Smt. Premlata Purshottam Paldiwal [2017] 84 taxmann.com 317 (Bombay) [01-08-2017]
Aggrieved with amount of compensation, assessee filed a reference to Civil Judge to enhance compensation – Civil Judge enchanced compensation along with interest thereon – State filed an appeal before High Court against order of Civil Judge – Interim order was passed by High Court allowing assessee to withdraw original compensation amount – Assessee deposited interim compensation amount in fixed deposit and earned interest – Assessee contended that issue of compensation had not yet been finally decided and income on account of compensation would accrue only on final determination of compensation by High Court – Whether source of funds to earn income could not determine taxability of income earned on capital amount which had been invested – Held, yes – Whether since right to receive interest from fixed deposits had already accrued to assessee, interest received on fixed deposit would be chargeable in current year under head income from other sources – Held, yes
Paragon Constructions (India) (P.) Ltd. [2005] 142 TAXMAN 215 (DELHI)[28-09-2004]
There was a contract between assessee and ‘NDMC’ – Disputes arose about implementation of contract in time and matter was referred to arbitration – Arbitrator passed an award directing NDMC to pay certain sum to assessee – Assessee moved to High Court for making award a rule of Court – Though NDMC filed objection against said award but deposited amount in Court with out prejudice to its objections – During pendency of said proceeding, High Court permitted that amount to be withdrawn against a bank guarantee with a further condition that in case NDMC succeeded, assessee would refund that amount with interest – Assessee, accordingly withdrew that amount and kept it in a fixed deposit account with a bank and earned interest there on – Assessing Officer held interest accrued on amount so deposited as a taxable income for relevant assessment year – High Court, subsequently, affirmed that award in 995 – Whether instant case was not one where merely date of payment was deferred, rather entire right to receive same was in question and jeopardy – Held, yes – Whether right accrued to assessee when said award was affirmed by High Court – Held, yes – Whether, therefore, determinative date would be that date on which decision was rendered by High Court and it was for that relevant year that income-tax would have to be assessed as it could be said that amount accrued on that date only – Held, yes – Whether therefore, Tribunal was not right in holding that interest accrued to assessee during relevant previous year – Held, yes
Note : Held by High Court in Prem lata Purshottam Paldiwal (Para 8) since 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 (India) (P.) Ltd.
Other Important Observations of the Court in Premlata (supra)
Para 11: “………………….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 appellant-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………………………………”
(Para 12) “………………..in any view of the matter on the principle of the restitution as provided under Section 144 of the Civil Procedure Code , the appellant-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.