the ao at the time of assessment and hence section 263 had no application. it is further stated that in note 6 forming part of the account of the year ended 31st march, 1998 it is mentioned that the insurance claim of rs. 4,22,94,363 relating to losses lodged with the insurance company have not been accounted for and also losses against claim amounting to rs. 63,40,155 has not been accounted for. the management on the basis of legal opinion obtained has decided to account for 50 per cent of the insurance claim after adjusting losses of rs. 63,40,155. the claim has not been accepted by the insurance company and a case is pending with national consumer disputes redressal commission, new delhi.6. in respect of assessment of rental income from delhi property, the learned authorised representative submitted that the assessee against the assessment order, had filed an appeal which was decided by the learned cit(a)-18, new delhi vide his order dt. 12th dec, 2003 in which he had duly discussed the rental income from the properties both at bombay and delhi. therefore, the assessment stood merged with the appellate order.7. as per learned authorised representative even on merits the issue regarding inclusion of 12.5 per cent of interest-free security deposit given to the assessee, in the annual letting value of property at delhi, is covered in favour of assessee by order of the tribunal dt.24th may, 2006.8. on the other hand, learned cit (departmental representative) shri satbir singh strongly supported the order passed under section 263 and vehemently argued with respect to accounting of insurance claim, that the assessee cannot adopt 'mixed or hybrid' system of accounting w.e.f.1st april, 1997. the accounting standards and methods of accounting regularly followed by the assessee have to be consistently applied in respect of all the receipts and expenses. since, the assessee generally adopted accrual system of accounting, even in respect of the receipts on account of settlement of insurance claim, it has to follow the same system. as per shri satbir singh moreover, in the present case, what is in dispute is the quantum of the claim and not the entire claim. it is well settled that where the right to receive payments is not in dispute, the amount is taxed in the year of accrual of the same.clearly, by not bringing to tax the insurance claim as per cit (departmental representative), the ao erred in law, which rendered his order erroneous as well as prejudicial to interest of revenue.9. shri satbir singh has drawn our attention to the order of the ao wherein he has discussed regarding annual letting value of the property at delhi and bombay in great detail but in the final conclusion the computation of annual letting value in respect of delhi property was left, thereby making the order erroneous. since the order was erroneous for not computing the annual letting value of delhi property, as per mr. satbir singh, the order of the ao has become prejudicial to the interest of the revenue insofar as the ao has not finally worked out the annual letting value of delhi property even after considering the aspect of interest-free security deposit given to the assessee with respect to both bombay and delhi property. he, therefore, submitted that order of the ao was both erroneous as well as prejudicial to the interest of revenue and the cit was therefore perfectly justified in invoking his powers under section 263 and thereby directing the ao to determine annual value of delhi property and to compute interest on interest-free security deposit, given to the assessee by sister-concern to whom property was let out at very meager rent.10. with regard to computation of rental income, shri satbir singh, cit (departmental representative) has drawn our attention to the order of the tribunal in the case of fizz drinks ltd. v. dy. cit (2005) 95 ttj (del) 429 in support of the contention that the assessee having fixed meager rent but having received large interest-free security deposit, annual letting value has to be determined in accordance with section 23(l)(a) by taking into account notional interest on the amount of security deposit calculated @ 12.5 per cent per annum.11. learned cit (departmental representative) further submitted that section 23(l)(a) provides that for the purpose of section 22, the annual letting value of any property shall be deemed to be (a) the sum for which the property might reasonably be expected to let from year to year. in the present case, the actual rent was much lower as admitted by the assessee itself. the sum for which the property might reasonably be expected to let from "year to year" had to be determined and for this all relevant factors including the benefit of interest-free security deposit had to be taken into account. he submitted that annual letting value directed to be determined by cit by taking into account the factor of interest on the amount of interest-free loan given to the assessee was fair and reasonable.12. we have considered the rival contentions carefully, gone through the orders of the lower authorities and also deliberated on the various case laws cited by the learned authorised representative and departmental representative during the course of hearing before us, in the context of factual matrix of the case. a bare reading of provisions of section 263 makes it clear that the prerequisite to exercise of jurisdiction by the cit suo motu under it, is that the order of the ito is erroneous insofar as it is prejudicial to the interests of the revenue. the cit has to be satisfied of twin conditions, namely, (i) the order of the ao sought to be revised is erroneous; and (ii) by virtue of the order being erroneous, prejudice has been caused to the interests of the revenue. if one of them is absent-if the order of the ito is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue-recourse cannot be had to section 263(1). there can be no doubt to the well-settled legal proposition