Commissioner Of Income-tax v. H.s. Shivarudrappa

K. Shivashankar Bhat, J.

1. The following question has been referred for our consideration under section 256(1) of the Income Tax Act, 1961 :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that installments due as on January 30, 1981, alone should be taken into consideration for computing profits under section 41(2) "

2. The assessment year is 1981-82, for which the previous year ended on March 31, 1981. The assessee owned two buses which were bearing Nos. MYA 2334 and MYA 6169. These were acquired by the Government of Karnataka in the year 1976, under the provisions of the Karnataka Contract Carriages (Acquisition) Act, 1976. For bus No. MYA 6169, compensation of Rs. 1,15,574 was awarded. Out of that, Rs. 20,000 was paid on March 12, 1976, and the balance was payable in eight annual installments of Rs. 11,410.90 each payable on January 30 of each calendar year commencing from January 30 of each calendar year commencing from January 30, 1978. For bus No. MYA 2334 compensation of Rs. 69,687 was awarded on September 27, 1980, and but of that Rs. 20,000 was paid on March 7, 1977. The balance was payable in eight annual installments of Rs. 6,210.88 each payable on January 30 of each calendar year commencing from January 30, 1978. The Income Tax Officer computed the profits under section 41(2), in respect of the above two buses, considering the entire compensation awarded, namely, Rs. 1,15,574 and Rs. 69,687, respectively. Aggrieved by the assessment, the assessee appealed and the Commissioner (Appeals) upheld the order of the Income Tax Officer. The assessee preferred a second appeal to the Tribunal. The Tribunal held that only installments due on January 30, 1981, in respect of both the buses are to be taken for computing profits under section 41(2).

3. The question involves the interpretation of section 41(2). The relevant part of the section reads thus :

"Where any building, machinery, plant or furniture which is owned by the assessee and which was or has been used for the purposes of business or profession is sold, discarded, demolished or destroyed and the moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, if any, exceed the written down value, so much of the excess as does not exceed the difference between the actual cost and the written down value shall be chargeable to Income Tax as income of the business or profession of the previous year in which the moneys payable for the building, machinery, plant or furniture became due".

4. The charge on the excess received on sale of the subject-matter (the buses), is referred to as the balancing charge. It represents the amount which the assessee got as depreciation allowance in the earlier years; it is charged to tax on the sale of the asset because, to the extent to which a depreciation allowance was granted in the past, the chargeable profit of the business during those past years was reduced and a lower profit was computed for tax; on sale of the asset, the excess sum received over and above the written down value is considered as the return of the profit which was not taxed during earlier years. The provision creates a legal fiction to rope in the excess amount received on sale for taxation as profit chargeable to tax. It is chargeable to Income Tax as income of the business of the previous year in which the moneys payable for the asset became due. The problem before us is to identify the previous year; that is to be identified as the year in which on sale of the asset, the moneys payable become due. In other words, the year in which sale consideration becomes due to be paid is to be the previous year. (Here, for the sake of convenience, we confine the reference to "sale" only, though the provision is attracted under other circumstances also stated in the sub-section).

5. Money payable for the asset is either the compensation determined in the case of compulsory acquisition or the price for the sale of the asset in the case of an ordinary sale. It can be said that a certain sum is payable for the asset on its sale; but the said money payable for the asset need not always become due immediately on the sale (or acquisition as the case may be). In the case of compulsory acquisition, compensation has to be determined and only then it becomes payable, subject to any statutory terms governing the acquisition. In the instant case, compensation had to be determined and it was accordingly determined. However, payment of compensation was postponed statutorily; it was to be paid in installments. Can it be said that, on determination of the compensation, the same became "due"

6. The word "due" is normally understood as conveying the meaning "imminent". Money payable becomes due for payment on the date when it is to be paid; such a date is usually called the "due date". Unless the money payable is due, its recovery cannot be enforced; a creditor cannot demand payment unless it is "due".

