JUDGMENT
Sen, J.
1. The Ondal Investments Co. Ltd., the assessee, has initiated the above reference No. 10 of 1971. The other reference No. 19 of 1971 is at the instance of the CIT, West Bengal-II, Calcutta. In these references this court has directed the Tribunal to draw up a case under Section 256(2) of the I. T. Act, 1961, and refer the following questions :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in treating the sum of Rs. 1,47,090 or any portion thereof as the income of the assessee ?
2. Whether there is any evidence for the Tribunal to come to the conclusion that Sonepur Coalfields Ltd. was in possession of the coal mines and/or seams in the area referred to in the Tribunal’s order ?
3. Whether, on the facts and in the circumstances of the case, and particularly in the face of the finding that re-entry into possession by the Ondal Coal Company Ltd. took place pursuant to their letter to Sonepur Coalfields Ltd., dated the 20th January, 1960, the Tribunal was justified in law in holding that the assessee was liable to be assessed during the relevant year on the income based upon the minimum royalty contemplated during the negotiations as also one year’s interest at the rate of 12 per cent. on the unpaid amount for the earlier years?” Income-tax Reference No. 19 of 1971 :
“(a) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that even though entry has been made in the books of account of the assessee for the accounting year 1961, crediting the amount of Rs. 1,47,090 as income from minimum royalty and interest thereon, it cannot be held that the whole of the amount represented assessable income for the year 1961 ? ‘
(b) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that out of the sum of Rs. 1,47,090 only such sum as related to the accounting year based on the minimum royalty contemplated during negotiation and one year’s interest should be brought tinder tax for the year, and not the whole of the sum of Rs. 1,47,090 which had been credited in that year as income of the assessee ? ”
2. The admitted facts and/or facts found are as follows:
The assessee, originally known as the Ondal Coal Co. Ltd., was the lessee of extensive lands in Mouzas : Sonepur, Nabagram, Hansdia and Jote Khankhan and was entitled to the mining and mineral rights therein,
3. During the year 1945-46, the assessee entered into negotiations with one Business Development Ltd. for sub-lease of mineral and mining rights in respect of coal in specified areas of the demised land.
4. In the course of such negotiations between 1946 and 1955, several amounts were received by the assessee from the said Business Development Ltd. on account of salami for the proposed sub-lease aggregating Rs. 2,55,625 which was shown in the balance-sheet of the assessee under the head “Current liabilities” and described as “property sales suspense”.
5. Due to certain difficulties the documents for the sub-lease could not be drawn up and executed. In January, 1960, the assessee served notice of re-entry on Sonepur Coalfields Ltd. on whose behalf the said Business Development Ltd. had been negotiating for the sub-lease and purportedly took back possession of the land in question.
6. The assessee, thereafter, apprehended that the amount received on account of salami might have to be repaid. As possession of land had been made over, the assessee thought that it could claim from the proposed sublessee some compensation on the basis of minimum royalty up to the date of re-entry. Accordingly, the assessee recorded its claim in a letter and posted an entry in its books for Rs. 1,47,089.82 debiting Sonepur Coalfields Ltd. with a corresponding credit entry in the suspense account. The debit was shown in the balance-sheet under the sub-head “Sundries” against the “Current liabilities and provisions”.
7. In the assessment year 1962-63, the corresponding previous year ending on the 31st December, 1961, the ITO found that as the land had been in the possession of the proposed sub-lessee a “minimum royalty” had become chargeable thereon. The assessee who following the mercantile system having credited its accounts on the basis of a contingent claim he held that the said Rs. 1,47,089.82 should be included in the assessee’s income.
8. Being aggrieved by this decision, the assessee preferred an appeal to
the AAC who held that the disputed entry was merely a book entry and
had been made by way of a counter claim. The said amount could not be
regarded as income of the assessee as a dispute had been raised in respect
thereof by Sonepur Coalfields Ltd., who had filed a writ application in the
court challenging the right of the assessee to re-enter the said land. He
noted further that the entire sum of Rs. 1,47,089.82 could not in any event
be held to be the “minimum royalty” payable for the year but should be
spread over from 1945. Accordingly, he allowed the appeal of the assessee
and directed that the said sum of Rs. 1,47,089.82 be deleted from the total
income.