that the provision cannot be invoked to correct each and every type of mistake or error committed by the ao. an incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. in the same category fall orders passed without applying the principles of natural justice or without application of mind. the phrase 'prejudicial to the interests of the revenue' is not an expression of art and is not defined in the act. understood in its ordinary meaning it is of wide import and is not confined to loss of tax. the scheme of the act is to levy and collect tax in accordance with the provisions of the act and this task is entrusted to the revenue. if due to an erroneous order of the ito, the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the revenue. the phrase 'prejudicial to the interest of the revenue' has to be read in connection with an erroneous order passed by the ao. every loss of revenue as a consequence of an order of ao cannot be treated as prejudicial to the interests of the revenue, for example, when an ito adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ito has taken one view with which the cit does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue unless the view taken by the ito is unsustainable in law. an order cannot be termed as erroneous unless it is not in accordance with law. if an ito acting in accordance with law passes some order, the same cannot be branded as erroneous by the cit simply because he is of some other view. this section does not visualize a case of substitution of judgment of the cit for that of the ito, who passed the order, unless the decision is held to be erroneous.13. the power of suo motu revision under sub-section (1) of section 263 is in the nature of supervisory jurisdiction and the same can be exercised only if both the circumstances specified therein exist. two circumstances must exist to enable the cit to exercise power of revision under this sub-section, viz., (i) the order is erroneous; (ii) by virtue of the order being erroneous prejudice has been caused to the interest of the revenue. it has, therefore, to be considered firstly as to whether the order passed by the ao was erroneous. from the record, we found that during the year under consideration, there was a loss to the assessee and the assessee has filed a insurance claim of rs. 4,22,94,263. on the basis of legal opinion obtained by it, the assessee company decided to account for 50 per cent of the insurance claim income equivalent to rs. 2,11,47,132 after adjusting losses of rs. 63,40,155. even though these losses were not accepted by the insurance company and the case is still pending with national consumer disputes redressal commission, new delhi, the assessee accounted for income of rs. 1,48,06,977 on account of insurance claim by crediting into p&l a/c. however, while computing the income for the purpose of filing return, the assessee company again reduced the taxable income exactly by the same amount of rs. 1,48,69,997 on the plea of the matter being sub judice. as the assessee was consistently following mercantile system of accounting and which was also mandatory for it as per the provisions of the it act, 1961, the cit found that by reducing the income on account of insurance claim in the computation of income, the assessee has reduced its income even after accounting the same as per mercantile system of accounting, and which has escaped the attention of the ao and rendered the assessment order erroneous and prejudice has been caused to the revenue to this extent. it was submitted by the learned authorised representative at bar that dispute is still going on in the court of law and the matter is sub judice before the national consumer court and nothing was received till date. since nothing was received, as per learned authorised representative, mere accounting entry does not create any right in the hands of the assessee to receive any income which neither accrued nor arose during the year nor in the subsequent years. income is liable to be taxed under the it act on the basis of its accruing or arising to the assessee, or on the basis of its receipt by the assessee, during the relevant previous year. the words "accrue", "arise" and "is received" are not synonymous. the expression "is received" conveys a clear and definite meaning. the words 'accrue or arise' depend upon the rights of the assessee to secure the income though the actual receipt of the income may not be there. ordinarily, the income is said to have accrued to a person when he has acquired a right to the income. he must have acquired an enforceable right in regard to that income, though actual quantification and receipt may follow in due course. a mere claim to income without an enforceable right thereto cannot, therefore, be regarded as an accrued income for the purpose of the it act. likewise, a mere filing of claim with insurance company, is itself not sufficient to make such income to be accrued for taxing purposes. it goes without saying that the mere such filing of claim without its acceptance by the insurance company cannot accrue income in the hands of the assessee merely by passing accounting entry to this effect in the assessee's books of account. it is only when such a claim is accepted by the insurance company that it can be the basis of treating income as "accrued" within the scope of section 5(l)(b) of the it act. once the claim is accepted the assessment of such accrued income cannot be postponed till it is actually paid to the assessee. in the instant case there is no dispute to the fact that in spite of filing its claim to the insurance company, neither the insurance company accepted any claim nor anything was paid to the assessee in the form of compensation by the insurance company. as per our considered view and as per provisions of section 5, income can be brought to tax only on the basis of its accrual or receipts. if the income has neither accrued nor received, the same cannot be brought