TaxTMI 
TaxTMI 
2002 (2) TMI 44
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....78, was liable to tax on accrual basis for the assessment year 1979-80? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the interest accrued from day-to-day as a result of supplementary agreement and as such, the same was exigible to tax as income for the assessment year 1979-80? (3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that giving up of interest on the ground of commercial expediency was not justified as no direct or indirect benefit had accrued to the assessee? For the assessment year 1980-81--at the instance of the Revenue: (1) Whether, the Appellate Tribunal has not erred in law and on facts in holding that no income could be said to be accrued to the assessee as the interest would start accruing from July 1, 1979, i.e., after the end of the accounting year? (2) Whether, the finding of the Tribunal that the interest could not be said to be accrued to the assessee during the accounting period in question and hence, question of relinquishment of any right does not arise is correct in law?" In Income-tax Reference No. 75 of 1987 (w....
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.... The assessee--Sarabhai Chemicals (P.) Ltd. (now known as Sarabhai Holdings (P.) Ltd.) had filed its return on June 26, 1979, declaring a total income of Rs. 772 under the head business income for the assessment year 1979-80, and for the assessment year 1980-81, it had filed return on September 27, 1980, declaring a loss of Rs. 17,345. The assessee was following the mercantile system of accounting at the relevant time. In response to the notice under section 143(2) of the Act, the assessee had submitted that, with effect from February 28, 1977, the industrial undertaking of Sarabhai Chemicals and business activity of Sarabhai Common Services Division which was a unit of Sarabhai Chemicals were transferred by it to its subsidiary Elscope (P.) Ltd., which, in turn, after four months, transferred them to Ambalal Sarabhai Enterprises Ltd., which was the subsidiary of Elscope (P.) Ltd. The said agreement was made on February 28, 1977, which was amended by the supplemental agreement dated March 4, 1977 and a deed of assignment came to be executed on June 28, 1977. The assessee effected the transfer of the industrial undertaking and business of Sarabhai Chemicals Division and Sarabhai Com....
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.... view that, in the assessee's case, there was a written contract which was sought to be modified by the resolution dated June 30, 1978 by which date the interest for the whole year had already accrued to the assessee. It was observed that it was not the case of the assessee that the vendee-company had gone into liquidation or had no assets from which the recovery could be effected. The Income-tax Officer further held that the assessee had relinquished the interest without any commercial consideration and since the two companies were closely related, it was a case of collusion to evade tax liabilities, and, therefore, interest on accrual basis was taxable in the hands of the assessee. The Income-tax Officer, accordingly, made a draft order computing the total income of the assessee at Rs. 66,29,236 on the count of accrual of interest on the deferred consideration and also ordered to charge interest under section 217 of the Act as well as issued notices for default under section 273 and section 271(1)(c) of the Act. The Inspecting Assistant Commissioner of Income-tax, to whom this draft order was forwarded, issued directions under section 144B(4) of the Act, after taking into cons....
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....at the vendee, Elscope (P.) Ltd., was a wholly owned subsidiary of the assessee and that the facts, figures and circumstances, mentioned in paragraph 13 of the order, highlighted the fact that the transaction could not be regarded as entered into in the normal course and at arm's length. It was observed that the business consideration put forth by the assessee was not actually specified beyond saying that the unsecured loans were offered to be secured. The appellate authority held that the talk regarding purchase price was merely an eye-wash and that it was obvious from the assessee's letter dated January 6, 1984, that the vendee far from offering securities for paying money in cash to the assessee merely furnished secured bonds of Ambalal Sarabhai Enterprises Ltd. to whom it had transferred the undertaking purchased from the assessee. These bonds carried interest of 11 per cent and were redeemable in 1991 or subject to some conditions in 1987. It was observed that they were mortgagable but since they carried interest at 11 per cent only and were not redeemable before 1987, the market price quoted was about two thirds of the face value. Thus, in the process, the assessee-company ha....
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.... by section 215, if it had paid Re. 1 advance tax on the basis of the estimate, but is not covered by that section, because, the advance tax paid is "nil" in pursuance of the "nil" estimate filed would lead to absurdity. He relied on the decision of the Bombay High Court in Bombay Burma Trading Corporation Ltd. v. CIT [1984] 145 ITR 793, in which it was held that the case having "nil" income from salary chargeable under the Act would be covered by dictate of the law that salary income chargeable was less than Rs. 7,500. Reliance was also placed on the decision of the Madras High Court in Addl. CIT v. Brakes India Ltd. [1979] 118 ITR 820 in this regard and the contention of the assessee that "nil" estimate of advance tax rules out applicability of section 215, was rejected. It was observed that levy of interest under section 215 of the Act was almost automatic unless and until the assessee was able to show that his nil estimate at the time of filing was the correct estimate. The Commissioner of Income-tax (Appeals) also observed that the element of consciousness for wrong estimate is needed for levy of penalty under section 273 and not for levy of interest under section 215. It was ....
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....unting year as the interest accrues from day-to-day." Considering the alternative contention of the assessee that if the interest had accrued, that income should be excluded from chargeability on the ground of commercial expediency, the Tribunal held that there was no material for reaching to a conclusion that the income from interest was given up on the ground of commercial expediency. The only ground that was placed before the Tribunal was that the unpaid purchase price which was unsecured had become secured under the revised mode of payment. The Tribunal held that this aspect did not carry the matter anywhere. The vendee Elscope (P.) Ltd. was a subsidiary of the assessee and its entire shareholding was owned and controlled by the assessee. The security which was offered in terms of the secured debentures of Ambalal Sarabhai Enterprises Ltd. to whom the under taking was transferred by Elscope (P.) Ltd. was again a subsidiary of Elscope (P.) Ltd. Therefore, the offering of secured debentures to cover the unpaid purchase price would not give some added commercial benefit to the assessee which otherwise was secured in view of its position as the sole shareholder of its fully owne....
