JUDGMENT JUDGMENT : H. N. Seth, J. - At the instance of the assessee, this court, vide its order dated 26th March, 1975, called upon the ITAT to state the case and refer the following question of law in respect of assessees assessment for the years 1960-61 and 1961-62 for its opinion :
"Whether on the facts and in the circumstances of the case the Tribunal was right in its view that the assessee was liable to tax his business income ?"
The Appl. Tribunal has accordingly drawn up the statement of the case and has referred the aforesaid question for the opinion of this court.
2. The assessee is a registered firm which owned house property, government security and derived income from business. It had leased out its factory premises to M/s Narain Das Gopal Das on an annual rent of Rs. 8,000/-payable by the 31st of October each year. In due course, the financial position of the lessee became bad and they made defaults in payment of the lease money to the assessee. Accordingly, by means of a notice dated 4th of January, 1960, the assessee determined the lease of M/s Narain Das Gopal Das. Inasmuch as during the previous years, relevant to the asst. yrs. 1960-61 and 1961-62, the lessee did not pay any rent to the assessee, the assessee did not include any rental income on this account in the tax returns filed by it for the two years.
3. However, while making the assessment the ITO, as had been done by him in respect of assessees assessment for the earlier years, included a sum of Rs. 8,000/- on this account as income that had accrued to the assessee under the head income from other source. Being aggrieved the assessee went up in appeal before the AAC and contended that inclusion of the said amount in the income of the assessee, on accrual basis was unjustified. The AAC pointed out that for the asst. yrs. 1958-59 & 1959-60 also he had, while computing the assessees income, upheld the inclusion of the lease rent on accrual basis and that the objection raised by the assessee to such inclusion deserved to be rejected for the same reason. The assessee then went up in appeal before the ITAT and contended that as it was not realising the lease rent it had by means of a notice dated 4th of January, 1960 terminated the lease granted to M/s Narain Das Gopal Das. After determination of the said lease, it could not be said that any income accrued to the assessee and the addition made by the ITO on that account deserved to be deleted.
4. It may, at this stage, be mentioned that the question of inclusion of the aforesaid lease rent in computing assessees income had also come up before the ITAT in connection with the assessees assessment for the years 1956-57, 1957-58, 1958-59 and 1959-60. For the asst. yrs. 1956-57 and 1957-58 the Appl. Tribunal ruled that the said lease rent had accrued to the assessee during the relevant previous years and was as such, liable to be included in assessees income for those years. However, in respect of the asst. yrs. 1958-59 and 1959-60 the Tribunal held that no rental income accrued to the assessee for the relevant previous years and it did not uphold the addition in that respect made by the ITO.
5. A perusal of the order passed by the Appl. Tribunal relating to the asst. yrs. 1960-61, 1961-62 (the years with which we are concerned in this reference) shows that while arguing the appeal, ld. counsel appearing for the Revenue contended before contended before the Tribunal that the Tribunal had, while dealing with the assessees appeal for the years 1958-59 and 1959-60, been mislead into holding that no income in respect of the lease rent had accrued to the assessee in the relevant previous years, because of mis-statement, made by the assessee. He pointed out that the relevant previous years of the assessee ended in the months of March 1960 and March 1961 respectively. On 10th February, 1962 the assessee filed a suit against the lessee, for recovery of rent due to it up to 10th August, 1961 and that the said suit had also been decreed. The assessee had been following mercantile system of accounting. So long as M/s Narain Das Gopal Das remained the tenant of the assessee, the rental income had accrued to it and a sum of Rs. 8,000/- had rightly be added on account of the income of the assessee from other sources.
6. The Appl. Tribunal pointed out that u/s 145(1) of the IT Act, income chargeable to tax under the head other sources had to be computed in accordance with the method of accounting regularly employed by the assessee. It observed that in the instant case the assessee had been following the mercantile system of accounting. Accounting to this system profits or gains are credited as and when they accrue even though they are not actually realised. The income accrues in a particular year only when a right is accrued or a liability is created in that year. The income can be said to accrue or liability created in an year in spite of the fact that the ascertainment of the amount or the receipt thereof is postponed to a subsequent date. Applying the law laid down by the Supreme Court in the case of Morvi Industries Ltd. v. CIT and keeping in mind the fact that the assessee was following the mercantile system of accounting as also the allegations made in the plaint of the suit for recovery of rent filed by the assessee, the Tribunal concluded that the rental income from M/s Narain Das Gopal Das continued to accrue uptil 10th August, 1961 as the assessee had, by its own action, determined the lease of M/s Narain Das Gopal Das only with effect from 11th of August, 1961. The assessee, therefore, had an enforceable right against the lease rent recoverable from the lessee and in view of the system of accounting adopted by the assessee it held that the said income had accrued to the assessee and that it had been correctly brought to tax.