to tax either on notional basis or on the basis of accounting entry being passed by the assessee, unless cogent material is brought on record proving otherwise. it is also not the case of the revenue that even though entry was made in the relevant assessment year under consideration regarding claim filed by the assessee, in the subsequent year the assessee has actually received amount from the insurance company or at least there is acceptance by the insurance company regarding claim lodged with it. in cit v.ferozepur finance (p) ltd. income-tax is levied on income whether the accounts are maintained on mercantile system or on cash basis. if income does not result at all, there cannot be levy of tax. even if an entry of hypothetical income is made in the books of account, where the income does not result at all as there is neither accrual nor receipt of income, no tax can be levied. even in mercantile system of accountancy an assessee could forgo the whole or part of a debt, which was irrecoverable, and the same could not be added to the income of the assessee. (a) hon'ble supreme court in the case of godhra electricity co. ltd. v. cit (1997) 139 ctr (sc) 564 : (1997) 225 ftr 746 (sc), held that "income-tax is a levy on income. no doubt, the it act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. if the income does not result at all, there cannot be a tax, even though in book keeping, an entry is made about a hypothetical income, which does not materialize". at pp. 748 and 749, the supreme court further observed as under: even though the assessee company was following the mercantile system of accounting and had made entries in the books regarding enhanced charges for the supply made to the consumers, no real income had accrued to the assessee company in respect of those enhanced charges. the tribunal had rightly held that the claim at the increased rates as made by the assessee company on the basis of which necessary entries were made, represented only hypothetical income, and the amounts in question brought to tax by the ito did not represent income which had really accrued to the assessee company during the relevant previous years.14. we, therefore do not find any merit in the action of cit for adding the notional income which has neither received nor accrued nor arose in favour of assessee and, moreover the assessee also has not offered the same for taxation in view of the dispute being sub judice, by excluding the same from the computation of total income filed along with the return of income. mere filing of claim did not give any right to receive till the claim is accepted by the insurance company . had there been any acceptance of claim by the insurance company, the income could be said to have accrued on the basis of accounting entry to this effect passed by the assessee, notwithstanding its actual payment by the insurance company. but in the instant case neither there is any such acceptance nor there is any payment by the insurance company during the year under consideration or in any of the subsequent years, till the date of hearing of the case. a statement to this effect was given by learned authorised representative at bar. we are, therefore, persuaded to agree with the learned senior advocate, shri o.p. sapra that no fault can be found in the order of the ao for not including the amount of claim for which entry was passed in the books of account, and the cit was not justified in directing to include income of rs. 1,48,006,977 credited in the p&l a/c on account of insurance claim, which was neither received nor accrued in favour of the assessee nor there existed any right to receive. this ground of assessee's appeal is accordingly allowed.15. with regard to determination of annual letting value of property at delhi, we found that ao while framing assessment under section 143(3)/147 of the act has elaborately dealt with the issue of low rent being charged from the sister-concern in respect of property situated at a prime location of bombay and delhi and also interest-free security deposit of rs. 3,00,00,000 taken from the sister-concern. the ao has also discussed the size of the property let out at lawrence road, new delhi having area of 3800 sq. ft. and stated that annual letting value is to be arrived at as per the provisions of section 23 of the act according to which the sum for which property may reasonably be expected to be let out from year to year is to be determined. however, while making the final computation of income at p. 4 of his assessment order, the determination of annual letting value of mumbai property was got done but there was no computation of annual value of delhi property and thus entirely escaped computation of total income which rendered the order of the ao erroneous and prejudicial to the interest of revenue with regard to computation of annual letting value of delhi property. we, are therefore, inclined to agree with the contention of learned cit (departmental representative) shri satbir singh that cit has correctly invoked the provisions of section 263 of the act in respect of non computation of annual letting value of delhi property which has escaped by the ao in his assessment order, thereby failing to apply provisions of the act correctly. with respect to the reliance placed by the learned authorised representative on the order of the tribunal dt. 24th may 2006, wherein inclusion of 12.5 per cent on interest-free security deposit received by the assessee, was held to be not justified by placing reliance on the decision of calcutta high court reported at cit v. poddar bros (p) ltd. (cal) and bombay high court reported at cit v. j.k. investors (bombay) ltd. , the learned departmental representative submitted that decision of both the high courts dealt with the provisions of section 23(l)(b) and not of section 23(l)(a) of the act. according to learned departmental representative, as per provisions of sub-section (l)(a) of section 23, the sum for