7. One of the characteristics of the English is the latitude extended to the words in it. A work is to be understood in the setting in which it is used. There are occasions where the terms "payable" and "due" are used to convey the same meaning. It is also possible to understand the word "payable" as conveying the idea of a liability to pay in future also and when that future date is reached, it would become "due".

8. The Revenue contends that, on the determination of the compensation, the money became payable and due; the postponement of the payment under the installments would not make any difference. The assessee, on the other hand, contends that, determination of compensation under the Acquisition Act determined the moneys payable which, however, become due only on the date of the respective installments. If, even before the entire sum is received, the assessee is to be taxed on the same, the assessee has to bear a greater burden; that he is charged to a profit which he has not yet realised, is the assessees contention. The Revenue, on the other hand, points out that if the assessees interpretation of section 41(2) is accepted, it would render the working of it impractical, and the assessee is likely to escape the levy having regard to the number of yearly installments involved.

9. The impracticability or the difficulty in collecting the levy by itself is no ground to interpret the taxing provision differently from what it conveys. Where the moneys were to be paid in installments, the charge may not be attracted until the moneys which had fallen due for payment exceed the written down value; the charge itself has to be spread over during the years in which the amounts representing the "excess" referred to in section 41(2) are received. If it is a case of considering the respective hardships or inconveniences of the Revenue and of the assessee, courts should lean in favour of the assessee and interpret the provision accordingly.

10. In CIT v. J. H. Gotla , the Supreme Court observed at page 339 thus :

"Where the plain literal interpretation of a statutory provision produces a manifestly unjust result which could never have been intended by the Legislature, the court might modify the language used by the Legislature so as to achieve the intention of the Legislature and produce a rational construction. The task of interpretation of a statutory provision is an attempt to discover the intention of the Legislature from the language used. It is necessary to remember that language is at best an imperfect instrument for the expression of human intention. It is well to remember the warning administered by Judge Learned Hand that one should not make a fortress out of the dictionary but remember that statures always have some purpose or object to accomplish and sympathetic and imaginative discovery is the surest guide to their meaning".

Again (at page 339) :

"If the purpose of a particular provision is easily discernible from the whole scheme of the Act, which in this case is to counteract the effect of the transfer of assets so far as computation of income of the assessee is concerned, then bearing that purpose in mind, we should find out the intention from the language used by the Legislature and if strict literal construction leads to an absurd result, i.e., a result not intended to be subserved by the object of the legislation found in the manner indicated before, then if another construction is possible apart from the strict literal construction, then that construction should be preferred to the strict literal construction. Though equity and taxation are often strangers, attempts should be made that these do not remain away so and if a construction results in equity rather than in injustice, then such construction should be preferred to the literal construction".

11. Section 41(2) may be compared with its predecessor and found as one of the provisos to section 10 (2) (vii) of the Indian Income Tax Act, 1922; it reads :

"Provided further that where the amount for which any such building, machinery or plant is sold....... exceeds the written down value, so much of the excess as does not exceed the difference between the original cost and the written down value shall be deemed to be profits of the previous year in which the sale took place". (underlining is ours).

Another proviso was :

".......... where any insurance, salvage or compensation moneys are received in respect of any such building, machinery or plant as aforesaid, and the amount of such moneys exceeds the difference between the written down value and the scrap value no amount shall be allowable under this clause and so much of the excess as does not exceed the difference between the original cost and the written down value less the scrap value shall be deemed to be profits of the previous year in which such moneys were received". (underlining is by us).

12. The practical difficulty of working the last mentioned proviso when moneys were received in installments would be the same difficulty now pleaded before us by learned counsel for the Revenue. The earlier proviso, in clear terms, identified the previous year in which the sale took place. Parliament has departed from the language used in the earlier proviso while enacting the present section 41(2). Whether Parliament also intended to depart from the meaning conveyed by the second proviso referred to above, is a debatable question. It is more reasonable to read section 41(2) as conveying the idea of charging to tax the excess amount during the year when it ought to be received under the terms governing the sale transaction or of the compulsory acquisition. An amount payable as "due" ought to be normally received by the recipient; if the payer fails to pay, the recipient has every right to enforce the payment immediately. The second of the above-referred provisos under section 10 (2) (vii) of the earlier Act may enable the assessee to postpone the receiving of the amount, though it was liable to be paid to him; thus he may not "receive" that amount during the particular year to avoid the operation of the proviso. Probably, to get over such a situation, Parliament used the word "due", so that the year in which the amount is due shall be the "previous year" in respect of which the charge is attracted.