9. The revenue went up on further appeal from this order to the Income-tax Appellate Tribunal. It was contended before the Tribunal that as the
assessee maintained its accounts on mercantile basis and had brought in its accounts a sum representing “minimum royalty” and interest the same must be held to form part of its income.
10. It was contended on behalf of the assessee that the amount had not been treated as income in the accounts but had been both credited and debited. The entry merely represented a counter claim in the event the salami collected was directed to be refunded.
11. The Tribunal agreed with the AAC that a mere book entry would not give rise to an income. Following the decision of the Supreme Court in the case of CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144 the Tribunal held that an entry made in respect of a “hypothetical income”, which did not materialise could not be taxed as income. The Tribunal observed as follows :
“What amount the assessee could rightly claim in spite of no lease document or sub-lease being executed and registered remained uncertain and was a matter that might be ultimately decided through litigation.
It cannot be denied that the mouzas were handed over to the sub-lessee or otherwise there can be no question of the assessee’s re-entering into the possession of the mouzas after due notice. This would mean that even though the negotiations for the Sub-lease had failed, the assessee had made over the possession of the mouzas to the party and could accordingly claim the payment of a reasonable amount for the period for which the party was in possession. The assessee claimed this at the rate that was to have been paid as minimum royalty and it cannot be said that this is an unreasonable rate. It is also not unreasonable for the assessee to claim interest on the outstanding amount at a fair rate. The assessee considered that it was entitled to receive the amounts.
Since the assessee’s method of accounting is mercantile, the income has to be taken on accrual basis. The assessee cannot claim before the I.T. authorities that the amount which it considered recoverable from the party was not its true income. We cannot agree, in the circumstances of the case, that the book entry here is for a ‘hypothetical income’. However, even though the entry Has been made in the books of account for the assessment year 1961, it cannot be treated that the whole of the amount represents the income for the year 1961.
We hold that only such income as is related to the accounting year based on the minimum royalty contemplated during negotiations should be brought under tax in the year as also one year’s interest at the rate of 12% on the unpaid amounts for the earlier years. The Income-tax Officer will work out the amount accordingly.”
12. Dr. Debi Pal, learned counsel for the assessee reiterated before us that the said amount of Rs. 1,47,089.82 could never be considered as income of
the assessee inasmuch as it was a mere book entry and nothing more. The amount was introduced as a debit in the balance-sheet under the head “Sundries” on the asset side and there was a corresponding credit under the head “Suspense” in the balance-sheet on the liability side.
13. Dr. Pal submitted further that the claim of the assessee against the proposed sub-lessee was in any event a tentative claim, not followed by any legal proceedings and was raised by way of a counter-blast against the anticipated claim for return of the amounts paid on account of salami. The claim, therefore, was an inchoate one. In support of his contentions, Dr. Pal cited several decisions as follows :
(a) CIT v. Associated Commercial Corporation [1963] 48 ITR 1 (Bom). This case was cited for the following proposition (p. 18):
“In our opinion, a profit could be said to have accrued or a liability or loss could be said to have been incurred only when the profit is either actually due or the liability becomes enforceable. A mere claim to a profit or to a liability is not sufficient to make the profit to accrue or the liability to be incurred for the purposes of the Income-tax Act.”
(b) CIT v. A. Gajapathi Naidu . The facts in this case were that the assessee having supplied bread to a Government hospital between 1st April, 1948 and 31st March, 1949 under a contract, represented to the Government after the close of the year that he had incurred loss. The Government directed payment of a certain sum to the assessee by way of compensation for the loss claimed. The amount of compensation was received in the accounting year 1950-51. On these facts, the Supreme Court observed as follows (pages 118, 119):
“When does the right to receive an amount under a contract accrue or arise to the assessee, i.e., come into existence ? That depends upon the terms of a particular contract. No other relevant provision of the Act has been brought to our notice–for there is none which provides an exception that though an assessee does not acquire a right to receive an income under a contract in a particular accounting year, by some fiction the amount received by him in a subsequent year in connection with the contract, though not arising out of a right accrued to him in the earlier year, could be related back to the earlier year and made taxable along with the income of that year. But that legal position is sought to be reached by a process of reasoning found favour with English courts. It is said that on the basis of proper commercial accounting practice, if a transaction takes place in a particular year, all that has accrued in respect of it, irrespective of the year when it accrues, should belong to the year of transaction and for the purpose of reaching that result closed accounts could be reopgned. Whether this principle is justified in the English law, it has no place under the Indian I.T. Act. When an ITO proceeds to include a particular income in the assessment, he should ask himself, inter alia, two questions, namely : (i) what is the system of accountancy adopted by the assessee ? and (ii) if it is the mercantile system of accountancy subject to the deemed provisions, when has the right to receive that amount accrued ? If he comes to the conclusion that such a right accrued or arose to the assessee in a particular accounting year he shall include the said income in the assessment of the succeeding assessment year. No power is conferred on the Income-tax Officer under the Act to relate back an income that accrued or arose in a subsequent year to another earlier year on the ground that the said income arose out of an earlier transaction.”
