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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
INCOME TAX REFERENCE No 56 of 1986
WITH INCOME TAX REFERENCE NO. 75 OF 1987
AND INCOME TAX REFERENCE NO. 58 OF 1993
AND INCOME TAX REFERENCE NO. 220 OF 1995
For Approval and Signature:
Hon'ble MR.JUSTICE R.K.ABICHANDANI
and
Hon'ble MR.JUSTICE K.A.PUJ
============================================================
1. Whether Reporters of Local Papers may be allowed : YES
to see the judgements?
2. To be referred to the Reporter or not? : YES
3. Whether Their Lordships wish to see the fair copy : NO
of the judgement?
4. Whether this case involves a substantial question : NO
of law as to the interpretation of the Constitution
of India, 1950 of any Order made thereunder?
5. Whether it is to be circulated to the Civil Judge? : NO
--------------------------------------------------------------
SARABHAI CHEMICALS PVT. LTD. (now known as
Sarabhai Holdings Pvt. Ltd.)
Versus
THE COMMISSIONR OF INCOME-TAX
--------------------------------------------------------------
Appearance:
1. INCOME TAX REFERENCE No. 56 of 1986, 58 of 1993
220 of 1995 and 75 of 1987 :
MR KC PATEL with MR. R.K.PATEL, MR. M.K.PATEL
and MR B.D.KARIA, Advocates for the Assessee in
all References
MR BB NAIK for the Revenue in all References
--------------------------------------------------------------
CORAM : MR.JUSTICE R.K.ABICHANDANI
and
MR.JUSTICE K.A.PUJ
Date of decision: 06/02/2002
ORAL COMMON JUDGEMENT
Per : MR.JUSTICE R.K.ABICHANDANI (for the Court) :-
1. All these four references have been argued at
length together and they concern the same assessee and
therefore, they are disposed of by this common judgement.
2. In Income Tax Reference No. 56 of 1986 (which
emanates from the quantum proceedings in respect of the
Assessment Years 1979-80 and 1980-81), the Income Tax
Appellate Tribunal, Ahmedabad Bench, Ahmedabad has
referred the following questions of for the opinion of
this Court :
"For the A.Y. 1979-80 - at the instance of the
assessee :
[1] Whether, on facts and in the
circumstances of the case, the Tribunal
was right in law in holding that the
interest of Rs.66,29,236/- being the
amount of interest as determined by the
Income Tax Officer on a notional basis
from 1-7-1977 to 30-6-1978 was liable to
tax on accrual basis for A.Y. 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 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 A.Y. 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 1-7-1979 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?"
2.1 In Income Tax Reference No. 75 of 1987 (which
also relates to the Assessment Year 1979-80 pertaining to
levy of interest under section 215 of the Act), the
Tribunal has referred the following question :
"Whether the Appellate Tribunal has not erred in
law and on facts in holding that charging of
interest under section 215 of the I.T. Act, 1961
in the instant case was not justified?"
2.2 In Income Tax Reference No. 220 of 1995 filed at
the instance of the assessee, the Tribunal has, in
respect of the Assessment Year 1979-80, referred the
following question of law in respect of the penalty
levied under section 273(2)(a) of the Act :
"Whether, on the facts and in the circumstances
of the case, the Tribunal was justified in law in
confirming the penalty of Rs.4 lakhs levied under
section 273(2)(a) of the Act?"
2.3 In Income Tax Reference No. 58 of 1993 (which
also relates to the Assessment Year 1979-80 and is in
respect of the penalty imposed under section 271(1)(C) of
the Act), the Tribunal has referred the following
question of law :
"Whether, on the facts and in the circumstances
of the case, the Tribunal was justified in law in
confirming the penalty of Rs.55,00,000/- levied
under section 271(1)(c) of the Act?"
3. Income Tax References Nos. 56 of 1986 (at the
instance of the Assessee as well as the Revenue) and 75
of 1987 (at the instance of the Revenue) arise out of the
same judgement of the Tribunal rendered on 15th February
1985 in I.T.A. Nos. 1137 and 1138 / AHD/ 84, by which
the Tribunal had partly allowed the assessee's appeal and
held in respect of the Assessment Year 1979-80 that levy
of interest under section 215 of the said Act was not
justified, while upholding the decision of the lower
authorities in regard to the Assessment Year 1979-80 to
the effect that there was accrual of interest income
which was rightly brought to tax on accrual basis by
them. As regards the Assessment Year 1980-81, the
Tribunal held that, under the revised agreement reflected
from the resolution dated 30th June 1979, no interest was
payable on the outstanding amount, because, as a result
of the resolution dated 30th June 1979, no income could
be said to have accrued to the assessee as the interest
was to start accruing from 1-7-1979 i.e. after the
accounting year relevant to the Assessment Year 1980-81
and the assessee's appeal was, therefore, allowed in
respect of the Assessment Year 1980-81.
3.1 The assessee - Sarabhai Chemicals Pvt. Ltd.
(now known as Sarabhai Holdings Pvt. Ltd.) had filed its
return on 26th June 1979 declaring a total income of
Rs.772=00 under the head of business income for the
Assessment Year 1979-80, and for the Assessment Year
1980-81, it had filed return on 27-9-1980 declaring a
loss of Rs.17,345=00. The assessee was following
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, w.e.f. 28th February
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 Pvt. Ltd.,
which in turn, after four months, transferred them to
Ambalal Sarabhai Enterprises Ltd., which was the
subsidiary of Elscope Pvt. Ltd. The said agreement was
made on 28th February 1977, which was amended by the
supplemental agreement dated 4th March 1977 and a deed of
assignment came to be executed on 28th June 1977. The
assessee effected the transfer of the industrial
undertaking and business of Sarabhai Chemicals Division
and Sarabhai Common Services Division to Elscope Pvt.
Ltd. as a going concern. On inquiry, the assessee
informed the I.T.O., as recorded in the draft order, that
during the year, the assessee had not received any
interest from Elscope Pvt. Ltd., to whom its undertaking
was transferred on 28th February 1977. From the
agreement of transfer, the I.T.O. noticed the terms of
payment of purchase consideration to the assessee and the
fact that, as per those terms, a sum of Rs.2 crore was to
be paid as and when demanded by the Company, and it was
to carry simple interest at the rate equal to the rate of
interest which the Company paid to its bankers in the
ordinary course of business, and that the sum of
Rs.4,54,18,760=89 ps. which was also a part of deferred
purchase consideration, payable in eight equal annual
installments on 1st October of every year beginning from
1st October 1979 and was to carry interest at 11% per
annum on the said sum or the amount remaining outstanding
from time to time. The I.T.O. noted that the assessee
was accordingly entitled to interest at the rate
stipulated in the said agreement in respect of these
amounts. On noticing that, in respect of none of these
amounts, the assessee had shown interest as received or
receivable, the assessee was, inter alia, asked to show
cause as to why interest on accrual basis be not taxed on
amounts due from Elscope Pvt. Ltd. as outstanding
purchase consideration.
Against the suggestion to tax the income from
interest on accrual basis, the assessee sent its
objections as per letter dated 16-9-1981, pointing out
that no interest was in fact charged or chargeable in
these accounting years in view of the revised mode of
payment agreed to between the parties as it was to be now
charged only with effect from 1-7-1979. The assessee
filed exerpts from the minutes of the meeting of the
Board of Directors, which was held on 30th June 1978 in
support of his explanation.
Thereafter, the assessee filed a further letter
on 21-1-1982 explaining as to why the interest should not
be taxed on accrual basis in the hands of the assessee,
and contending that there were exceptions to the general
rule. It was urged that the interest cannot be taxed on
a hypothetical basis, because, the assessee did not
actually receive any interest.
3.2 The I.T.O. was of the view that, in assessee's
case, there was a written contract which was sought to be
modified by the resolution dated 30th June 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 I.T.O. 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 I.T.O.
accordingly made a draft order computing the total income
of the assessee at Rs.66,29,236=00 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.
3.3 The Inspecting Assistant Commissioner of Income
Tax, to whom this draft order was forwarded, issued
directions under section 144(B)(4) of the Act, after
taking into consideration the objections raised by the
assessee against the draft order, holding that the Income
tax Officer was justified in coming to the conclusion
that interest would be chargeable on accrual basis, and
that the resolution dated 30th June 1978 passed by the
Board of Directors on the last day of the previous year
not to charge such interest from a retrospective date was
nothing but a device to deprive the revenue of its dues
which legitimately accrued to it.
3.4 The final assessment order in respect of the
Assessment Year 1979-80 was thereafter made and the
interest income as discussed in the draft assessment
order as well as in the I.A.C.'s direction under section
144-B (4) was added to the tune of Rs.66,29,236=00 and it
was ordered to charge interest under section 215 of the
said Act and notices were ordered to be issued for the
default under section 273(2)(a) and 271(1)(c) of the Act.
4. The assessee preferred an appeal before the
Commissioner of Income Tax (Appeals-I), Baroda, who, by
his order dated 29th February 1984, upheld the said
addition of interest income, holding that interest was
receivable by the assessee under the agreement dated 4th
March 1977 and the deed of assignment dated 28th June
1977 and was, therefore, rightly brought to tax in the
assessee's hands. The CIT (Appeals) elaborately
considered the terms of the supplemental agreement as
well as the deed of assignment and held that, for more
than fifteen months from 4th march 1977 to 15th June
1978, the stipulations for payment of interest
incorporated in the said documents held the field
unchallenged and undiluted, and that, it was on 15th June
1978 that the buyer company made a proposal for amendment
(in the stipulations) and the assessee ungrudgingly
agreed to forgo the interest which exceeded Rs.120 lakhs
for two years. The CIT (Appeals) considered the
contentions raised by the assessee to the effect that it
had agreed to this concession, firstly due to the
business expediency and secondly, since the vendee
company had offered to furnish security and found that
there was nothing said on behalf of the company as to
what was the so-called business expediency, and that
original agreements were silent on the aspect of security
and did not envisage that security would not be
furnished. The appellate authority found that the vendee
Elscope Pvt. 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 any normal course and at arms 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 6-1-1984 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% and were redeemable in 1991 or
subject to some conditions in 1987. It was observed that
they were mortgageable but since they carried interest at
11% only and were not redeemable before 1987, the market
price quoted was about two-third of the face value.
Thus, in the process, the assessee company had accepted
the assets worth two-third of the market price. As per
the original agreement, the installments would have
started in October 1979 and ended in October 1986,
against which, as per the revised terms of the resolution
dated 30th June 1978, the installmets would have started
falling due from 1987 only. It was observed that, apart
from postponement by about eight years, it is obvious
that there was no security worth the name actually given
by Elscope Pvt. Ltd. for making payments in cash and
what was actually given was bonds whose market price was
two-third of the face value. All these concessions were
given to Elscope Pvt. Ltd. just like that and for no
real consideration. In this background, the CIT
(Appeals) applying doctrine of lifting the veil of
corporate personality, found that the assessee was the
sole shareholder of the vendee Elscope Pvt. Ltd., and
that the transaction should be viewed in that
perspective. The CIT (Appeals) observed that, taking
totality of the connected transactions together, it could
not be said that there was no loss caused to the revenue.
He however held that the real relevant consideration was
of accrual of interest to the assessee.
4.1 As regards the levy of interest under section 215
of the Act, the CIT (Appeals) held that the assessee
company had neither filed any estimate, nor paid any
advance tax. As per the assessee's letter dated
26-3-1983, it was an admitted fact that the I.T.O. had
issued a notice under section 210 of the Act calling upon
the assessee to pay advance tax on the basis of regular
assessment completed for Assessment Year 1976-77 and
thereafter, the notice was revised under section 210, but
the assessee filed the estimate of advance tax in form
No. 29 showing income of advance tax payable as `Nil'.
Rejecting the contention that provision of section 215 of
the Act did not apply since the assessee had not paid any
advance tax, the CIT (Appeals) held that, in pursuance of
the `Nil' estimate, the advance tax paid by the assessee
was also `Nil' and that situation was obviously different
from a case in which estimate is not filed at all, which
would be covered by section 217 of the Act for levy of
corresponding interest. It was observed that, to say
that the assessee would have been covered by section 215,
if it had paid Re.1 advance tax on the basis of 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, reported in (1984) 145 ITR 793
(Bom), 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=00. Reliance was also
placed on the decision of the Madras High Court in ACE
CIT v. Brakes India Ltd., reported in (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 CIT (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 also observed that
the element of reasonable belief for quantum of income
does not come into play in section 215 with that much
force as it does in section 217(1A). It was, therefore,
held that the decision of the Gujarat High Court in
C.I.T. v. Bharat Machinery & Hardware Mart, reported in
(1982) 136 ITR 875 could not assist the assessee on the
question of interest chargeable under section 215 of the
Act. The appellate authority observed that the interest
income exceeding Rs.60 lakhs was attempted to be taken
out of the taxation net, and that, this was a fit case
for levy of interest under section 215 of the Act. It
was further observed that, in regard to quantum, no
calculation mistake was brought to the notice by
applicability of Rule 40 of the Rules made under the Act.
5. The assessee preferred an appeal against the
decision of the C.I.T. (Appeals) before the Tribunal.
The Tribunal rejected the contention that no interest
accrued for the Accounting Year 1-7-1977 to 30-6-1978 on
the basis of the resolution dated 30th June 1978, by
which the mode of payment incorporated in the original
agreement stood revised. It also rejected the contention
that, in view of the modification in the original
agreement as amended by the supplemental agreement dated
4-3-1977, the interest which was recoverable stood
waived. Construing the provisions of the agreement and
deed of assignment which has a bearing on the obligation
on the part of the vendee Elscope Pvt. Ltd. to pay
interest on the deferred consideration, the Tribunal in
paragraph 17 of its order held :
"In the instant case, the income from interest on
unpaid purchase price was a vested right created
under the supplemental agreement, as a
consequence the income from interest could be
said to be accrued or arisen to the assessee
during the relevant accounting year. In this
connection, it is pertinent to note that while
the supplemental agreement forms part of the
original agreement, there is no indication in the
resolution to suggest that the revised mode of
payment was effective from any date prior to
30-6-1978. Therefore, this is not a case where
the income though given up during the year could
not be said to accrue as was the case in managing
agency commission, the determination of which was
based on accrual of profits. The accrual of
interest commenced from the beginning of the
accounting year as the interest accrues from day
to day."
