TMI Blog2002 (2) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 for the opinion of this court: "For the assessment year 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 July 1, 1977 to June 30, 1978, was liable to tax on accrual basis for the assessment year 1979-80? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the interest accrued from day-to-day as a result of supplementary agreement and as such, the same was exigible to tax as income for the assessment year 1979-80? (3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that giving up of interest on the ground of commercial expediency was not justified as no direct or indirect benefit had accrued to the assessee? For the assessment year 1980-81--at the instance of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment year 1980-81, the Tribunal held that, under the revised agreement reflected from the resolution dated June 30, 1979, no interest was payable on the outstanding amount, because, as a result of the resolution dated June 30, 1978, no income could be said to have accrued to the assessee as the interest was to start accruing from July 1, 1979, i.e., after the 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. The assessee--Sarabhai Chemicals (P.) Ltd. (now known as Sarabhai Holdings (P.) Ltd.) had filed its return on June 26, 1979, declaring a total income of Rs. 772 under the head business income for the assessment year 1979-80, and for the assessment year 1980-81, it had filed return on September 27, 1980, declaring a loss of Rs. 17,345. The assessee was following the mercantile system of accounting at the relevant time. In response to the notice under section 143(2) of the Act, the assessee had submitted that, with effect from February 28, 1977, the industrial undertaking of Sarabhai Chemicals and business activity of Sarabhai Common Services Division which was a unit o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he minutes of the meeting of the board of directors, which was held on June 30, 1978, in support of its explanation. Thereafter, the assessee filed a further letter on January 21, 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. The Income-tax Officer was of the view that, in the assessee's case, there was a written contract which was sought to be modified by the resolution dated June 30, 1978 by which date the interest for the whole year had already accrued to the assessee. It was observed that it was not the case of the assessee that the vendee-company had gone into liquidation or had no assets from which the recovery could be effected. The Income-tax Officer further held that the assessee had relinquished the interest without any commercial consideration and since the two companies were closely related, it was a case of collusion to evade tax liabilities, and, therefore, interest on accrual basis was taxable in the hands of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner of Income-tax (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 the 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 (P.) Ltd., was a wholly owned subsidiary of the assessee and that the facts, figures and circumstances, mentioned in paragraph 13 of the order, highlighted the fact that the transaction could not be regarded as entered into in the normal course and at arm's length. It was observed that the business consideration put forth by the assessee was not actually specified beyond saying that the unsecured loans were offered to be secured. The appellate authority held that the talk regarding purchase price was merely an eye-wash and that it was obvious from the assessee's letter dated January 6, 1984, that the vendee far from offering securities for paying money ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the contention that the provision of section 215 of the Act did not apply since the assessee had not paid any advance tax, the Commissioner of Income-tax (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 an 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 the estimate, but is not covered by that section, because, the advance tax paid is "nil" in pursuance of the "nil" estimate filed would lead to absurdity. He relied on the decision of the Bombay High Court in Bombay Burma Trading Corporation Ltd. v. CIT [1984] 145 ITR 793, in which it was held that the case having "nil" income from salary chargeable under the Act would be covered by dictate of the law that salary income chargeable was less than Rs. 7,500. Reliance was also placed on the decision of the Madras High Court in Addl. CIT v. Brakes India Ltd. [1979] 118 ITR 820 in this regard and the contention of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 June 30, 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." Considering the alternative contention of the assessee that if the interest had accrued, that income should be excluded from chargeability on the ground of commercial expediency, the Tribunal held that there was no material for reaching to a conclusion that the income from interest was given up on the ground of commercial expediency. The only ground that was placed before the Tribunal was that the unpaid purchase price which was unsecured had become secured under the revised mode of payment. The Tribunal held that this aspect did not carry the matter anywhere. The vendee Elscope (P.) Ltd. was a subsidiary of the assessee a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 215 of the Act. 