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....ssioner of Income-tax (Appeals) confirmed the addition of Rs. 55,67,750 on the same count for the assessment year 1980-81 by his order dated February 29, 1984. The levy of interest under section 215 was also confirmed in respect of the said assessment year. In appeal, the Tribunal held in paragraph 20 of the order that there was a material distinction between the facts that were obtained in the earlier year i.e., assessment year 1979-80 and in the assessment year 1980-81. It observed that the material difference was caused by the assessee's resolution dated June 30, 1978, under which the original agreement stood modified. It was held that, as a result of the said resolution, no income could be said to have accrued to the assessee as the interest was to start accruing from July 1, 1979, i.e., after the end of the accounting year from June 1, 1978 to July 30, 1979. Moreover, since there was no accrual of income at all, there could arise no question of relinquishment of any right to receive the income. It was held that the reduction of the tax liability was a consequence of the modified arrangement, as per which, the income did not accrue during the said accounting period relevant ....
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....t, held that, while filing the "nil" estimate of advance tax on December 14, 1978, the assessee had full knowledge of interest income of Rs. 66,29,236 which had already accrued and also knew that it could not forgo the income that had already accrued by passing a resolution on a subsequent date. The order of penalty was, therefore, confirmed. The assessee appealed against the order of the Commissioner of Income tax (Appeals) confirming the penalty under section 273(2)(a) of the Act before the Tribunal and the Tribunal, concluding that interest was payable to the assessee from March 1, 1977, by Elscope (P.) Ltd. in pursuance of the agreements and the deed of assignment, and observing that the case of Packart (P.) Ltd. in which penalty imposed under section 273(2)(a) of the Act was deleted, stood on a different footing because, in that case, the amount of addition on account of accrual of interest in the quantum proceedings was set aside and the matter was restored back to the Income-tax Officer and was pending, held that the "nil" estimate filed by the assessee on December 14, 1978 was, prima facie, untrue within the knowledge of the assessee and that the penalty was, therefore, ....
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....t the assessee had failed to offer any bona fide and satisfactory explanation in the matter, holding that the assessee had not disclosed fully and truly all the material facts necessary for its assessment and had concealed the particulars of its income from interest (of Rs. 66,29,236), which had accrued on the deferred sale consideration in respect of the said transfer. Penalty of Rs. 55 lakhs was thus imposed on the assessee under section 271(1)(c) of the Act. The assessee appealed against the aforesaid penalty order and the Commissioner of Income-tax (Appeals), Baroda, by his order dated January 8, 1990, dismissed the appeal, holding that no justifiable explanation in support of its claim that the income of interest had not accrued during the said accounting year, was given by the assessee, and that the assessee's case fell within the ambit of Explanation 1 to section 271(1)(c) of the Act. It was observed that the supplemental agreement indicated that interest was considered payable. It was observed that the agreements subsequent to the resolutions dated February 25, 1977 and March 3, 1977 indicated that interest was considered payable and that it was only at the fag end of th....
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....a view to nullify the accrual of interest income, which had really accrued on the basis of the agreement. It was also held that Elscope (P.) Ltd. did not take any steps at all to furnish any security pursuant to the said mutual agreement made in terms of the resolution dated June 30, 1978, in which it was mentioned that the security should be furnished to the satisfaction of the assessee in respect of the unpaid purchase price. Referring to the additional evidence in the form of the earlier resolutions dated February 25, 1977 and March 3, 1977, the Tribunal observed that they did not in any manner support the contention of the assessee about non-accrual of the income up to June 30, 1978 by virtue of these resolutions, but they, on the contrary, destroyed the reliability and veracity of the submissions made in the quantum proceedings. It was also held that the rights of the contracting party were governed by the terms of the agreement and the contract executed between them and the prior resolutions dated February 28, 1977 and March 3, 1977 could not override the specific terms of the contract. In respect of the resolution dated February 25, 1977, after perusing the original minut....
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.... accrue under the mode of payment earlier stipulated in the deed of assignment. It was further argued that, in the event the court comes to the conclusion that the interest income did accrue during the said accounting year from July 1, 1977 to June 30, 1978, it should be held that the income so accrued on mercantile basis of accounting was given up by the assessee for valid consideration which was commercial expediency. The assessee wanted to reorganise its business and this fact was recorded even in the agreements and deed of assignment and it is not as if the arrangements were made as a device to evade taxes. The assessee wanted to put more capital in the hands of its subsidiary Elscope (P.) Ltd., and there were further transactions between Elscope (P.) Ltd. and its own subsidiary, and all these transactions were genuine and in reality, entered into as per the scheme of reorganisation. It was submitted that, under the original agreement and the deed of assignment, there was no mention about any security being furnished in respect of the outstanding amount payable by Elscope (P.) Ltd. to the assessee, while in the proposal dated June 15, 1978 sent by Elscope (P.) Ltd. to the asses....