5.1 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 Pvt. Ltd.
was a subsidiary of the assessee and its entire
share-holding was owned and controlled by the assessee.
The security which was offered in terms of secured
debentures of Ambalal Sarabhai Enterprises Ltd. to whom
the undertaking was transferred by Elscope Pvt. Ltd.
was again a subsidiary of Elscope Pvt. 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
owned subsidiary and also vis-a-vis Ambalal Sarabhai
Enterprises Ltd., which was a fully owned subsidiary of
Elscope Pvt. Ltd. The Tribunal observed that when
substantial portion of its income which had accrued was
sought to be given up by the assessee, there ought to be
some corresponding benefit matching giving up of such
income, but there was nothing to indicate in this matter
that the benefit accruing to the assessee was such as
would outweigh the right which it was giving up. It was
finally held that the inevitable conclusion which can be
reached so far as the Assessment Year 1979-80 was
concerned, was that there was accrual of interest as a
result of the supplement agreement and that the interest
amount was rightly brought to tax on accrual basis.
5.2 As regards the ground on which the interest
charged under section 215 was challenged, the Tribunal in
paragraph 23 of its judgement observing that, though it
had rejected the assessee's claim that on the basis of
resolution dated 30th June 1978 it had modified its
original arrangement and therefore, there was no accrual
of income and hence, no liability to advance tax was
rejected by it, "it cannot be said that the assessee
could predicate the said assessment based on estimate of
notional income from interest. The question of
determining accrual of income is a highly complex issue
and the fact that a decision is reached against the
assessee cannot be determinative of its liability to pay
advance tax which arises in accordance with the statutory
date fixed in the Act." Relying upon the decision of this
Court in C.I.T. v. Bharat Machinery & Hardware Mart,
reported in (1982) 136 ITR 875, the Tribunal held that
levy of interest under section 215 of the Act, on the
facts of the case, was not justified for the Assessment
Year 1979-80. The assessee's appeal was accordingly
partly allowed on the question of interest under section
215 of the Act.
6. Income Tax Reference No. 75 of 1987 arises from
that part of the order of the Tribunal passed in respect
of the Assessment Year 1979-80 by which the assessee's
appeal was partly allowed and interest added under
section 215 of the Act deleted.
6.1 For the reasons which were given by the C.I.T.
(Appeals) in the appellate order dated 29-2-1984 for
confirming the addition of Rs.66,29,236=00 as interest
accrued for the Assessment Year 1979-80, the C.I.T.
(Appeals) confirmed the addition of Rs.55,67,750=00 on
the same count for the Assessment Year 1980-81 by his
order dated 29th February 1984. The levy of interest
under section 215 was also confirmed in respect of the
said Assessment Year.
7. In appeal, the Tribunal held in paragraph 20 of
the order that there was a material distinction between
the facts that 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 30th June 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 1-7-1979 i.e.
after the end of the Accounting Year from 1-7-1978 to
30th June 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 to the Assessment Year 1980-81. It was,
therefore, held that the inclusion of the amount of
interest for Assessment Year 1980-81 was not justified.
The addition was therefore deleted and the assessee's
appeal was allowed by the Tribunal for the Assessment
Year 1980-81, giving rise to the two questions raised at
the instance of the revenue in Reference No. 56 of 1986.
8. As noted above, notice was issued under section
273(2)(a) and also under section 271(c) of the Act in
respect of the Assessment Year 1979-80. In the penalty
order made under section 273(2)(a) of the Act, on 9th
August 1988, the Assistant Commissioner of Income Tax
came to a finding that the assessee had committed a
default by filing `Nil' estimate of advance tax payable
by it, which it had reason to believe to be untrue and
imposed penalty of Rs.4 lakhs under section 273(2)(a) of
the Act against the maximum penalty of Rs.50,89,815=00
leviable for the default. A notice under section 210 was
served on the assessee on 17th October 1978 requiring
payment of advance tax of Rs.1,00,22,757=00. By a
subsequent notice under section 210 of the Act served on
the assessee on 8th December 1978, the assessee was
required to pay advance tax of Rs.1,28,74,172=00. In
response to these notices, the assessee filed an estimate
showing `Nil' amount of advance tax payable on 14th
December 1978.
8.1 In response to the show cause notice issued under
section 274 read with section 273(2)(a) of the Act, the
assessee contended that it had made an honest and fair
estimate of the total income, and that it believed that
the amount in question was not includible in its total
income as no income was received by the assessee. The
said authority agreed with the observation of C.I.T.
(Appeal) - Baroda in which it was observed that interest
income exceeding Rs.60 lakhs was attempted to be taken
out of the taxation net and that fact would not impart
reasonableness to the estimates of advance tax. It was
held that the assessee had committed a default by filing
`Nil' estimate of advance tax payable by it which it had
reason to believe to be untrue, which default was liable
to be punished under section 273(1)(a) of the Act.
8.2 The C.I.T. (Appeal), by the order dated 15th
March 1989 made in the appeal of the assessee against the
said order imposing penalty under section 273(2)(a) of
the Act, held that, while filing the `Nil' estimate of
advance tax on 14-12-1978, the assessee had full
knowledge of interest income of Rs.66,29,236=00, 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.
8.3 The assessee appealed against the order of the
C.I.T. (Appeal) 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 1-3-1977 by Elscope Pvt. Ltd. in
pursuance of the agreements and the deed of assignment,
and observing that the case of Packart Pvt. 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 14-12-1978 was, prima facie, untrue
within the knowledge of the assessee and that the penalty
was therefore rightly levied under section 273(2)(a) of
the Act by the authorities below.
9. After the notice under section 271(1)(c) was
issued as noted above, in respect of the Assessment Year
1979-80, the assessee was given an opportunity of being
heard before finalising the penalty proceedings by the
Assistant Commissioner of Tax vide letter dated
26-11-1987 referred to in paragraph 19 of the order and
the assessee, by its letter dated 9th March 1988,
furnished its reply relying on its earlier replies dated
29-10-1982, 26-6-1984 and 30-8-1985. The Assistant
Commissioner of Income Tax, by his order dated 9th August
1988, held that the facts of the case and the subsequent
acts of the assessee as analyzed by the Income Tax
Officer in the assessment order, the C.I.T. (Appeal) and
the Tribunal in the appellate orders, would go to
establish that there was gross and wilful attempt on the
part of the assessee to evade tax on interest income that
had accrued to it on the deferred sale consideration
payable on its undertakings being transferred as per the
original agreement. It was held that the waiver of
interest was not done by the assessee on account of any
commercial expediency as alleged, but only to benefit its
own group of companies. It was further held that the
action of waiver of interest by the assessee company
amply goes to show that it had willfully made an attempt
not to bring to tax the interest income receivable by it
under the agreements and that the transaction involved in
this case could be reasonably termed as a colourable
device to evade tax on its legitimate income, by dubious
methods. It was further observed that, by accepting the
proposal of Elscope Pvt. Ltd. for modifying the
agreement dated 28-2-1977 to waive interest upto the
period ending on 30th June 1979, the assessee had
deprived the revenue of its legitimate tax on the
interest income that had accrued as per the original
agreement. The assessee did not disclose the said income
to the Department nor did it furnish all the relevant
particulars of that income and it was only when the
Department could lay its hands on this "dubious method of
transaction", that the facts came to light. The
Assistant Commissioner of Income Tax concluded that
Explanation I of section 271(1)(c) of the said Act was,
therefore, clearly attracted in this case, and that the
assessee had failed to offer any bonafide 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
considerations 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.
9.1 The assessee appealed against the aforesaid
penalty order and the Commissioner of Income Tax
(Appeals), Baroda, by his order dated 8th January 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 as
payable. It was observed that the agreements subsequent
to the resolutions dated 25-2-1977 and 3-3-1977 indicated
that interest was considered as payable and that it was
only at the fag end of the year that it was agreed to be
charged from 1-7-1979. It was further observed that the
agreements confirming the charging of interest at the
rates specified and from specific dates were more binding
on the parties than these earlier resolutions which were
now tried to be relied upon by the assessee. The
subsequent agreements had the effect of overruling
intention recorded in the resolution dated 25-2-1977.
The C.I.T. (Appeals) also held that if there were no
commercial considerations justifying postponement /
waiver of interest in a normal business transaction,
interest should have been charged on the balance amount
due and receivable from the day from which the transfer
was made effective. The change which was brought about
by the resolution dated 30th June 1978 by which it was
agreed to charge interest from 1-7-1979 was not part by
any commercial consideration and that by resorting to a
scheme, the assessee had omitted to include the accrued
interest in its total income and thereby furnished
inaccurate particulars of his total income.
9.2 The order of the C.I.T. (Appeals), confirming
the penalty imposed on the assessee, came to be
challenged by the assessee before the Tribunal and the
Tribunal, by its order dated 5-12-1991, dismissed the
appeal, holding that the assessee had concealed the
particulars of its interest income to the tune of
Rs.66,29,236=00 and that A.C.I.T. had rightly levied
penalty of Rs.55 lakhs under section 271(1)(c) which was
in turn, rightly confirmed by the C.I.T. (Appeals). The
Tribunal observed that the assessee had failed to
substantiate the explanations submitted in the penalty
proceedings and had also failed to disclose all the
material facts relating to the aforesaid items of
addition in the return of income and the statements
accompanying the said return. The Tribunal noted that,
nowhere in the return of income or in the statements
accompanying the said return, the fact about the passage
of the resolution dated 30th June 1978 was mentioned.
The assessee was fully conscious of the fact at the time
of closing of the accounting year that if such interest
income would be accounted for, it would be liable to a
huge tax liability of more than Rs. 45 lakhs and
therefore, the resolution dated 30th June 1978 was passed
with 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 Pvt. Ltd. did not take
any steps at all to furnish any security pursuant to the
said mutual agreement made in terms of resolution dated
30-6-1978, in which it was mentioned that the security
should be furnished to the satisfaction of the assessee
in respect of unpaid purchase price. Referring to the
additional evidence in form of the earlier resolutions
dated 25-2-1977 and 3rd March 1977, the Tribunal observed
that they did not in any manner support the contention of
the assessee about non-accrual of the income upto 30th
June 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
28-2-1977 and 3-3-1977 could not override the specific
terms of the contract.
9.3 In respect of the resolution dated 25-2-1977,
after perusing the original minute book, the Tribunal in
paragraph 8.3 of its judgement observed that, the crucial
3 to 4 lines of the clause (reproduced in that paragraph)
including the date with effect from which the interest
was to be charged was admittedly subjected to rewriting
after erasing the crucial lines. It appears that this
rewriting has weighed with the Tribunal while holding
against the assessee and observing that the assessee's
stand that it had forgotten to bring to the notice of its
representative in the quantum proceedings this earlier
resolution could not be accepted as a reasonable or valid
explanation.
10. In context of the reference having bearing on the
quantum proceedings (Reference No.56 of 1986), the
learned counsel for the assessee contended that, in view
of the resolution dated 30th June 1978 passed by the
assessee, accepting the proposal of the vendee Elscope
Pvt. Ltd. contained in their letter dated 15th June
1978, which both documents were produced during the
course of assessment proceedings, there was no accrual of
interest to the assessee on the amount of deferred
consideration till 30th June 1979. It was argued that,
under the original agreement dated 28-2-1977 as modified
by the supplemental agreement dated 4th March 1977, as
also in the deed of assignment dated 28-6-1977, though
interest was to be paid on the amount of deferred
consideration, no date was mentioned for accrual of such
interest and therefore, it should be held that interest
was to be paid only from the date on which the
installments were to fall due and were not paid. It was
further argued that, before the end of the Accounting
Year 1978-79 (i.e. from 1-7-1977 to 30-6-1978), it was
open for the assessee to agree to modification of the
terms of mode of payment and substitute the original
stipulation regarding payment of interest by fixing the
time from which the interest would accrue and
accordingly, by such modification, the date of accrual of
interest was fixed as 1-7-1979 under the resolution dated
30th June 1978. The learned counsel submitted that there
was no challenge against the genuineness of the
resolution dated 30th June 1978 at any stage of the
proceedings uptill now and once that resolution is held
to be genuine, it should be given its full play and it
should be held that no interest accrued till 30-6-1979 by
virtue of this resolution, even if it were to 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
1-7-1977 to 30-6-1978, 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
re-organise 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 Pvt. Ltd., and there were further
transactions between Elscope Pvt. 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 deed of assignment, there was no
mention about any security being furnished in respect of
the outstanding amount payable by Elscope Pvt. Ltd. to
assessee, while in the proposal dated 15th June 1978 sent
by Elscope Pvt. Ltd. to the assessee, there was a clear
offer of giving security in respect of the deferred
consideration which was required to be paid by Elscope
Pvt. Ltd. to the assessee. Since the proposal was
coupled with this offer, the assessee, with a view to get
its dues secured, shifted the date of accrual of interest
on the deferred consideration to 1-7-1979 by accepting
the proposal of Elscope Pvt. Ltd. and passing the said
resolution dated 30th June 1978.
10.1 As regards the penalty proceedings from which the
Income Tax Reference No. 58 of 1993 arises, the learned
counsel for the assessee argued that there was no
concealment of material particulars during the assessment
proceedings and the assessee had disclosed the relevant
particulars, which had a bearing on the computation of
the income including the income said to have accrued by
way of interest on the deferred payment in connection
with the said Assessment Year 1979-80. It was submitted
that the assessee bonafide believed in his explanation
given in the assessment proceedings to the effect that no
interest had accrued on the basis of the resolution dated
30th June 1978 and that fact was supported by additional
evidence adduced during the penalty proceedings alongwith
the reply dated 9th March 1988. It was submitted that
the resolution dated 25th February 1977 clearly recorded
the fact that the interest was payable on the deferred
consideration from 1-7-1978 and merely because there was
rewriting in some portion of that resolution, it could
not be inferred that it was not a genuine resolution. He
pointed out from the circular resolution dated 3-3-1977,
in the same minute book, that this date of 1-7-1978 was
also mentioned there without any erasion. In other
words, from the contemporaneous record, it can be seen
that the rewriting in the resolution dated 25-2-1977 in
the minute book was not an attempt to change the date of
accrual of interest to 1-7-1978. It was also mentioned
in the corresponding resolution of Elscope Pvt. Ltd.