which the property may reasonably be expected to let from year to year is to be taken as annual letting value and for this purpose all the factors regarding municipal value of the property, standard rent etc. is to be considered. sub-section (1)(b) will come into operation only when the actual rent received or receivable is more than the sum referred to in clause (a) of sub-section (1) of section 23. since there was no determination of annual value under sub-section (l)(a), no reason arises for finding out excess of actual rent over the sum for which the property might reasonably be expected to let from year to year. as per learned departmental representative non-application of mind by the ao and non-application of correct provision of law has rendered the assessment order erroneous which has prejudiced revenue's interest.16. we had given thoughtful consideration to rival contentions, and perused the provisions of section 23 relating to determination of annual letting value of property chargeable to income-tax under the head "income from house property". so far as determination of annual letting value of the delhi property is concerned, there is no dispute to the well settled law that the same is to be done as per provisions of section 23(l)(a) of the act, which has not been done by the ao while framing the assessment. contention of learned authorised representative to the effect that cit(a) has considered the matter of rental income in respect of both bombay and delhi properties, therefore, assessment order merged with appellate order, do not carry any weight insofar as there was no grievance of assessee before the cit(a) regarding determination of incorrect annual value of delhi property. as the ao had not computed the annual letting value of delhi property, there does not arise any reason for assessee to allege the same before cit(a), nor cit(a) has decided the issue in favour of assessee or against the assessee regarding determination of annual letting value of delhi property. even by exercising the coterminous powers vested in cit(a), to do the thing which ao failed to do, undisputedly in the instant case the cit(a) had not enhanced the assessment, so as to close the doors of cit under section 263. under these circumstances, the theory of merger will not apply, so as to restrain the powers vested under section 263.with respect to the specific direction given by the cit for taking 12.5 per cent interest, on the interest-free security deposit given to the assessee, we are inclined to agree with the learned authorised representative that the issue is covered by the order of the tribunal, therefore, this specific direction of the cit is not sustainable. we are, therefore, inclined to modify the direction of cit and direct the ao to determine the annual letting value of property as per provisions of section 23 of the act, ao is further directed for not making any addition on account of interest at 12.5 per cent on the interest-free security deposit given to the assessee, while arriving at annual letting value as per provisions of section 23 of the act. we direct accordingly.17. in the result, the appeal of the assessee is allowed in part in terms indicated hereinabove.
Judgment: 1. This is an appeal filed by the assessee against the order of the CIT dt. 30th March, 2005 for the asst. yr. 1999-2000, passed under Section 263 of the IT Act, 1961 wherein following grounds have been raised by the assessee: 1. That the order under Section 263 dt. 30th March, 2005 as passed by the learned CIT, Delhi is arbitrary, unjust and illegal on various factual and legal grounds including the following: (a) The learned CIT had no jurisdiction to invoke Section 263 of the IT Act, 1961 because the learned AO had passed the assessment order under Section 143(3)/147 dt. 28th March, 2003 after proper application of mind.
(b) The learned CIT is incorrect in holding that the AO had not decided upon the issues raised by her in her notice under Section 263 clearly and that the view taken by the AO in the assessment order dt. 28th March, 2003 was in violation of the law.
(c) The observations of the learned CIT in last para at p. 2 of her impugned order regarding the insurance claim are factually incorrect and legally untenable. She is wrong in presuming that the right to receive insurance claim was not in dispute. She has not brought any evidence on the record to show that an amount of Rs. 1,48,06,977 though credited in the P&L a/c had actually accrued due to the appellant. This amount neither represented a receipt in the hand of the appellant nor it constituted taxable income of the year under appeal.
(d) The following observations of the learned CIT in para 7 are incorrect: As regards, the underassessment of value of property at Delhi, the assessee has itself agreed that a mistake had crept into the assessment order in not taxing the notional interest on security deposit.
(e) Provisions of Section 263 of the IT Act, 1961 in terms had no application to the facts of this case.
(f) Various observations made by the learned CIT in the impugned order are either incorrect or are legally untenable.
2. That the impugned order under Section 263, dt. 30th March, 2005 as passed by the learned CIT being unjust and illegal deserves to be cancelled and the order of the learned AO deserves to be restored on the issues raised by the learned CIT. 3. That the learned CIT was wholly unjustified in directing the AO to make fresh assessment by bringing to tax the insurance claim of Rs. 1,48,06,977 and notional rent @ 12.5 per cent on security deposit in respect of property at Delhi.
4. That the appellant reserves its right to add, amend/modify the grounds of appeal.
2. Rival contentions have been heard and record perused. In the course of proceedings under Section 263 of the Act, the CIT observed that during the year as per the P&L a/c a sum of Rs. 1,48,09,977 was shown credited under the head "other income" on account of insurance claim.