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. For the reasons which were given by the Commissioner of Income-tax (Appeals) in the appellate order dated February 29, 1984, for confirming the addition of Rs. 66,29,236 as interest accrued for the assessment year 1979-80, the Commissioner of Income-tax (Appeals) confirmed the addition of Rs. 55,67,750 on the same count for the assessment year 1980-81 by his order dated February 29, 1984. The levy of interest under section 215 was also confirmed in respect of the said assessment year. In appeal, the Tribunal held in paragraph 20 of the order that there was a material distinction between the facts that were obtained in the earlier year i.e., assessment year 1979-80 and in the assessment year 1980-81. It observed that the material difference was caused by the assessee's resolution dated June 30, 1978, under which the original agreement stood modified. It was held that, as a result of the said resolution, no i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axation 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. The Commissioner of Income-tax (Appeals), by the order dated March 15, 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 December 14, 1978, the assessee had full knowledge of interest income of Rs. 66,29,236 which had already accrued and also knew that it could not forgo the income that had already accrued by passing a resolution on a subsequent date. The order of penalty was, therefore, confirmed. The assessee appealed against the order of the Commissioner of Income tax (Appeals) confirming the penalty under section 273(2)(a) of the Act before the Tribunal and the Tribunal, concluding that interest was payable to the assessee from March 1, 1977, by Elscope (P.) Ltd. in pursuance of the agreements and the deed of assignment, and observing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts 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 1 to section 271(1)(c) of the said Act was, therefore, clearly attracted in this case, and that the assessee had failed to offer any bona fide and satisfactory explanation in the matter, holding that the assessee had not disclosed fully and truly all the material facts necessary for its assessment and had concealed the particulars of its income from interest (of Rs. 66,29,236), which had accrued on the deferred sale consideration in respect of the said transfer. Penalty of Rs. 55 lakhs was thus imposed on the assessee under section 271(1)(c) of the Act. The assessee appealed against the aforesaid penalty order and the Commissioner of Income-tax (Appeals), Baroda, by his order dated January 8, 1990, dismissed the appeal, holding that no justifiable explanation in support of its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tatements accompanying the said return. The Tribunal noted that, nowhere in the return of income or in the statements accompanying the said return, was the fact about the passage of the resolution dated June 30, 1978 mentioned. The assessee was fully conscious of the fact at the time of closing of the accounting year that if such interest income was accounted for, it would be liable to a huge tax liability of more than Rs. 45 lakhs and, therefore, the resolution dated June 30, 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 (P.) Ltd. did not take any steps at all to furnish any security pursuant to the said mutual agreement made in terms of the resolution dated June 30, 1978, in which it was mentioned that the security should be furnished to the satisfaction of the assessee in respect of the unpaid purchase price. Referring to the additional evidence in the form of the earlier resolutions dated February 25, 1977 and March 3, 1977, the Tribunal observed that they did not in any manner support the contention of the assessee about non-accrual of the income up to June 30, 1978 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accrue and, accordingly, by such modification, the date of accrual of interest was fixed as July 1, 1979 under the resolution dated June 30, 1978. Learned counsel submitted that there was no challenge against the genuineness of the resolution dated June 30, 1978, at any stage of the proceedings uptil 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 June 30, 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 July 1, 1977 to June 30, 1978, it should be held that the income so accrued on mercantile basis of accounting was given up by the assessee for valid consideration which was commercial expediency. The assessee wanted to reorganise its business and this fact was recorded even in the agreements and deed of assignment and it is not as if the arrangements were made as a device to evade taxes. The assessee wanted to put more capital in the hands of its subsidiary Elscope ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ange the date of accrual of interest to July 1, 1978. It was also mentioned in the corresponding resolution of Elscope (P.) Ltd. Learned counsel further argued that since the assessee bona fide believed that the explanation offered by it was correct, the presumption under Explanation 1 did not arise in the case of the assessee. It was contended that admittedly it was nobody's case that a 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) to Explanation 1 and which, in turn, attracted the provisions of the proviso under which it could be shown that the belief of the assessee was