(c) CIT v. Swadeshi Cotton & Flour Mills . In this case, the assessee had paid an amount as profit bonus to its employees for the calendar year 1947 in terms of an award made on the 13th January, 1949, under the Industrial Disputes Act and debited the amount in its profit and loss account for the earlier year 1948. The Supreme Court held that as the claim of profit bonus was settled by the award of the Tribunal in 1949, the liability for this payment was incurred in 1949.
(d) CIT v. India Discount Co. Ltd. . This decision was cited for the following proposition laid down by the Supreme Court (page 195):
“…it is well established that a receipt which in law cannot be regarded as income cannot become so merely because the assessee erroneously credited it to the profit and loss account.”
(e) CIT v. Nadiad Electric Supply Co. Ltd. [1971] 80 ITR 650 (Bom). The facts in this case were that the assessee carried on the business of supply of electricity at Nadiad and one of its consumers was the Nadiad Municipality. Up to the 31st August, 1960, the assessee supplied electricity to the Municipality at a stipulated rate of 19 paise per unit whereas the rate charged by the assessee to its other consumers was 30 paise per unit. After expiry of the agreement, the assessee continued to supply electricity to the Municipality and billed the Municipality at its usual rate of 30 paise per unit. The Municipality disputed the assessee’s right to. charge at that rate, paid the bills at the earlier lower rate and within a few months filed a suit for renewal of the earlier agreement on the same terms and conditions. The suit ultimately succeeded in favour of the Municipality in the Gujarat High Court.
The assessee maintained its books of account on the mercantile system. In respect of the electricity supplied after the expiry of the said agreement the assessee had credited the amount actually received at the rate of 19 paise per unit and the balance claimed, i.e., 11 paise per unit was shown as an asset under “doubtful creditors”. For the assessment year in question, this balance amount was sought to be taxed in the hands of the asses-
see. On these facts, the Bombay High Court observed as follows (page 652):
“An amount can accrue or arise to an assessee when the assessee acquires a legal right to recover that amount, that is, conversely, that amount becomes legally due to the assessee by the assessee’s debtor. What has happened in this case was that on the expiry of the agreement the assessee-company only sent its bills to the municipality made out at the rate of 30 paise per unit. Sending the bills amounts to merely making a claim for the amounts mentioned in the bill. The mere sending of bills does not create a legal enforceable right in the assessee-company, nor a corresponding legal enforceable obligation on the municipality. There would be a legal enforceable claim or obligation only if there was an agreement, express or implied, in that behalf or there was some statutory or similar right or obligation,…there appears to be nothing to show that there was any right or obligation in the assessee-company to charge the municipality for the electrical energy supplied to it at the rate of 30 paise per unit. The sending of the bills at 30 paise per unit was merely an attempt made by the assessee-company to recover from the municipality amounts calculated at that rate. On the record there is nothing to show that the assessee-company had any such legal right. What the assessee-company in fact recovered was at the rate of 19 paise per unit. In the circumstances, in our opinion, the assessee-company was under no obligation to credit in its books of account, even though they were maintained on the mercantile system, any amount for the electricity supplied by it to the municipality calculated at any rate other than the rate of 19 paise per unit and the only amount which could be brought to tax in this connection would be the amount calculated at the rate of 19 paise per unit. ”
(f) CIT v. Smt. Sankari Manickyamma . In this case, the facts were that the land of the assessee had been acquired by the Government under the Land Acquisition Act in 1933. The compensation determined was considered by the assessee to be inadequate and legal proceedings were instituted. A compromise decree was ultimately passed for a larger amount in the assessment year 1964-65. Under the terms of that decree, the assessee was entitled to receive an extra compensation along with a further sum on account of interest on the amount of such compensation. The entire amount was paid to the assessee during the same assessment year. The assessee claimed that only that part of this interest which had accrued in the previous year was liable to tax. The Tribunal held that the right to compensation having accrued to the assessee in 1933 the contentions of the assessee should be sustained. On a reference, the Andhra Pradesh High Court distinguished between the right to receive and right to claim and held that the right to receive compensation and interest
accrued from the date when the statutory authority determined the same. Till then the assessee had only a right to claim compensation. The entire amount of interest was held liable to be taxed in the assessment year in question.
