Bombay High Court
Commissioner Of Income-Tax vs Smt. Vimla D. Sonwane And Others on 1 January, 1800
Equivalent citations: [1995]212ITR489(BOM)
JUDGMENT V.A. Mohta, J.
"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in holding that the lease rent from the properties was to be assessed in the hands of the assessee on receipt basis ?
(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in holding that the Income-tax Officer was under no obligation to tax the lease rent on accrual basis and he had the option to tax it on receipt basis as well ?"
1. The above two questions are referred for the opinion of this court under section 256 of the Income-tax Act, 1961 (for short "the Act"), at the instance of the Commissioner, Nagpur.
2. The assessees are some of the co-owners of plots Nos. H-1, H-2 and H-3 of Shivsagar Estate, Annie Besant Road, Worli, Bombay. Plot No. H-1 was given on lease to Messrs. Punam Hotel P. Ltd. at Rs. 9 lakhs per year and plots Nos. H-2 and H-3 to Messrs. Punjab Co-operative Housing Society Ltd. at Rs. 6 lakhs per year. Both the lessees have filed proceedings for fixation of standard rent under the Bombay Rents, Hotel and Lodging House Rates Control Act, 1947, in the Small Causes Court, Bombay. The assessees earned income also from other sources. They included the actual receipts of rent under the head "Income from other sources" in their return of income. The assessees do not maintain regular account books and do not follow the mercantile system of accounting. The Income-tax Officer added the lease money in the total income on accrual basis on the basis of agreed rent. The Appellate Assistant Commissioner maintained the additions. But the Tribunal quashed those additions holding that there was no justification for adding income from lease rent on accrual basis.
3. Against the aforesaid background it seems very clear to us that the Tribunal has approached the case from absolutely the correct perspective. No wonder, applications for reference arising out of the orders passed by the Tribunal in the case of other co-owners were not earlier passed by the Commissioner. ITA No. 72 of 1984 decided on January 12, 1987, at Nagpur (Bharucha and Mohta JJ. - CIT v. Sheela K. Singhee).
4. But that aspect is not decisive of the matter.
5. The right to receive the agreed lease money was in jeopardy because of pendency of proceedings for fixation of standard rent in a court of law. There was thus neither factual accrual nor deemed accrual. Income arising out of the lease of the plots falls in assets under the head "Other sources". Option regarding adoption of system of accounting is with the assessee and not with the Income-tax Department. The assessee is indeed free even to follow different methods of accounting for income from different sources in an appropriate case. The Department cannot compel the assessee to adopt the mercantile system of accounting. As a matter of fact, it was not adopted. Under the circumstances, the income from lease rent could not be taxed on accrual basis.
6. In the case of CIT v. Hindustan Housing and Land Development Trust Ltd. [1986] 161 ITR 524, the Supreme Court has ruled that the amount which is under real and substantial dispute in a court cannot be included as income on accrual basis. In the case of J. K. Bankers v. CIT [1974] 94 ITR 107, the Allahabad High Court has held that since income from lease money falls to be assessed as income from other sources, it was open to the assessee to follow any system of accounting in respect of that source. It is further held that the assessee may follow even different systems of accounting in respect of different sources.
7. Under the circumstances, both these questions are answered in the affirmative and in favour of the assessees. No order as to costs.