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.... to substantiate his explanation during the assessment proceedings which fell under sub-clause (B) to Explanation 1 and which, in turn, attracted the provisions of the proviso under which it could be shown that the belief of the assessee was bona fide in which event, the Explanation would not apply and no presumption could be raised. It was also argued that all the material particulars having bearing on the computation of the assessee's income that is said to have accrued by way of interest on deferred payment were furnished during the proceedings in the form of agreements, the deed of assignment, notes in the balance-sheet showing the transaction, reference to the transaction in the context of "nil" capital gains, etc., and it is on the basis of the material which was already adduced that the department came to the conclusion that interest had accrued for the assessment year 1979-80. As regards the reference arising from the order imposing penalty under section 273(2)(a) of the said Act which is the subject-matter of Reference No. 220 of 1995, it was argued that when "nil" estimate was filed by the assessee in response to the notice under section 210 of the said Act, it had no ....
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....nation is unconvincing and one which deserves to be rejected, the Department can reject it and draw the inference that the amount represents income either from the sources already disclosed by the assessee or from some undisclosed source. (c) Decision in the case of H.M. Kashiparekh and Co. Ltd. v. CIT [1960] 39 ITR 706 (Bom) was cited for the proposition that it was the real income of the assessee-company for the accounting year that was liable to tax and that the real income could not be arrived at without taking into account the amount forgone by the assessee. The principle of real income is not to be so sub-ordinated as to amount virtually to a negation of it when a surrender or con cession or rebate, in respect of managing agency commission, is made, agreed to or given on grounds of commercial expediency, simply because it takes place sometime after the close of an accounting year. The court held that, in examining any transaction and situation of this nature, the court would have more regard to the reality and speciality of the situation rather than the purely theoretical or doctrinaire aspect of it. (d) Decision in the case of CIT v. Calcutta Discount Co. Ltd. [1973] 9....
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....itting to disclose that income. This judgment was rendered by a Bench of three judges of the Supreme Court and was considered in a later judgment of the two-judge Bench of the Supreme Court in CIT v. Smt. P.K. Kochammu Amma [1980] 125 ITR 624 in which, while stating that: "With the greatest respect to the learned judges who decided this case, we do not think, for reasons already discussed, that this decision lays down the correct law on the subject...", it was observed that the said decision was a binding upon the Bench as it was a three judges Bench decision. (g) Decision of the Punjab and Haryana High Court (which was later on reversed by the Supreme Court) in the case of Shiv Parkash Janakraj and Co. P. Ltd. v. CIT [1978] 112 ITR 872, was cited for the proposition that where no interest had actually been paid to the assessee-company, nor had it made any debit entries in its account books and no date was fixed in the agreement of loan regarding the payment of interest, it cannot be said that the income from interest had actually accrued to the assessee even if the assessee-company had adopted the mercantile system of accounting. Reliance on this decision of the Punjab and Hary....
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....ribunal to hold that the dissolution of the firm after transfer of the business was a mere device and not a genuine act of parties. The High Court referring to the decision of the Supreme Court in McDowell's case [1985] 154 ITR 148 held that: "The court nowhere said that every action or inaction on the part of the taxpayer which results in reduction of tax liability to which he may be subjected in future, is to be viewed with suspicion and be treated as a device for avoidance of tax irrespective of the legitimacy or genuineness of the act...". It was held that: "The facts and circumstances which led to McDowell's decision leave us in no doubt that the principle enunciated in the above case has not affected the freedom of the citizen to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspection, within the framework of law, unless the same fall in the category of colourable device which may properly be called a device or a dubious method or a subterfuge clothed with apparent dignity". (i) The decision in the CWT v. Arvind Narottam [1988] 173 ITR 479 (SC) was cited for the proposition that where ....
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....accrued to him. (m) The decision of this court in CIT v. Bharat Machinery and Hardware Mart [1982] 136 ITR 875 was cited to point out that, in a matter where the difference between the returned income and the assessed income had arisen due to the addition made by the Income-tax Officer by an estimate of the gross profits under the proviso to section 145(1), no interest could be charged under section 217(1A) for failure of the assessee to file an estimate under section 212(3A). The court observed that: "In a given set of facts, an assessee may be expected to anticipate on his own even in regard to the estimate which the Income-tax Officer might make in exercise of the powers under the proviso to section 145(1) of the Act in the light of past experience." Confining the ratio to the facts of the case, the court observed that: "There may be innumerable situations such as the one illustrated by us in which the assessee may be required to make an estimate as enjoined by section 212(3A). We do not propose to undertake the exercise of anticipating and enumerating them exhaustively. Suffice it to say the present case does not fall under that category." (m-1) In this context, ....
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....u [1980] 122 ITR 1006 was relied upon for the proposition that the provisions contained in section 271(1)(c) apply only to concealment of "his income"; they do not speak of concealment of such incomes as are includible by a fiction of law in "his income". The High Court upheld the decision of the Tribunal in holding that there was no obligation on the assessee to include in his return of income, the income arising to his wife and minor sons which were includible in his income in terms of section 64 of the Act and the failure of the assessee to do so did not attract the penal provisions of section 271(1)(c) against him. (o) The decision of the Supreme Court in CIT v. Anwar Ali [1970] 76 ITR 696 was cited for the proposition that if there is no evidence on the record except the explanation given by the assessee, which explanation has been found to be false, it does not follow that the receipt constitutes his taxable income. It would be perfectly legitimate to say that the mere fact that the explanation of the assessee is false does not necessarily give rise to the inference that the disputed amount represents his income. It was held that it cannot be said that the finding given in....