(g) CIT v. Hindustan Housing and Land Development Trust Ltd. . The facts in this case were that lands belonging to the assessee were first requisitioned and then acquired permanently by the Government of West Bengal under Section 5 of the Requisition of Land (Continuance of Powers) Act, 1947, and a sum of Rs. 24,97,249 was awarded as compensation by the Land Acquisition Collector, to the assessee. On further proceedings an award was made in favour of the assessee fixing the amount of compensation at Rs. 30,10,875 and on the enhanced amount interest was allowed at 5% per annum. Against this order, the State Government preferred an appeal to the High Court and deposited a sum of Rs. 7,36,691 in the appeal. The assessee after furnishing a security bond withdrew the said amount. The ITO assessed the said amount as income of the assessee accrued in the relevant year. The Tribunal held that the assessee had withdrawn the amount furnishing security in a sub-judice claim and as such had no absolute right to receive the said amount till the appeal was decided. Therefore, it held that this amount did not accrue during the relevant year. On reference, this court also held that the compensation amount could only be considered to have accrued or arisen when the same would be determined and payable and not before and observed as follows (page 394) :
“In the instant case the claim for the said further amount is in jeopardy and the right of the assessee to receive any further amount is also clearly unsettled. Unless the question of payment of any enhanced compensation is decided and the amount of enhanced compensation becomes determinate and payable, the said amount cannot, in our opinion, be said to accrue or arise. The further amount awarded by the arbitrator forms in reality at this stage the subject-matter of a mere claim or an assertion
on the part of the assessee to receive the said amount, but the said claim
has yet to be accepted by the court. The fact that the assessee was allowed to withdraw the said amount after furnishing the security bond, does not, in our opinion, affect the position and does not make the amount of compensation either determinate or payable…….the right of the assessee to
receive any further compensation or the amount of the further compensation has not yet been adjudicated upon and decided. The said receipt is
really the receipt of a particular sum pursuant to an order of court on the
security bond executed by the assessee and on the basis of terms and
conditions mentioned in the said bond.”
14. Mr. Suhas Sen, learned counsel for the revenue, contended on the other hand that in the instant case, it has been found as a fact that the mining lands which were the subject-matter of the proposed sub-lease had been made over to Sonepur Coalfields Ltd. and further that there was no binding agreement for the sub-lease.” On the basis of the aforesaid the assessee itself contended that it was out of possession of its properties from 1946 to 1948 and, therefore, was entitled to some compensation. This compensation was calculated by the assessee on the basis of the “minimum royalty” payable under the proposed sub-lease and was claimed along with interest.
15. Mr. Sen submitted that it cannot be said that the claim of the assessee was without any basis whatsoever and as the assessee maintained its account on mercantile basis, the amount claimed must be deemed to have accrued when the claim was made.
16. In support of his contention Mr. Sen cited the following decisions: (a) CIT v. Thiagaraja Chetty & Co. [1953] 24 ITR 525 (SC). Here, the assessee as the managing agent of a limited company was entitled to a monthly remuneration, a commission of 10% on the net profits of the managed company and a small percentage on sales and purchases. Under the managing agency agreement, the assessee was also entitled to reimburse itself of its dues out of the funds of the managed company. During the accounting year ending 31st March, 1942, the assessee became entitled to a commission. On the 30th March, 1942, the assessee wrote to the managed company requesting that another debt due to the managed company from the assessee should be written off as a bad debt. A dispute arose therefrom and the commission due to the assessee was retained by the managed company in suspense but claimed as its revenue expenditure in that year. The question arose whether in the same assessment year the assessee was liable to pay tax on the said amount. On these facts, the Supreme Court observed that accrual of profits did not depend on their computation and held that the quantification of the commission in that case was not a condition precedent to its accrual.