The learned counsel further argued that since the
assessee bonafide believed that the explanation offered
by it was correct, the presumption under Explanation I
did not arise in the case of the assessee. It was
contended that admittedly it was nobody's case that false
explanation was given by the assessee; but, the case
against the assessee was that he had not been able to
substantiate his explanation during the assessment
proceedings which fell under sub-clause `B' of
Explanation I and which in turn attracted the provisions
of the proviso under which it could be shown that the
belief of the assessee was bonafide, 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 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 form of agreements, deed of assignment,
notes in the balancesheet showing the transaction,
reference to the transaction in 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.
10.2 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 reason to believe that
estimate to be untrue, because, on the date when the
estimate was filed, resolution dated 30th June 1978
accepting the proposal of the vendee to substitute the
mode of payment of the deferred consideration amount by
shifting the date of accrual of interest to 1-7-1979, was
already in existence. It was argued that the requisite
mental element that the estimate was untrue was absent in
assessee's case and therefore, no penalty could have been
levied under section 273 (2) (a) of the Act.
10.3 In context of the Income Tax Reference No. 75 of
1987, the learned counsel for the assessee contended that
the Tribunal had rightly set aside the order directing
recovery of interest under section 215 of the said Act on
the ground that the question of accrual of interest was a
complex one and that the assessee could not predict
assessment based on estimate of notional income from
interest. It was also argued in this context that
section 215 of the said Act was attracted only in cases
where the assessee had paid a sum of advance tax under
section 209A or section 212 of the Act and therefore,
when `Nil' advance tax was paid, the provisions could not
be invoked for the purpose of levying interest.
11. In support of his above contentions, the learned
counsel for the assessee relied upon the following
decisions :
[a] Decision in case of C.I.T., Tamil Nadu v. Motor
Credit Co. P. Ltd., reported in 127 ITR 572 was
cited for the proposition that if no income has
materialised, there can be no liability to tax on
a hypothetical income and it is not the
hypothetical accrual of income based on the
mercantile system of accounting followed by the
assessee that has to be taken into account, but
what should be considered is whether the income
has really materialised or resulted to the
assessee. The question whether real income has
materialised to the assessee has to be considered
with reference to commercial and business
realities of the situation in which the assessee
has been placed and not with reference to his
system of accounting.
[b] Decision in case of Sreelekha Banerjee v.
Commissioner of Income Tax, reported in XLIX ITR
112 was cited for the proposition that if the
explanation shows that the receipt was not of an
income nature, the department cannot act
unreasonably and reject that explanation to hold
that it was income. It was also held by the
Supreme Court that if, however, the explanation
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 case of H.M. Kashiparekh & Co. Ltd.
v. Commissioner of Income Tax, Bombay North,
reported in XXXIX 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 subordinated as to
amount virtually to a negation of it when a
surrender or concession or rebate, in respect of
managing agency commission, is made, agreed to or
given on grounds of commercial expediency, simply
because it takes place some time 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
to it.
[d] Decision in case of Commissioner of Income Tax v.
Calcutta Discount Co. Ltd., reported in 91 ITR 8
was cited for the proposition that an assessee
can so arrange his affairs as to minimize his tax
burden. It was held that, where a trader
transfers his goods to another trader at a price
less than the market price, and the transaction
is a bona fide one, the taxing authority cannot
take into account the market price of those
goods, ignoring the real price fetched, to
ascertain the profit from the transaction. It
was held that, if the assessee had arranged its
affairs as to reduce its tax liability by
starting a subsidiary company and transferring
its shares to that subsidiary company and thus,
forgoing part of its own profits and at the same
time, enabling its subsidiary to earn some
profits, such a course is not impermissible under
law.
[e] Decision in case of Commissioner of Income Tax v.
M/s Shoorji Vallabhdas & Co., reported in XLVI
ITR 144 was cited for the proposition that though
the Income Tax Act takes into account two points
of time at which the liability to tax is
attracted, viz., the accrual of the income or its
receipt, yet the substance of the matter is the
income. If income does not result at all, there
cannot be a tax, even though in book-keeping, an
entry is made about a `hypothetical income',
which does not materialize. Where income has, in
fact, been received and is subsequently given up
in such circumstances that it remains the income
of the recipient, even though given up, the tax
may be payable. Where, however, the income can
be said not to have resulted at all, there is
obviously neither accrual nor receipt of income,
even though an entry to that effect might, in
certain circumstances, have been made in the
books of account.
[f] Decision in case of V.D.M. RM. M. RM. Muthiah
Chettiar v. Commissioner of Income Tax reported
in 74 ITR 183 was referred to point out that the
Supreme Court held that since there was no clause
which required disclosure of the income of any
person other than the income of the assessee,
which was liable to be included in his total
income in the prescribed form of return, and the
assessee was not required under section 22(5) of
the Income Tax Act 1922 in making a return to
disclose that any income was received by his wife
or minor child admitted to the benefits of
partnership in a firm of which he was a partner,
re-assessment proceedings cannot be commenced
under section 34(1)(a) of that Act against the
assessee for failing or omitting to disclose that
income. This judgement was rendered by a bench
of three judges of the Supreme Court and was
considered in a later judgement of the two-judge
bench of the Supreme Court in C.I.T. v. Smt.
P.K. Kochammu Amma, Peroke, reported in 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
binding upon the bench as it was a three judge
bench decision.
[g] Decision of the Punjab High Court (which was
later on reversed by the Supreme Court) in case
of Shiv Parkash Janakraj & Co. (P) Ltd. v.
Commissioner of Income Tax, reported in 112 ITR
873, 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 High Court has been
placed with a view to argue that this judgement
was rendered on 27th September 1977 during the
accounting year of the assessee, and that it
should constitute a bona fide belief on the legal
aspect of the matter when the assessee had put
forth the explanation that, on the strength of
the resolution of 30th June 1978, interest could
not be said to have accrued since the accrual
date was shifted thereunder to 1-7-1979.
[g-1] The above decision was reversed by the Supreme
Court in Commissioner of Income Tax v. Shiv
Prakash Janak Raj & Co., reported in 222 ITR 583,
in which the Supreme Court in terms held that the
concept of real income cannot be employed so as
to defeat the provisions of the Act and the
Rules. Where the provisions of the Act and the
Rules apply, it is only those provisions which
must be applied and followed. There is no
room-nor would it be permissible for the court to
import the concept of real income so as to
whittle down, qualify or defeat the provisions of
the Act and the Rules. Here, we may also refer
to the decision of the Supreme Court in State
Bank of Travancore v. Commissioner of Income
Tax, reported in 158 ITR 102, in which the
Supreme Court held that the concept of reality of
the income and the actuality of the situation are
relevant factors which go to the making up of the
accrual of income but once accrual takes place
and income accrues, the same cannot be defeated
by any theory of real income. 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 under
section 36(2) of the Act, 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. It was also held that
where interest has accrued and the assessee has
debited the account of the debtor, the difficulty
of recovery would not make its accrual
non-accrual.
[h] A decision of this Court in Banyan and Berry v.
Commissioner of Income Tax, reported in 222 ITR
831 was cited to point out that it was held
therein that the factum of transfer of the
business as a going concern excepting the
retention of right to the pending claim, could
not be termed a colourable device. It was held
that there was no basis for the Tribunal 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 [154 ITR 148 (SC)] 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 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 Commissioner of Wealth Tax v.
Arvind Narottam, reported in 173 ITR 479 was
cited for the proposition that where the true
effect on the construction of the deeds is clear,
appeal to discourage tax avoidance is not a
relevant consideration.
[j] The decision of the Supreme Court in Commissioner
of Income Tax v. Asiatic Textile Ltd., reported
in 82 ITR 816 was referred to in order to point
out that, in the matter of declaring dividend,
the reasonableness or unreasonableness of the
amount distributed as dividends is judged by
business considerations, such as the previous
losses, the present profits, the availability of
surplus money and the reasonable requirements of
the future and similar others. The Income Tax
Officer must take an overall picture of the
financial position of the business. He should
put himself in the position of a prudent
businessman or the director of a company and deal
with the problem with a sympathetic and objective
approach.
[k] In Commissioner of Income Tax v. Birla Gwalior
(P) Ltd., reported in 89 ITR 266, in context of
the commission given up by the respondent, it was
held that such commission which is given up could
not be considered to be its real income of the
managing agency. This decision was rendered in
the context where the managing agency commission
which could have been ascertained only after the
managed company had made up its accounts and the
respondent had given up the commission even
before the managed company made up its accounts,
and no date had been fixed in the agreement for
payment of the commission and it was held that
mere fact that the respondent was maintaining its
accounts on the mercantile system did not lead to
the conclusion that the commission had accrued to
it by the end of the relevant accounting year.
It will be noticed that the accrual of the
managing agency would have taken place only at
the end of the accounting year when the profit
was ascertained.
[l] The decision of the Supreme Court in E.D.Sassoon
& Company v. Commissioner of Income Tax,
reported in XXVI ITR 27 was cited for the
proposition that, if the assessee acquires a
right to receive the income, the income can be
said to have accrued to him though it may be
received later, on its being ascertained. The
basic conception is that he must have acquired a
right to receive the income, and that there must
be a debt owed to him by somebody. Unless and
until there is created in favour of the assessee
a debt due by somebody, it cannot be said that he
has acquired a right to receive the income or
that income has accrued to him.
[m] The decision of this Court in Commissioner of
Income Tax v. Bharat Machinery & Hardware Mart,
reported in 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 ITO 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 ITO
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, reference may be made to the
decision of the Supreme Court in Central
Provinces Manganese Ore Co. Ltd. v.
Commissioner of Income Tax, reported in 160 ITR
961, in which, in context of the provision of
section 215 of the Act, approving the decision of
the Gujarat High Court in Bhikhoobhai N. Shah v.
Commissioner of Income Tax, reported in 114 ITR
197, it was held that, interest is levied under
sub-section (8) of section 139 and under section
215, because, by reason of the omission or
default mentioned in the relevant provision, the
revenue is deprived of the benefit of the tax for
the period during which it had remained unpaid.
The very period for which interest is levied
under the relevant provision points to the nature
of the levy and the levy of interest is part of
the process of assessment. Where the Income Tax
Officer considers that there is a case for
levying interest under sub-section (8) of section
139 or under section 215, what he does in
practice, is to make an order levying such
interest after completing the assessment of the
assessee's total income and the tax payable by
him. In cases where the jurisdictional fact
attracting the levy cannot be disputed, for
example, where the return has been furnished
under section 139 with delay, it will be a
question merely of satisfying the relevant
authority that there are circumstances calling
for a reduction or waiver of the interest.
[m-2] In Commissioner of Income Tax v. Gordhanbhai
Jethabhai, reported in 205 ITR 279, this Court
applying the decision in Central Provinces
Manganese Ore Co. Ltd. (supra), held that the
history of section 215 and the way it has worked
and also the case law clearly indicate 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. 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(1) is payable by the
assessee or not, what the Income Tax Officer has
to consider is whether the required conditions
are satisfied or not, and he would be under no
obligation to consider whether interest should be
reduced or waived, which question would arise
only after payment of interest is determined.
[n] The decision of the Patna High Court in
Commissioner of Income Tax v. Lal Babu, reported
in 122 ITR 1006 was relied upon for the
proposition that the provisions contained in
section 271(1)(c) of the Act 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) of the Act against him.
[o] The decision of the Supreme Court in Commissioner
of Income Tax v. Anwar Ali, reported in 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 the
assessment proceedings for determining or
computing the tax is conclusive. However, it is
good evidence. Before penalty can be imposed,
the entirety of circumstances must reasonably
point to the conclusion that the disputed amount
represented income and that the assessee had
consciously concealed the particulars of his
income or had deliberately furnished inaccurate
particulars. The decision in Commissioner of
Income Tax v. Khoday Eswarsa & Sons, reported in
83 ITR 369 in which Anwar Ali's case (supra) was
followed, was cited to point out that it was held
therein that the penalty proceedings being penal
in character, the department must establish that
the receipt of the amount in dispute constitutes
income of the assessee.
[o-1] We may note here that, in Commissioner of Income
Tax v. Jeevan Lal Sah, reported in 205 ITR 244,
the Supreme Court held that, even after the
amendment of 1964, penalty proceedings continue
to be penal proceedings, and that where the
Explanation has made a difference is while
deciding that question the presumption created by
it has to be applied, which has the effect of
shifting the burden of proof. It was held that
the rule regarding burden of proof enunciated in
C.I.T. v. Anwar Ali (1970) 76 ITR 696 (SC) is
no longer valid. Whether it is a case of
undisclosed or unexplained cash deposit or any
other concealment the standard is the same. The
principle enunciated in Anwar Ali's case that
mere rejection of the explanation of the assessee
is not sufficient for levying penalty no longer
holds good and it is no longer necessary that the
Department must go further and establish that
there was conscious concealment of particulars of
income or a deliberate failure to furnish
accurate particulars. It was held that the cases
to which the Explanation is attracted have to be
decided in the light of the law enunciated in the
cases of Mussadilal Ram Bharose (1987) 165 ITR 14
(SC) and Sadayappan (1990) 185 ITR 49 (SC).
[o-2] In B.A.Balasubramaniam & Bros. Co. v.
Commissioner of Income Tax, reported in 236 ITR
977, the Supreme Court held that after the
incorporation of the Explanation in section
271(1)(c) of the Income Tax Act, 1961, the view
which had been taken earlier in CIT v. Anwar Ali
(supra), no longer holds the field and it is for
the assessee to prove that there had been no
concealment of income where the income shown in
the return is less than eighty per cent of the
assessed income.