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....ent of the assessed income. (p) The decision of this court in Smt. Ramalaxmi Jivraj v. CWT [1982] 138 ITR 731, which was rendered in the context o t provisions o sections 14 and 18 of the Wealth-tax Act, 1957, was cited for the proposition that the penalty was leviable under section 18(1)(a) of the Wealth-tax Act only if it is established that the assessee has, without reasonable cause, failed to furnish the return which he or she was required to furnish in response to a notice given under sub-section (2) of section 14, and that if the assessee's net wealth was not taxable, it would be open to the assessee to contend that the failure to furnish a return could not be said to be without reasonable cause. (q) The decision of the Supreme Court in CIT v. A. Raman and Co. [1968] 67 ITR 11 was referred to for the proposition that avoidance of tax liability by so arranging one's commercial affairs that the charge of tax is distributed is not prohibited. A taxpayer may resort to a device to divert the income before it accrues or arises to him. The effectiveness of the device depends not upon considerations of morality, but on the operation of the Income-tax Act. Legislative injunction....
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.... that this onus is rebuttable. In the said decision, it was also observed that the burden placed upon the assessee is not discharged by any fantastic explanation. Nor is it the law that any and every explanation by the assessee must be accepted. It must be an explanation acceptable to the fact finding body. The ratio of Mussadilal Ram Bharose's case [1987] 165 ITR 14 (SC) was followed in Jeevan Lal Sah's case [1994] 205 ITR 244 (SC) and B.A. Balasubramaniam and Bros. Co.'s case [1999] 236 ITR 977 (SC). (v) The decision of this court in CIT v. Vinaychand Harilal [1979] 120 ITR 752 was cited for the proposition that, normally, the Revenue must establish that the receipt of the amount in question constituted the income of the assessee. The Explanation to section 271(1)(c) of the Act enables the Revenue to discharge this burden of proof laid on it if the condition regarding the returned income being less than 80 per cent of the assessed income is satisfied. But the presumption can be rebutted by the assessee. (w) The decision of the Supreme Court in D.M. Manasvi v. CIT [1972] 86 ITR 557 was cited for the proposition that satisfaction in the very nature of things under section ....
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....ur Finance (P.) Ltd. [1980] 124 ITR 619 was cited for the proposition that if income does not result at all, there cannot be levy of tax. The court followed the decision of the Supreme Court in CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144. (cc) The decision of the Patna High Court in CIT v. Lal Babu [1980] 122 ITR 1006 was cited for the proposition that if the assessee gives a plausible explanation against the additions made to his income, the onus shifts to the department. (dd) The decision of the Gujarat High Court in CIT v. Lakhdhir Lalji [1972] 85 ITR 77 was cited for the proposition that, where the very basis for the penalty proceedings against the assessee initiated by the Income-tax Officer disappeared and when the AAC held that there was no suppression of income by the assessee, the IAC had no jurisdiction to impose penalty under section 271(1)(c) for concealment of income. (ee) The decision of the Patna High Court in CIT v. Nipani Tobacco Stores [1984] 145 ITR 128 was cited for the proposition that the initial burden of proof which lay upon the assessee to prove a negative fact could be said to have been discharged by merely showing a preponderance of proba....
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....acts and agreements entered into by Elscope and Elscope was discharged in respect of such liabilities. On the basis of these documents, learned counsel for the Revenue argued that the transaction between the assessee and Elscope was not a genuine transaction, but Elscope was only made a conduit pipe and merely a technical transfer was effected so that Elscope can, in turn, transfer to its subsidiary the same unit and business and the result was arranged in such a way that Elsco e would gain, which was the gain of the assessee itself, since it was the sole shareholder of Elscope. It was further argued that the resolution dated June 30, 1978 of the assessee did not bring about any valid terms of contract because there was a counter proposal contained in that resolution that Elscope shall furnish security to the satisfaction of the assessee and to that counter proposal, no acceptance was sent by Elscope. Since there was no concluded contract on the aspect of the mode of payment, which was purported to be changed by the proposal dated June 15, 1978 and the resolution dated June 30, 1978, there was no effective substitution of the mode of payment which was stipulated in the agreement....
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....ime, did the assessee claim that interest was to be charged from July 1, 1978, as per the resolution dated February 25, 1977 and the circular resolution dated March 3, 1977, passed by the assessee. It was argued that if the resolutions dated February 28, 1977 and March 3, 1977, really contained the date July 1, 1978, or were worded the way they now appear to be worded, the date of July 1, 1978, could never have been missed in the supplemental agreement dated March 4, 1977, which was specifically entered into, in the context of the interest payable by the vendee, since the stipulation was earlier left out in the agreement dated February 28, 1977. It was submitted that since the resolution dated June 30, 1978, was not a genuine resolution because it was intended to evade tax and, therefore could not have been a bona fide act on the part of the assessee and that no charge was created pursuant to the security which was offered and further that, as there was incongruity in the stand before the quantum proceedings in which the date July 1, 1978, never occurred and the stand taken up in the penalty proceedings, in which it was suggested that the interest was to be charged from July 1, 197....
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....to claim that the same should not be included in the total income for the relevant year or that the amount should be allowed deduction as business expenditure. (b) The decision in CIT v. Shiv Prakash Janak Raj and Co. (P.) Ltd. [1996] 222 ITR 583 (SC) was relied upon for the proposition that the concept of real income cannot be employed so as to defeat the provisions of the Act and the Rules. It was held that there was no contradiction or inconsistency between the decision in CIT v. Birla Gwalior (P.) Ltd. [1973] 89 ITR 266 (SC) and Morvi Industries Ltd. v. CIT [1971] 82 ITR 835 (SC). In the former case, the important fact found was that the money became due to the assessee not at the end of the accounting year, but on the date the managed company made up its accounts. (c) The decision of this court in CIT v. Gordhanbhai Jethabhai [1994] 205 ITR 279 was cited for its proposition that interest becomes payable by the assessee as a result of operation of law and it is not made dependent upon the discretion of the Income-tax Officer. It was held that the discretion which is conferred upon the Income-tax Officer is not with respect to determination of payability of interest, but w....