17. The next case cited was E. D. Sassoon & Company Ltd. v. CIT . In this case, the Supreme Court in its majority judgment held that where remuneration or commission became due to a managing agent on the completion of a definite period of service such remuneration constituted a debt only at the end of such period of service and nothing was payable to the managing agent for any broken period.
18. Last cited was CIT v. Chunilal V. Mehla & Sons P. Ltd. . In this case, under an agreement the assessee was to continue as managing agents for 21 years and was entitled to a minimum remuneration of Rs. 6,000 per month and further that if at the end of any year the
remuneration was less than 10% of the gross profits the assessee would receive an additional sum to make up the difference. In 1951, the shares of the managed company were acquired by a hostile group and pursuant to a resolution dated the 23rd April, 1953, the managing agency agreement was-terminated. The assessee refused to accept the amount offered as compensation calculated at Rs. 6,000 per month and filed a suit claiming Rs. 28 lakhs for unlawful termination of the agency. Ultimately, the suit was decreed for the sum originally offered as compensation and it was held that the assessee was entitled to stipulate liquidated damages at the rate of Rs. 6,000 per month. The assessee received the amount of compensation in December, 1955, and credited the same in its profit and loss account for that year. The question arose in which year the amount accrued to the assessee.
19. On these facts, the Supreme Court held that the compensation became due to the assessee in 1951 though actually received in December, 1955. It was sought to be contended on behalf of the revenue that as the assessee disputed the quantum of compensation to which it was entitled, the right to get the amount arose when the dispute was determined by the court. The Supreme Court negatived this contention and held that the right of the assessee to get compensation for the unlawful termination of its services and the quantum of such compensation was clearly prescribed in the agreement and was upheld in the suit. The fact that the assessee was claiming an exorbitant sum to which it was not entitled could not convert the assessee’s accrued right into a contingent right.
20. The controversy in the present case before us is whether the claim of the assessee which it sought to raise on the basis of minimum royalty resulted in the accrual of any right in the assessee to receive the amount of claim.
21. It has been found as a fact that the intended sub-lessee failed to complete the sub-lease and the assessee was on of possession of its land since 1946. But the Tribunal has also found that the amount which the assessee could rightly claim was uncertain and might ultimately be decided through litigation. The Tribunal has further found that the assessee’s claim was in the nature of a counter-claim which the assessee intended to press if the amounts received by it on account of salami in the proposed sub-lease had to be refunded.
22. It appears to us from these facts that the assessee was not preferring a straight claim but was seeking to set up a tentative defence against an anticipated demand for refund. The assessee could not claim “minimum royalty” as such as no sub-lease had been executed and the claim of the
assesses had no contractual basis or foundation. It is not clear on what basis interest was being claimed by the assessee on this amount.
23. The assessee’s claim was a claim for compensation. The basis of this claim appears to be the alleged user of the assessee’s land without consideration by a third party with whom negotiations for a sub-lease were proceeding.
24. There is no finding that the intending sub-lessee was clearly at fault because of which the sub-lease could not be effected. If due to the fault of the assessee the sub-lease failed to be executed then the assessee’s claim for compensation loses force. There is also no finding that the claim of the assessee followed the accrual of any lawful right in favour of the assessee to receive the amount claimed.
25. Even the entries in the books of the assessee were tentative. It is on record that the dispute between the parties have continued and appeal from the writ proceedings are still pending.
26. For the reasons stated above it appears to us that no part of the said sum of Rs. 1,47,090 can be held to have accrued as the income of the assessee.
27. Accordingly, we answer the questions as follows :
Income-tax Reference No. 10 of 1971: Question No. 1 is answered in the negative and in favour of the assessee.
Question No. 2 is answered in the affirmative and in favour of the revenue.
Question No. 3 is answered in the negative and in favour of the assessee.
Income-tax Reference No. 19 of 1971: By reason of the answers to questions raised in the Income-tax Reference No. 10 of 1971, these two questions do not call for any answer.
28. The references are disposed of accordingly. There will be no order as to costs.
Banerji, J.
29. I agree.