[p] The decision of this Court in Smt. Ramalaxmi
Jivraj v. Commissioner of Wealth Tax, reported
in 138 ITR 731, which was rendered in context of
the provisions of 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 Commissioner
of Income Tax v. A. Raman & Co., reported in 67
ITR 11 was referred to for the proposition that
avoidance of tax liability by so arranging
commercial affairs that 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. Effectiveness of the
device depends not upon considerations of
morality, but on the operation of the Income Tax
Act. Legislative injunction in taxing statutes
may not, except on peril of penalty, be violated,
but it may lawfully be circumvented.
[q-1] Reliance on this decision of the Supreme Court is
wholly misconceived, because the above
observations were disapproved in McDowell & Co.
Ltd. v. Commercial Tax Officer, reported in 154
ITR 148.
[r] The decision of the Andhra Pradesh High Court in
Commissioner of Income Tax v. Sri Venkateswara
Timber Depot, reported in 230 ITR 675, which was
in context of the provisions of section 271(1)
Explanation 1 sub-clause (B), was cited for the
proposition that, if no finding that the assessee
had not been able to substantiate the explanation
could be recorded, the amount added or disallowed
in computing the total income can not be deemed
to represent the income in respect of which
particulars have been concealed for purpose of
clause (c) of sub-section (1) of section 271. In
such a situation, there is no need to look to the
requirements of the proviso to the Explanation.
[s] The decision of this Court in K.M.Bhatia v.
Commissioner of Income Tax, reported in 193 ITR
379 was cited to point out that, when
inconsistent approach was adopted by the tribunal
in rejecting the explanation, the levy of penalty
was not valid. In that case, the Tribunal had
adopted inconsistent and incongruous stand in
upholding the penalty in respect of the year
1971-72 and the same explanation which was given
by the assessee, namely, mistake of the accounts
clerk which was put forth at the earliest point
of time was accepted by the Tribunal for the year
1972-73 and an inconsistent approach was adopted
by the Tribunal in respect of that very
explanation for the year 1971-72.
[t] The decision of this Court in Commissioner of
Income Tax v. S.P. Bhatt, reported in 97 ITR
440 was cited for pointing out that it was held
therein that the burden of proof under
explanation to section 271(1)(c) is akin to that
in a civil case where the determination is made
upon preponderance of probabilities, and that it
was not necessary that any positive material
should be produced by the assessee in order to
discharge the burden that rests upon him.
[u] The decision of the Supreme Court in Commissioner
of Income Tax v. Mussadilal Ram Bharose,
reported in 165 ITR 14 was referred to for the
observations made therein that, the explanation
to section 271(1)(c) of the Income Tax Act, 1961
shifts the burden to the assessee to show that
the difference was not owing to fraud or gross or
wilful neglect on his part, and 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 Musaddilal's case (supra) was
followed in Jeevan Lal Sah's case (supra) and
B.A. Balsubramaniam's case (supra).
[v] The decision of this Court in Commissioner of
Income Tax v. Vinaychand Harilal, reported in
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 M.M.Manasvi
v. Commissioner of Income Tax, reported in 86
ITR 557 was cited for the proposition that,
satisfaction in the very nature of things under
section 271(1) precedes issuance of notice and it
would not be correct to equate the satisfaction
of the Income Tax Officer with the actual
issuance of notice. In that case, the Court held
that the penalty proceedings were validly
initiated and that there was relevant material
before the Tribunal to hold that the assessee had
deliberately concealed the particulars of his
income.
[x] The decision in Hindustan Steel Ltd. v. State
of Orissa, reported in 83 ITR 26, which was a
decision rendered in context of the penalty
proceedings of the Orissa Sales Tax Act, was
cited for relying upon the observations that an
order imposing penalty for failure to carry out a
statutory obligation is the result of a
quasi-criminal proceedings, and penalty will not
ordinarily be imposed unless the party obliged
either acted deliberately in defiance of law or
was guilty of conduct contumacious or dishonest,
or acted in conscious disregard of its
obligation. Penalty will not also be imposed
merely because it is lawful to do so.
[y] A decision of this Court in Commissioner of
Income Tax v. Manu Engineering Works, reported
in 122 ITR 306 was cited for the proposition that
it is incumbent upon the IAC to come to a
positive finding as to whether there was
concealment of income by the assessee or whether
any inaccurate particulars of such income had
been furnished by him and if no such clear-cut
finding is reached by the IAC, penalty cannot be
levied.
[y-1] The provisions of sub-clause (iii) of section
271(1)(c), with which we are concerned in the
present proceedings, were substituted with effect
from 1-4-1976, while this decision related to the
Assessment Year 1970-71 i.e. to a period prior
to the aforesaid explanation coming into force.
[z] The decision in Commissioner of Income Tax v.
Vegetable Products Ltd., reported in 88 ITR 192
was cited for the proposition that, where two
reasonable constructions are possible, the one
favourable to the assessee must be followed, more
particularly so where the provision relates to
imposition of a penalty.
[aa] The decision of the Supreme Court in Cement
Marketing Co. of India Ltd. v. Assistant
Commissioner of Sales Tax, reported in 124 ITR 15
was cited for the proposition that omission to
include in return of turnover the amount of
freight included in the price under a bonafide
belief that it was not taxable, cannot be said to
be false.
[bb] The decision of the Punjab & Haryana High Court
in Commissioner of Income Tax v. Firozepur
Finance (P) Ltd. reported in 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 C.I.T. v. Shoorji Vallabhdas & Co., reported
in 46 ITR 144.
[cc] The decision of Patna High Court in Commissioner
of Income Tax v. Lal Babu, reported in 122 ITR
1006 was cited for the proposition that if
assessee gives a plausible explanation against
the additions made to his income, the onus shifts
to the department.
[dd] The decision of the Supreme Court in Commissioner
of Income Tax v. Lakhdhir Lalji, reported in 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 when the Appellate Assistant
Commissioner 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
Commissioner of Income Tax v. Nipani Tobacco
Stores, reported in 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 probabilities
by the assessee.
[ff] The decision of this High Court in National
Textiles v. Commissioner of Income Tax, reported
in 249 ITR 125 was cited for the proposition
that, where the circumstances were equally
consistent with the hypothesis that they could
have been sundry loans of small amounts obtained
from different parties, the imposition of penalty
was not justified.
12. The learned counsel appearing for the Revenue
submitted that, in view of the specific terms of the
agreement and the deed of assignment, interest was
payable on the deferred consideration amount from 1st
March 1977 being the date of the transaction. It was
submitted that since interest was to be charged on the
amount outstanding from time to time, it became payable
from 1-3-1977 being the date when the deferred
consideration amount became outstanding. The learned
counsel also argued that there was no commercial
expediency for which the interest that had accrued could
have been given up. It was pointed out that the unit and
the business which were transferred by the assessee to
its subsidiary Elscope Pvt. Ltd. with effect from
1-3-1977 under the agreement dated 28-2-1977 were in turn
transferred by Elscope to its subsidiary Ambalal Sarabhai
Enterprises Ltd. with effect from 1-7-1977, and that
under the agreement between Elscope and ASE, the
liabilities in respect of the transferred unit and
business were taken over by ASE. There was also a
stipulation in clause (4) of that agreement dated
28-6-1977 between Elscope and ASE that liability of
Elscope to pay under the agreement under which it had
purchased the unit and the business from the assessee, as
it stood on 30th June 1977, was taken over by the ASE and
if no claim was made in respect of such liability which
was taken over, then ASE was to pay Elscope total value
of such liabilities and such value was deemed to augment
the purchase price payable by ASE to Elscope to be added
prorata in the installments of the balance purchase
price. It was also submitted that, under the deed of
assignment dated 25-4-1978, it was stipulated between
Elscope and ASE that the purchaser ASE would perform all
contracts and agreements entered into by Elscope and the
Elscope was discharged in respect of such liabilities.
On the basis of these documents, the 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 its subsidiary the same unit and business
and the result was arranged in such a way that Elscope
would gain, which was the gain of the assessee itself,
since it was the sole shareholder of Elscope.
12.1 It was further argued that the resolution dated
30th June 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 15-6-1978 and the
resolution dated 30th June 1978, there was no effective
substitution of the mode of payment which was stipulated
in the agreement and the deed of assignment between these
parties, as per which, the interest was to accrue from
1st March 1977 and therefore, during the accounting year,
and it constituted part of the total income of the
assessee during that year. It was submitted that since
the resolution dated 30th June 1978 did not effectively
change the mode of payment even for the year 1980-81,
interest continued to accrue to the assessee under the
existing mode of payment stipulated in the agreement and
the deed of assignment. It was further contended that
the resolution dated 30th June 1978 could not be given
any retrospective effect because on the last date of the
accounting year, the interest that had already accrued,
could not have been affected by the said resolution. It
was further pointed out that, in the proposal dated 15th
June 1978 sent by Elscope to the assessee, the statement
made to the effect that the mode of payment in respect of
the transfer by Elscope to ASE was till under discussion
between those parties was wrong, because, the deed of
assignment between Elscope and ASE was already executed
on 25-4-1978 in which all the terms including mode of
payment were crystallized. It was also argued that there
was no security furnished by Elscope to ASE as proposed
by it and therefore, the change in mode of payment which
was conditional upon furnishing such security by Elscope
to the assessee did not operate and non-fullfillment of
the condition of security, which was a part of the
consideration, not being furnished, there was no
effective change brought about in the existing mode of
payment as per which interest was payable from 1-3-1977.
It was also argued that there was no reason for the
Elscope to make such proposal on 15-6-1978, because, ASE
had already stepped into its shoes and was liable to the
assessee in view of the fact that the liabilities were
taken over by the ASE pursuant to the transfer of the
same unit and business by Elscope to ASE with effect from
1-7-1977.
12.2 In context of the penalty proceedings under
section 271(1)(c) of the Act (Income Tax Reference No.
58 of 1993), the learned counsel for the revenue argued
that, in the quantum proceedings, at no point of time,
did the assessee claim that interest was to be charged
from 1-7-1978 as per the resolution dated 25-2-1977 and
the circular resolution dated 3-3-1977 passed by the
assessee. It was argued that if the resolutions dated
28-2-1977 and 3-3-1977 really contained the date 1-7-1978
or were worded the way they now appear to be worded the
date of 1-7-1978, could never have been missed in the
supplemental agreement dated 4-3-1977 which was
specifically entered into, in context of the interest
payable by the vendee, since the stipulation was earlier
left out in agreement dated 28-2-1977. It was submitted
that since the resolution dated 30th June 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 1-7-1978 never
occurred and the stand taken up in the penalty
proceedings, in which it was suggested that the interest
was to be charged from 1-7-1978 as per the resolutions
dated 28-2-1997 and 3-3-1977, which date was shifted to
1-7-1979 as per the resolution dated 30-3-1978 and
further because, there was collusion between the assessee
and its subsidiary to make an arrangement which would
have the effect of warding off the payment of tax by the
assessee, it should be held that the penalty imposed on
the assessee under section 271(1)(c) of the said Act was
fully justified, and that there was no error committed by
the Tribunal in that regard.
12.3 As regards the decision of the Tribunal deleting
the levy of interest under section 215 of the Act in
respect of the Assessment Year 1979-80 (Income Tax
Reference No. 75 of 1987), the learned counsel argued
that the Tribunal has, without there being any valid
reason, set aside the levy of interest which was a
corollary to the lapse committed by the assessee in
respect of the Assessment Year 1979-80, for which it had
filed a `Nil' estimate of advance tax pursuant to the
notice which was sent under section 210 of the Act. It
was submitted that the provisions of section 215 of the
Act were automatically attracted to the facts of the case
and the interest was, therefore, rightly charged under
section 215 of the Act by the authorities below, and the
Tribunal deleted the charge of interest under section 215
contrary to law.
12.4 As regards the penalty imposed under section
273(2)(a) of the said Act and confirmed by the Tribunal,
which is the subject matter of Income Tax Reference No.
220 of 1995, the learned counsel supported the reasoning
of the concerned authorities and the tribunal and
submitted that the assessee had reason to believe that
the estimate of advance tax filed by it in respect of the
Assessment Year 1979-80 was untrue and that the Tribunal
had not committed any error in reaching that finding.
13. In support of his contentions, the learned
counsel for the revenue relied upon the following
decisions :
[a] The decision in Commissioner of Income Tax v.
Hindustan Motors Ltd., reported in 202 ITR 839
(Cal.) was cited for the proposition that accrual
of interest takes place normally on day to day
basis and even when there is no due date fixed
for payment of interest, interest certainly
accrues on the last day of the previous year. It
was held that accrual of interest does not depend
upon the making up of the accounts and 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 deduction as business expenditure.
[b] The decision in Commissioner of Income Tax v.
Shiv Prakash Janak Raj & Co. Pvt. Ltd.,
reported in 222 ITR 583 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. [
(1978) 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 Commissioner of
Income Tax v. Gordhanbhai Jethabhai, reported in
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 with respect to reduction or waiver
of interest payable by the assessee.
In this context, the learned counsel submitted
that the reliance placed by the Tribunal on the
decision of this court in Commissioner of Income
Tax v. Bharat Machinery & Hardware Mart,
reported in 136 ITR 875, was misconceived,
because, that was a case under section 217 of the
Act, and not under section 215, and that, on the
facts of the case, the Court held that the ITO
had misapplied the law in levying interest under
section 217(1A), and that it was a case of error
of law committed by the ITO capable of
rectification under section 154. It was also
submitted that the Court had in terms observed
that there may be innumerable situations in which
the assessee may be required to make an estimate
as enjoined by section 212(2A) of the Act.
[d] The decision of the Supreme court in Central
Provinces Manganese Ore Co. Ltd. v.
Commissioner of Income Tax, reported in 160 ITR
961 was relied upon for its holding to the effect
that interest levied under section 215 of the Act
was by way of compensation for depriving the
revenue of the benefit of the tax for the period
during which it had remained unpaid, and that
levy of interest is the part of the process of
assessment. It was held that since the assessee
had made no application for reduction or waiver
of interest under section 215, no question arose
of the relevant authority having denied
improperly interest or waiver of interest.