bona fide in which event, the Explanation would not apply and no presumption could be raised. It was also argued that all the material particulars having bearing on the computation of the assessee's income that is said to have accrued by way of interest on deferred payment were furnished during the proceedings in the form of agreements, the deed of assignment, notes in the balance-sheet showing the transaction, reference to the transaction in the context ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence 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 the case of Sreelekha Banerjee v. CIT [1963] 49 ITR 112 (SC) 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 the case of H.M. Kashiparekh and Co. Ltd. v. CIT [1960] 39 ITR 706 (Bom) was cited for the proposition that it was the real income of the assessee-company for the accounting year that was liable to tax and that the real income could not be arrived at without taking into account the amount forgone by the assessee. The principle of real income is not to be so sub-ordinated as to amount virtually to a negation of it when a surrender or con cession ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Indian 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 judgment was rendered by a Bench of three judges of the Supreme Court and was considered in a later judgment of the two-judge Bench of the Supreme Court in CIT v. Smt. P.K. Kochammu Amma [1980] 125 ITR 624 in which, while stating that: "With the greatest respect to the learned judges who decided this case, we do not think, for reasons already discussed, that this decision lays down the correct law on the subject...", it was observed that the said decision was a binding upon the Bench as it was a three judges Bench decision. (g) Decision of the Punjab and Haryana High Court (which was later on reversed by the Supreme Court) in the case of Shiv Parkash Janakraj an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. CIT [1996] 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 [1985] 154 ITR 148 held that: "The court nowhere said that every action or inaction on the part of the taxpayer which results in reduction of tax liability to which he may be subjected in future, is to be viewed with suspicion and be treated as a device for avoidance of tax irrespective of the legitimacy or genuineness of the act...". It was held that: "The facts and circumstances which led to McDowell's decision leave us in no doubt that the principle enunciated in the above case has not affe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... position 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 CIT v. Bharat Machinery and Hardware Mart [1982] 136 ITR 875 was cited to point out that, in a matter where the difference between the returned income and the assessed income had arisen due to the addition made by the Income-tax Officer by an estimate of the gross profits under the proviso to section 145(1), no interest could be charged under section 217(1A) for failure of the assessee to file an estimate under section 212(3A). The court observed that: "In a given set of facts, an assessee may be expected to anticipate on his own even in regard to the estimate which the Income-tax Officer might make in exercise of the powers under the proviso to section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 CIT v. Lal Babu [1980] 122 ITR 1006 was relied upon for the proposition that the provisions contained in section 271(1)(c) apply only to concealment of "his income"; they do not speak of concealment of such incomes as are includible by a fiction of law in "his income". The High Court upheld the decision of the Tribunal in holding that there was no obligation on the assessee to include in his return of income, the income arising to his wife and minor sons which were includible in his income in terms of section 64 of the Act and the failure of the assessee to do so did not attract the penal provisions of section 271(1)(c) against him. (o) The decision of the Supreme Court in CIT v. Anwar Ali [1970] 76 ITR 696 was cited for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Sadayappan [1990] 185 ITR 49 (SC). (o-2) In B.A. Balasubramaniam and Bros. Co. v. CIT [1999] 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 Anwar Ali [1970] 76 ITR 696 (SC), 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. CWT [1982] 138 ITR 731, which was rendered in the context o t provisions o sections 14 and 18 of the Wealth-tax Act, 1957, was cited for the proposition that the penalty was leviable under section 18(1)(a) of the Wealth-tax Act only if it is established that the assessee has, without reasonable cause, failed to furnish the return which he or she was required to furnish in response to a notice given under sub-section (2) of section 14, and that if the assessee's net wealth was not taxable, it would be open to the assessee to contend that the failure to furnish a return could not be said to be without reasonable cause. (q) The d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 CIT v. Mussadilal Ram Bharose [1987] 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 Mussadilal Ram Bharose's case [1987] 165 ITR 14 (SC) was followed in Jeevan Lal Sah's case [1994] 205 ITR 244 (SC) and B.A. Balasubramaniam and Bros. Co.'s case [1999] 236 ITR 977 (SC). (v) The decision of this court in CIT v. Vinaychand Harilal [1979] 120 ITR 752 was cited for the proposition that, normally, the