7. A perusal of the order passed by the Appl. Tribunal shows that before it the assessee did not raise any submission with regard to the method of accounting adopted by it in respect of the income from other sources (whether the same was maintained on mercantile basis or cash basis). The assessee did not dispute the theory that system of accounting adopted by it in respect of the concerned income was on mercantile system. The Submission made on behalf of the assessee was that in the circumstances it could not be said that any income had, in connection with the lease granted to M/s. Narain Das Gopal Das, accrued to the assessee in the relevant year This position becomes clear if we look into the Tribunals order passed in the appeal relating to asst. yrs. 1958-59 and 1959-60 (Annexure F of the paper book filed by the assessee). In paragraphs 12 and 13 of the said order the Appl. Tribunal observed thus :
"The next ground is against the maintenance of inclusion of Rs. 8,000/- being lease rent from M/s Narain Das Gopal Das in respect of the assessees properties including machinery styled Kanpur Ginning Factory. Observing that the lease rent was included in the computation of the assessees income on accrual basis even though no amount was received by the assessee in the past, the ITO included the said sum of Rs. 8,000/- in each of the two years in the computation of the assessees income. Following his appellate order in the assessees appeal relating to 1957-58 assessment the AAC confirmed the inclusion.
It is conceded before us by Sri Vaish that the factory was, no doubt, given on lease for an annual rent of Rs. 8,000/- to M/s Narain Das Gopal Das. It is, however, submitted that in the earlier years besider outstanding lease rent the assessee had also financed the said firm so much so the total of such outstandings amounted to Rs. 3,30,893/- in the previous year relevant for the asst. yr. 1956-57. The assessee later on came to know about certain frauds committed by the said firm and its very unsatisfactory financial conditions, whereafter it considered that it was no use wasting good money after bad money and decided to induce the debtor to surrender the lease and to recover as much money as possible. Having found that the said firm was neither in a mood to make any payment nor to surrender the lease and had no financial capacity, the assessee claimed the aforesaid sum of Rs. 3,30,893/- as a bad debt in the asst. yr. 1957-58. This claim, according to the assessee, was disallowed both by the Departmental authorities but was allowed by the Tribunal in the assessees quantum appeal. All these facts according to the assessee show that M/s Narain Das Gopal Das were occupying the factory after the previous year relevant for the asst. yr. 1957-58 practically as trespasser in the sense that the assessee was not agreeable to their occupation. It is, thus, urged that the lease rent never accrued during the relevant previous years. Alternatively it is contended that if the lease rent is deemed to have accrued the same should be allowed as a bad debt on the parity of reasoning adopted by Tribunal in the assessees quantum appeal for the asst. yr. 1956-57 referred to above."
8. The contention of the assessee thus appeared accounting adopted by it, namely, mercantile system, no rent had accrued to it as after the previous years relevant to the asst. yr. 1957-58 the assessee had not been treating M/s Narain Das Gopal Das as their tenant who has been occupying the premises practically as trespasser. Accordingly it could not be said that any income had accrued to them. The alternative case taken up by the assessee, consistent with the mercantile system of accounting adopted by it, was that considering the financial position of M/s Narain Das Gopal Das it could be said that the lease rent which has accrued to the assessee was bad debt in the very same year.
9. It appears that in the meantime M/s Juggilal Kamlapat Bankers v. CIT was decided by this court on 28-11-1973. This court took the view that if the assessee chooses to adopt cash system of accounting in respect of the income assessable u/s 10 or 12 of the Act, he cannot be assessed on accrual basis. The option is with the assessee and not with the department so that the department cannot compel an assessee to adopt the mercantile system of accounting, if the assessee chooses to adopt cash system. The assessee then applied to the ITAT to state the case in respect of the following two questions which according to it, arose from out of the appellate order of the Tribunal passed in respect of its assessment for the years 1960-61 and 1961-62.
1. Whether there was any evidence to support the Appl Tribunal in its finding that the applicant followed mercantile system of accounting for lease rent ?
2. Whether on the facts and in the circumstances of the case the Tribunal was justified in upholding the addition of Rs. 8,000/- each year on account of lease rent in the assessment of the applicant for the asst. yrs. 1960-61 and 1961-62 ?"
The ITAT held that by means of the two questions the assessee sought to challenge the method of accounting on the basis of which it had been held that the lease rent had accrued during the relevant years. It was the accepted position that the assessee had been following mercantile system of accounting and that there was no dispute about the method of accounting before the Tribunal. On that basis the Tribunal came to the conclusion that assessee. As such, the assessee could not challenge, through reference application, the admitted fact that it followed mercantile system of accounting. The Tribunal also held that in the case of M/s J. K. Bankers Kanpur v. CIT, Lucknow the basic dispute was about the method of accounting for the lease rent and, as such, the assessee could not derive any advantage from that decision. It held that in circumstances the two questions framed by the assessee did not arise from out of the finding of the Tribunal and that the same could not be referred to the High Court.
10. The assessee then approached this Court and obtained an order requiring the Tribunal to State the case in respect of the question mentioned in the beginning of this judgment.
