JUDGMENT
1. The Income-tax Appellate Tribunal, Allahabad, has referred the following questions of law under Section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), for the opinion of this Court:
1. Whether the Tribunal was justified in law in holding that the bank interest on fixed deposits representing the particular amount received against the bank guarantee furnished by the assessee from the U. P. State Electricity Board was taxable for the assessment years 1983-84, and 1984-85 and 1985-86 and specially in view of the circumstances of this particular case ?
2. Whether, on the facts and circumstances of the case, the Tribunal was justified in law in holding that the income from Nainital property and from furniture and fixtures therein as leased out to the State Bank of India for use of the training centre was income from house property and not income from business or income from other sources, as alleged by the assessee ?
2. The reference relates to the assessment years 1983-85, 1984-85 and 1985-86.
3. Briefly stated the facts giving rise of the present reference in so far as the first question is concerned are as follows:
The applicant was running generation and distribution of electricity and its assets were taken over in the year 1964 by the U. P. State Electricity Board ("the Electricity Board" for short). The dispute had arisen with regard to the quantum of compensation, which was paid by the Electricity Board. The matter was referred to the arbitration of Shri S. P. Sinha and Sri D. N. Mehrotra who gave their award on December 23, 1973. In terms of that award, the assessee was to be paid Rs. 43,82,000 by the Electricity Board, the break-up of which is given below:
Rs.
(1) Market value of the undertaking on the date of take over excluding non-
4. The arbitrators also held in the said award that further interest will accrue at 6 per cent, on the aforesaid amount or any part of it remaining unpaid beyond August 31, 1974. On October 6, 1975, the said order was made the rule of the court by the order of the Civil Judge, Lucknow. Dissatisfied by that order, the Electricity Board took up the matter in appeal before this Court, but that appeal was dismissed by the order dated March 12, 1981. Thereafter the Electricity Board took up the matter before the Supreme Court, which by order dated March 5, 1982, granted special leave for filing the appeal. The said appeal was pending disposal at the time of making the reference. The decree passed in favour of the applicant was put into execution and the sum of Rs. 68 lakh odd, belonging to the Electricity Board and lying with the State Bank of India, Ashok Marg Branch, Lucknow, was attached. However, the Electricity Board moved the Supreme Court for stay. The hon'ble Supreme Court granted stay for 50 per cent, of the amount and directed the Electricity Board to pay 50 per cent, to the applicant on furnishing a bank guarantee to the satisfaction of the authority concerned. In pursuance of that order, after the execution of a bank guarantee, the applicant was paid a sum of Rs. 33,84,256.75. This amount was deposited by the applicant with the Bank of Baroda, Nazrat-ganj Branch, Lucknow in the shape of fixed deposit and the applicant is earning interest at 10 per cent, per annum on the said amount. In the return, the applicant included interest only at 4 per cent, on the plea that in case the applicant loses the case in the hon'ble Supreme Court, it will have to pay interest at 6 per cent, on the amount received by it from the Electricity Board.
5. The Assessing Officer did not accept the applicant's contention on the ground that the applicant was under no obligation to pay the interest and nor any such order had been passed by the hon'ble Supreme Court while granting stay. In fact, the payment of interest on the amount received by the applicant depended on the final order of the hon'ble Supreme Court and that too in case the Electricity Board succeeds in its appeal. Consequently, the Assessing Officer included the total interest, that is, the balance 6 per cent, as well which was not returned by the applicant in all the three years.
6. In appeal, the same objections were raised by the applicant but they were also rejected by the Commissioner of Income-tax (Appeals) and the order of the Assessing Officer was confirmed. In the second appeal before the Tribunal, again the same pleas were raised but were not accepted by the Tribunal as well and the order of the Commissioner of Income-tax (Appeals) was upheld.
7. So far as the second question is concerned which relates to the income from the Nainital property for the assessment year 1985-86, the facts are as follows:
8. The applicant owned a property at Nainital and it was being used as a guest house. Some of the portions of the alleged building were rented and the income from those portions was returned by the applicant as income from house property in earlier years. Afterwards, the applicant wanted to convert the building into a hotel and with that in view the assistance from Pradeshik Industrial and Investment Corporation of U. P. Limited (PICUP for short) was sought. A project report from hotel consultant M/s. Eastern Hotel P. Ltd., was also obtained and allegedly some efforts were also made for converting the property into a hotel. Before the said property could be converted into a hotel, the major portion of it was let out to the State Bank of India for setting up of the staff training centre at the rent of Rs. 22,500 per month. It has been alleged by the applicant that this rent was nothing but a payment for the use of certain rooms of the building and it amounted to exploitation of the building commercially and thereby the income should be treated as income from business. Efforts to seek the assistance of PICUP and attempts at subsequent conversion of the said premises into a hotel should be treated to be an effort of the applicant to exploit the premises commercially. The said contention of the applicant was not accepted by the Assessing Officer on the ground that the building has not been converted into a hotel and nor can it be said that the rent was a compensation paid by the State Bank of India for use of only certain rooms for certain period. In fact, emphasis was laid by the Assessing Officer on the lease deed executed by the State Bank of India in favour of the applicant, which clearly showed that it was nothing but leasing out the property on rent to the State Bank of India and the amount of Rs. 22,500 per month was nothing but rent of the building along with its fixtures and furnishings used by the State Bank of India. The said order of the Assessing Officer was also confirmed by the Commissioner of Income-tax (Appeals) in the first appeal filed by the applicant. The same order was also confirmed in the second appeal by the Tribunal.
9. We have heard Sri R. R. Kapoor, learned Counsel for the applicant and Sri A. N. Mahajan, learned standing counsel appearing on behalf of the Revenue.
10. Learned Counsel for the applicant submitted that the applicant is liable to pay 6 per cent, interest on the amount of compensation paid to it under the orders of the hon'ble Supreme Court in the event the Electricity Board won and, therefore, the amount which represented 6 per cent, of the interest could not have been taxed in its hands.
11. The submission is misconceived. The interim order of the apex court does not provide for payment of any interest by the applicant to the Electricity Board. Further the applicant itself had been treating part of the said interest as its income to the extent of 4 per cent. It is well-settled that where an assessee follows the mercantile system of accounting, the interest accrues in that year without waiting for the actual receipt of the amount of interest by the assessee. However, for claiming the liability as a deduction in a particular year, the liability should be an ascertained one and should not be dependent on any contingency in future. This is the position in claiming deduction regarding liability in the present case. We find that there is no liability for payment of interest by the applicant in the assessment years in question. The Tribunal has rightly held that the entire amount of interest, which had accrued to the applicant on the FDR is liable to be taxed. We, accordingly, answer the first question referred to us in the affirmative, i.e., in favour of the Revenue and against the assessee.
12. So far as the second question is concerned, a similar question came up for consideration before this Court in the case of the applicant itself since reported in CIT v. Pateshwari Electrical and Associated Industries P. Ltd. , in which it had answered questions Nos. 1 and 2, which related to the Nainital property being leased out to the State Bank of India, in favour of the assessee and against the Revenue.
13. Respectfully following the aforesaid decision of this Court, we answer the second question referred to us in the affirmative, i.e., in favour of the assessee and against the Revenue. There will be no order as to costs.