Revenue must establish that the receipt of the amount in question constituted the income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Asst. CST [1980] 124 ITR 15 was cited for the proposition that omission to include in the return of turnover the amount of freight included in the price under a bona fide belief that it was not taxable, cannot be said to be false. (bb) The decision of the Punjab and Haryana High Court in CIT v. Ferozepur Finance (P.) Ltd. [1980] 124 ITR 619 was cited for the proposition that if income does not result at all, there cannot be levy of tax. The court followed the decision of the Supreme Court in CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144. (cc) The decision of the Patna High Court in CIT v. Lal Babu [1980] 122 ITR 1006 was cited for the proposition that if the assessee gives a plausible explanation against the additions made to his income, the onus shifts to the department. (dd) The decision of the Gujarat High Court in CIT v. Lakhdhir Lalji [1972] 85 ITR 77 was cited for the proposition that, where the very basis for the penalty proceedings against the assessee initiated by the Income-tax Officer disappeared and when th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Elscope the total value of such liabilities and such value was deemed to augment the purchase price payable by Ambalal Sarabhai Enterprises Ltd. to Elscope to be added pro rata in the instalments of the balance purchase price. It was also submitted that, under the deed of assignment dated April 25, 1978, it was stipulated between Elscope and Ambalal Sarabhai Enterprises Ltd. that the purchaser Ambalal Sarabhai Enterprises Ltd. would perform all contracts and agreements entered into by Elscope and Elscope was discharged in respect of such liabilities. On the basis of these documents, learned counsel for the Revenue argued that the transaction between the assessee and Elscope was not a genuine transaction, but Elscope was only made a conduit pipe and merely a technical transfer was effected so that Elscope can, in turn, transfer to its subsidiary the same unit and business and the result was arranged in such a way that Elsco e would gain, which was the gain of the assessee itself, since it was the sole shareholder of Elscope. It was further argued that the resolution dated June 30, 1978 of the assessee did not bring about any valid terms of contract because there was a counter pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the assessee in view of the fact that the liabilities were taken over by Ambalal Sarabhai Enterprises Ltd. pursuant to the transfer of the same unit and business by Elscope to Ambalal Sarabhai Enterprises Ltd. with effect from July 1, 1977. In the context of the penalty proceedings under section 271(1)(c) of the Act (Income-tax Reference No. 58 of 1993), 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 July 1, 1978, as per the resolution dated February 25, 1977 and the circular resolution dated March 3, 1977, passed by the assessee. It was argued that if the resolutions dated February 28, 1977 and March 3, 1977, really contained the date July 1, 1978, or were worded the way they now appear to be worded, the date of July 1, 1978, could never have been missed in the supplemental agreement dated March 4, 1977, which was specifically entered into, in the context of the interest payable by the vendee, since the stipulation was earlier left out in the agreement dated February 28, 1977. It was submitted that since the resolution dated June 30, 1978, was not a genuine resolution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in CIT v. Hindusthan Motors Ltd. [1993] 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 CIT v. Shiv Prakash Janak Raj and Co. (P.) Ltd. [1996] 222 ITR 583 (SC) was relied upon for the proposition that the concept of real income cannot be employed so as to defeat the provisions of the Act and the Rules. It was held that there was no contradiction or inconsistency between the decision in CIT v. Birla Gwalior (P.) Ltd. [1973] 89 ITR 266 (SC) and Morvi Industries Ltd. v. CIT [1971] 82 ITR 835 (SC). In the former case, the important fact found was that the money became due to the assessee not at the end of the accounting year, but on the date the man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 961 approved the decision of this court in Bhikhoobhai N. Shah v. CIT [1978] 114 ITR 197, in which it was held that waiver or reduction of interest pre-supposes 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. CIT [1986] 158 ITR 102 (SC) was relied upon on behalf of the Revenue for the proposition that the notion of real income cannot be brought into play where income has accrued according to the accounts of the assessee and there is no indication of the assessee treating the amount as not having accrued and that, once accrual takes place, the same cannot be defeated by any theory of real income. It was held that the concept of real income cannot be so used as to make accrued income non-income simply because after the event of accrual, the assessee neither decides to treat it as a bad de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue correspondence with a view to arrive at a conclusion whether there was any meeting of minds between the parties, which would create a binding contract between them. (j) The decision of the Kerala High Court in Anand Liquors v. CIT [1998] 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 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. CIT [1989] 177 ITR 455 was cited for the proposition that there is nothing in section 271(1)(a) of the Act which requires that mens rea must be proved before penalty could be levied under that provision. I. Income-tax Reference No. 56 of 1986: On the question whether interest accrued during the accounting year from July 1, 1977 to June 30, 1978, it would be appropriate to refer to the stipulations of the agreement and the deed of assignment, which have a bearing on the question of accrual of interest. By the agreement dated February 28, 1977 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." 