JUDGMENT
1. The Tribunal, Allahabad has referred the following questions of law under Section 256(2) of the IT Act, 1961 (hereinafter referred to as the Act) for 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 UP State Electricity Board was taxable for the asst. yrs. 1983-84, 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 asst. yrs. 1983-84, 1984-85 and 1985-86.
Briefly stated, the facts giving rise of the present reference insofar 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 (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 23rd Dec, 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:
The arbitrators also held in the said award that further interest will accrue @ 6 per cent on the aforesaid amount or any part of it remaining unpaid beyond 31st Aug., 1974. On 6th Oct., 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 dt. 12th March, 1981. Thereafter the Electricity Board took up the matter before the Supreme Court, which by order dt. 5th March, 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 lakhs and 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, Hazratganj Branch, Lucknow in the shape of fixed deposit and the applicant is earning interest @ 10 per cent per annum on the said amount. In the return, the applicant included interest only @ 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 @ 6 per cent on the amount received by it from the Electricity Board.
The AO 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 AO 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.
In appeal, the same objections were raised by the applicant but they were also rejected by the CIT(A) and the order of the AO was confirmed. In 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 CIT(A) was upheld.
3. So far as the second question is concerned which relates to the income from Nainital property for the asst. yr. 1985-86, the facts are as follows:
The applicant owned a property at Nainital and it was being used as a guesthouse. Some of the portions of the alleged building were rented and the income from those portions were 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 assistance from Pradeshik Industrial and Investment Corporation of UP Ltd. (PICUP for short) was sought. Project report from hotel consultants M/s Eastern Hotex (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 an income from business. Efforts to seek the assistance of PICUP and the attempts of the 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 AO on the ground that the building has not been converted into a hotel nor it can 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 AO 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 AO was also confirmed by the CIT(A) in first appeal filed by the applicant. The same order was also confirmed in second appeal by the Tribunal.
4. 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.
5. 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 Hon'ble Supreme Court in the event the Electricity Board had won and, therefore, the amount which represented 6 per cent of the interest could not have been taxed at its hand.
6. 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 affirmative, i.e. in favour of the Revenue and against the assessee.
7. So far as the second question is concerned, the similar question came up for consideration before this Court in the case of the applicant itself since reported in CIT v. Pateshwari Electrical & Associated Industries (P) Ltd. , in which it had answered the question 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.
8. 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.