11. At the hearing of this reference application ld. counsel for the Deptt. contended that in view of the admitted position before the Tribunal that the assessee had been following mercantile system of accounting and it did not take up the stand that it was following any other system of accounting in respect of its income from other source, the question on which the statement of the case has been called from the Tribunal did not arise from out of the order of the Tribunal and, as such, it is not necessary for this Court to answer the question referred by the Tribunal.
12. Learned counsel for the assessee, on the other hand, contended that the assessee had throughout been contending that the income in question could not be included in the assessment of the relevant year on accrual basis. This controversy necessarily implied that the assessee had not been maintaining accounts in respect of its income from other sources on mercantile system but that it had been maintaining such accounts on cash basis. The controversy was very much there before the Tribunal and the Tribunal could not merely on the ground that the assessee had been keeping its account of business on mercantile system assessed the income from other sources also on that basis without there being any material for holding that the assessee was keeping the accounts of its income from other sources also on mercantile system. The question, as called for by this Court, therefore, squarely arose from out of the order of the Appl. Tribunal and it needs to be decided by this Court. In the alternative he urged that as this Court has already called for the question, it must answer the same and if that is to be done, the question will have, in view of the decisions cited by him necessarily to be answered in its favour.
13. Merely because the assessee had been contending that inclusion of the sum of Rs. 8,000/- on accrual basis was wrong, it did not mean that the implication of the submission was that the assessee was not keeping the account of the income from the other sources on mercantile basis but that he was keeping the same on cash basis. The submission could imply that even if the assessee had been keeping the account on mercantile system, the same could not be brought to tax in the relevant assessment year as no income on that account had accrued in that year. As already stated, the stand taken by the assessee was that in view of special circumstances of this case, no income in regard to the lease rent from M/s Narain Das Gopal Das accrued in the relevant year as the tenancy of M/s Narian Das Gopal Das had been terminated on 4th January, 1960 and also because even from an earlier period he was not being treated as a tenant. This was a controversy with regard to the mercantile system of accounting adopted by the assessee, no income had accrued to it in the relevant year and the controversy did not in fact touch on the question with regard to the system of accounting adopted by the assessee in respect of its income from other sources. The controversy between the parties was : whereas according to the assessee the income did not accrue, the Departments case was that it did accrue and it was not with regard to whether the assessee should be taxed on the basis of accrued in come as against an income actually received by it. There is nothing in the order of the Appl. Tribunal dismissing assessees appeal to show that the assessee contended before it that it had been maintaining account of its income from other sources on cash basis. On the other hand, it indicates that the only case urged by the assessee before the Tribunal was that even if the assessee had, in respect of its income from other sources, been maintaining the account of mercantile system, the amount had been wrongly brought to tax as no income in that respect had accrued to the assessee in the relevant assessment year. The position is made amply clear by the order made by the Tribunal refusing the application of the assessee for making a reference to this Court wherein it has clearly observed that the dispute with regard to the method of maintaining the account was not raised by the assessee had that the Tribunal had proceeded on the basis that the system of accounting adopted by the assessee in respect of the income from other sources was the mercantile system. It is now well settled that a statement of the case can be called from the Tribunal only on a question of law which arises out of the Tribunals appellate order that such a question can be said to arise out of the Tribunals order only if it is dealt with by the Tribunal or is raised before it though not decided by it. A question which has not been raised before the Tribunal nor has it been decided by the Tribunal cannot be said to arise out of Tribunals appellate order. In this case the Tribunal did not hold that the rental income of Rs. 8,000/- was being brought to tax on the ground that the as assessee had been following mercantile system of accounting in respect of his business income. It has been brought to tax because the assessee did not dispute that it had adopted mercantile system of accounting in respect of its income from other sources, also and after the dispute, as to whether or not the income in question had accrued in the relevant previous year, had been resolved in favour of the Revenue. We are, therefore, clearly of opinion that the question on which the reference has been called for by this Court dose not arise from out of the appellate order of the Tribunal.
14. So far as the question, whether once the statement of case on a particular question, has been called for by this Court it is open to it to refuse to answer the same, is concerned, it is now well settled that the High Court may decline to answer a question of law which is purely academic and the answer to which would have no bearing on any actual right or liability of the tax payer or if the answer would not dispose of the real questions in issue between the parties or if the question is unnecessary or irrelevant, as it does not arise out of the order of the Tribunal. The Supreme Court has further held that the High Court may decline to answer such questions even if the court itself had, u/s 256(2), directed the Tribunal to state a case on those questions - see Laxshmi Ratan Cotton Mills Ltd. v. CIT. Accordingly if we hold that the question on which the statement of the case has been called for from the Tribunal does not arise from out of its appellate other (the conclusion to which we have arrived at in this case), it will be open to us to decline to answer the question.
15. As in this case we have come to the conclusion that the statement of the case called for from the Tribunal does not arise from out of the order of the Tribunal, we decline to answer the question and return the present reference unanswered. In the circumstances, we direct the parties to bear their own costs.