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 instalments were not duly paid, the rate of interest was to be higher than 11 per cent. per annum and the vendee was in the event of default of payment of instalment bound to pay interest at the rate payable by the vendor to its bankers in the ordinary course of business. These terms regarding mode of payment were never disturbed until the last date of the accounting year ending on June 30, 1978 on which date the assessee passed the resolution dated June 30, 1978, by which it accepted the proposal of its subsidiary Elscope sent on June 15, 1978 and substituted the mode of payment by purporting to shift the date of charging of interest to July 1, 1979. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the context of the transaction that took place with effect from March 1, 1977. The obligation to pay interest was not a separate debt, but the debt incurred 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 there of despite the express stipulation about the obligation to pay interest which was to be treated as the essence of the contract. When no date is specified in a transaction, which incorporated an obligation of a party thereto to pay interest, it obviously would mean that the date from which the interest is to be paid would be the point of time from when the obligation to pay the outstanding amount starts, and that will be the date from which the creditor's entitlement to recover interest starts. The sale is performed when the seller of goods has transferred the property in the goods to the buyer for a price, with all significant risks and rewards of ownership and no effective control of the goods transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 ITR 583, the Supreme Court reiterated that 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. In Hindusthan Motors Ltd.'s case [1993] 202 ITR 839, the 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 the 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. The interest on the deferred amount of consideration clearly accrued to the assessee in the instant case on the basis of the terms stipulated between the parties in the deed of assignment. Neither in the principal agreement or the supplemental agreement amending it nor in the deed of assignment dated June 28, 1977, was the date of charging of interest fixed as July 1, 1978. This date did not occur in any of the documents executed between the parties or in any of the correspondence addressed to the concerned inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee's subsidiary Elscope which had purchased its undertaking, while proposing modification in the terms of the deed of assignment dated June 28, 1977, the vendee had suggested modifi cation 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 instalments will carry simple interest at 11 per cent. per annum with effect from July 1, 1979 on the amount remaining outstanding from time to time. It will be noted that the last mentioned words purported to have been quoted from the deed of assignment in the letter dated June 15, 1978 to the effect that, "continue as unsecured deferred consideration" were not there in the deed of assignment, nor were they incorporated in the supplemental agreement dated March 4, 1977, substituting the mode of payment originally stipulated in the agreement dated February 28, 1977. At the end of the proposal of the vendee, it was mentioned that "mode of payment of the purchase price and the question of security is still under discussion between our company and Ambalal Sarabhai Enterprises ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would have started in October 1979 and ended in October 1986 against which as per revised terms suggested in June 1978, the instalments 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 2/3rds of its face value. All these concessions are given to EPL just like that, and for no real consideration." It is clear that the last minute arrangement to ward off the payment of tax on the interest income that had accrued to the assessee during the entire accounting year July 1, 1977 to June 30, 1978 (till the moment the resolution dated June 30, 1978 was passed at 2 p.m.) was made by creating a ground of commercial expediency of getting the debt secured. In fact and reality, neither was there any particular security offered in the proposal nor was there any acceptance of security. A ghost was created to hide the real object of modification of the mode of payment which was to ward off the payment of tax on interest income that already had accrued to the assessee. The contention that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Tribunal, the Commissioner of Incometax (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 June 