[e] The decision of the Madras High Court in
M.N.Kanagasabai Chettiar v. Commissioner of
Income Tax, reported in 75 ITR 672 was cited for
relying upon the observations to the effect that
the company cannot, by a self-serving resolution
of the board of directors, alter the situation
and voluntarily give certain tax benefits to the
assessee and gain certain advantages to itself
under the guise and in the exercise of the indoor
management of the company.
[f] The Supreme Court in Central Manganese case
(supra) approved the decision of this Court in
Bhikhoobhai N. Shah v. Commissioner of Income
Tax, reported in 114 ITR 197, in which it was
held that, waiver or reduction of interest
pre-supposses that liability has been incurred by
the assessee, and that if no liability has been
incurred, then there is no question of exercise
of discretion of waiver or reduction of interest.
It was also held that the assessee in an appeal
against the order of assessment cannot question
the 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.
Commissioner of Income Tax, reported in 158 ITR
102 was relied upon on behalf of the Revenue for
the proposition that 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 by 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 Chancery Division in
Dickison (Inspector of Taxes) v. ABEL,
reported in (1996) All E.R. 484 was
cited for the proposition that a
conditional promise made without valuable
consideration was unforceable.
(ii) The decision of the House of Lords in
Scammell v. Ousto, reported in (1941)1
All E.L.R. 14 was cited to point out
that, in a case where the expression `on
hire-purchase terms' was found to be too
vague to be given any definite meaning,
it was held that there was no concluded
agreement.
(iii) The decision of the Chancery Division in
Myton Ltd. v. Schwab-Morris reported in
(1974)1 All E.R. 326 was referred to
point out that in a case where the
condition precedent of making a deposit
was not fulfilled, it was held that the
plaintiff was not bound by the agreement.
(iv) The decision of the Court of Appeal in
May And Butcher Ltd. v. The King,
reported in (1934) 2 K.B. 17 was
referred to for the proposition that it
was well recognised principle of contract
law that an agreement between two parties
to enter into an agreement in which some
critical part of the contract matter is
left undetermined, is no contract at all.
[i] (i) The decision of the Supreme Court in Col.
D.I. MacPherson v. M.N. Appanna,
reported in AIR 1951 SC 184 was cited for
the proposition that the mere statement
of the lowest price at which the vendor
would sell contains no implied contract
to sell at the price to the person making
an enquiry. It was held that, as there
was no express assent to the offer made
by the plaintiff, there was no concluded
contract.
(ii) The decision of the Supreme Court in M/s
Zodiac Electrical Pvt. Ltd. v. Union
of India, reported in AIR 1986 SC 1918
was cited for the proposition that, where
the correspondence showed that no
unqualified acceptance of the counter
offer was made, there was no concluded
contract between the parties.
(iii) The decision in M/s Rickmers Verwaltung
Gimb H. v. Indian Oil Corporation Ltd.,
reported in AIR 1989 SC 504 was referred
to for the proposition that, while
deciding the question whether any
agreement can be spelt out from the
correspondence between the parties, the
cardinal principle to remember is that it
is the duty of the Court to construe
correspondence with a view to arrive at a
conclusion whether there was any meeting
of mind between the parties, which would
create a binding contract between them.
[j] The decision of the Kerala High Court in Anand
Liquors v. Commissioner of Income Tax, reported
in 232 ITR 35 was cited for the proposition that
where there is an explanation and no material to
substantiate or support it, the proviso to the
Explanation 1 to section 271(1)(c) of the Act is
attracted. 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. Commissioner of Income Tax,
reported in 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 :
14. On the question whether interest accrued during
the Accounting Year of 1-7-1977 to 30-6-1978, it would be
appropriate to refer to the stipulations of the agreement
and deed of assignment, which have bearing on the
question of accrual of interest. By the agreement dated
28th February 1977 (Annexure `P' in ITR No. 56 of 1986),
the assessee who held entire issue 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 1st March 1977. In paragraph 12 of the agreement,
it was stipulated;
"On the first day of March 1977, the vendor
shall, put the purchaser in full possession,
custody and control of the said industrial
undertaking ad the business of Sarabhai Chemicals
Division and of the business of the said Sarabhai
Common Services Division and the purchaser shall
be deemed on and from 1st day of March 1977 to
carry on the business of the Sarabhai Chemicals
Division and Sarabhai Common Services Division as
its own and for and on its own account without
any reference or recourse whatsoever to the
vendor".
In paragraph 3(b)(iii), the mode of payment of
the consideration amount for which the transfer was made
was stipulated, which, to the extent that it relates to
payment of interest, reads as under :
"The payment of moneys in the manner aforesaid on
or before the stipulated dates shall be of the
essence of the contract. Provided, however, that
in case the purchaser fails to pay any instalment
on the due date, then, in such event,
notwithstanding and in addition to any other
rights and remedies accruing or available to the
vendor, the vendor shall be entitled to call upon
the purchaser to pay interest at such rate as is
equal to the rate of interest payable by the
vendor to its bankers in the ordinary course of
business from the due date of payment of the
instalment until the date of actual payment
thereof."
14.1 In context of the aforesaid agreement of
28-2-1977, the parties entered into a supplemental
agreement on 4-3-1977, by which more elaborate provisions
were made for payment of interest and as stipulated in
paragraph 3 of the supplemental agreement, the amendments
and modifications made by it in the principal agreement
dated 28-2-1977 were to be deemed to have formed part of
and incorporated in the principal agreement from the date
of execution thereof. The parties agreed to the mode of
payment of the consideration under the principal
agreement as set out in this supplemental agreement and
to the extent to which it has relevance on the aspect of
payment of interest, the terms so substituted read as
under :
"[D] The parties hereto declare, acknowledge
and confirm that the proposal relating to
payment of interest on the unpaid
purchase price remaining outstanding from
time to time was through oversight and
accident not incorporated in the
principal agreement. The parties hereto
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=00 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
installments, together with
interest thereon at the rate
hereinafter provided, the first
of such installments shall be due
and payable on the 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
xxxxxx
xxxxxx
xxxxxx
12.1/2% to be paid on or before the
1-10-1986
The purchaser shall pay simple interest
at the rate of 11% per annum on the
balance of the unpaid purchase
consideration remaining outstanding from
time to time and, if the purchaser
commits ay default or delay in paying any
installment or installments on the due
date, the purchaser shall pay 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 from the due date of payment of
installment until the date of payment
thereof."
14.2 In the deed of assignment dated 28th June 1977,
it was again reiterated that in light of the agreement
dated 28th February 1977, the assessee had agreed to
transfer and assign on and with effect from 1st day of
March 1977 the industrial undertaking and business of its
Sarabhai Chemical Division and the business of its
Sarabhai Common Services Division as going concerns to
Elscope pursuant to the supplemental agreement dated 4th
March 1977, which was referred to in paragraph (Q). It
was, inter alia, stated that the amount of Rs. 2 crore
would be paid as and when demanded by the vendor `and
will carry interest at the rate as is equal to the rate
of interest which the vendor pays to its bankers in the
ordinary course of business', and as regards the amount
of Rs.4,54,18,760=89, it was provided that the said
amount was payable as per the installments mentioned
therein `and will carry interest at 11% per annum on the
amount remaining outstanding from time to time'. It was
further provided that :
"The payment of installments together with the
interest at the rate of eleven percent per annum
thereon in the manner and on the dates aforesaid
shall be of the essence of the contract; provided
however that in case the purchaser fails to pay
any instalment on the due date then in such
event, notwithstanding and in addition to any
other rights and remedies accruing or available
to the vendor, the vendor shall be entitled to
call upon the purchaser to pay interest on such
instalment at such rate as is equal to the rate
of interest as payable by the vendor to its
bankers in the ordinary course of business from
the due date of payment of the instalment until
the date of actual payment thereof."
14.3 It would be a trite thing to say that the terms
of payment of interest which were binding on the parties
were those which finally came to be incorporated in the
deed of assignment. Payment of interest was treated as
essence of the contract and as noted above. If the
installments were not duly paid, the rate of interest was
to be higher than 11% 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 30th June 1978
on which date the assessee passed the resolution dated
30th June 1978, by which it accepted the proposal of its
subsidiary Elscope sent on 15th June 1978 and substituted
the mode of payment by purporting to shift the date of
charging of interest to 1-7-1979.
14.4 As noted above, in response to the inquiry from
the ITO in the quantum proceedings, the assessee had
produced letter dated 15th June 1978 of Elscope and its
resolution dated 30th June 1978. In the letter dated
15th June 1978 (Annexure `F' in ITR No. 56 of 1986), the
vendee, Elscope, referring to the deed of assignment
dated 28th June 1977 and the deed of conveyance dated
February 1978 in respect of movable and immovable
properties respectively and to the terms stipulated for
paying the consideration, proposed the method of payment
of the balance of Rs.6,54,10,253=49, which remained
outstanding by suggesting that Rs.1,84,10,253=49 out of
the said amount will not carry any interest and will be
paid as and when demanded by the assessee, while Rs.4.70
crores will be paid in five annual installments, first of
which was to be made payable on 1st March 1987 with an
option to the vendee to repay the sum on 1st March 1991
and that the said amount `shall carry simple interest at
11% per annum with effect from 1st July 1979'. It was
further mentioned that the vendee i.e. Elscope had in
the course of re-organisation of the business,
transferred and assigned of its undertakings and business
to ASE, and that the mode of payment of the purchase
price and the question of security was still under
consideration between them. It was then stated,
"However, we confirm that we shall provide you the same
security or security similar to the security as may be
provided by Ambalal Sarabhai Enterprises Pvt. Ltd. in
respect of deferred purchase consideration".
14.5 In the minutes dated 30th June 1978, after
referring to the said proposal regarding revised mode of
payment, it was, inter alia, resolved, " ..............
the company hereby approve, accept and adopt the
following revised mode of payment as contained in letter
dated 15th June 1978 received from Elscope Pvt. Ltd.
..........". Accordingly, it was resolved that the
amount of Rs.1,84,10,253=45 will not carry any interest
and that Rs.4.70 crores `shall carry simple interest at
11% per annum with effect from 1st July 1979 and the said
amount will be secured to the satisfaction of the
company'.
14.6 It will be seen from the above terms of the
supplemental agreement as amending the principal
agreement as well as the deed of assignment that the
transaction took place with effect from 1st March 1977
and the interest was to be charged on the amount
outstanding from time to time. The obligation to pay
interest was thus incorporated in the agreement and the
deed of assignment in context of the transaction that
took place with effect from 1-3-1977. The obligation to
pay interest was not a separate debt, but the debt
incurred under under the contract included the obligation
to pay interest. To say that no date of accrual of
interest was fixed in the contract is to misconstrue the
provisions thereof 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. 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
recognize 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, unless otherwise
stipulated by the parties.
14.7 Interest accrued in most circumstances on the
time basis to be determined by the amount outstanding and
the rate applicable. Recognition of revenue requires
that the revenue is measurable, and that at the time of
sale, it would not be unreasonable to accept ultimate
collection. In the present case, in view of the
categorical stipulation that interest will be payable on
the deferred consideration amount in respect of the sale
which became effective from 1st March 1977, the interest
started accruing on that time basis from 1st March 1977
determined by the amount outstanding from time to time
and the rate applicable which both were stipulated in
clearest possible terms in the deed of assignment dated
28th June 1977 and the agreements which preceded it.
That what already accrued during the Accounting Year from
1-7-1977 to 30-6-1978 could not be nullified by the
resolution of 30th June 1978 said to have been passed at
2.00 p.m. on that day. As held by the Supreme court in
C.I.T. v. Shiv Prakash Janak Raj (supra), concept of
real income cannot be employed so as to defeat the
provisions of the Act and the Rules. In that case, it
was held that the waiver of interest after the expiry of
the relevant accounting year only meant that the assessee
was giving up the money which had accrued to it. It
cannot be said that the interest amount had not accrued
to the assessee.
14.8 In State Bank of Travacore (supra), the Supreme
Court held that the concept of real income could not be
so read as to defeat the object and the provisions of the
statutory enactment and it could not make accrued income
non-income. The concept of real income would apply where
there has been a surrender of income which in theory may
have accrued but in the reality of the situation, no
income had resulted because the income did not really
accrue. In Shiv Prakash Janak Raj (supra), the Supreme
Court reiterated that there is no room nor would it be
permissible for the Court to import concept of real
income so as to whittle down, qualify or defeat the
provisions of the Act and the Rules.
14.9 In Hindustan Motors (supra), Calcutta High Court
held that accrual of interest takes place normally on day
to day basis and it does not depend upon the making of
account. 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.
14.10 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 28th June
1977, the date of charging of interest was fixed as
1-7-1978. 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 9th
March 1988 that the resolution dated 25-2-1977 and the
circular resolution dated 3-3-1977 surfaced when they
were furnished with the assessee's reply dated 9th March
1988 in the penalty proceedings initiated against it
under section 271(1)(c) of the Act. There was no whisper
of these resolutions mentioning the date from which
interest was to be charged as 1-7-1978 made in any of the
replies of the assessee sent on 29-12-1982, 26-6-1984 and
14-8-1985 to the showcause notice issued in the penalty
proceedings. There is no explanation forthcoming to show
why were these resolutions of 25-2-1977 and 3-3-1977 not
produced in the quantum proceedings or thereafter in the
penalty proceedings, if the date of 1-7-1978 was fixed in
them as the date from which the interest was to be
charged. In fact, as noted above, the supplemental
agreement of 4-3-1977 was entered into between the
parties specifically for incorporating interest clause
and it would be too naive to assume that the company of
the assessee's standing, assisted by its Chartered
Accountants and Lawyers would through oversight not
mentioned an important term of the date of charging of
interest in the agreement and the deed of assignment and
even thereafter, at any time, during the quantum
proceedings or in any of the replies to the show cause
notice in the penalty proceedings prior to 9th March 1988
when the assessee suddenly came up with the idea that the
resolutions dated 25th February 1977 and 3rd March 1977
should come to their rescue. There is, therefore,
absolutely no substance in the contention that the
interest did not accrue to the assessee during the
Accounting Year 1-7-1977 to 30-6-1978.