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.... interest assessed if he does not deny his liability to be assessed to such interest under section 215 of the Act. (g) The decision in State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC) was relied upon on behalf of the Revenue for the proposition that the notion of real income cannot be brought into play where income has accrued according to the accounts of the assessee and there is no indication of the assessee treating the amount as not having accrued and that, once accrual takes place, the same cannot be defeated by any theory of real income. It was held that the concept of real income cannot be so used as to make accrued income non-income simply because after the event of accrual, the assessee neither decides to treat it as a bad debt nor claims deduction, but still enters the same with a diminished hope of recovery in the suspense account. Extension of the concept of real income to this field to negate accrual after the amount had become payable is contrary to the postulates of the Act. (h)(i) The decision of the Chancery Division in Dickinson (Inspector Of Taxes) v. Abel [1969] 1 All ER 484 was cited for the proposition that a conditional promise made without valua....
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....d. It was held that the deeming provision of Explanation 1 would operate to conclude that the income had been concealed by the assessee. (k) The decision of the Supreme Court in Gujarat Travancore Agency v. CIT [1989] 177 ITR 455 was cited for the proposition that there is nothing in section 271(1)(a) of the Act which requires that mens rea must be proved before penalty could be levied under that provision. I. Income-tax Reference No. 56 of 1986: On the question whether interest accrued during the accounting year from July 1, 1977 to June 30, 1978, it would be appropriate to refer to the stipulations of the agreement and the deed of assignment, which have a bearing on the question of accrual of interest. By the agreement dated February 28, 1977 (annexure "P" in I.T.R. No. 56 of 1986), the assessee who held the entire issued subscribed and paid-up share capital of the vendee, Elscope, who was the purchaser as mentioned therein, agreed to transfer and assign to the purchaser its industrial undertaking and business of Sarabhai Chemicals Division and the business of Sarabhai Common Services Division as a going concern with effect from March 1, 1977. In paragraph 12 of the agre....
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....o being the same as parties to the principal agreement desire expressly to incorporate and record the same in the said agreement for sale by executing this supplemental agreement for sale to the principal agreement dated the 28th day of February, 1977. (E) The parties hereto are also desirous of varying and altering schedule for the payment of the purchase consideration as set out in the principal agreement in the manner herein provided and, accordingly, the balance of the purchase price shall be payable as under: Rs. 2,00,00,000 payable as and when demanded by the vendor and shall carry interest at such rate as is equal to the rate of interest which the vendor pays to its bankers in the ordinary course of business. (ii) The balance of the purchase price shall be paid by the purchaser to the vendor in eight equal instalments, together with interest thereon at the rate hereinafter provided, the first of such instalments shall be due and payable on 1st October, 1979 and each subsequent instalment shall be due and payable on the first day of October in each consecutive year as under: 12 1/2% to be paid on or before the 1-10-1979 ... 12 1/2% to be paid on or before the 1....
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....d in the deed of assignment. Payment of interest was treated as essence of the contract and as noted above. If the instalments were not duly paid, the rate of interest was to be higher than 11 per cent. per annum and the vendee was in the event of default of payment of instalment bound to pay interest at the rate payable by the vendor to its bankers in the ordinary course of business. These terms regarding mode of payment were never disturbed until the last date of the accounting year ending on June 30, 1978 on which date the assessee passed the resolution dated June 30, 1978, by which it accepted the proposal of its subsidiary Elscope sent on June 15, 1978 and substituted the mode of payment by purporting to shift the date of charging of interest to July 1, 1979. As noted above, in response to the inquiry from the Income-tax Officer in the quantum proceedings, the assessee had produced a letter dated June 15, 1978 of Elscope and its resolution dated June 30, 1978. In the letter dated June 15, 1978 (annexure "F" in I.T.R. No. 56 of 1986), the vendee, Elscope, referring to the deed of assignment dated June 28, 1977 and the deed of conveyance dated February 1978 in respect of the ....
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....was fixed in the contract is to misconstrue the provisions there of despite the express stipulation about the obligation to pay interest which was to be treated as the essence of the contract. When no date is specified in a transaction, which incorporated an obligation of a party thereto to pay interest, it obviously would mean that the date from which the interest is to be paid would be the point of time from when the obligation to pay the outstanding amount starts, and that will be the date from which the creditor's entitlement to recover interest starts. The sale is performed when the seller of goods has transferred the property in the goods to the buyer for a price, with all significant risks and rewards of ownership and no effective control of the goods transferred is retained to a degree usually associated with ownership. A criteria for determining when to recognise the revenue from a transaction involving sale of movables is the time when the seller has transferred the property in the goods to the buyer for consideration. The transfer of property in goods in most cases, results in or coincides with the transfer of significant risks and rewards of ownership to the buyer, unle....
