TMI Blog2008 (7) TMI 445X X X X Extracts X X X X X X X X Extracts X X X X ..... was reproduced in the assessment order, which reads as under: "An advance of Rs. 130.69 crores was given to a foreign supplier i.e., M/s. Karsan in 1995-96 against import of urea, the supplies of which were not received and subsequently the contract was terminated. The company initiated arbitration proceedings in the International Court of Arbitration (ICA) which delivered the award on December 3, 1998, in favour of the company for US dollar 40.69 millions along with simple interest at 5 per cent. on the principal amount of US dollar 37.62 millions with effect from November 14, 1995, till the date of payment. The recovery proceedings in pursuance of ICA award are already underway against the identified assets in the name of M/s. Karsan and its executives in various countries. M/s. Karsan had filed their counter claim during the ICA arbitration amounting to US dollar 33.63 millions and GBP 73,609.20 (INR 161.04 crores), which was rejected by ICA. The party challenged the award in District Court at Amsterdam during March, 1999, which was rejected vide their judgment dated December 12, 2001, thus, making the award enforceable. The party filed an appeal against the judgment of the D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a specific mention that such amount is paid towards the liability of interest or litigation costs. The explanation of the assessee was considered by the Assessing Officer. It was pointed out that the assessee is following the mercantile system of accounting, under which the income and expenditure are recorded in the books at the time of their occurrence and not at the time of receipt thereof. Thus, if any income accrues in a year, it has to be recorded irrespective of the fact that the same was received in the year or not. Similar considerations are applicable to the accounting of the expenditure. This principle was confirmed by the hon'ble Supreme Court in the case of Indermani Jatia v. CIT [1959] 35 ITR 298. Further, an income is said to accrue or arise when the right to receive the same becomes vested in the assessee, as held by the hon'ble Supreme Court in the case of CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42. An income can be said to accrue to an assessee when it is due and the postponement of the date of payment does not effect the accrual of the income, as held by the hon'ble Supreme Court in the case of Morvi Industries Ltd. v. CIT [1971] 82 ITR 835. Coming to the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee's petition for passing a decree in its favour was pending before the Chief Judge, City Civil Court, Hyderabad; (iii) the arbitration award was not a decree, but it will become so when it is so decreed by the court and only thereafter the award becomes enforceable against M/s. Karsan; and (iv) the assessee was not able to recover even the principal amount and, therefore, no real income accrued to the assessee in respect of interest and litigation costs. Coming to the legal issues, it was pointed out that the case law relied upon by the Assessing Officer was not applicable to the facts of the case of the assessee. On the other hand, reliance was placed on the decision in the case of Fazilka Electric Supply Co. Ltd. v. CIT [1983] 143 ITR 551 (Delhi); A.P.S. Cold Storage and Ice Factory v. CIT [1979] 119 ITR 709 (All); UCO Bank v. CIT [1999] 237 ITR 889 (SC) and Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746 (SC). In the alternative, it was argued that even if it is taken that the impugned income had accrued to the assessee, it cannot be taxed in one year and it should be taxed in each year of its accrual. The learned Commissioner of Income-tax (Appeals) forwarded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ef Judge, City Civil Court, Hyderabad, was occupied with Executive Petition No. 57 of 2003. In this petition, it was the claim of the assessee that he was the decree holder and, therefore, the arbitration award was at par with the decree of a competent authority. In view of these facts, it was held that the right to receive the money had been finally vested in the assessee when M/s. Karsan did not pursue the matter any further in Dutch Supreme Court, which happened in this year. Coming to the other argument, namely, that the assessee had not even received the principal amount and, therefore, there was no question of accrual of interest and litigation income, it was mentioned that the income has to be accounted on accrual basis in the mercantile system of accounting. In this system, the assessee also has a right subsequently to claim the deduction when it is felt that the amount is not recoverable. In such a situation, it may be written off from the books of account by claiming the deduction as bad debt. It was also held that the issue of real vs. notional income was decided by the courts on altogether different facts. The assessee had also argued that interest and litigation cost s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceive interest and cost accrued to the assessee as per the award on January 22, 2004, as the dispute ended on that day. Thereafter, learned counsel for the assessee furnished his argument against the order of the learned Commissioner of Income-tax (Appeals), which are summarised as under: (i) the appeal of M/s. Karsan against the arbitration award was finally disposed of on December 14, 2006, when the petition for revocation of the award was dismissed by the Court of Appeal. This did not happen in this year but subsequently and till such disposal even the award had not become final; (ii) the arbitration award was not a decree enforceable against M/s. Karsan as per the decision of the hon'ble Delhi High Court in the case of Fuerst Day Lawson Ltd. v. Jindal Exports Ltd. [1999] 1 Arb LR 571, in which it was pointed out that the satisfaction of the court as contemplated under section 49 can be arrived at only after