V.K. Singhal, J. - (1.) THE following question of law has been referred by the Income-tax Appellate Tribunal under Section 256(1) of the Income-tax Act, 1961, in respect of the assessment year 1975-76 : "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that since the award was not made the rule of court in the year under consideration, the interest amount of Rs. 29,312 had not accrued to the assessee and could not be brought to tax in its hands ?"
(2.) THE brief facts of the case are that while examining the balance-sheet submitted by the assessee, a note was given by the assessee's auditor that a sum of Rs. 1,28,296.24 receivable from Messrs. Podar Trading Company (P.) Ltd. in respect of the debt Rs. 67,450 and interest and compensation of Rs. 60,880. THE company has referred the matter for arbitration and as per the award dated October 28, 1974, of the arbitrator, Shri A. A. Kala, the company was to receive Rs. 92,415.67 as principal amount and Rs. 35,880.37 as interest up to the date of award. THE company had approached the court of the District Judge of Jaipur for the decree of the amount. THE party has filed objections in respect of the award by the arbitrator. As the matter is pending in the court, the company has not made provision for the interest. On the basis of the above note, the Income-tax Officer called upon the assessee to file a detailed reply as to why the balance interest amount made in the books of account of Messrs. Podar Trading Company (P.) Ltd., namely, Rs. 25,036 due to the assessee under the aforesaid award as also the amount of Rs. 4,276 of the future interest accrued to the assessee under the said award for the year under consideration be not added to its income. Out of the total sum of Rs. 35,881 which was given in the award only Rs. 10,845 was accounted for in the books of account and the balance amount was not shown as the amount receivable. The Income-tax Officer, besides this amount of Rs. 25,036, added interest on the total amount of Rs. 1,28,216 from October 7, 1974, to December 31, 1974, at the rate of ten per cent. and the amount of Rs. 4,276 in respect of interest accrued was also added. In the appeal preferred before the Commissioner of Income-tax, it was submitted that the award has not become final and the appeal has not become final against Messrs. Podar Trading Company (P.) Ltd. in the court of law and since the award was ex parte, as such interest has not accrued to the assessee. Since the amount has not arisen or accrued or actually due, therefore, it cannot be treated as income. The Commissioner of Income-tax (Appeals) found that the principle involved in respect of accrual of the income is that the assessee should acquire the right to receive that income, and whenever there is a dispute in respect of right to receive, the amount crystallises not at the moment the claim is first made but at the moment it is decreed or the claim is admitted. It was observed that the claim of interest would arise from the date of the award of the arbitrator and the fact that the award was not accepted and further appeal has been filed is not material. The assessee was found to be maintaining the mercantile system of accounting. The appeal was accordingly dismissed. In the second appeal before the Tribunal, it was found that according to the award dated October 28, 1974, of the sole arbitrator, Mr. Kala, the assessee-company was to receive Rs. 92,415 by way of principal trade debt and Rs. 35,880 as interest up to the date of the award. The arbitrator further directed that the aforesaid amount awarded by him to the assessee against the aforesaid debtor shall carry future interest at the rate of ten per cent. per annum from the date of the award up to the date of the realisation. The said award was filed in the court of District Judge, Jaipur, to make it a rule of the court. The Tribunal found that since the award was given ex parte and the matter is being contested, unless the said award is made a rule of the court and fructifies into a decree executable in the court of law, the assessee has no legal right to proceed for the recovery of the amount mentioned in the award and it is piece of paper and nothing more and, therefore, the addition of interest of Rs. 29,312 was deleted. The assessee is carrying on the business and in the course of its business activities, certain dues were payable by Messrs. Podar Trading Co. (P.) Ltd. The matter was referred to the arbitrator. The arbitrator has mentioned in the award that a sum of Rs. 92,415.67 was due from Messrs. Podar Trading Company (P.) Ltd. against the supplies of soapstone made to them and this amount was admitted by them. There was an arbitration earlier in which Shri B. L. Ajmera, Chartered Accountant, was directed to reconcile the accounts which was duly complied with. There was an agreement between the assessee and Messrs. Podar Trading Company (P.) Ltd. that, in case of any dispute, the matter would be referred to arbitration. In the proceedings before the arbitrator. None appeared on behalf of Messrs. Podar Trading Company (P.) Ltd. and it is mentioned that initially there was a claim for a different figure but Messrs. Podar Trading Company (P.) Ltd. agreed in the earlier proceedings that a sum of Rs. 92,415.67 was payable and sheet F of the paper book before the arbitrator for that purpose was relied upon. It has not been stated as to what has happened in the proceedings before the District Judge, Jaipur, where the matter was challenged by Messrs. Podar Trading Company (P) Ltd. Under law, unless an award is made a rule of the court, it cannot be enforced. The amount which accrues or arises or is due can be said to be income under Section 5 of the Income-tax Act. The income cannot be said to have accrued under an award unless it is made a rule of the court and, therefore, the Income-tax Appellate Tribunal was justified in coming to the conclusion that the award in respect of interest which had accrued up to the date of award and further payment of interest under the said award cannot be considered to be income accrued unless it is made a rule of the court. A different position may arise in a case where the interest was payable otherwise and in that case if the accounts are maintained on mercantile basis, then the interest could be deemed to accrue but if the interest is under an award, then the income would be considered to have accrued or arisen only when it is made a rule of the court. This matter pertains to the assessment year 1975-76 and by this time it must have become a rule of the court and a final decree must have been passed. It will be for the Income-tax Officer to get the information from the assessee and assess in the year in which it has been made a rule of the court.
(3.) UNDER these circumstances, we are of the view that the Income-tax Appellate Tribunal was justified that unless the award is made a rule of the court, the interest amount of Rs. 29,312 cannot be said to have accrued to the assessee and could not be brought to tax in its hands in the relevant assessment year.;