30, 1978, and that if accrued, it was given up due to any commercial expediency. The Tribunal was, therefore, right in holding that the interest amount of Rs.66,29,236 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. Questions Nos. 1, 2 and 3 of Income-tax Reference No. 56 of 1986 are, therefore, answered in the affirmative, in favour of the Revenue and against the assessee. There was no challenge levelled against the resolution dated June 30, 1978 on the ground that it was not a genuine resolution. Law permits the con tracting parties to lawfully change their stipulations by mutual agreement and, therefore, the assessee and the vendee had no legal impedim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly complex issue. It was contended that the levy of interest under section 215(1) upon the amount by which the advance tax paid fell 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 CIT v. Bharat Machinery and Hardware Mart [1982] 136 ITR 875, set aside the levy of interest under section 215 of the Act. Learned counsel for the assessee, supporting the reasoning of the Tribunal, contended that even if "nil" estimate was filed and "nil" advance tax paid, it would be treated as if no estimate was filed and would attract the provisions of section 217 of the Act and not section 215 of the Act invoked by the taxing authorities and the Tribunal. Moreover, the assessee could not have estimated the advance tax due to complexity in deciding the issue of accrual of interest. As per the provisions of section 215 of the Act, as it stood at the relevant time, it was obligatory on the part of the assessee under section 209A which was then operative, to send an estimate of curr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reference to the Inspecting Assistant Commissioner in certain cases when the Income-tax Officer proposed to make any variation in the income or loss returned, which would be prejudicial to the assessee. The assessee forwards its objections to such varia tions. The Inspecting Assistant Commissioner then issues directions for the guidance of the Assessing Officer under section 144B(4) which were binding on the Income-tax Officer. The Inspecting Assistant Commissioner had confined his directions to the matters falling within his jurisdiction which had bearing on the proposed variation in the income returned and made it clear that he was not issuing any directions in respect of initiation of proceedings on completion of the assessment by the Income-tax Officer. Therefore, there is no substance in the contention, which was not even raised before the Tribunal, that the Income-tax Officer's final assessment charging interest under section 215 of the Act was against the directions of the Inspecting Assistant Commissioner or without jurisdiction. It was perfectly within the jurisdiction of the Income-tax Officer to charge interest under section 215 and add the tax amount worked out, on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of section 18A(6) of the Indian Income-tax Act, 1922, as originally enacted and which corresponded to section 215(1) of the Act of 1961, left no discretion to the Income-tax Officer and if the estimate fell below the prescribed limit, the Income-tax Officer was obliged to direct payment of interest as held by the Supreme Court in the Constitution Bench decision in S.A.L. Narayan Row v. Ishwarlal Bhagwandas [1965] 57 ITR 149; AIR 1965 SC 1818. The fifth proviso was added to sub section (6) of section 18 retrospectively from April 1, 1952 by reason of which, the Income-tax Officer was invested with the discretion to reduce or waive interest payable by the assessee, as is provided for in sub-section (4) of section 215 of the Act of 1961 read with rule 40. It was held in paragraph 18 of the judgment that there was, at the date of the original assessment, an absolute obligation imposed upon the assessee to pay interest under section 18A(6), but by reason of the retrospective operation given to the fifth proviso added to sub-section (6) by Act 25 of 1953, the Income-tax Officer was invested with the discretion to reduce or waive interest payable by the assessee and this power the Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income-tax Officer 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 Income-tax Officer had misapplied the law in levying interest under section 217(1A) and that it was a clear case of error of law committed by the Income-tax Officer 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 Income-tax Officer might make in exercise of the powers under the proviso to section 145(1) of the Act in light of past experience". It was in terms observed, as noted above that, there may be innumerable situations in which the assessee may be required to make an estimate. The decision of the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961 was applied by the Division Bench of this court in CIT v. Gordhanbhai Jethabhai [1994] 205 ITR 279, in which while construing the provisions of section 215, the court in terms held that interest be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 June 30, 1978 for forgoing interest had become applicable from July 1, 1978. 