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....count. It was held that forgoing of interest after its accrual will not enable an assessee to claim that the same should not be included in the total income for the relevant year or that the amount should be allowed as deduction by way of business expenditure. The interest on the deferred amount of consideration clearly accrued to the assessee in the instant case on the basis of the terms stipulated between the parties in the deed of assignment. Neither in the principal agreement or the supplemental agreement amending it nor in the deed of assignment dated June 28, 1977, was the date of charging of interest fixed as July 1, 1978. This date did not occur in any of the documents executed between the parties or in any of the correspondence addressed to the concerned income-tax authorities during the proceedings despite the fact that the assessee was called upon to explain non-disclosure of the interest income. It was for the first time on March 9, 1988 that the resolution dated February 25, 1977 and the circular resolution dated March 3, 1977 surfaced when they were furnished with the assessee's reply dated March 9, 1988, in the penalty proceedings initiated against it under sectio....
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....talments will carry simple interest at 11 per cent. per annum with effect from July 1, 1979 on the amount remaining outstanding from time to time. It will be noted that the last mentioned words purported to have been quoted from the deed of assignment in the letter dated June 15, 1978 to the effect that, "continue as unsecured deferred consideration" were not there in the deed of assignment, nor were they incorporated in the supplemental agreement dated March 4, 1977, substituting the mode of payment originally stipulated in the agreement dated February 28, 1977. At the end of the proposal of the vendee, it was mentioned that "mode of payment of the purchase price and the question of security is still under discussion between our company and Ambalal Sarabhai Enterprises (P.) Ltd." to whom the business purchased by this subsi diary from the assessee, was transferred. The vendee wrote "we confirm that we shall provide you the same security or securities similar to the security as may be provided by Ambalal Sarabhai Enterprises (P.) Ltd. in respect of the deferred purchase consideration". Admittedly, the vendee had already executed the deed of assignment on April 25, 1978, in favour o....
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....lue. All these concessions are given to EPL just like that, and for no real consideration." It is clear that the last minute arrangement to ward off the payment of tax on the interest income that had accrued to the assessee during the entire accounting year July 1, 1977 to June 30, 1978 (till the moment the resolution dated June 30, 1978 was passed at 2 p.m.) was made by creating a ground of commercial expediency of getting the debt secured. In fact and reality, neither was there any particular security offered in the proposal nor was there any acceptance of security. A ghost was created to hide the real object of modification of the mode of payment which was to ward off the payment of tax on interest income that already had accrued to the assessee. The contention that there was no loss to the Revenue by relinquishing the accrual, because, if interest were accepted, the assessee on the one hand would have paid tax while on the other, the vendee would have claimed deduction on interest paid, is wholly besides the point. The vendee was a loss-making company and if in principle, such escape route is accepted to be valid, it would be very easy to dodge payment of tax on the accrued ....
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....s liable to tax on accrual basis for the assessment year 1979-80, and that interest had accrued as a result of the supplemental agreement and the deed of assignment on day-to-day basis and was exigible to tax. The Tribunal was right in rejecting the contention that there was commercial expediency for giving up the accrued interest. Questions Nos. 1, 2 and 3 of Income-tax Reference No. 56 of 1986 are, therefore, answered in the affirmative, in favour of the Revenue and against the assessee. There was no challenge levelled against the resolution dated June 30, 1978 on the ground that it was not a genuine resolution. Law permits the con tracting parties to lawfully change their stipulations by mutual agreement and, therefore, the assessee and the vendee had no legal impediment in modifying the terms of their contract. The resolution dated June 30, 1978 accepted the proposal of the vendee as contained in the letter dated June 15, 1978, as is clear from the following words: "The company hereby approve, accept and adopt the following revised mode of payment as contained in the letter No. Elscope/MC dated 15th June, 1978, received from Elscope (P.) Ltd." Though the resolution by ....
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....Machinery and Hardware Mart [1982] 136 ITR 875, set aside the levy of interest under section 215 of the Act. Learned counsel for the assessee, supporting the reasoning of the Tribunal, contended that even if "nil" estimate was filed and "nil" advance tax paid, it would be treated as if no estimate was filed and would attract the provisions of section 217 of the Act and not section 215 of the Act invoked by the taxing authorities and the Tribunal. Moreover, the assessee could not have estimated the advance tax due to complexity in deciding the issue of accrual of interest. As per the provisions of section 215 of the Act, as it stood at the relevant time, it was obligatory on the part of the assessee under section 209A which was then operative, to send an estimate of current income under section 209A(2)(i) of the Act, if the current income of the assessee was likely to be less than the income on which advance tax was payable by him under section 209A(2)(i) of the Act. If, by an order under section 210 as it was operative at the relevant time, the assessee was required to pay advance tax, he had an option to send an estimate of current income by reason of his current income bein....
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....ncome-tax Officer. The Inspecting Assistant Commissioner had confined his directions to the matters falling within his jurisdiction which had bearing on the proposed variation in the income returned and made it clear that he was not issuing any directions in respect of initiation of proceedings on completion of the assessment by the Income-tax Officer. Therefore, there is no substance in the contention, which was not even raised before the Tribunal, that the Income-tax Officer's final assessment charging interest under section 215 of the Act was against the directions of the Inspecting Assistant Commissioner or without jurisdiction. It was perfectly within the jurisdiction of the Income-tax Officer to charge interest under section 215 and add the tax amount worked out, on the facts, in the tax computation. The provisions of section 215, to the extent they are relevant for this case, were as follows: "215. (1) Where, in any financial year, an assessee has paid advance tax under section 209A or section 212 on the basis of his own estimate (including revised estimate), and the advance tax so paid is less than seventy-five per cent. of the assessed tax, simple interest at the rat....
