Tax Can't Be Imposed Presuming Possible Order Of The Small Causes Court: Bombay High Court

The Bombay High Court has held that one cannot tax the amount that has not accrued to the assessee and has not been received by the assessee on the assumption and presumption that in the future, the small Causes court will at least order the said sum in favour of the appellant or assessee.

The bench of Justice G.S. Kulkarni and Justice Jitendra Jain has observed that the determination of the amount payable by the IDBI to the appellant as prayed for by the appellant in its suit is to be determined by the Small Causes Court, and it is only when the Court passes a final decree that one can say that the right to receive the sum decreed by the Small Causes Court has accrued to the appellant. Till then, the right to receive any sum by the appellant is in jeopardy and subjudice before the Small Causes Court.

The appellant/assessee is the leaseholder of Neville Wadia Pvt. Ltd., which entered into an agreement with Bombay Builders to construct a building at Cumballa Hill and sell 30 flats to the appellant at an agreed price. On April 22, 1980, by a tripartite agreement, Bombay Builders as the confirming party was substituted with IDBI as the sub-lessee, and the appellant sub-leased the said property at Cumballa Hill in Mumbai on an annual lease rent of Rs. 3,42,720 to IDBI. The appellant received the rent and offered Rs. 3,42,720 as lease rent in its return of income for the assessment year 1981–82. The income was offered for tax under the heading “Income from Other Sources.”

The dispute arose between the appellant and the IDBI for various breaches alleged to have been committed by the IDBI. This led to the appellant terminating the sublease agreement. The appellant refused to accept the rent from IDBI post-termination. In 1981, IDBI filed a declaratory suit in the Small Cause Court and obtained an injunction against the appellant for terminating the sub-lease agreement.

The department issued a garnishee notice to IDBI under Section 226(3) of the Income Tax Act with respect to the outstanding tax arrears of the appellant, directing IDBI to pay the rent to the Income Tax Department. The appellant informed the department that since the sub-lease agreement has been terminated, there is no rent due and payable by IDBI to the appellant, and consequently, the garnishee proceedings are illegal.

A copy of this letter was also sent to IDBI under a cover letter. Also, the appellant addressed the IDBI and reiterated the termination recording that IDBI should not make payment to the income tax department pursuant to the garnishee notice. However, IDBI deposited the amount as per the sub-lease agreement with the Income Tax Department in spite of the appellant terminating the agreement. In the year 1984, the appellant filed a suit for eviction against the IDBI and claimed various reliefs, including compensation for wrongful use and occupation of the flats.

An assessment order under Section 143 read with Section 148 for the assessment year 1986–87 came to be passed, and the rent on account of the sub-lease agreement of the appellant with IDBI amounting to Rs. 3,42,720 was added as income of the appellant.

The appellant contended that since the appellant had terminated the sub-lease agreement with the IDBI in 1981 itself, It had filed a suit for eviction before the Small Cause Court, and the IDBI has also filed a suit to restrain the appellant from terminating the agreement and from dispossessing IDBI. Both the cross-suits are still pending adjudication by the Small Causes Court as of today; there was no accrual of income arising under the sub-lease agreement between the appellant and the IDBI.

The department contended that whether the suit pending before the Small Causes Court is allowed in favour of the appellant or dismissed against the appellant, in either case, the Small Causes Court would at least order IDBI to pay Rs. 3,42,720 p.a. towards the use and occupation of the property of the appellant since the property is in the possession of IDBI.

The court noted that the department was not correct in contending that irrespective of the fate of the civil suits, the Small Causes Court would never order less than Rs. 3,42,720 to the appellant, and, therefore, the ascertained sum is accrued to the appellant.

“In our view, this would amount to pre-empting the decision to be rendered by the Small Causes Court in the cross-suits filed by the appellant and IDBI,” the court said.

Counsel For Petitioner: Shobha Jagtiani

Counsel For Respondent: Akhileshwar Sharma

Case Title: T.V. Patel Pvt. Ltd. Versus Dy. Commissioner of Income Tax

Case No.: Income Tax Appeal No.699 Of 2002

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