15. The only question that now remains to be examined
is whether the interest that had accrued and which the
assessee did not in fact receive was given up for any
commercial expediency after it had accrued upto 30th June
1978, as pleaded in the alternative on behalf of the
assessee on the basis of the resolution dated 30th June
1978. The ground of commercial expediency put forth was
that the debt which had not been secured was now secured.
In the proposal dated 15th June 1978 sent by the
assessee's subsidiary Elscope which had purchased its
undertaking, while proposing modification in the terms of
the deed of assignment dated 28th June 1977, the vendee
had suggested modification of the method of payment of
the balance amount of Rs.6,54,10,253=49, as narrated
above and suggesting that the amount which was payable on
demand will not carry any interest while the amount which
was to be paid by installments will carry simple interest
at 11% per annum with effect from 1st July 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 15th June 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 4th March 1977 substituting
the mode of payment originally stipulated in the
agreement dated 28-2-1977. 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 Pvt. Ltd." to whom the business purchased by
this subsidiary 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 Pvt.
Ltd. in respect of the deferred purchase consideration".
Admittedly, the vendee had already executed the deed of
assignment on 25th April 1978, in favour of the ASE for
the assets which included the asset purchased by Elscope
from the assessee, under which the mode of payment
between the two was finally settled. Therefore, the
proposal was made in the letter dated 15th June 1978 of
the vendee on a statement namely, "mode of payment of
purchase price and question of security is still under
discussion between our company and Ambalal Sarabhai
Enterprise Pvt. Ltd." which was not correct. The
assessee readily obliged its subsidiary Elscope by
accepting the said proposal of shifting the date of
accrual of interest to 1st July 1979, and though no
concrete proposal of security was made, by simply stating
that "the said amount will be secured to the satisfaction
of the (assessee) company". Admittedly, no security
passed. The Commissioner of Income Tax (Appeals) has
admirably discussed this aspect in paragraph 15 of his
order, exposing the hollowness of the assessee's stand
that it secured bonds of ASE, in the following words :
"It was contended that since the Bonds themselves
were secured on the assets of ASE Pvt. Ltd., it
should be viewed as security furnished by the EPL
for the unpaid purchase price payable to the
appellant company. The appellant has gone to the
extent of saying that the debt itself was
satisfied (refer para marked 1 of the appellant's
submissions starting towards the middle of page 3
of the appellant's letter dated 6-1-1984) by
passing on the said secured Bonds. These bonds
carried interest of 11% and they were redeemable
in 1991 or subject to some other conditions i
1987. They were marketable but since they
carried interest at 11% only and they were not
redeemable before 1987, the market price quoted
was about 2/3rd of the face value. So, i the
process, the appellant company has accepted
assets worth 2/3rd of the market price while
actually as per the original agreement, the
installments would have started in October 1979
and ended in October 1986 against which as per
revised terms suggested in June 1978, the
installments would have started falling due from
1987 only. Apart from postponement by about
eight years, it is obvious that there was no
security worth the name actually given by EPL for
making payments in cash and what was actually
given was Bonds whose market price was 2/3rd of
its face value. All these concessions are given
to EPL just like that, and for no real
consideration."
15.1 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 1-7-1977 to 30th June 1978 (till the moment the
resolution dated 30th June 1978 was passed at 2.00 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 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
interest by effecting such waiver in favour of the wholly
owned subsidiary which may be incurring losses. The
waiver of accrued interest for commercial expediency
cannot be confused with the last minute device adopted
for evasion of tax. The arrangement made on 30th June
1978 was clearly a subterfuge aimed at shifting the
profits which would have shown due to the accrual of
interest. The resultant benefit to the wholly owned
company Elscope Pvt. Ltd. remained assessee's own
benefit, because, it was the sole shareholder of the
vendee company. Commercial expediency must be viewed in
the light of the requirements of the business and the
actual services rendered, facilities given, the
legitimate needs of the business met or other benefit to
the business derived by the assessee, for which the claim
is relinquished. Any fanciful or abstract consideration
of commercial expediency is out of place in context of
allowance of expenses incurred wholly and exclusively for
the purposes of business under section 37 of the Act.
Whether the expenditure was incurred out of commercial
expediency or not can be judged on objective standards
such as, the nature of business, the terms and conditions
of agreement or contract having bearing on the
expenditure, the purpose for which the expenditure is
incurred by payment or by adopting the mode of
relinquishment of the accrued amount and whether the
expenditure so incurred was meant to serve, promote or
increase commercial activity or business of the assessee.
In the present case, there was, if at all, commercial
inexpediency in giving up the accrued interest, because,
there was no valid justification to relinquish it from
the assessee's business point of view. The only aim was
to avoid payment of tax which had become due on the basis
of accrual of interest and commercial expediency is only
a dignified garb in which arrangement calculated to evade
tax is sought to be covered. We have no hesitation in
holding that the Tribunal, Commissioner of Income Tax
(Appeals) and the Income Tax Officer have, for very valid
reasons, rejected the claim of the assessee that the
interest did not accrue during the accounting year due to
the resolution dated 30th June 1978 and that if accrued,
it was given up due to any commercial expediency.
16. The Tribunal was, therefore, right in holding
that the interest amount of Rs.66,29,236=00 was 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.
The questions No. 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.
16.1 There was no challenge levelled against the
resolution dated 30th June 1978 on the ground that it was
not a genuine resolution. Law permits the contracting
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 30th June 1978 accepted
the proposal of the vendee as contained in the letter
dated 15th June 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 Pvt. Ltd."
Though the resolution by which it was agreed that
the amount of Rs.1,84,10,253=49 will not carry any
interest, and that Rs.4.70 crores payable in five equal
installments shall carry simple interest at 11% per annum
w.e.f. 1-7-1979, could not be given any retrospective
effect so as to facilitate evasion of the tax liability
that already had arisen for the Assessment Year 1979-80,
it being a valid stipulation, changed the mode of payment
from the date of the resolution and therefore, under the
changed mode of payment adopted under it, no interest was
to accrue during the accounting period from 1-7-1978 upto
30th June 1979 i.e. before 1-7-1979 as per the new
stipulation and therefore, the reasoning of the Tribunal
on that count appears to be correct as regards the
Assessment Year 1980-81. Since no interest accrued in
the Accounting Year 1-7-1978 to 30-6-1979, there could
arise no question of relinquishment of interest for any
commercial expediency, because, you cannot relinquish
income that has not accrued at all. The questions No. 1
and 2 for the Assessment Year 1980-81 raised at the
instance of the revenue in Income Tax Reference No. 56
of 1986 are, therefore, answered accordingly, against the
revenue and in favour of the assessee.
16.2 The Reference No.56 of 1986 stands disposed of in
terms of the above answers to Questions Nos. 1, 2 and 3
for the Assessment Year 1979-80 and to Questions Nos. 1
and 2 for the Assessment Year 1980-81 with no order as to
costs.
[II] INCOME TAX REFERENCE NO. 75 OF 1987 ::
17. The counsel appearing for the Revenue contended
in Reference No. 75 of 1987 that the Tribunal has
committed gross error in deleting the interest levied
under section 215 of the Act in respect of the interest
income added for the Assessment Year 1979 - 80 on the
ground that the assessee could not have predicted the
assessment based on estimate of total income and the
question of determining accrual of income is a highly
complex issue. It was contended that the levy of
interest under section 215(1) upon the amount by which
the advance tax paid fall short of the assessed tax was
automatic and that in the present case, in view of the
stipulation to pay interest, it could not be said that
the assessee could not have predicted accrual of
interest. The Tribunal relying upon the decision of the
Gujarat High Court in Commissioner of Income Tax v.
Bharat Machinery & Hardware Mart, reported in 136 ITR 876
set aside the levy of interest under section 215 of the
Act.
17.1 The 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.
17.2 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 being likely to be less than the
income on which the advance tax payable by him under
section 210 had been computed. Thus, the assessee was
required to furnish estimate of his current income, if
according to him, his income was likely to be less than
the advance tax payable under section 209A (1) as
contemplated by section 209A(2) and had an option to do
so when called upon to pay advance tax by virtue of
section 210 as contemplated by section 212 of the Act.
17.3 I‰n the present case, the assessee never filed
any estimate of advance tax until the order under section
210 of the Act was issued on it, requiring it to pay
advance tax and a notice of demand was sent on it on
17-10-1978, by which it was required to pay
Rs.1,22,22,757=00 and subsequent notice also under
section 210 of the Act served on it on 8-12-1978 for the
revised advance tax of Rs.1,28,74,172=00. Thereafter,
the assessee filed its estimate of `Nil' advance tax in
Form No. 29 on 14-12-1978. In pursuance of the `Nil'
estimate, advance tax paid also was `Nil'. Therefore,
this was not a case where the assessee had sent no
estimate which would be governed by section 217(1) of the
Act. The ITO completed the assessment by order dated
20th September 1982 by which it was ordered to charge
interest under section 215 of the Act and an amount of
Rs.19,30,364=00 was added in the tax calculation.
17.4 There is no substance in the contention that the
ITO could not have ordered to charge interest under
section 215 of the Act when the draft order mentioned
section 217 and no directions were issued by the IAC
under section 144B of the Act to change that to section
215. The IAC by his order dated 18-9-1982 did not issue
any direction on the initiation of proceedings under
various provisions pursuant to the proposed assessment
order. Section 144B of the Act, as it existed at the
relevant time, provided for reference to the IAC in
certain cases when the ITO proposed to make any variation
in the income or loss returned, which would be
prejudicial to the assessee. The assessee forwards his
objections to such variations. The IAC then issues
directions for the guidance of the assessee under section
144B (4) which were binding on the ITO. The IAC 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 ITO.
Therefore, there is no substance in the contention, which
was not even raised before the Tribunal, that the ITO's
final assessment charging interest under section 215 of
the Act was against the directions of the IAC or without
jurisdiction. It was perfectly within the jurisdiction
of the ITO to charge interest under section 215 and add
the tax amount worked out, on the facts, in the tax
computation.
17.5 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 rate of
twelve per cent per annum from the 1st day of
April next following the said financial year upto
the date of the regular assessment shall be
payable by the assessee upon the amount by which
the advance tax so paid falls short of the
assessed tax.
(2) xxxxx
(3) xxxxx
(4) In such cases and under such
circumstances as may be prescribed, the Income
Tax Officer may reduce or waive the interest
payable by the assessee under this section.
(5) xxxxx
17.6 It will be noticed from the wordings of section
215(1) that simple interest at the rate of 12% per annum
from 1st day of April next following the financial year
in which advance less than 75% of the assessed tax was
paid, upto the date of regular assessment "shall be
payable" by the assessee upon the amount by which the
advance tax paid fell short of the assessed tax. The
words "shall be payable" bring about the statutory
liability to pay such interest as a direct consequence of
non-payment of advance tax as stipulated in this
provision. Under sub-section (4) of section 215 of the
Act, the ITO in cases and under circumstances as were
prescribed by the Rules (Rule 40), was empowered to
"reduce or waive the interest payable by the assessee
under this section". These words also indicate that the
liability to pay interest statutorily arises under
section 215(1) when the assessee has paid less advance
tax as contemplated by that provision. The rationale
behind this provision is obvious. The amount of tax
found payable on regular assessment not having been paid
earlier as contemplated by law was retained by the
assessee and to that extent, the State coffers suffered.
Interest was, therefore, required to be levied by way of
compensation. Once the interest became payable by virtue
of the operation of section 215(1), it would become open
to the assessee to apply to the ITO after such order is
made to show that a reduction or waiver of interest is
justified under Rule 40. (See Central Provinces
Manganese Ore Co. Ltd. v. Commissioner of Income Tax,
reported in (1986) 3 SCC 461).
17.7 The provision of section 18A(6) of the Income Tax
Act of 1922 as originally enacted and which corresponded
to section 215(1) of the Act of 1961 left no discretion
to the ITO and if the estimate fell below the prescribed
limit, the ITO was obliged to direct payment of interest
as held by the Supreme Court in the constitution bench
decision in I.S.A.L. Narayan Row v. Ishwarlal
Bhagwandas, reported in AIR 1965 SC 1818 (See paragraph
17 of the judgement). Fifth proviso was added to
sub-section (6) of section 18 retrospectively from
1-4-1952 by reason of which, ITO 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 judgement that there was at
the date of the original assessment an absolute
obligation imposed upon the assessee to pay interest
under section 18-A (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 assessment was made in this case.
It was also held that his power to reduce or waive
interest could be exercised only in 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 depend upon any other factor beyond
those specifically recognised by section 215(1). The CIT
(Appeals) had given very cogent reasons for upholding the
levy of interest in paragraphs 24 and 25 of his order
dated 29-2-1984 and the Tribunal has, for no valid
reason, taken a different view and curiously brushed
aside the addition on account of interest in computation
of tax, which clearly became payable under section 215(1)
on the established facts of the case.
17.8 Reliance placed by the Tribunal and on behalf of
the assessee on the decision of this Court in
Commissioner of Income tax v. Bharat Machinery &
Hardware Mart, reported in 136 ITR (Guj) 875, is wholly
misconceived in the context of the facts of the case.
That was a case falling under section 217 (1A) of the Act
and it was held that the question of the assessee being
required to make an estimate of current income for the
purpose of advance tax under section 212(3A) of the Act
of 1961, could arise only if he could reasonably be
attributed with the knowledge that his current income was
likely to be greater than the income on which the advance
tax was payable under section 210. In that case, there
was a discrepancy between the income returned by the
assessee and the income as assessed by the ITO, and the
tax payable exceeded the advance tax by more than 33.1/2
per cent. The discrepancy had arisen by reason of the
fact that the assessee had submitted his return on the
basis of the income as disclosed by the books of account
maintained by him, but the ITO did not accept the
correctness of the books of account and acting under
section 145(1) made an estimate of the gross profits on
the basis of 18% of the total sales and it was not shown
that in prior years, the assessment was made by estimate
of gross profits. In the background of those facts, the
Court held that since difference between the returned
income and the assessed income had arisen due to addition
made by the ITO by an estimate of the gross profit under
the direction of 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) and
that the ITO had misapplied law in levying interest under
section 217 (1A) and that it was a clear case of error of
law committed by the ITO capable of rectification 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 ITO 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.