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 February 28, 1977 as modified by the supplementary agreement dated March 4, 1977 and the deed of assignment dated June 28, 1977, the assessee knew or had reason to believe that the "nil" estimate of advance tax filed by it was wrong. The authorities and the Tribunal have held that, while filing the "nil" estimate of advance tax on December 14, 1978, the appellant had full knowledge of the interest income of Rs.66,29,236 which had accrued and knowing or having reason to believe that "nil" estimate was untrue, it had filed the same. There can be no dispute about the fact that the levy of interest under section 215 and levy of penalty under section 273(2)(a) of the Act stand on different footings. While the forme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in confirming the penalty of Rs. 4 lakhs levied under section 273(2)(a) of the Act on the assessee. 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: 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 The provisions of section 271(1)(c) of the Act, as they were operative at the relevant time, read as under: "271. Failure to furnish returns, comply with notices, concealment of income, etc. -- (1) If the Income-tax Officer or the Appellate Assistant Commissioner or the Commissioner (Appeals) in the course of any proceedings under this Act, is satisfied that any person--... (c) has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty,--... (iii) in the cases r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to offer an explanation or offers an explanation which is found by the Income-tax Officer or the Appellate Assistant Commissioner or Commissioner of Income-tax (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 Income-tax Officer, the Appellate Assistant Commissioner or the Commissioner of Income-tax (Appeals) in the quantum proceedings shall be deemed to represent the income in respect of which particulars have been concealed. By its very nature, the expression "fails to offer an explanation" or "offers an explanation which is found by the Income tax Officer or Appellate Assistant Commissioner or the Commissioner (Appeals) to be false" occurring in clause (A) of Explanation 1 to clause (iii) of section 271(1)(c) refers to the quantum proceedings. Therefore, the cases where no explanation was given in respect of any facts material to the computation of total income in respect of the amount added or disallowed therein or the explanation given in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x Officer, the Appellate Assistant Commissioner and/or the 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 Income-tax Officer, the Appellate Assistant Commissioner or the Commissioner (Appeals) as contemplated by clause (B) of Explanation 1, then there still remains a scope to examine the bona fides of the explanation already given by the assessee in the quantum proceedings. The rationale behind not giving similar consideration to cases falling in clause (A) of Explanation 1 to a person who "fails to offer an explanation before the Income-tax Officer during the proceedings" appears to be the legal assumption underlying the provision that in fact, there existed no explanation which could have been offered and to rule out any possibility of bringing into existence, the explanations which in fact were not there. In cases where an expla nation was offered, but was rejected as it could not be substantiated by the assessee, there would arise no presumption of concealment of the particulars of income that was added or disallowed and such assessee can show that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y entry in respect thereof, it could not be said that the interest had accrued on the last day of the accounting year ending on June 30, 1978. The assessee relied upon the decision of the Punjab and Haryana High Court in Shiv Parkash Janakraj and Co. P. Ltd. v. CIT [1978] 112 ITR 872 which was later reversed by the Supreme Court as reported in Shiv Prakash Janak Raj and Co. (P.) Ltd.'s case [1996] 222 ITR 583. Before the Inspecting Assistant Commissioner to whom the draft assessment order was forwarded, the assessee had raised an objection challenging the findings of the Income-tax Officer on the ground that the original agreement under which interest was receivable by the assessee was revised on June 30, 1978. The Inspecting Assistant Commissioner rejected the contention and held that since the right to interest did accrue to the assessee by virtue of the deed of assignment dated June 28, 1977, the right to receive interest existed till June 30, 1978, on which date the previous year of the assessee ended and that mere passing of the resolution on such last day pursuant to the request of the purchaser not to charge interest was nothing but relinquishment of the right without any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any bona fide belief on the part of the assessee on the basis of such resolution. Moreover, the 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 June 15, 1978, and the passing of the resolution dated June 30, 1978, were tainted with the intention of tax evasion and, therefore, any belief based on such resolution cannot be said to be bona fide. It does appear from the record that the assessee had disclosed material having bearing on the computation of its income in the quantum proceedings. As noted above, the agreement dated February 28, 1977, as modified by the supplemental agreement dated March 4, 1977, clearly stipulated that the inter est was payable on the deferred consideration and that payment of interest was the essence of the contract. The deed of assignment dated June 