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....das [1965] 57 ITR 149; AIR 1965 SC 1818. The fifth proviso was added to sub section (6) of section 18 retrospectively from April 1, 1952 by reason of which, the Income-tax Officer was invested with the discretion to reduce or waive interest payable by the assessee, as is provided for in sub-section (4) of section 215 of the Act of 1961 read with rule 40. It was held in paragraph 18 of the judgment that there was, at the date of the original assessment, an absolute obligation imposed upon the assessee to pay interest under section 18A(6), but by reason of the retrospective operation given to the fifth proviso added to sub-section (6) by Act 25 of 1953, the Income-tax Officer was invested with the discretion to reduce or waive interest payable by the assessee and this power the Income-tax Officer must, in view of the retrospective amendment, be deemed in law to have possessed on the date on which the order of the assessment was made in this case, It was also held that his power to reduce or waive interest could be exercised only in the prescribed cases within the limits of the authority conferred upon him. Thus, the obligation to pay interest flows from section 215(1) and it did not ....
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....ctification under section 154 of the Act. In the process, the court clearly observed that: "In a given set of facts, an assessee may be expected to anticipate on his own even in regard to the estimate which the Income-tax Officer might make in exercise of the powers under the proviso to section 145(1) of the Act in light of past experience". It was in terms observed, as noted above that, there may be innumerable situations in which the assessee may be required to make an estimate. The decision of the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961 was applied by the Division Bench of this court in CIT v. Gordhanbhai Jethabhai [1994] 205 ITR 279, in which while construing the provisions of section 215, the court in terms held that interest becomes payable by the assessee under that provision as a result of operation of law and it is not made dependent upon the discretion of the Income-tax Officer. The discretion which is conferred upon the Income-tax Officer is not with respect to determination of payability of interest but with respect to reduction or waiver of interest payable by the assessee. While deciding whether interest under section 215....
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.... authorities below it and argued that, in view of the agreement dated February 28, 1977 as modified by the supplementary agreement dated March 4, 1977 and the deed of assignment dated June 28, 1977, the assessee knew or had reason to believe that the "nil" estimate of advance tax filed by it was wrong. The authorities and the Tribunal have held that, while filing the "nil" estimate of advance tax on December 14, 1978, the appellant had full knowledge of the interest income of Rs.66,29,236 which had accrued and knowing or having reason to believe that "nil" estimate was untrue, it had filed the same. There can be no dispute about the fact that the levy of interest under section 215 and levy of penalty under section 273(2)(a) of the Act stand on different footings. While the former emanates as a statutory consequence under section 215(1), the latter requires, by virtue of its quasi-criminal nature, that it should be proved that the assessee knew or had reason to believe that the estimate was untrue. The word 'untrue' means what is not true; and 'true' in the context would mean what is in accordance with fact or reality and is genuine, i.e., not spurious. Therefore, the Revenue ....
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....d to consider the question referred to this court in Income-tax Reference No. 58 of 1993 arising from the order of the Tribunal, confirming the penalty of Rs.55 lakhs levied on the assessee under section 271(1)(c) of the Act The provisions of section 271(1)(c) of the Act, as they were operative at the relevant time, read as under: "271. Failure to furnish returns, comply with notices, concealment of income, etc. -- (1) If the Income-tax Officer or the Appellate Assistant Commissioner or the Commissioner (Appeals) in the course of any proceedings under this Act, is satisfied that any person--... (c) has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty,--... (iii) in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed twice, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income: Provided that, if in a case falling under clause (c), the amount of income (as determined by the Income-tax....
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....or disallowed in computing the total income by the Income-tax Officer, the Appellate Assistant Commissioner or the Commissioner of Income-tax (Appeals) in the quantum proceedings shall be deemed to represent the income in respect of which particulars have been concealed. By its very nature, the expression "fails to offer an explanation" or "offers an explanation which is found by the Income tax Officer or Appellate Assistant Commissioner or the Commissioner (Appeals) to be false" occurring in clause (A) of Explanation 1 to clause (iii) of section 271(1)(c) refers to the quantum proceedings. Therefore, the cases where no explanation was given in respect of any facts material to the computation of total income in respect of the amount added or disallowed therein or the explanation given in respect thereof was already found in such assessment proceedings to be false, there would arise a presumption that particulars of such added or disallowed income were concealed. In such cases falling under clause (A) of Explanation 1, there can arise no question of allowing the assessee to urge that he had a bona fide belief in the explanation which was proved to be false or which never was given, ....
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....a scope to examine the bona fides of the explanation already given by the assessee in the quantum proceedings. The rationale behind not giving similar consideration to cases falling in clause (A) of Explanation 1 to a person who "fails to offer an explanation before the Income-tax Officer during the proceedings" appears to be the legal assumption underlying the provision that in fact, there existed no explanation which could have been offered and to rule out any possibility of bringing into existence, the explanations which in fact were not there. In cases where an expla nation was offered, but was rejected as it could not be substantiated by the assessee, there would arise no presumption of concealment of the particulars of income that was added or disallowed and such assessee can show that the said explanation offered by him was a bona fide one and that he had disclosed all facts relating to such explanation and material to the computation of his total income during the quantum proceedings. Learned counsel for the assessee has contended that there was no concealment of particulars of income by the assessee nor did it furnish inaccurate particulars and, therefore, the notice un....