While computing the taxable income the assessee company reduced the taxable income by Rs. 1,48,69,997 on account of insurance claim on the pretext that it was not taxable during the year as the matter was sub judice. Note 7 of notes to the accounts revealed that the assessee company claimed insurance amounting to Rs. 4,22,94,263 relating to losses lodged with the insurance company whereas the company has accounted for a sum of Rs. 1,48,69,997 on accrual basis. Thus the claim of deduction was wrongly allowed by the AO. It was also noticed that the AO while framing the order added back 12.5 per cent of Rs. 2 crores of security deposit in respect of property in Mumbai as the value of interest-free security leaving a balance of Rs. 1 crore on account of property at Delhi. Thus, the value of property at Delhi was underassessed. The CIT observed that as regards the underassessment of value of property at Delhi, the assessee has itself agreed that a mistake had crept into the assessment order in not taxing the notional interest on security deposit. The CIT held that it is clear that the impugned assessment order is erroneous and prejudicial to the interest of Revenue as it failed to apply the provisions of the Act correctly.
Therefore, the said order was cancelled under Section 263 of the IT Act, 1961. The AO was directed to make fresh assessment and bring to tax the insurance claim of Rs. 1,48,06,977 and notional rent @ 12.5 per cent on security deposit on property at Delhi after allowing proper and reasonable opportunity to the assessee.
3. It was vehemently argued by the learned Authorised Representative, Shri O.P. Sapra, that the learned CIT had no jurisdiction to invoke Section 263 because the reassessment order as passed under Section 143(3)/147 dt. 28th March, 2003 was after proper application of mind.
The learned CIT overlooked to appreciate that in the computation of income filed with the return, copy at p. 24 admittedly, the assessee had deleted the amount of Rs. 1,48,46,997 credited to P&L a/c vide Sch.
14 under the head 'Other income' copy at p. 40 with the following specific narration: Less : Item credited to P&L a/c. Insurance claim not taxable during the year as the matter is sub judice and the claim has not been settled (kindly see note No. 7 of the notes on account.) 4. Learned Authorised Representative has drawn our attention to para 7 of Sch. 21 forming part of audited balance sheet filed along with the return of income which reads as under: In Note No. 6 forming part of the accounts of the year ended 31st March, 1998, it was mentioned that the insurance claim of Rs. 4,22,94,263 relating to losses lodged with insurance company have not been accounted for and also losses against claim amounting to Rs. 63,40,155 had not been accounted for. Now management on the basis of legal opinion obtained by it has decided to account for 50 per cent of the insurance claim income equivalent to Rs. 2,11,47,132 after adjusting losses of Rs. 63,40,155 though such claims are not yet accepted by the insurance company. However, the case is still pending with National Consumer Disputes Redressal Commission, New Delhi.
5. As per learned Authorised Representative, the issue of insurance claim has been examined by the AO at the time of assessment and hence Section 263 had no application. It is further stated that in note 6 forming part of the account of the year ended 31st March, 1998 it is mentioned that the insurance claim of Rs. 4,22,94,363 relating to losses lodged with the insurance company have not been accounted for and also losses against claim amounting to Rs. 63,40,155 has not been accounted for. The management on the basis of legal opinion obtained has decided to account for 50 per cent of the insurance claim after adjusting losses of Rs. 63,40,155. The claim has not been accepted by the insurance company and a case is pending with National Consumer Disputes Redressal Commission, New Delhi.
6. In respect of assessment of rental income from Delhi property, the learned Authorised Representative submitted that the assessee against the assessment order, had filed an appeal which was decided by the learned CIT(A)-18, New Delhi vide his order dt. 12th Dec, 2003 in which he had duly discussed the rental income from the properties both at Bombay and Delhi. Therefore, the assessment stood merged with the appellate order.
7. As per learned Authorised Representative even on merits the issue regarding inclusion of 12.5 per cent of interest-free security deposit given to the assessee, in the annual letting value of property at Delhi, is covered in favour of assessee by order of the Tribunal dt.
24th May, 2006.
8. On the other hand, learned CIT (Departmental Representative) Shri Satbir Singh strongly supported the order passed under Section 263 and vehemently argued with respect to accounting of insurance claim, that the assessee cannot adopt 'mixed or hybrid' system of accounting w.e.f.
1st April, 1997. The accounting standards and methods of accounting regularly followed by the assessee have to be consistently applied in respect of all the receipts and expenses. Since, the assessee generally adopted accrual system of accounting, even in respect of the receipts on account of settlement of insurance claim, it has to follow the same system. As per Shri Satbir Singh moreover, in the present case, what is in dispute is the quantum of the claim and not the entire claim. It is well settled that where the right to receive payments is not in dispute, the amount is taxed in the year of accrual of the same.
Clearly, by not bringing to tax the insurance claim as per CIT (Departmental Representative), the AO erred in law, which rendered his order erroneous as well as prejudicial to interest of Revenue.
