The ruling by the Bombay High Court clarifies that it’s impermissible to levy taxes on an amount that the assessee hasn’t accrued or received, based solely on the assumption that the Small Causes Court might eventually favour the appellant or assessee by ordering such a sum.
Justice G.S. Kulkarni and Justice Jitendra Jain noted that the determination of the sum owed by IDBI to the appellant, as requested in the appellant’s suit, falls under the jurisdiction of the Small Causes Court.
They stated that only upon the Court issuing a final decree can it be concluded that the appellant has gained the right to receive the sum decreed by the Small Causes Court.
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Until such a decree is made, the appellant’s entitlement to any amount remains uncertain and subject to the Small Causes Court’s ongoing deliberations.
The appellant/assessee, holding the lease from Neville Wadia Pvt. Ltd., initially engaged Bombay Builders to construct a Cumballa Hill building and sell 30 flats at an agreed price.
However, through a tripartite agreement on April 22, 1980, IDBI replaced Bombay Builders as the sub-lessee. The appellant then sub-leased the Cumballa Hill property in Mumbai to IDBI for an annual lease rent of Rs. 3,42,720.
This rent was received by the appellant and declared as lease rent of the same amount in its income tax return for the assessment year 1981–82, categorized under “Income from Other Sources.”
Disputes between the appellant and IDBI arose due to alleged breaches by IDBI, resulting in the appellant terminating the sublease agreement. Following this, the appellant declined to accept rent from IDBI.
In response, in 1981, IDBI filed a declaratory suit in the Small Cause Court and secured an injunction against the appellant’s termination of the sublease agreement.
Subsequently, the department issued a garnishee notice to IDBI under Section 226(3) of the Income Tax Act concerning the appellant’s outstanding tax arrears. This notice directed IDBI to pay the rent directly to the Income Tax Department.
The appellant informed the department that, given the termination of the sub-lease agreement, no rent was owed or payable by IDBI to the appellant. Consequently, the appellant argued that the garnishee proceedings were unlawful.
A copy of this letter was sent to IDBI accompanied by a cover letter. Additionally, the appellant directly addressed IDBI, reiterating the termination of the agreement and explicitly advising against making any payments to the income tax department in response to the garnishee notice.
Despite this, IDBI deposited the stipulated amount, as per the sub-lease agreement, with the Income Tax Department, even after the appellant had terminated the agreement.
Subsequently, in 1984, the appellant filed an eviction suit against IDBI, seeking various remedies, including compensation for wrongful use and occupation of the flats.
An assessment order under Sections 143 and 148 for the assessment year 1986–87 included the rent from the sub-lease agreement, amounting to Rs. 3,42,720, as the appellant’s income.
The appellant argued that the sub-lease agreement had been terminated in 1981, with a suit for eviction already filed in the Small Cause Court. Additionally, IDBI had filed a suit to prevent the appellant from terminating the agreement and dispossessing IDBI.
Both these lawsuits are still awaiting adjudication in the Small Causes Court. Therefore, the appellant asserted that no income had accrued under the sub-lease agreement between the appellant and IDBI.
The department argued that regardless of the outcome of the pending suit in the Small Causes Court, IDBI would still be ordered to pay Rs. 3,42,720 annually for using the appellant’s property, as the property remains in IDBI’s possession.
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The court observed that the department’s contention was flawed. It stated that the department’s assertion—that the Small Causes Court would invariably order no less than Rs. 3,42,720 to the appellant, irrespective of the outcome of the civil suits—was incorrect. Consequently, the court rejected the notion that the specified sum had accrued to the appellant.
“We believe this would equate to anticipating the judgment that the Small Causes Court will deliver in the counter lawsuits filed by both the appellant and IDBI,” stated the court.
| Case Title | T.V. Patel Pvt. Ltd. Versus Dy. Commissioner of Income Tax |
| Citation | Income Tax Appeal No.699 Of 2002 |
| Date | 04.12.2023 |
| Counsel For Petitioner | Shobha Jagtiani |
| Counsel For Respondent | Akhileshwar Sharma |
| Bombay High Court | Read Order |
