HON’BLE SRI JUSTICE L. NARASIMHA REDDY AND HON’BLE SRI JUSTICE CHALLA KODANDA RAM
I.T.T.A Nos. 68, 97 AND 168 OF 2003
02-09-2014 BETWEEN M/s. R.S. Rangadas, Hyderabad …Appellant And ACIT, Circle 2(1), Hyderabad …..Respondent HON’BLE SRI JUSTICE L. NARASIMHA REDDY AND HON’BLE SRI JUSTICE CHALLA KODANDA RAM
I.T.T.A Nos. 68, 97 AND 168 OF 2003
COMMON JUDGMENT: (per the Hon'ble Sri Justice L. Narasimha Reddy)
These three appeals are in relation to the same assessee and arise out of a common order passed by the Hyderabad Bench ‘A’ of the Income Tax Appellate Tribunal (for short, ‘the Tribunal’).
For the sake of convenience, the parties are referred to as arrayed in ITTA No. 68 of 2003.
The appellant is a civil contractor. He executes the civil works mostly awarded by the Government. For the assessment year 1995-96, he filed return on 31-10-1995 and through an order dated 22-12-1995 under Section 143(3) of the Income Tax Act, 1961 (for short, ‘the Act’), the assessing officer has determined the total income as Rs.14,43,390/-. However, the assessing officer issued notice under Section 148 of the Act proposing to reopen the assessment. It was mentioned that the appellant received a sum of Rs.2,02,975/- as interest on a sum of Rs.32,00,000/-, which was deposited in compliance with the order of a Court, in the proceedings pertaining to arbitration. The explanation offered by the appellant was not found satisfactory and the amount of Rs.2,02,975/- was brought under the purview of tax.
In relation to the returns submitted for the assessment year 1996-97, the appellant made a mention about deposit of Rs.32,00,000/- in his favour. The reason for not showing the same as income is that the amount is still under dispute. Another sum received by the appellant was Rs.3,31,33,750/- towards 50% of the amount covered by the award dated 09-08-1993. As regards this also, his plea was that the amount was received by him by furnishing bank guarantee, and it cannot be treated as income, since the dispute is pending.
The assessing officer treated 10% of the amount received towards 50% of the awards as income and levied tax. The appellant filed ITA Nos. 320 and 321/AC2(1)/CIT(A)-V/96-97 before the Commissioner of Income Tax (Appeals-V), Hyderabad. Through common order dated 28-11-1997, the Commissioner dismissed both the appeals. Thereupon, the appellant filed I.T.A Nos.93 and 94/Hyd/1998 before the Tribunal. Through the common order dated 29-07-2002, the Tribunal dismissed I.T.A No. 93 of 1998 upholding the view taken by the assessing officer as well as the Commissioner about the taxability of the interest received on the amount deposited towards 50% of the amount covered by the award. ITTA No. 168 of 2003 is filed against the same.
So far as ITA No. 94 of 2003 is concerned, the Tribunal allowed the same taking the view that part of the amount awarded by the Arbitrator ought not to have been taxed during the concerned financial year and it becomes taxable only on cessation of dispute. While the appellant filed ITTA No. 68 of 2003 not satisfied with the view taken by the Tribunal, the department i.e., the respondent filed ITTA No. 97 of 2003 against the same. Thus, these three appeals have arisen out of a common order.
Heard Sri A.V. Krishna Koundinya, learned Senior Counsel for the appellant and Sri J.V. Prasad, learned Senior Counsel for the respondent.
Though the appellant raised a strong plea that the order of assessment for the year 1995-96 ought not to have been reopened by issuing a show cause notice under Section 148 of the Act, we are not impressed by that argument. The reason cited by the assessing officer for reopening of the assessment is valid and referable to the facts that can be verified from the record.
The controversy is in two parts. The first is as to whether the amount deposited by a party to the award in compliance with the directions issued by a Court in which the award is under challenge can be treated as the income of the other party i.e., assessee for the assessment year during which such deposit was made. The second is whether the interest that has accrued on the deposits so made and received by the assessee can be treated as his income for the assessment year in which it was received.
