A. Introduction

The words ‘accrues’ and ‘arises’ never stop showing their significance in the tax life in India. Their placement in section 5 which has been kept largely virgin since its inception is one of the reasons for this. The meaning of the above words as given in the celebrated case of E.D. Sassoon & Co. Ltd. v. CIT, [1954] (SC) continues today with full vigour. In a recent decision in the case of T.V. Patel (P.) Ltd. v. DCIT, the Hon. Bombay High Court had to decide on accrual of disputed rent in an eviction case. In this connection of what constitutes accrual or arisal, the High Court applied the principles adumbrated in E.D. Sasson & Co. It also looks like the High Court used the analysis in a Book titled as “Decoding Section 5” authored by H Padamchand Khincha & KK Chythanya published by Oak Bridge in 2018.

B. Relevant facts of the case:

1. The Appeals related to the assessment years 1986-87, 1987-88, 1988-89, 1989-90, 1990-91, 1991-92 and 1993-94. The Appeal related to AY 1986-87 was considered as the lead matter.

2. A sub-lease agreement for an annual lease rent of Rs. 3.42 lakhs was entered by the assessee and the IDBI on 22.04.1980. On receiving the aforementioned annual lease rent, the Assessee included it in its income return for the AY 1981–82 under the head "Income from Other Sources". The assessee and the IDBI were in disagreement about a number of purported breaches that IDBI had made in the FY 1980–81 fiscal year. Due to this, the assessee ended the sublease agreement on 14.09.1981, and proceeded to reject the rent from IDBI following the termination.

3. IDBI filed a Declaratory Suit in the Small Cause Court in 1981and on 13-10-1981 obtained injunction against the assessee from terminating the sub-lease agreement.

4. On 19-3-1984, the Revenue issued a garnishee notice to IDBI u/s 226(3) of the IT Act with respect to outstanding tax arrears of the Assessee directing IDBI to pay the rent to the IT department. The assessee informed the revenue vide letter dated 16-6-1984, that since the sub-lease agreement had been terminated, there was no rent due and payable by IDBI to the assessee and, consequently, the garnishee proceedings are illegal. The copy of the letter was also furnished to the IDBI.

5. The assessee by its letter addressed to IDBI, reiterated the termination and requested that the 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 assessee terminating the agreement.

6. In1984, the assessee filed a suit for eviction against IDBI and claimed various reliefs, including compensation for wrongful use and occupation of the flats wherein the Small Causes Court on an application made by the IDBI allowed IDBI to deposit the lease rent in Court. However, the assessee did not withdraw any amount, despite a liberty granted in this regard. The Hon’ble Bombay Court notes at para 7 that the suits filed by IDBI, and the Assessee were pending even on the date of the decision.

7. In the said assessment order, the AO noted the submissions of the Assessee that since the sub lease agreement with the IDBI was terminated and a suit was filed against it, no amount was due from IDBI as lease rent. Therefore, question of taxing the same does not arise. The AO, however, rejected the said contention on the ground that sub lease agreement existed for the relevant AY 1986-87 for the reason that the Assessee itself has admitted that it had filed a suit against the IDBI for termination of sub-lease agreement and, the matter was therefore sub-judice.

8. Consequently, the AO passed an assessment order on 20-3-1989 under section 143 read with section 148 wherein the rent on account of sub-lease agreement of the assessee with IDBI was added as income of the assessee.

9. The Commissioner (Appeals) and Tribunal confirmed the addition made by the Assessing Officer. Aggrieved by the order of the Tribunal, the Assessee filed an appeal u/s 260A of the IT Act before the Hon’ble High Court.

C. Analysis & Ratio laid down by the Hon’ble High Court after considering the submissions made by the respective parties:

1. After considering the submissions made by the counsels of the both the parties, the Hon’ble Court framed the issue as to whether the lease rent of Rs. 3,42,720/-can be said to have accrued to the Assessee in the assessment year 1986-87?

2. The Court analysed the provisions of Section 56 of the Act which dealt with 'Income from other sources' and provides for charging to income tax, income of every kind which is not chargeable for income tax under any of the heads specified in Section 14, items A to E.

3. The Court considering the fact that the Assessee is a Company and is governed by the Companies Act, 1956 (now Companies Act, 2013) noted that the Assessee maintained its books of accounts on mercantile basis.