28, 1977, clearly incorporated the terms of the payment of interest as noted above. These documents were produced during the quantum proceedings and the explanation of the assessee for not showing interest as having accrued for the period between July 1, 1977 to June 30, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by five equal instalments, interest was to be charged at 11 per cent per annum with effect from July 1, 1979. The vendee confirmed that it shall provide the assessee the same security as it would get from Ambalal Sarabhai Enterprises or security similar to the security as may be provided by them in respect of the deferred purchase consideration. In the resolution dated June 30, 1978, after referring to the proposal dated June 15, 1978, a resolution was passed by the board that, "the company do hereby approve, accept and adopt the following revised mode of payment" as contained in the letter dated June 15, 1978. In the penalty proceedings, by its letter dated March 9, 1988, the assessee adduced additional material in order to show that the explanation given during the quantum proceedings by it was bona fide. In the letter dated March 9, 1988, which is on record, the assessee, inter alia, informed the Income-tax Officer that the company transferred and assigned its undertakings to Elscope with effect from March 1, 1977 on the strength of the resolution passed by the board of directors on February 25, 1977, which was enclosed. A circular resolution was also passed on March 3, 1977 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oned also in the proposal of June 15, 1978 and the date of July 1, 1978 would have been in that event specifically shifted to July 1, 1979 in the resolution dated June 30, 1978. In other words, since July 1, 1978 was not the date mentioned at all in any of the agreements or the deed of assignment, or the proposal dated June 15, 1978 and the resolution dated June 30, 1978, it was only now preferred to bolster up the contention that the explanation on the basis of the resolution dated June 30, 1978 given by the assessee in the quantum proceedings was bona fide. There is more sound than substance in this reasoning. The resolution dated June 30, 1978, which modified the mode of payment, clearly recorded that interest on the deferred payment was to be paid from July 1, 1979. The original stipulation about the payment of interest was sought to be changed by this substituted mode of payment under which the balance of the deferred purchase price was to carry interest only from July 1, 1979 on the amount of Rs.4,75,000, which was to be paid on instalments and no interest was to be paid on the amount of Rs. 2 crores. As per this arrangement, no interest was to be charged for the accounting y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 July 1, 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 clause (B) to Explanation 1 to section 271(1)(c)(iii), therefore, is covered by the proviso to Explanation 1 to the effect that the preponderance of probabilities point to the belief to be bona fide though not legally tenable on the ground that the resolution intended to be retrospectively changing the mode of payment could not really affect the accrual of interest that already took place before its passage. The facts relating to the explanation given in the quantum proceedings and material to the computation of the total income were disclosed during the quantum proceedings. The assessee had in response to a query, produced the said proposal dated June 15, 1978 and the resolution dated June 30, 1978 and relied upon them for its claim that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accrual of income could be worked out for the accounting period of July 1, 1977 to June 30, 1978 would be those which formed the source of information about that income on the basis of which, the interest income could be ascertained and worked out by computing the total income the supplemental agreement dated March 4, 1977, clearly referred to the fact that the date of transaction was March 1, 1977 and that, under the mode of payment adopted thereunder, interest at the rates stipulated was to be paid from the date from which the amount of consideration was outstanding and on such amounts which remained outstanding from time to time. It is precisely from these particulars that the Income-tax Officer raised specific queries during the proceedings in response to which, the resolution dated June 30, 1978 accepting the proposal of Elscope made on June 15, 1978 for substituting the terms of payment incorporated in the agreement and the deed of assignment was produced during the assessment proceedings. It has also come on record that in the notes annexed to and forming part of the balance sheet as on June 30, 1978 mentioned the fact that the deferred sale consideration pertained to the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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. Assessment year 1980-81: Question Nos. (1) and (2) raised at the instance of the Revenue 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 17.11): Assessment year 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): Assessment year 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): Assessment year 1979-80: he 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, ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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