13. The language of section 45 governing "capital gains" also stands in contrast to the language used in section 41(2). Capital gains chargeable to Income Tax is deemed to be the income of the previous year in which the transfer takes place; here, receipt of consideration is entirely irrelevant. However, under section 45(5)(b), the enhanced compensation is brought to tax in the previous year in which such amount is received by the assessee.

Therefore, there is nothing unusual if the previous year is postponed to the year in which the money is actually payable to the assessee in the sense that the assessee should have a right to demand its payment during that year and thus it becomes "due" to him; the due date for payment would identify the previous year.

14. Learned counsel for the Revenue strongly relied on Kesoram Industries and Cotton Mills Ltd. v. CWT It was held therein that the Income Tax liability was held to be a debt due, on the last date of the accounting year and, therefore, it was deductible under section 2(m) of the Wealth-tax Act. Mr. Raghavendra Rao relied on the meaning of the term "debt", as a sum of money which is now payable or will become payable in the future by reason of a present obligation. (Vide page 776). On the same analogy, it was contended that money payable becomes "due" when the obligation is created, though the obligation may have to be discharged in future. Mr. Prasad, on the other hand, relied on the observations at page 779, wherein a decision of the Calcutta High Court was referred to and the Supreme Court accepted as correct the following statement made by an American court (People v. Arguello [1869] 37 Cal. 521) :

"Standing alone, the word debt is as applicable to a sum of money which has been promised at a future day as to a sum now due and payable. If we wish to distinguish between the two, we say of the former that it is a debt owing, and of the latter that it is a debt due".

15. There is a difference between a debt owing and a debt due; the sum which is now due and payable is referred to as the debt due. A similar approach to section 41(2) would mean that the word "due" conveys the idea of the immediate right to demand payment on the part of the seller and an immediate liability to pay factually on the part of the purchaser.

16. The working difficulty cannot be a reason to give a different meaning of the statute than what it conveys. A similar argument was dealt with by the Supreme Court in CIT v. Best and Co. (Private) Ltd. At page 23, it was held :

"If the compensation paid was in respect of two distinct matters, one taking the character of a capital receipt and the other of a revenue receipt, we do not see any principle which prevents the apportionment of the income between the two matters. The difficulty in apportionment cannot be a ground for rejecting the claim either of the Revenue or of the assessee. Such an apportionment was sanctioned by the courts in Wales v. Tilley [1942] 25 TC 136Carer v. Wadman [1946] 28 TC 41 (KB) and T. Sadasivam v. CIT In the present case apportionment of the compensation has to be made on a reasonable basis between the loss of the agency in the usual course of business and the restrictive convenient. The manner of such apportionment has perforce to be left to the assessing authorities".

17. In CIT v. Sheshappa Hegde the question referred arose under a different set of circumstances. Contract carriages were acquired by the State Government in the year 1976. The minimum compensation payable under the Acquisition Act was considered for assessment under section 41(2) in respect of the year of acquisition; the assessee contended that the amount of compensation was not yet determined under the Acquisition Act and that it had not become payable; the minimum compensation payable by itself would not result in making the said amount "money payable" for the acquisition; his contention was accepted by this court. A page 167, the mode of determining the compensation is stated thus :

"The basis for determination of the amount has been provided in the Schedule of section 6 of the Acquisition Act. Such compensation which is required to be paid is the sum arrived a on a certain percentage of the cost of such contract carriages as per the Table annexed to the Schedule. This amount, unless otherwise fixed by agreement, is to be determined by the arbitrator appointed for the purpose. Under section 12 of the Acquisition Act, an appeal is provided to the High Court by any person aggrieved by the said award.