4. Section 5(1)(b) of the IT Act provides for scope of total income to include all income which "accrues" or "arises" or "is deemed to accrue or arise" in India during such year. The Court interpreted the meaning of the words 'accrue' or 'arise' in Section 5(1)(b) of the IT Act in paragraph 19 as under:

19. The words 'accrue' or 'arise' have different meanings attributed to them.  While the former connotes the idea of a growth or accumulation, the latter connotes the idea of crystallization of the former into a definite sum that can be demanded as a matter of right. For determining the point of time of accrual, two factors are relevant. The first is a qualitative factor and second is a quantitative factor. The qualitative factor is relatable to the terms of the agreement or conduct of the parties for determining when the legal right to receive income emerges. The quantitative factor is relatable to the exact sum in respect of which the qualitative factor of legal right to receive is applied. These two factors have no order of priority between them. When both converge, there is a legal right to receive a certain sum of money as income. Such convergence determines a point of time of accrual. In order that income may be said to have accrued at a particular point of time, it must have ripened into a debt at that time, that is to say, the Assessee, should have acquired a right to receive payment at that moment, though the receipt itself may take place later. There must be a debt owed to the Assessee by somebody at that moment or, as is otherwise expressed, "debitum in praesenti solvendum in futuro". Until it is created in favour of the Assessee, the debt due by somebody, it cannot be said that he has acquired a right to receive to any income accrued to him. There is also a difference between "accrue or arise" or "earned" Earning the same is not the same as accrual of income but it is a stage anterior to accrual of income. A person does not have a legal right to receive the income by merely earning of income. Although, earning of income is a necessary pre-requisite for accrual of income, mere earning of income without right to receive the same does not suffice. A person may be said to have "earned" his income in the sense that he has contributed to its production by rendering service and the parenthood of the income can be traced to him but in order that the income that may be said to have "accrued" to him an additional element is necessary that he must have created a debt in his favour. The phrase "accrue or arise" has been the subject matter of judicial debate from inception which we now propose to deal with some of them.

5. Eventually, in paragraph 29, reiterating the above analysis, the following was stated;

29. The principle of law as laid down in the aforesaid decisions is to the effect that if the matter is pending before the judicial forum and pending adjudication if certain amount is deposited in the said judicial forum or the amount is allowed to be withdrawn by the party, the consistent view in such a scenario taken by the Courts is that till the case is decided finally by the judicial forum, it cannot be said that the Assessee has acquired a right to receive the income for the purposes of Section 5 of the Income-tax Act, 1961.

6. Interestingly, in a book titled as “Decoding Section 5” authored by H Padamchand Khincha & KK Chythanya published by Oak Bridge in 2018 at Chapter 11, the Learned Authors have stated as under:

11.3. There is a difference between earn' and `accrue. Earning of income is  not the same as accrual of income. Earning of income is necessarily a stage anterior to accrual of income. For, by mere earning of income, a  person does not have a legal right to receive the income. Although  earning of income is a necessary prerequisite for accrual of income, mere  earning of income without the right to receive the same does not suffice. The Supreme Court in E.D. Sassoon & Co. Ltd. v. CIT,) while recognising the importance of earning of income, held that  earning of income is not the same as accrual of income. The Supreme  Court observed that the concept of earning of income cannot be divorced  from that of income accruing to the assessee and if income has accrued  to the assessee it is certainly earned by him in the sense that he has  contributed to its production or the parenthood of the income can be  traced to him. The Supreme Court however added that in order that the income can be said to have accrued to or earned by the assessee it is not only necessary that the assessee must have contributed to its accruing of arising by rendering services or otherwise but he must have created a debt in his favour. A debt must have come into existence and he must have acquired a right to receive the payment. Unless and until his contribution or parenthood is effective in bringing into existence a debt or a right to receive the payment or in or in other words a debitum in prasenti, solvendum in future, it cannot be said that any income has accrued to him. The Supreme Court concluded that the mere expression "earned" in the sense of rendering the services etc. by itself is of no avail. Thus, it may be said that earning is a fact whereas accrual is a legal right founded on the said fact.

[…]

11.14. For determining the point of time of accrual, two factors are relevant. The first is a qualitative factor and second is a quantitative factor, The qualitative factor is relatable to the terms of the agreement or conduct of the parties for determining when the legal right to receive income emerges. The quantitative factor is relatable to the exact sum in respect of which the qualitative factor of legal right to receive is applied. These two factors have no order of priority between them. In other words, it is not correct to say that one follows the other. When both converge, there is a legal right to receive a certain sum of money as income. Such convergence determines the point of time of accrual.