17.9 The decision of the Supreme Court in Central
Provinces Manganese Ore Co. Ltd. (supra) was applied by
the Division Bench of this Court in Commissioner of
Income Tax v. Gordhanbhai Jethabhai, reported in 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(1) is payable by the assessee or not,
what the Income Tax Officer has to consider is whether
the required conditions are satisfied or not, and at this
stage, he is under no obligation to consider whether
interest should be reduced or waived, which question
would arise after the aspect of payability of interest is
determined. The point of time when the ITO has to decide
whether to reduce or waive the interest would be
subsequent.
17.10 The Supreme Court in Central Provinces Manganese
Ore Co. Ltd. (supra), approved the decision of the
Karnataka High Court in National Products v. C.I.T.
reported in 108 ITR 935 and the decision of the Gujarat
High Court in Bhikhoobhai N. Shah v. Commissioner of
Income Tax, reported in 114 ITR 197, in which, referring
to the legal position laid down in National Products v.
C.I.T. (supra), it was held that waiver or reduction of
interest pre-supposes that the liability has been
incurred by the assessee and that if no liability was
incurred, then there was no question of exercise of
discretion of waiver or reduction of interest.
17.11 For the foregoing reasons, we hold that the
Tribunal has erred in law in holding that the charge of
interest under section 215 was not justified in the
instant case. The question referred to this Court in
Income Tax Reference No. 75 of 1987 is, therefore,
answered accordingly in favour of the revenue and against
the assessee. The reference stands disposed of
accordingly with no order as to costs.
III. INCOME TAX REFERENCE NO. 220 OF 1995 :
18. This takes us to Income Tax Reference No. 220 of
1995 in which the assessee challenges the Tribunal's
order confirming the penalty of Rs.4 lakhs levied under
section 273(2)(a) of the Act. It was argued by the
learned counsel for the assessee that the imposition of
this penalty was not justified, because, it cannot be
said that the assessee had reason to believe that the
estimate of advance tax filed by it was untrue. It was
also contended that penalties levied under section
273(2)(a) were determined in cases of two companies of
the same group Fabriquip Pvt. Ltd. and Packart Pvt.
Ltd. in the Assessment Year 1980-81, because, it was
held in similar circumstances that the resolution passed
on 30th June 1978 for forgoing interest had become
applicable from 1-7-1978.
18.1 The learned counsel for the Revenue on the other
hand supported the decision of the Tribunal and the
authorities below it and argued that, in view of the
agreement dated 28-2-1977 as modified by the
supplementary agreement dated 4th March 1977 and the deed
of assignment dated 28-6-1977, the assessee knew or had
reason to believe that the `Nil' estimate of advance tax
filed by it was wrong.
18.2 The authorities and the Tribunal have held that,
while filing the `Nil' estimate of advance tax on
14-12-1978, the appellant had full knowledge of the
interest income of Rs.66,29,236=00 which had accrued
knowing or having reason to believe that `Nil' estimate
was untrue, it had filed the same.
18.3 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 former emanates as a statutory
consequence under section 215(1), the later requires, by
virtue of its quasi-criminal nature, that it should be
proved that the assessee knew or had a reason to believe
that the estimate was untrue. The word `untrue' means
that what is not true; and true in the context would mean
that what is in accordance with fact or reality and is
genuine i.e. not spurious. Therefore, the revenue has
to establish under section 273(2)(a) that the assessee
when it filed the `Nil' estimate knew or had reason to
believe that it was not genuine and was spurious. Such
mental state of the assessee can be inferred from the
relevant objective facts. In the present case, the
resolution of 30th June 1978 was never doubted by the
authorities to be spurious and under that resolution, the
date of accrual of interest was shifted to 1st July 1979
by substituting the mode of payment as was incorporated
in the agreement and the deed of assignment. The `Nil'
estimate was filed on 14-12-1978, much after the said
resolution was passed. In the background of the said
resolution, by which the assessee intended to shift the
date of accrual of interest to 1-7-1979, it is difficult
to accept that the assessee had reason to believe that
the `Nil' estimate was untrue. The possibility that the
assessee reasonably believed that, in view of the
resolution dated 30th June 1978, it could legitimately
file `Nil' estimate, cannot be ruled out. In view of the
nature of the change in the stipulation of mode of
payment made by the resolution dated 30th June 1978, no
definite conclusion can be drawn that the assessee had
reason to believe that the `Nil' estimate filed by it was
untrue. Merely because on assessment, the assessee's
stand that the resolution which was passed on the last
day of its Accounting Year i.e. on 30th June 1978 was
not accepted on the ground that the interest that had
already accrued during the Accounting Year on the
strength of the contractual terms cannot be made `not to
accrue after its actual accrual, it cannot be inferred
with any certainty that the assessee had reason to
believe that its `Nil' estimate was untrue. The penalty
under section 273(2)(a) is not an automatic outcome of
the addition of such income. The imposition of penalty
under section 273(2)(a) was, therefore, not justified in
the present case and therefore, the Tribunal was not
justified in law in confirming the penalty of Rs.4 lakhs
levied under section 273(2)(a) of the Act on the
assessee.
18.4 The question referred to this Court in Income Tax
Reference No. 220 of 1995 is, therefore, answered in the
negative in favour of the assessee and against the
revenue. The reference stands disposed of accordingly
with no order as to costs.
IV. INCOME TAX REFERENCE NO. 58 OF 1993 :
19. We now proceed 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.
19.1 The provisions of section 271(1)(c) of the Act,
as they were operative at the relevant time, read as
under:-
"Failure to furnish returns, comply with notices,
concealment of income etc.
271. (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 -
(a) xxxxx
(b) xxxxx
(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 -
(i) xxxxx
(ii) xxxxx
(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 Officer on assessment) in respect of
which the particulars have been concealed or
inaccurate particulars have been furnished
exceeds a sum of twenty-five thousand rupees, the
Income Tax Officer shall not issue any direction
for payment by way of penalty without the
previous approval of the Inspecting Assistant
Commissioner.
Explanation 1 : Where in respect of any facts
material to the computation of the total income
of any person under this Act, -
(A) such person fails to offer an explanation
or offers an explanation which is found by the
Income Tax Officer or the Appellate Assistant
Commissioner or the Commissioner (Appeals) to be
false, or
(B) such person offers an explanation which
he is not able to substantiate,
then, the amount added or disallowed in computing
the total income of such person as a result
thereof shall, for the purposes of clause (c) of
this sub-section, be deemed to represent the
income in respect of which particulars have been
concealed :
Provided that nothing contained in this
Explanation shall apply to a case referred to in
clause (B) in respect of any amount added or
disallowed as a result of the rejection of any
explanation offered by such person, if such
explanation is bonafide and all the facts
relating to the same and material to the
computation of his total income have been
disclosed by him.
19.2 The satisfaction in the course of assessment
proceedings that any person has concealed the particulars
of his income or furnished inaccurate particulars of his
income may give rise to a liability to pay penalty as
provided by section 271(1)(c)(iii) of the Act.
Accordingly, 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'.
Explanation 1 to section 271(1)(c)(iii) raises a
presumption in cases where such person (a) fails to offer
an explanation or offers an explanation which is found by
the Income Tax Officer or the Appellate Assistant
Commissioner or C.I.T. (Appeals) to be false, or (b)
offers an explanation which he is not able to
substantiate, in respect of any facts material to the
computation of the total income of such person. This
presumption is to the effect that the amount added or
disallowed in computing the total income by the ITO, AAC
or CIT (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 ITO or AAC or the
Commissioner (Appeals) to be false' occurring in
sub-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 sub-clause (A) of Explanation 1, there can
arise no question allowing the assessee to urge that he
bonafide believe in the explanation which was proved to
be false or which never was given, for, one cannot be
said to have a reasonable bonafide belief in an
explanation which never was given or an explanation
proved to be false.
19.3 However, in cases where the explanation offered
by such person in the quantum proceedings could not be
substantiated by him in those proceedings, as a result of
which, the amount was added or disallowed in computing
the total income of such person by the ITO, AAC or the
Commissioner (Appeals) before whom the explanation given
could not be substantiated as contemplated by sub-clause
(B) to Explanation I. The deeming fiction that the added
/ disallowed amounts represent the income in respect of
which particulars have been concealed contained in
Explanation 1 will not apply if the explanation that was
given by the assessee in the quantum proceedings which he
could not substantiate in those proceedings was (i)
bonafide and, (ii) if he had disclosed all the facts
relating to the same and material to the computation of
his total income.
19.4 Penalty proceedings which are an aftermath of the
quantum proceedings are not devised to undo the findings
reached in the quantum proceedings. They are in
continuity of the outcome of the quantum proceedings. If
the assessee has concealed the particulars of his income
or furnished inaccurate particulars of such income, which
is added or allowed in the quantum proceedings, there
still would remain to be considered the question as to
the nature and circumstances of concealment and the
penalty that may be imposed on him when the requisite
satisfaction is reached by the ITO, AAC or Commissioner
(Appeals), and that is why, the show cause notice for the
penalty proceedings comes to be issued under section
271(1) after reaching the requisite satisfaction. In a
large umber of cases where the assessee was not able to
substantiate the explanation in respect of the income and
by rejecting his explanation, the ITO, AAC and/or
Commissioner (Appeals) added or disallowed the amount in
computing the total income and it is not a case of `no
explanation' or an explanation already found to be false
by the ITO, AAC or the Commissioner (Appeals) as
contemplated by clause (B) of Explanation 1, then there
still remains a scope to examine the bonafides of the
explanation already given by the assessee in the quantum
proceedings. The rationale behind not giving similar
consideration to cases falling in sub-clause (A) of
Explanation 1 to a person who `fails to offer a
explanation before the ITO 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, explanations
which in fact were not there. In cases where explanation
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 bonafide
one ad that he had disclosed all facts relating to such
explanation ad material to the computation of his total
income during the quantum proceedings.
19.5 The 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 under section
271(1)(c) was issued without any basis. He submitted
that the assessee had in the quantum proceedings taken up
the stand that there did not accrue any interest in view
of the fact that under the proposal of Elscope made in
their letter dated 15th June 1978 and the resolution
dated 30th June 1978, which was passed by the assessee
accepting that proposal, interest was to be charged only
from 1st July 1979 and the earlier mode of payment under
the agreement and deed of assignment was substituted. He
heavily relied upon the draft assessment order for the
year 1979-80 prepared by the I.T.O. under section 143(3)
read with section 144-B of the Act to contend that it was
disclosed during the quantum proceedings as stated in
that order that the assessee had not received any
interest from Elscope to whom the undertaking and
business were transferred, and that interest was payable
only from 1st July 1979 on the deferred payment. As
recorded in the draft order, it was noticed that, in the
return, no interest was shown as received or receivable
by the assessee. The assessee was therefore asked to
showcause why interest on accrual basis be not taxed on
the amount due from Elscope as the outstanding purchase
consideration. In the letter dated 16th September 1981,
referred to in para 10 of the draft order, an explanation
was given by the assessee that no interest had been
charged pursuant to the revised mode of payment on the
outstanding amount for the year in question ended on 30th
June 1978. Extracts from the minutes of the meeting of
the Board of Directors held on 30th June 1978 were filed.
The assessee wrote another letter on 21-1-1982 explaining
the reasons as to why interest should not be taxed in its
hands. It was contended that the interest cannot be
taxed on hypothetical basis. The stand of the assessee
was that though it followed the mercantile system of
accounting, when the assessee did not actually receive
any interest, nor did it make any entry in respect
thereof, it could not be said that interest had accrued
on the last day of the accounting year ending on 30th
June 1978. The assessee relied upon the decision of the
Punjab High Court in Shiv Prakash Janak Raj (supra) which
was later reversed by the Supreme Court as reported in
222 ITR 583).
19.6 Before the IAC to whom the draft assessment order
was forwarded, the assessee had raised an objection
challenging the findings of the ITO on the ground that
the original agreement under which interest was
receivable by the assessee was revised on 30th June 1978.
The IAC rejected the contention and held that since the
right to interest did accrue to the assessee by virtue of
the deed of assignment dated 28-6-1977, the right to
receive interest existed till 30th June 1978, on which
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 30th June 1978 which had no
business expediency behind it. The assessee in its
letter dated 6th January 1984 tried to explain that the
secured bonds were furnished and those should be viewed
as security furnished by the Elscope for the unpaid
purchase price to the assessee, and that, in fact the
debt itself was satisfied.
19.7 The contention raised on behalf of the assessee
is that the above explanation offered by the assessee in
the quantum proceedings that the interest did not accrue
to it in the Accounting Year of 1-7-1977 to 30-6-1978
(Assessment Year 1979-80) in view of the resolution dated
30th June 1978 was a bonafide explanation which could not
be substantiated in the quantum proceedings. As per the
terms of assignment as modified by the resolution dated
30th June 1978, according to the belief of the assessee,
the interest was to accrue on the deferred consideration
amount only from 1-7-1979. In the penalty proceedings,
additional material in form of two resolutions dated 25th
February 1977 and 3rd March 1977 was relied upon to show
that even earlier, it was resolved that interest was to
accrue from 1-7-1978 which date was changed to 1-7-1979
by the resolution of 30th June 1978. It was argued that
all the facts relating to the explanation and material to
the computation of income were disclosed in the quantum
proceedings and thereafter, in the penalty proceedings by
showing additional material, the assessee had show that
the explanation which he gave about the interest accruing
only from 1-7-1977 was a bonafide one though not accepted
upto the Tribunal level in the quantum proceedings. The
presumption under Explanation 1 therefore, according to
the learned counsel for the assessee, stood rebutted and
the onus was now on the Department to prove that the
assessee had concealed material particulars.
19.8 The learned counsel for the revenue supporting
the reasoning of the Tribunal confirming the penalty,
contended that passing of the resolution dated 30th June
1978 was itself a malafide device to evade tax and
therefore, there could not be any bonafide belief on the
part of the assessee on the basis of such resolution.