9. Shri Satbir Singh has drawn our attention to the order of the AO wherein he has discussed regarding annual letting value of the property at Delhi and Bombay in great detail but in the final conclusion the computation of annual letting value in respect of Delhi property was left, thereby making the order erroneous. Since the order was erroneous for not computing the annual letting value of Delhi property, as per Mr. Satbir Singh, the order of the AO has become prejudicial to the interest of the Revenue insofar as the AO has not finally worked out the annual letting value of Delhi property even after considering the aspect of interest-free security deposit given to the assessee with respect to both Bombay and Delhi property. He, therefore, submitted that order of the AO was both erroneous as well as prejudicial to the interest of Revenue and the CIT was therefore perfectly justified in invoking his powers under Section 263 and thereby directing the AO to determine annual value of Delhi property and to compute interest on interest-free security deposit, given to the assessee by sister-concern to whom property was let out at very meager rent.
10. With regard to computation of rental income, Shri Satbir Singh, CIT (Departmental Representative) has drawn our attention to the order of the Tribunal in the case of Fizz Drinks Ltd. v. Dy. CIT (2005) 95 TTJ (Del) 429 in support of the contention that the assessee having fixed meager rent but having received large interest-free security deposit, annual letting value has to be determined in accordance with Section 23(l)(a) by taking into account notional interest on the amount of security deposit calculated @ 12.5 per cent per annum.
11. Learned CIT (Departmental Representative) further submitted that Section 23(l)(a) provides that for the purpose of Section 22, the annual letting value of any property shall be deemed to be (a) the sum for which the property might reasonably be expected to let from year to year. In the present case, the actual rent was much lower as admitted by the assessee itself. The sum for which the property might reasonably be expected to let from "year to year" had to be determined and for this all relevant factors including the benefit of interest-free security deposit had to be taken into account. He submitted that annual letting value directed to be determined by CIT by taking into account the factor of interest on the amount of interest-free loan given to the assessee was fair and reasonable.
12. We have considered the rival contentions carefully, gone through the orders of the lower authorities and also deliberated on the various case laws cited by the learned Authorised Representative and Departmental Representative during the course of hearing before us, in the context of factual matrix of the case. A bare reading of provisions of Section 263 makes it clear that the prerequisite to exercise of jurisdiction by the CIT suo motu under it, is that the order of the ITO is erroneous insofar as it is prejudicial to the interests of the Revenue. The CIT has to be satisfied of twin conditions, namely, (i) the order of the AO sought to be revised is erroneous; and (ii) by virtue of the order being erroneous, prejudice has been caused to the interests of the Revenue. If one of them is absent-if the order of the ITO is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue-recourse cannot be had to Section 263(1). There can be no doubt to the well-settled legal proposition that the provision cannot be invoked to correct each and every type of mistake or error committed by the AO. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase 'prejudicial to the interests of the Revenue' is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the ITO, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue. The phrase 'prejudicial to the interest of the Revenue' has to be read in connection with an erroneous order passed by the AO. Every loss of revenue as a consequence of an order of AO cannot be treated as prejudicial to the interests of the Revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the Revenue unless the view taken by the ITO is unsustainable in law. An order cannot be termed as erroneous unless it is not in accordance with law. If an ITO acting in accordance with law passes some order, the same cannot be branded as erroneous by the CIT simply because he is of some other view. This section does not visualize a case of substitution of judgment of the CIT for that of the ITO, who passed the order, unless the decision is held to be erroneous.