7. It may be noticed that the observations of the Hon’able Court in paragraph 19 are to a significant extent taken from aforesaid paragraphs 11.3 and 11.14 of the above book.

8. The Hon’ble Court also relied on the following decisions:

♦ E D Sassoon & Co. Ltd. v. CIT [TS-1-SC-1954-O] wherein it was held that for the purpose of section 5 the aforesaid difference between the words 'accrue' and 'arise' is not relevant as both are considered to convey the same meaning.

♦ CIT v. Ashokbhai Chimanbhai 1965 AIR 1343, wherein the Apex Court observed that when the right to receive the income becomes vested in the Assessee, it can be said to have accrued or arisen.

♦ CIT v. Bharat Petroleum Corpn. Ltd. [TS-5901-HC-1990(Calcutta)-O] wherein it was observed that amount can accrue or arise to the Assessee if the Assessee acquires a legal right to receive the amount or, conversely, the said amount has become legally due to the Assessee from the Assessee's debtor. The mere raising of claim or bill does not create any legally enforceable right to receive the same.

♦  CIT v. Smt. Vimla D. Sonwane [TS-5037-HC-1992(Bombay)-O] wherein it was held that the right to receive the agreed lease money was in jeopardy because of pendency of proceedings for fixing of standard rent in a Court of law. There was neither factual accrual nor deemed accrual.

♦ Pal Properties (I) (P.) Ltd. v. CIT [TS-6068-HC-2001(Delhi)-O] wherein it was held that the mesne profits, which are yet to be determined, do not come within the purview of an accrued income for the purposes of Section 4 and 5 of the Income-tax Act till the judgment in regard to civil dispute was rendered in this regard

♦ P. Mariappa Gounder v. CIT [1998] 3 SCC 552 wherein it was held that it is only when the trial court determined the amount of mesne profit, the right to receive the same is accrued in the favour of the assessee and the liability became ascertained only on the date of the trial court determining mesne profit and not earlier.

♦ Godhra Electricity Ltd. v. CIT [TS-5046-SC-1997-O] wherein it was held that even though the Assessee Company was following mercantile system of accounting and had made entries in the books regarding enhancement charges, no real income accrued to the Assessee company in respect of those enhanced charges on account of various suits filed and pending on the right of the Assessee company to enhance the charges.

♦ CIT v. Hindustan Housing & Land Development Trust Ltd. [TS-3-SC-1986-O] Trust wherein it was held that it was on the final determination of the amount of compensation that the right to such income would arise or accrue and, till then, there was no liability in presenti in respect of the additional amount of compensation claimed by the owner of the land.

♦ The Court also relied on the following decisions which held that in case of civil disputes pending before the Court, no income accrues till the dispute is finally adjudicated:

♦ DSL Enterprises (P.) Ltd. v. ITO [2013] (Bom.)

♦ Pr. CIT v. Rajdarbar Heritage Venture Ltd. [2022] (Delhi)

♦ CIT v. Sarvatra Road Runners (P.) Ltd. [TS-5237-HC-2008(Delhi)-O]

♦ FGP Ltd. v. CIT [TS-71-HC-2008(BOM)-O]

♦ CIT v. Sushil Thomas Abrahum [TS-5471-HC-2018(Kerala)-O]

9. Eventually, the court summarized that common thread running through all the above judicial pronouncements is that the time of accrual for taxing income gets postponed till the dispute is adjudicated by the Civil Court. Considering the facts of the case and the pending civil suits, the court held that it cannot be said that the Assessee is entitled to receive a sum of Rs. 3,42,720/- under the sub-lease agreement with IDBI or a right is vested in the Appellant to that sum. The Court rejected the contention of the Revenue 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 said ascertained sum is accrued to the Appellant. The Court held that 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.

10. The Court further observed that one cannot tax the amount having not accrued to the Assessee and not received by an Assessee on an assumption and presumption that in future the Small Causes Court will at least order the said sum in favour of the Appellant. 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 as and when the Court passes a final decree that one can say that right to receive the sum decreed by the Small Causes Court as having accrued to the Appellant. Till then, the court held, the right to receive any sum by the Appellant is in jeopardy and subjudice before the Small Causes Court.

D. Conclusion:

The understanding of the words ‘accrues’ and ‘arises’ has passed the test of time. The principle of convergence of qualitative factor and quantitative factor being a pre-condition of accrual of income as stated in the book “Decoding Section 5” has received the imprimatur from the court.