HIGH COURT OF PUNJAB AND HARYANA
Commissioner of Income-tax, Patiala
v.
Chandigarh Industrial & General Development Corpn.
Ltd.
M.M. Kumar and Ajay Kumar Mittal, JJ.
I.T. Reference No. 349 of 1995
November 1, 2007
Section 145 of the Income-tax Act, 1961 - Method of accounting - System of accounting - Assessment year 1983-84 - Assessee-corporation allotted an industrial shed on leasehold basis in which premium was required to be paid over 10 years period and rights were transferred in allottee’s favour on payment of final instalment as per its allotment rules - Further, till assessee received payment of annual instalment during a year, it was an inchoate right in assessee’s favour since in event of failure on allottee’s part to make payment of said instalment, its managing director had only right to resume said shed but could not enforce payment of balance amount - Still, further, since 1979 revenue had been treating accrual of profits on yearly basis on instalments due till payment of last instalment was made - Whether, therefore, approach of Tribunal was correct and it had rightly held that even under mercantile system of accounting followed by assessee, income would accrue on receipt of instalment on year to year basis and not on allotment of land or industrial sheds - Held, yes
The assessee-corporation, engaged in the business of development and sale of industrial sheds, allotted such sheds to the entrepreneurs on leasehold basis as per its allotment rules. Since as per said rules, the leasehold rights of said sheds were to be transferred in allottee/lessee’s favour only after the entire consideration, which was payable in ten equated instalments, was finally paid by them, the assessee claimed that the income on receipt basis and not on accrual basis must be assessed. The Assessing Officer, however, rejected said claim. On appeal, the Commissioner (Appeals) allowed assessee’s said claim, which was further upheld by the Tribunal.
On reference:
It emerged after careful analysis of the allotment rules, that the transfer of rights in favour of the allottee were not complete till the payment of the last instalment and in the event of default on his part, the assessee could not recover the balance amount forcibly though it had right to cancel the allotment and resume the land or industrial shed. That clearly showed that the right transferred to the allottees were not absolute right in respect of land or industrial sheds till the payment of the final instalment. [Para 8]
The assessee was following mercantile system of accountancy, under which, the assessee was liable to pay tax on the income that ‘accrues’ or ‘arises’ during the year of accounting. [Para 9]
It was undisputed that the assessee allotted an industrial shed on lease hold basis in which premium was required to be paid over 10 years period and the rights were transferred in favour of the allottee/lessee on the payment of final instalment. Further, till the assessee received payment of annual instalment during the year, it was an inchoate right in favour of the assessee as in the event of failure on the part of the allottee/lessee, its managing director had only right to resume but could not enforce the payment of the balance amount. Still further, the revenue since 1979 had been treating the accrual of profits on yearly basis on instalments due till the payment of last instalment was made and there was no justification for the revenue in deviating from the said approach which was in conformity with law. Therefore the approach of the Tribunal was correct and it had rightly held that even under mercantile system of accounting, the income would accrue on receipt of instalment on year to year basis and not on the allotment of land or industrial sheds. [Para 13]