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....[1996] 222 ITR 583. Before the Inspecting Assistant Commissioner to whom the draft assessment order was forwarded, the assessee had raised an objection challenging the findings of the Income-tax Officer on the ground that the original agreement under which interest was receivable by the assessee was revised on June 30, 1978. The Inspecting Assistant Commissioner rejected the contention and held that since the right to interest did accrue to the assessee by virtue of the deed of assignment dated June 28, 1977, the right to receive interest existed till June 30, 1978, on which date the previous year of the assessee ended and that mere passing of the resolution on such last day pursuant to the request of the purchaser not to charge interest was nothing but relinquishment of the right without any consideration or business expediency. In appeal, the Commissioner (Appeals) held that the assessee was a sole shareholder of the transferee Elscope and by forgoing interest of Rs. 1.20 crores for two years without any business expediency, it had benefited itself by a self-serving resolution of June 30, 1978 which had no business expediency behind it. The assessee in its letter dated January....
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....ion and, therefore, any belief based on such resolution cannot be said to be bona fide. It does appear from the record that the assessee had disclosed material having bearing on the computation of its income in the quantum proceedings. As noted above, the agreement dated February 28, 1977, as modified by the supplemental agreement dated March 4, 1977, clearly stipulated that the inter est was payable on the deferred consideration and that payment of interest was the essence of the contract. The deed of assignment dated June 28, 1977, clearly incorporated the terms of the payment of interest as noted above. These documents were produced during the quantum proceedings and the explanation of the assessee for not showing interest as having accrued for the period between July 1, 1977 to June 30, 1978 was that there was a change in the mode of payment as per the proposal of Elscope dated June 15, 1978 which was accepted by the resolution of June 30, 1978 by the assessee. Though the meaning put up by the assessee to the resolution dated June 30, 1978 that it had a retrospective effect and the mode of payment of interest got substituted retrospectively from the date of the deed of assig....
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....referring to the proposal dated June 15, 1978, a resolution was passed by the board that, "the company do hereby approve, accept and adopt the following revised mode of payment" as contained in the letter dated June 15, 1978. In the penalty proceedings, by its letter dated March 9, 1988, the assessee adduced additional material in order to show that the explanation given during the quantum proceedings by it was bona fide. In the letter dated March 9, 1988, which is on record, the assessee, inter alia, informed the Income-tax Officer that the company transferred and assigned its undertakings to Elscope with effect from March 1, 1977 on the strength of the resolution passed by the board of directors on February 25, 1977, which was enclosed. A circular resolution was also passed on March 3, 1977 and in both these resolutions, there was a specific mention of July 1, 1978 as the date from which the deferred purchase price would carry interest at 11 per cent. per annum. A copy of the corresponding resolution of the vendee-company was also produced. It was urged in this letter that the correct conclusion that could be drawn from these documents was that interest on unpaid purchase pric....
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....ferred to bolster up the contention that the explanation on the basis of the resolution dated June 30, 1978 given by the assessee in the quantum proceedings was bona fide. There is more sound than substance in this reasoning. The resolution dated June 30, 1978, which modified the mode of payment, clearly recorded that interest on the deferred payment was to be paid from July 1, 1979. The original stipulation about the payment of interest was sought to be changed by this substituted mode of payment under which the balance of the deferred purchase price was to carry interest only from July 1, 1979 on the amount of Rs.4,75,000, which was to be paid on instalments and no interest was to be paid on the amount of Rs. 2 crores. As per this arrangement, no interest was to be charged for the accounting year July 1, 1977 to June 30, 1978 since it was to be charged only from July 1, 1979. Under the resolutions dated February 25, 1977 and March 3, 1977 also, no interest was to be charged for the said period, i.e., July 1, 1977 to June 30, 1978, because it was to be charged from July 1, 1978 as mentioned in them. The resolution dated June 30, 1978 extended that concession up to June 30, 1979 by....
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....to time operated. The assessee's case falling under clause (B) to Explanation 1 to section 271(1)(c)(iii), therefore, is covered by the proviso to Explanation 1 to the effect that the preponderance of probabilities point to the belief to be bona fide though not legally tenable on the ground that the resolution intended to be retrospectively changing the mode of payment could not really affect the accrual of interest that already took place before its passage. The facts relating to the explanation given in the quantum proceedings and material to the computation of the total income were disclosed during the quantum proceedings. The assessee had in response to a query, produced the said proposal dated June 15, 1978 and the resolution dated June 30, 1978 and relied upon them for its claim that the interest was under the resolution now made to accrue from July 1, 1979 instead of its accrual as originally stipulated in the deed of assignment from March 1, 1977. The requirement of the proviso to Explanation 1, therefore, stood satisfied and the presumption under the Explanation would not apply in the case of the assessee. Therefore, the burden would be on the Revenue to prove that the ....
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....h 1, 1977 and that, under the mode of payment adopted thereunder, interest at the rates stipulated was to be paid from the date from which the amount of consideration was outstanding and on such amounts which remained outstanding from time to time. It is precisely from these particulars that the Income-tax Officer raised specific queries during the proceedings in response to which, the resolution dated June 30, 1978 accepting the proposal of Elscope made on June 15, 1978 for substituting the terms of payment incorporated in the agreement and the deed of assignment was produced during the assessment proceedings. It has also come on record that in the notes annexed to and forming part of the balance sheet as on June 30, 1978 mentioned the fact that the deferred sale consideration pertained to the amount receivable in instalments from the subsidiary company Elscope (P.) Ltd. "for the transfer and assignment of the industrial undertaking and business". The amount of deferred sale consideration of Rs.6,54,10,253 was mentioned as due on June 30, 1977 which was reduced to Rs.4,94,81,765 at the end of June 30, 1978 and the payments received during the year towards the deferred consideratio....