Premlata Purshottam Paldiwal vs. CIT (Bombay High Court)
August, 12th 2017
Interest on interim compensation received pending final disposal by the High Court is income if there is no direction given by the Court. The source of funds to earn income cannot determine the taxability of the income. The fact that the assessee may have to return the compensation and interest on the principle of restitution as provided under S. 144 of the Civil Procedure Code is not relevant because restitution is not a certainty. Paragon Construction 274 ITR 413 (Del) distinguished
(i) The only substantial question of law raised relates to the impugned order of the Tribunal completely misconstruing the decision of the Delhi High Court in Paragon Construction (I) Private Limited .vs. C.I.T. (2005) 274 I.T.R. 413 which according to the appellant would apply on all fours to the present facts. The facts in Paragon Construction (supra) before the Delhi High Court were as follows:
(a) The assessee therein was entitled to a sum of money from the Municipal Corporation consequent to award of the Arbitrator.
(b) The assessee moved the High Court seeking a direction that the Arbitrator be directed to file the original award in Court for making it the rule of the Court. This was objected to by the Corporation. In those proceedings the Corporation deposited the amount of the award without prejudice to its objection to the award.
(c) The Court by an interim order allowed the assessee therein to withdraw the amount deposited subject to furnishing a bank guarantee and an undertaking that in case the Corporation succeeds, the assessee will refund the amount to the Corporation along with the interest.
(ii) In the present facts although the interim order allowed the assessee to withdraw the amount of Rs.63.33 lakhs, there was no stipulation in the interim order that in case the appellant loses, she was obliged to return the amount to the State along with interest. Therefore, the facts in the present case are completely distinguishable from the decision of the Delhi High Court in Paragon Construction (supra). The requirement of returning the amount along with interest thereon by a subsequent order of the Court is uncertain. Therefore, such an uncertain event cannot by itself divest the accrual of interest income on the fixed deposit in subject assessment year in the hands of the appellant assessee.
(iii) Further as pointed out above, there was no obligation in terms of the order allowing the appellant to withdraw the amount of Rs.63.33 lakhs, to deposit the same in fixed deposits and return it along with interest received on fixed deposit to the State in case it loses in the appeal filed by the State before the High Court. Therefore, the interest if awarded at the final hearing would not necessarily be related to the interest earned on the fixed deposit in the absence of any such direction being made in the interim order. Thus the impugned order of the Tribunal has correctly held that the decision of the Delhi High Court in Paragon Construction (supra) would have no application in view of the above distinction to the present facts.
(iv) In fact the above findings of ours would dispose of the substantial question of law in favour of the Revenue. However, we have considered the further submissions made by the assessee challenging the impugned order. This as we heard the parties on the same at length. The core issue which arises for our consideration is whether interest received on fixed deposit for the subject assessment year has accrued to the assessee for being taxed. The main limb of the assessee’s case as canvassed before us is that the interest on the fixed deposit should not be brought to tax in the subject assessment year as the source of the deposit on which the interest has been earned is the compensation received by her in land acquisition proceedings. It is a settled issue between the parties that the amounts received at the interim stage in the land acquisition proceedings cannot be brought to tax not only for the reason that it is agricultural income but also for the reason that final determination of the enhanced compensation receivable by the assessee has not yet been finally determined. Mr. Thakar very fairly states that it is not appellant’s claim that interest received on the fixed deposits is not taxable because it is agricultural income. Admittedly it is not agricultural income. However, the interest accruing to the assessee on fixed deposit is taxable only on the final determination of the compensation receivable by her in the land acquisition proceedings pending before this Court. This for the reason that it is a continuation of the compensation receivable on acquisition of land and, therefore, it has to be considered as a part of enhanced compensation which is yet to be determined by the Court. Therefore, when the compensation received at the interim stage cannot be brought to tax, as it only accrues at the final determination then on the same basis the interest earned on the amount of fixed deposit should also follow the principal amount of Rs.63.33 lakhs received at interim stage.
(v) The above submission ignores the facts that once the interim compensation has been received by the assessee pending the final disposal by the High Court, she is free to deal with the amount as she deems fit. There is no requirement under the law nor any direction given by the Court while passing an interim order allowing the appellant to withdraw the sum of Rs.63.33 lakhs so as to invest the same in fixed deposits and account for the interest earned thereon. The moment the assessee receives/withdraws the amount of Rs.63.33 lakhs from the Court, it becomes a part of her pool of income/wealth to be utilised/disposed of as she deems fit. Therefore, the fixed deposit which is made in the Bank at the time of deposit loses its character as compensation amount received at the interim stage from the High Court. This link/connection is broken. It is a deposit made in the Bank by the assessee in her own capacity as an individual and not as a trustee appointed by the Court to make fixed deposit for the benefit of any accrual or interest arising therefrom for the benefit of successful party in the litigation before it. Therefore, there is no continuity as submitted on behalf of the appellant so as to exclude the interest earned on the fixed deposit from exigiblity to tax.
(vi) The source of funds to earn income cannot determine the taxability of the income earned on the capital amount which has been invested. This in the absence of any statutory mandate otherwise. The income earned would be chargeable to tax irrespective of the source of the funds from which the income has been earned. In the mercantile system of accounting, income accrues when the right to receive the same arises, even though the actual receipt could be at a later date. In the present case it is an accepted position that the right to receive the interest from the fixed deposits already accrued to the assessee. In such circumstances, the interest on the fixed deposit would be chargeable to tax, as sought to be done by the Assessing Officer under the head income from other sources.
(vii) It was next submitted that in any view of the matter on the principle of the restitution as provided under Section 144 of the Civil Procedure Code, the assessee would be obliged to return the amount of Rs.63.33 lakhs along with all benefits obtained by her to the successful party i.e. the State. Section 144 of the Code of Civil Procedure would only be triggered if the successful party makes an application to the Court for restitution. This application for restitution by the successful party is not a certainty. An application for restitution may or may not be made by the successful party. In any event even if application is made, the benefit which the assessee would have gained out of benefit/income out of the amount of Rs.63.33 lakhs would be net of tax. In those circumstances, the requirement for the appellant to pay to the State would be only the net amount received by her after payment of taxes due. Thus we find no merit in the submission that no tax is payable on the income earned on the fixed deposits as the same could be subject to proceedings of restitution under Section 144 of the Code of Civil Procedure.