Moreover, resolution was passed on the last day of the
Accounting Year which shows that the arrangement was made
with a view to evade the tax. He submitted that
initiation of the proposal dated 15th June 1978 and the
passing of the resolution dated 30th June 1978 were
tainted with the intention of tax evasion and therefore,
any belief based on such resolution cannot be said to be
bonafide.
20. It does appear from the record that the assessee
had disclosed material having bearing on the computation
of his income in the quantum proceedings. As noted
above, the agreement dated 28-2-1977 as modified by the
supplemental agreement dated 4-3-1977 clearly stipulated
that interest was payable on the deferred consideration
and that payment of interest was the essence of the
contract. The deed of assignment dated 28th June 1977
clearly incorporated the terms of 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 1-7-1977 to 30th June 1978 was that there was a
change in the mode of payment as per the proposal of
Elscope dated 15-6-1978 which was accepted by the
resolution of 30th June 1978 by the assessee. Though the
meaning put by the assessee to the resolution dated 30th
June 1978 that it had a retrospective effect and the mode
of payment of interest got substituted retrospectively
from the date of the deed of assignment did not find
favour at any stage of the quantum proceedings and it was
rightly held that the fact that interest that had accrued
upto 30th June 1978 on day to day basis, could not be
reversed by the alleged retrospective effect of the said
resolution, and that there was no commercial expediency
to forgo it, the fact remains for the purpose of penalty
proceedings that the genuineness of the resolution dated
30th June 1978 has never been questioned at any level of
the quantum or the penalty proceedings and even the
learned counsel for the Revenue has not assailed that
resolution on the ground that it was fake or concocted.
His attack was on the ground that this resolution did not
bring about a valid change in the existing terms of
contract under which the payment of interest accrued from
the date of the transaction i.e. 1-3-1977 and it,
therefore, accrued even during the previous year ending
on 30th June 1978 relevant to the Assessment Year
1979-80. The contention that there was no valid
acceptance of the proposal contained in the letter dated
15th June 1978 and the resolution of 30th June 1978 was
only a counter proposal and therefore, there did not come
about any modification in the mode of payment changing
the date of accrual of interest to 1-7-1979 was raised
for the first time before us by the learned counsel with
his usual vehemence. On perusal of the letter dated 15th
June 1978 containing the proposal and the resolution
dated 30th June 1978, it is difficult to hold that there
was no substitution made in the mode of payment. As
noted above, in the resolution dated 15th June 1978,
Elscope after referring to the contents of the deed of
assignment dated 28th June 1977, under which interest was
made payable which term was treated as of essence of the
contract, a proposal was made for a change in the method
of payment of the balance amount, as per which, on the
amount which was to be made payable on demand, no in
interest was to be charged, while on the amount payable
by five equal installments, interest was to be charged at
11% per annum with effect from 1st July 1979. The vendee
confirmed that it shall provide the assessee same
security as it would get from the ASE or security similar
to the security as may be provided by them in respect of
the deferred purchase consideration. In the resolution
dated 30th June 1978, after referring to the proposal
dated 15th June 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 letter dated 15th June 1978.
20.1 In the penalty proceedings, by its letter dated
9th March 1988, the assessee adduced additional material
in order to show that the explanation given during the
quantum proceedings by it was bonafide. In the letter
dated 9th March 1988, which is on record, the assessee,
inter alia, informed the ITO that the company transferred
and assigned its undertakings to Elscope with effect from
1st March 1977 on the strength of the resolution passed
by the Board of Directors on 25-2-1977, which was
enclosed. A circular resolution was also passed on 3rd
March 1977 and in both these resolutions, there was a
specific mention to 1-7-1978 as the date from which the
deferred purchase price would carry interest at 11% 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
price was payable at 11% per anum from 1-7-1978 and the
purchaser company had no obligation to pay interest from
1st March 1977 and the assessee had no right to claim
interest from that date. It was then stated that the
purchaser had sent proposal dated 15-6-1978 which was
accepted by the resolution dated 30th June 1978 under
which the date of accrual of interest on the installment
amounts was shifted to 1-7-1979. It was the case of the
assessee in the said letter that `initially, the parties
to the agreement had decided that the consideration for
sale of undertaking was not to carry interest upto 30th
June 1978, and thereafter, by mutually agreement, it was
decided by the parties to the agreement that the interest
on installments will commence from 1-7-1979'. It was,
therefore, contended that the assessee company had a
bonafide belief that the said interest amount could not
represent its income and therefore, it did not offer the
same. It was also pointed out that, in similar cases of
its sister concerns Fabriquip and Packart, penalties
under section 273(2)(a) were deleted.
20.2 The additional material relied upon by the
assessee in the penalty proceedings in form of the
resolutions dated 25-2-1977 and 3-3-1977 was discarded by
the Tribunal as inconsistent and a stand different than
the one taken by the assessee in the quantum proceedings
and on the ground that, as per these resolutions, the
unpaid purchase price was to carry interest with effect
from 1-7-1978, while under the resolution dated 30th June
1978 relied upon by the assessee in the quantum
proceedings, it was shown that such interest was to be
charged from 1-7-1979. This line of reasoning was
adopted by the learned counsel for the Revenue also, who
submitted that the stand taken up in the penalty
proceedings that the date 1-7-1978 was fixed in the
resolutions dated 25-2-1977 ad 3-3-1977 was false,
because, if that were so, this date would have been
mentioned also in the proposal of 15th June 1978 and the
date of 1-7-1978 would have been in that event
specifically shifted to 1-7-1979 in the resolution dated
30th June 1978. In other words, since 1-7-1978 was not
the date mentioned at all in any of the agreements or the
deed of assignment, or the proposal dated 15-6-1978 and
the resolution dated 30-6-1978, it was only now proferred
to bolster up the contention that the explanation on the
basis of the resolution dated 30th June 1978 given by the
assessee in the quantum proceedings was bonafide. There
is more sound than substance in this reasoning. The
resolution dated 30th June 1978, which modified mode of
payment, clearly recorded that interest on the deferred
payment was to be paid from 1-7-1979. The original
stipulation about 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 1-7-1979 on the amount of
Rs.4,75,000=00, which was to be paid on installments 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 1-7-1977 to 30-6-1978 since it
was to be charged only from 1-7-1979. Under the
resolutions dated 25-2-1977 and 3-3-1977 also, no
interest was to be charged for the said period i.e.
1-7-1977 to 30-6-1978, because, it was to be charged from
1-7-1978 as mentioned in them. The resolution dated 30th
June 1978 extended that concession upto 30th June 1979 by
providing that the amount will carry interest only from
1-7-1979, which means one more Accounting Year was
included for the purpose of concession of not charging
interest, which concession already operated under the
resolutions dated 25-2-1977 and 3-3-1977 for the
Assessment Year 1979-80. There is therefore no
discrepancy in the stand taken by the assessee in the
quantum and penalty proceedings. In the penalty
proceedings, explanation given earlier in the quantum
proceedings on the basis of resolution dated 30th June
1978 under which according to the assessee, interest was
to be charged only from 1-7-1979 was sought to be
substantiated by pointing out that even under the earlier
resolutions dated 25-2-1977 ad 3-3-1977, it was not to be
charged for the Accounting Year 1-7-1977 to 30-6-1978,
since as stipulated in those resolutions, interest was to
be charged from 1-7-1978 only. It is altogether a
different matter that, in the quantum proceedings, it was
held on the basis that the resolution dated 30th June
1978 could not operate retrospectively to undo the
accrual of interest that took place on the basis of mode
of payment stipulated in the agreement and the deed of
assignment by which interest was payable during the
Accounting Period of 1-7-1977 to 30-6-1978 since in the
deed of assignment, the date of 1-7-1978 which was
mentioned in the resolutions of 25-2-1977 and 3-3-1977
was not at all incorporated. It is not as if the
assessee had received interest and not show it. Only
that, it went wrong in its calculation that it could
retrospectively undo the effect of the stipulation of
payment of interest incorporated under the deed of
assignment, by which the interest accrued at the rates
mentioned therein on the amounts outstanding from time to
time from the date of the transaction, which admittedly
was 1st March 1977. It is no one's case that the
resolution dated 30th June 1978 was sham or bogus. It
would, therefore, appear that the assessee was under a
belief that by making such resolution, it could
retrospectively substitute the stipulations regarding the
mode of payment so as to make the interest accrue only
from 1-7-1979, so that it may not have to pay tax on
accrual basis for the period until the earlier
stipulation of payment of interest on the amount
outstanding from time to time operated. The assessee's
case falling under sub-clause (B) to Explanation 1 to
section 271(1)(c)(iii), therefore, is covered by the
proviso to the Explanation 1 to the effect that the
preponderance of probabilities point to the belief to be
bonafide 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.
20.3 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 15th June 1978 and the
resolution dated 30th June 1978 and relied upon them for
its claim that the interest was under the resolution now
made to accrue from 1-7-1979 instead of its accrual as
originally stipulated in the deed of assignment from
1-3-1977. 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 assessee concealed the particulars of its
income. Merely because, interest that accrued was not
shown as income in the return, it did not necessarily
follow that there was concealment of particulars of
income. The particulars of income would be - the factual
material on the basis of which the income can be computed
by the ITO / AAC or the Commissioner (Appeals), as the
case may be, in the course of the quantum proceedings.
20.4 The contention of the revenue that non-mention of
interest amount as income in the returns should be
sufficient to establish concealment, is misconceived.
When the return is filed, the assessee's case obviously
is that, according to him, what is computed by him in the
return, is his total income. If the Department does not
accept it, then a procedure under section 143(2) required
the ITO, who wants to verify the correctness and
completeness of the return, to require the presence of
the assessee or the production of evidence in respect
thereof. When called upon to produce evidence, the
assessee can put up the explanation and particulars in
support of his claim. Therefore, the contention of the
Revenue that since the resolution dated 30th June 1978
was not produced alongwith the return which was filed on
14-12-1978 i.e. after the date of the resolution, it
could not be looked into, is misconceived. The
explanation and the facts material to the computation of
the total income can be produced during the assessment
proceedings in which if the particulars of the assessee's
income are not disclosed, or if inaccurate particulars
are furnished, that will give rise to liability to pay
penalty under section 271 of the Act.
20.5 The question that, therefore, remains to be
considered is, whether the Revenue proves that
particulars of interest income which is added in the
Assessment Year 1979-80 were concealed by the assessee
during the assessment proceedings. The particulars on
the basis of which accrual of income could be worked out
for the Accounting Period of 1-7-1979 to 30-6-1978 would
be those which formed source of information about that
income on the basis of which, the interest income could
be ascertained and worked out by computing total income.
be ascertained and worked out while computing the total
income. supplemental agreement dated 4-3-1977 clearly
referred to the fact that the date of transaction was 1st
March 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 ITO raised specific queries
during the proceedings in response to which, the
resolution dated 30th June 1978 accepting the proposal of
Elscope made on 15th June 1978 for substituting the terms
of payment incorporated in the agreement and 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 30th June 1978 mentioned the fact that the deferred
sale consideration pertained to the amount receivable in
instalments from the subsidiary company Elscope Pvt.
Ltd. `for the transfer and assignment of the industrial
undertaking and business'. The amount of deferred sale
consideration of Rs.6,54,10,253=00 was mentioned as due
on 30th June 1977 which was reduced to Rs.4,94,81,765=00
at the end of 30th June 1978 and the payments received
during the year towards the deferred consideration were
also disclosed. Admittedly, it was not a case where
interest was received by the assessee but was not shown.
The balance sheet of the subsidiary Elscope was also
produced as required by law and there was no
inconsistency urged between the two balance sheets.
20.6 Thus, the record shows that all the relevant
particulars on the basis of which the income of the
assessee could be computed were disclosed by the assessee
and a claim was put up that the interest cannot be said
to have accrued, because, the original terms of payment
of deferred purchase price were substituted by the
resolution passed on the last day of the Accounting Year
i.e. 30th June 1978, by which the accrual date of
1-3-1977 which could be spelt out from the agreement
dated 28-2-1977 as modified by the supplemental agreement
dated 4-3-1977 and the deed of assignment dated 28th June
1977, was shifted to 1st July 1979. The fact that such
retrospectively could not be given to shift the accrual
date after the interest had already accrued would not
mean that the income on account of accrual of interest,
on the claim not being accepted, could not be worked by
the ITO on the basis of the relevant particulars already
furnished. In fact, on the basis of disclosures already
made during the proceedings, interest income was added in
the total income in the quantum proceedings.
20.7 For the foregoing reasons, we are of the opinion
that there was no justification for imposing penalty
under section 271 (1) (c) of the Act on the assessee for
the Assessment Year 1979-80. The question referred to
this Court in Income Tax Reference No. 58 of 1995 is
accordingly answered in the negative in favour of the
assessee and against the revenue. The reference stands
disposed of accordingly with no order as to costs.
21. The above answers to these four references are
briefly summed up as under :
Income Tax Reference No.56 of 1986 (Answered in
paragraphs 16 and 16.1) :
A.Y. 1979 - 80 ::
The questions Nos. 1, 2 and 3 raised at the
instance of the assessee are answered in the
affirmative, in favour of the Revenue and against
the assessee.
A.Y. 1980 - 81 ::
The questions Nos. 1 and 2 raised at the
instance of the assessee are answered against the
Revenue and in favour of the assessee.
The reference stands disposed of accordingly with
no order as to costs.
Income Tax Reference No.75 of 1987 (Answered in
paragraph 17.12) :
A.Y. 1979 - 80 ::
The question referred to this Court is answered
in favour of the Revenue and against the
assessee. The reference stands disposed of
accordingly with no order as to costs.
Income Tax Reference No.220 of 1995 (Answered in
paragraph 18.4) :
A.Y. 1979 - 80 ::
The question referred to this Court is answered
in the negative, in favour of the assessee and
against the Revenue. The reference shall stand
disposed of accordingly with no order as to
costs.
Income Tax Reference No.58 of 1993 (Answered in
paragraph 20.7) :
A.Y. 1979 - 80 ::
The question referred to this Court is answered
in the negative, in favour of the assessee and
against the Revenue. The reference shall stand
disposed of accordingly with no order as to
costs.
[R.K.ABICHANDANI, J.]
[K.A.PUJ, J.]
parmar*
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