13. The power of suo motu revision under Sub-section (1) of Section 263 is in the nature of supervisory jurisdiction and the same can be exercised only if both the circumstances specified therein exist. Two circumstances must exist to enable the CIT to exercise power of revision under this sub-section, viz., (i) the order is erroneous; (ii) by virtue of the order being erroneous prejudice has been caused to the interest of the Revenue. It has, therefore, to be considered firstly as to whether the order passed by the AO was erroneous. From the record, we found that during the year under consideration, there was a loss to the assessee and the assessee has filed a insurance claim of Rs. 4,22,94,263. On the basis of legal opinion obtained by it, the assessee company decided to account for 50 per cent of the insurance claim income equivalent to Rs. 2,11,47,132 after adjusting losses of Rs. 63,40,155. Even though these losses were not accepted by the insurance company and the case is still pending with National Consumer Disputes Redressal Commission, New Delhi, the assessee accounted for income of Rs. 1,48,06,977 on account of insurance claim by crediting into P&L a/c. However, while computing the income for the purpose of filing return, the assessee company again reduced the taxable income exactly by the same amount of Rs. 1,48,69,997 on the plea of the matter being sub judice. As the assessee was consistently following mercantile system of accounting and which was also mandatory for it as per the provisions of the IT Act, 1961, the CIT found that by reducing the income on account of insurance claim in the computation of income, the assessee has reduced its income even after accounting the same as per mercantile system of accounting, and which has escaped the attention of the AO and rendered the assessment order erroneous and prejudice has been caused to the Revenue to this extent. It was submitted by the learned Authorised Representative at bar that dispute is still going on in the Court of law and the matter is sub judice before the National Consumer Court and nothing was received till date. Since nothing was received, as per learned Authorised Representative, mere accounting entry does not create any right in the hands of the assessee to receive any income which neither accrued nor arose during the year nor in the subsequent years. Income is liable to be taxed under the IT Act on the basis of its accruing or arising to the assessee, or on the basis of its receipt by the assessee, during the relevant previous year. The words "accrue", "arise" and "is received" are not synonymous. The expression "is received" conveys a clear and definite meaning. The words 'accrue or arise' depend upon the rights of the assessee to secure the income though the actual receipt of the income may not be there. Ordinarily, the income is said to have accrued to a person when he has acquired a right to the income. He must have acquired an enforceable right in regard to that income, though actual quantification and receipt may follow in due course. A mere claim to income without an enforceable right thereto cannot, therefore, be regarded as an accrued income for the purpose of the IT Act. Likewise, a mere filing of claim with insurance company, is itself not sufficient to make such income to be accrued for taxing purposes. It goes without saying that the mere such filing of claim without its acceptance by the insurance company cannot accrue income in the hands of the assessee merely by passing accounting entry to this effect in the assessee's books of account. It is only when such a claim is accepted by the insurance company that it can be the basis of treating income as "accrued" within the scope of Section 5(l)(b) of the IT Act. Once the claim is accepted the assessment of such accrued income cannot be postponed till it is actually paid to the assessee. In the instant case there is no dispute to the fact that in spite of filing its claim to the insurance company, neither the insurance company accepted any claim nor anything was paid to the assessee in the form of compensation by the insurance company. As per our considered view and as per provisions of Section 5, income can be brought to tax only on the basis of its accrual or receipts. If the income has neither accrued nor received, the same cannot be brought to tax either on notional basis or on the basis of accounting entry being passed by the assessee, unless cogent material is brought on record proving otherwise. It is also not the case of the Revenue that even though entry was made in the relevant assessment year under consideration regarding claim filed by the assessee, in the subsequent year the assessee has actually received amount from the insurance company or at least there is acceptance by the insurance company regarding claim lodged with it. In CIT v.Ferozepur Finance (P) Ltd. Income-tax is levied on income whether the accounts are maintained on mercantile system or on cash basis. If income does not result at all, there cannot be levy of tax. even if an entry of hypothetical income is made in the books of account, where the income does not result at all as there is neither accrual nor receipt of income, no tax can be levied. Even in mercantile system of accountancy an assessee could forgo the whole or part of a debt, which was irrecoverable, and the same could not be added to the income of the assessee.
(a) Hon'ble Supreme Court in the case of Godhra Electricity Co. Ltd. v. CIT (1997) 139 CTR (SC) 564 : (1997) 225 FTR 746 (SC), held that "Income-tax is a levy on income. No doubt, the IT Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If the income does not result at all, there cannot be a tax, even though in book keeping, an entry is made about a hypothetical income, which does not materialize". At pp. 748 and 749, the Supreme Court further observed as under: Even though the assessee company was following the mercantile system of accounting and had made entries in the books regarding enhanced charges for the supply made to the consumers, no real income had accrued to the assessee company in respect of those enhanced charges. The Tribunal had rightly held that the claim at the increased rates as made by the assessee company on the basis of which necessary entries were made, represented only hypothetical income, and the amounts in question brought to tax by the ITO did not represent income which had really accrued to the assessee company during the relevant previous years.
14. We, therefore do not find any merit in the action of CIT for adding the notional income which has neither received nor accrued nor arose in favour of assessee and, moreover the assessee also has not offered the same for taxation in view of the dispute being sub judice, by excluding the same from the computation of total income filed along with the return of income. Mere filing of claim did not give any right to receive till the claim is accepted by the insurance company . Had there been any acceptance of claim by the insurance company, the income could be said to have accrued on the basis of accounting entry to this effect passed by the assessee, notwithstanding its actual payment by the insurance company. But in the instant case neither there is any such acceptance nor there is any payment by the insurance company during the year under consideration or in any of the subsequent years, till the date of hearing of the case. A statement to this effect was given by learned Authorised Representative at bar. We are, therefore, persuaded to agree with the learned senior advocate, Shri O.P. Sapra that no fault can be found in the order of the AO for not including the amount of claim for which entry was passed in the books of account, and the CIT was not justified in directing to include income of Rs. 1,48,006,977 credited in the P&L a/c on account of insurance claim, which was neither received nor accrued in favour of the assessee nor there existed any right to receive. This ground of assessee's appeal is accordingly allowed.