The assessing officer sought to treat 10% of the amount deposited towards 50%of the amount covered by the award as income with reference to the year in which the deposit was made. The appellate commissioner affirmed the same. The Tribunal has taken the view that the amount so deposited would become taxable only on cessation of the legal dispute, and can be brought under tax in the concerned assessment year.
When the deposits are made in compliance with the directions issued by the Court during the pendency of the dispute, it is difficult to treat the amount so deposited as the exclusive property or income of any particular assessee. Even where the permission is accorded for withdrawal of the same, it is always subject to the outcome of the proceedings before the Courts. There exits every likelihood of a view being taken by the Court, contrary to the claim of the party, who is permitted to receive the amount; and he being required to refund it, if the final outcome goes against him. When such is the uncertainty and contingent nature of the amounts, it is difficult to treat it as income of the concerned assessee.
The judgment of the Supreme Court in Commissioner of Income Tax v. Hindustan Housing & Land Development Trust
[1]
Ltd., is directly on the point. The amounts referable to that case are in the form of enhanced compensation payable under the Land Acquisition Act, 1894. The Supreme Court observed:
“….the legal position which emerges is that there is no liability in praesenti to pay an enhanced compensation till it is judicially determined by the final court since the entire question, namely, whether the offer made by the Land Acquisition Officer is inadequate and the claimant is entitled to an additional compensation and if yes, at what rate is in flux till the question is set at rest finally, we do not think that any enforceable right to a particular amount of compensation arises. The offer made by the Land Acquisition Officer, by his award, if not accepted by a claimant would not result automatically in a liability to pay additional compensation as claimed by a party aggrieved.”
The same principle applies to the present case also. There was followed by various High Courts in the subsequent years. In
[2]
FGP Ltd. vs. Commissioner of Income Tax , the Bombay High Court dealt with the amounts deposited in the legal proceedings pertaining to an arbitration award. After referring to the precedents on the subject, the Bombay High Court observed:
“In the instant case, there is no real accrual of income.
There is dispute between the parties for the relevant assessment year which was pending in arbitration. It is only on the arbitral proceedings coming to an end and award being passed and income received by the assessee it will be liable to be assessed.”
That very situation obtained in the instant case. Therefore, ITTA No. 68 of 2003 is liable to be allowed and ITTA No. 97 of 2003 is liable to be dismissed.
Coming to the second aspect: It has already been mentioned that the appellant was undertaking civil works and some of the disputes that arose in relation thereto have been referred to arbitration. In the respective awards, the arbitrators have quantified the amount to be paid to the appellant. Naturally, the matters landed before the Court and in compliance with the directions issued by the concerned Courts, 50% of the amount covered by the awards was deposited. While in one case, it was Rs.32,00,000/-, in the other case it was Rs.3,3137,750/-. The appellant was permitted to withdraw such amounts on furnishing bank guarantee. The amount of Rs.32,00,000/- remained in deposit for quite some time and the appellant received the accrued interest being Rs.2,02,975/-. Tax is levied thereon.
It is not in dispute that the appellant has received a sum of Rs.2,02,975/- as interest on the amount which was deposited towards 50% of the amount covered by the award. Whatever be the legal character of the amount in deposit, the interest that has accrued thereon and received by the assessee undoubtedly becomes income. The appellant has not even pleaded that the Court which directed the deposit of the amount has imposed any condition to the effect that even the withdrawal of the interest would be subject to outcome of the proceedings. Though an endorsement was made in the return that the amount received towards interest on the amount deposited in the legal proceedings cannot be treated as income and though an order in terms thereof was passed, the assessing officer reopened the same at a later point of time by issuing notice under Section 148 of the Act. There is no uncertainty surrounding the amount of interest received by the appellant. It constituted his income without any reservations whatever. The Tribunal has taken the correct view of the matter and ITTA No. 168 of 2003 deserves to be dismissed.
In the result, ITTA No. 68 of 2003 is allowed and ITTA Nos.
97 and 168 of 2003 are dismissed.
The miscellaneous petitions filed in these appeals shall also stand disposed of. There shall be no order as to costs.
L. NARASIMHA REDDY, J CHALLA KODANDA RAM, J 02-09-2014 ks Note:
LR copy to be marked.
B/O ks
[1] (1986) 161 ITR 524
[2] (2010) 326 ITR 444