The amount referred to in section 6 of the Acquisition Act is thus required to be determined and quantified under an award by the arbitrator and it becomes due only after such determination".

While considering the scope of section 41, it was held that section 41 deals with a deemed income or a fictional income and "the year of taxability under section 41(2) is the year of receipt or the year in which it becomes due". This sentence has to be understood as conveying the meaning, equating the "year of receipt" to the year in which it "becomes due"; in other words, money becomes due when it has to be actually paid. This is made clear by the following passage which reads (at page 167) :

"There are two significant expressions in section 41(2). They are moneys payable and moneys payable becoming due. More often, these two terms are used without much dissension. Money payable sometimes means only the money due. Money would not become due unless it is payable. But, in the context in which the said two terms are used in section 41(2), they do not carry the same meaning".

18. The sentence at page 169 "money payable in section 6 of the Acquisition Act thus becomes due only on its determination by the arbitrator ........" has to be understood in the circumstances of the said case; the court was not considering the effect of installments prescribed by the statute for payment of the compensation determined by the arbitrator. It was sufficient for the purpose of the said case to answer the question whether the minimum amount payable immediately on acquisition attracts section 41(2) of the Income Tax Act during the assessment year 1976-77.

19. In P. C. Gulati Voluntary Liquidator, Panipat Electric Supply Co. Ltd. v. CIT the undertaking was acquired in July, 1954, and the compensation was determined in April, 1962 (by way of a compromise decree in a civil suit). For the assessment year 1963-64, the "excess" was charged to tax under section 41(2). The assessees contention was that the sale took place in July, 1954, and, therefore, the amount in question could have been axed in the assessment year 1955-56; his plea was rejected by the High Court. At page 512, there is an observation, made in the context of the said case, that "no amount could be said to be due till it had been ascertained". Subsequently, the court pointed out that till the compensation was actually ascertained, the amount that was due to the assessee remained inchoate and unknown; and as soon as it was determined, it became payable and, therefore, due.

20. Akola Electric Supply Co. Pvt. Ltd. v. CIT is a decision of the Bombay High Court. Here again, it was a case of acquisition of an electrical undertaking; but compensation payable was determined much later. Compensation became payable only after its determination and thereafter it became due; the court had no occasion to consider the effect of the statutory installments granted to the State to make the payments.

21. In CIT v. Bharat Lines Ltd. the Bombay High Court was considering the case of a private sale and the agreement of sale under which the sale consideration was to be paid in monthly installments. The assessee claimed a loss which arose due to the fluctuation in the exchange rate. The Appellate Tribunal held that "moneys payable" in section 41(2) connoted simple indebtedness without reference to the time of payment. The assessee also contended that the balance amount received under the agreement was payable in installments and the said amount could be taxed in the year of payments. However, having regard to the questions referred and the alternative contentions based on the loss sustained due to fluctuation in the exchange rate, the questions were answered in favour of the assessee without specifically dealing with the assessees contention as to the year of receipt. But the ratio fully supports the assessees contention in the instant case before us. At page 548, the Bombay High Court held :

On the date of the agreement, only pound 48,000 was payable and in fact paid to the assessee. That would be required to be computed in terms of rupees at the rate of exchange as in force on that day. For the balance amount which was payable by four six-monthly installments, the rate of exchange as in force on the respective dates on which the installment fell due for payment would have to be considered".

22. CIT v. United Provinces Electric Supply Co. Ltd. a decision of the Calcutta High Court, is also a case of acquisition of an electrical supply undertaking by the Government where compensation was not finalised on the date of acquisition.

23. The decision of the Delhi High Court in Okara Electric Supply Co. Ltd. v. CIT is again a case of acquisition of an electric supply undertaking and the question involved was not concerned with the statutory installments.

24. It cannot be said that, in all circumstances, moneys become due immediately on the determination of the quantum payable towards a liability; it depends upon the particular facts and the statutory terms governing the payments.

25. Consequently, we answer the question in the affirmative and against the Revenue.

26. Reference answered accordingly.