15. With regard to determination of annual letting value of property at Delhi, we found that AO while framing assessment under Section 143(3)/147 of the Act has elaborately dealt with the issue of low rent being charged from the sister-concern in respect of property situated at a prime location of Bombay and Delhi and also interest-free security deposit of Rs. 3,00,00,000 taken from the sister-concern. The AO has also discussed the size of the property let out at Lawrence Road, New Delhi having area of 3800 sq. ft. and stated that annual letting value is to be arrived at as per the provisions of Section 23 of the Act according to which the sum for which property may reasonably be expected to be let out from year to year is to be determined. However, while making the final computation of income at p. 4 of his assessment order, the determination of annual letting value of Mumbai property was got done but there was no computation of annual value of Delhi property and thus entirely escaped computation of total income which rendered the order of the AO erroneous and prejudicial to the interest of Revenue with regard to computation of annual letting value of Delhi property. We, are therefore, inclined to agree with the contention of learned CIT (Departmental Representative) Shri Satbir Singh that CIT has correctly invoked the provisions of Section 263 of the Act in respect of non computation of annual letting value of Delhi property which has escaped by the AO in his assessment order, thereby failing to apply provisions of the Act correctly. With respect to the reliance placed by the learned Authorised Representative on the order of the Tribunal dt. 24th May 2006, wherein inclusion of 12.5 per cent on interest-free security deposit received by the assessee, was held to be not justified by placing reliance on the decision of Calcutta High Court reported at CIT v. Poddar Bros (P) Ltd. (Cal) and Bombay High Court reported at CIT v. J.K. Investors (Bombay) Ltd. , the learned Departmental Representative submitted that decision of both the High Courts dealt with the provisions of Section 23(l)(b) and not of Section 23(l)(a) of the Act. According to learned Departmental Representative, as per provisions of Sub-section (l)(a) of Section 23, the sum for which the property may reasonably be expected to let from year to year is to be taken as annual letting value and for this purpose all the factors regarding municipal value of the property, standard rent etc. is to be considered. Sub-section (1)(b) will come into operation only when the actual rent received or receivable is more than the sum referred to in Clause (a) of Sub-section (1) of Section 23. Since there was no determination of annual value under Sub-section (l)(a), no reason arises for finding out excess of actual rent over the sum for which the property might reasonably be expected to let from year to year. As per learned Departmental Representative non-application of mind by the AO and non-application of correct provision of law has rendered the assessment order erroneous which has prejudiced Revenue's interest.
16. We had given thoughtful consideration to rival contentions, and perused the provisions of Section 23 relating to determination of annual letting value of property chargeable to income-tax under the head "Income from house property". So far as determination of annual letting value of the Delhi property is concerned, there is no dispute to the well settled law that the same is to be done as per provisions of Section 23(l)(a) of the Act, which has not been done by the AO while framing the assessment. Contention of learned Authorised Representative to the effect that CIT(A) has considered the matter of rental income in respect of both Bombay and Delhi properties, therefore, assessment order merged with appellate order, do not carry any weight insofar as there was no grievance of assessee before the CIT(A) regarding determination of incorrect annual value of Delhi property. As the AO had not computed the annual letting value of Delhi property, there does not arise any reason for assessee to allege the same before CIT(A), nor CIT(A) has decided the issue in favour of assessee or against the assessee regarding determination of annual letting value of Delhi property. Even by exercising the coterminous powers vested in CIT(A), to do the thing which AO failed to do, undisputedly in the instant case the CIT(A) had not enhanced the assessment, so as to close the doors of CIT under Section 263. Under these circumstances, the theory of merger will not apply, so as to restrain the powers vested under Section 263.
With respect to the specific direction given by the CIT for taking 12.5 per cent interest, on the interest-free security deposit given to the assessee, we are inclined to agree with the learned Authorised Representative that the issue is covered by the order of the Tribunal, therefore, this specific direction of the CIT is not sustainable. We are, therefore, inclined to modify the direction of CIT and direct the AO to determine the annual letting value of property as per provisions of Section 23 of the Act, AO is further directed for not making any addition on account of interest at 12.5 per cent on the interest-free security deposit given to the assessee, while arriving at annual letting value as per provisions of Section 23 of the Act. We direct accordingly.
17. In the result, the appeal of the assessee is allowed in part in terms indicated hereinabove.