the court is satisfied that none of the grounds, as mentioned in section 48(2) of the Act, exists and that if an objection is filed, as contemplated under section 48(1) of the Act by the party, is dismissed. It is only after that satisfaction which is required to arriv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad debt because the same has been written off as there was no hope of recovery despite legal suit pending against them. In such a situation, it was held that even if the assessee could have provided for the penal interest, the same was liable to be written off as irrecoverable. Therefore, the lower authorities were not right in making addition of Rs. 3,41,400 on account of penal interest on accrual basis. In reply, the learned Departmental representative referred to the findings of the learned Commissioner of Income-tax (Appeals) in paragraphs 5.10, 5.11 and 5.12, which have been summarised by us, but which are reproduced below for the sake of ready reference: "5.10 The cumulative reading of the above makes it very clear that the damages awarded to the appellant under the arbitration award became a decree of the court of competent jurisdiction at Amsterdam, legally enforceable anywhere in the world as per the relevant laws of different nations. This decree and so the right to receive damages became a crystallised right when the process of appeals started by M/s. Karsan ended by the decision of the High Court at Amsterdam on January 22, 2004, against which M/s. Karsan did not fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submissions. The facts are that the assessee had placed an advance of Rs. 133.69 crores with M/s. Karsan in the year 1995-96 for import of urea. The supplies, were not received and subsequently the agreement was terminated. The agreement contained an arbitration clause, in view of which arbitration proceedings were initiated by the assessee in the ICA. The court delivered its judgment on December 3, 1998, in favour of the assessee to the effect that the assessee was entitled to receive the aforesaid advance from M/s. Karsan along with interest at 5 per cent. per annum on the principal amount with effect from November 14, 1995, till the date of the payment. The assessee was also entitled to receive litigation charges from M/s. Karsan. The recovery proceedings were started in pursuance of the award against M/s. Karsan and its executives in various countries. However, they had filed counter claim amounting to Rs. 161.04 crores. This claim was rejected by the ICA. The award was also challenged in the District Court at Amsterdam in March, 1999, which was rejected by the District Court on December 12, 2001. In the note to the account, it was mentioned that the award became enforceable o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivided Family held on behalf of the family a share of five annas in the rupee in the profits and loss of a firm, whose accounts were to be adjusted at the end of the calendar year. The Hindu undivided family was partitioned on November 12, 1955, and the assessee was allotted the five annas share in the firm. Consequently, he became the full fledged owner of the income by way of share in profits of the firm. The question was whether any part of the income from the firm for the calendar year 1955 was liable to be included in the income of the family? The determination of the question involved the time of accrual of profits to individual partners in the firm. The court came to the conclusion that the date when Ashokbhai acquired the right to receive the share of the profits there was no subsisting joint family and his share of profit was not received by him on behalf of the assessee. Therefore, it was held that no part of the profits could be taxed in the hands of the family. It was also pointed out that under the Income-tax Act, income is taxable when it accrues, arises or is received or when it is by fiction deemed to accrue, arise or is deemed to be received. Receipt is not the onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure is debited on becoming legally due, though it may be disbursed later on. There could be exceptional cases where only a hypothetical entry is made for the income which does not materialise. Applying the aforesaid principle, it was held that the income was given up unilaterally by the assessee after it had accrued to it. Therefore, the assessee could not escape the tax liability. The case before us is not one of foregoing of income after it became one. Thus, the facts are distinguishable. The real question before us is whether the income accrued to the assessee on January 2l 2004, on receiving the information that M/s. Karsan did not pursue the matter in the Dutch Supreme Court, in a situation when there was further litigation in the matter, which came to an end on December 14, 2006? We are of the view that the ratio of the case discussed above, does not lead to a conclusion that interest and litigation charges definitely accrued to the assessee on January 22, 2004. The Revenue also relied on the decision of the hon'ble Supreme Court in the case of CIT v. Shri Goverdhan Ltd. [1968] 69 ITR 675. The facts of the case are that the assessee derived income from its own busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... executed as if it was a decree. It was further pointed out that the foreign award per se cannot be said to be final and binding so long as it is not held as enforceable and does not become a deemed decree by virtue of the provisions of section 49 of the Act. Coming to the facts of instant case, it is an admitted position that the court of Monaco rejected the application of the assessee to pass a decree in its favour. Similar proceedings were pending in the City Civil Court at Hyderabad. Thus, no competent court recorded the satisfaction under section 49 to make the award as a deemed decree. Filling the form before the court showing the assessee to be a decree holder cannot lead to a conclusion that a decree was passed in its favour for the reason that the forms are so prescribed. The award becomes enforceable only when it becomes the rule of a competent court, which did not happen in this year. Therefore, we are of the view that this case supports the argument of learned counsel that the award did not become enforceable in this year and, thus, there was no accrual of income under the mercantile system of accounting. The assessee also relied on the decision of the hon'ble Delhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her, on the facts and in the circumstances of the case, was the Appellate Tribunal justified in holding that the sum of Rs. 1,55,628 is the income of the assessee liable to be taxed in the assessment year 1963-64? The finding of the court was that an award of an arbitrator that is not filed in the court and made a rule of court has no force or validity. It has no effective value and it cannot create, extinguish or pass any title or interest. In this connection, we would like to reproduce one paragraph from pages 558 and 559 of the judgment, which reads as under: "Even if it could be said that this question is comprehensive enough to raise the point now sought to be raised by learned counsel, the Tribunal declined to refer this question as well as another question posed by the assessee relating to its method of accounting and the assessee has not pursued the matter further under section 256(2). This aspect of the matter has, therefore, not been referred to us and it is not open to the assessee to raise the issue before us. Secondly even on the merits, the plea is not tenable. An award of an arbitrator that is not filed in court and made a rule of the court has no force or validit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at income is created in the assessee. If we view the subject-matter of taxation in the abstract the compensation or interest thereon, receivable by an assessee when his property is taken away, then clearly the right to compensation or interest thereon will arise as from the date of dispossession both under the relevant statutory provisions as well as the earlier provisions in the Constitution which prohibited the deprivation of property without compensation. But if we consider the subject-matter as the assessee's entitlement to a particular amount which has been awarded to him, such entitlement clearly can be said to have crystallised only on the date on which the amount is awarded to him finally with no dispute possible in regard thereto. The former view proceeds on the principle that where a right clearly exists, the delay in quantification or even a dispute regarding the same is immaterial and irrelevant, a principle settled beyond doubt in regard to accrual of liabilities by the decision of the Supreme Court in Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363. The latter proceeds on the view that as long as it is not known and cannot be stated with any certainty w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 263 of the Act, holding that when the assessment was completed, the only paper available was the Board's circular dated October 9, 1984 and, therefore, it cannot be said that the Inspecting Assistant Commissioner's order of assessment in not taxing interest suspense of Rs. 49,15,435 in view of that circular was erroneous and prejudicial to the interests of the Revenue? The assessee was following the mercantile system of accounting. However, the income by way of interest pertaining to doubtful loans was not considered as real income in the year in which it accrued, but only when it was realised. In order to support its case, the Revenue has placed reliance on the decisions in the case of Kerala Financial Corporation v. CIT [1994] 210 ITR 129 (SC) and State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC), in which it was held that the interest which had accrued on sticky advances had to be treated as income of the assessee and taxable as such. If the advance takes the shape of a bad debt, refund of tax paid on the interest would become due and the same can be claimed by the assessee in accordance with law. The hon'ble court pointed out that it was not in agreement wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that the assessee has not provided for the interest in the books of account by following conservative accounting policy. Thus, the facts are distinguishable. In the case of Space Financial Services, the Tribunal had allowed the loan as bad debt and consequently it came to the conclusion that even if interest had been provided, the same was liable to be written off. Thus, it was also held that interest income did not accrue to the assessee. In the case at hand, the assessee has not written off the principal amount. Therefore, the ratio of this case is also not applicable. However, we are of the view that since the principal amount has not been recovered over a long period, there is no possibility as of now for the recovery of the interest and litigation cost awarded to the assessee. No legal right has been created in favour of the assessee as the award has not been made a rule of the court. In such circumstances, the assessee was right in not providing for the interest in the books of account. Learned counsel also argued that the interest and the litigation costs did not pertain to one year and, therefore, the whole of the amount could not have been taxed in the assessment of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e continued in the subsequent year. The method of valuation may, however, be changed when the adopted method is also a recognised method and such method is subsequently followed from year to year. However, the assessee cannot change the method of valuation suddenly to its advantage. The changes in policy by the Government did not oblige the assessee to change its accounting policy. The purpose of the policy was to regulate the sale of product produced in excess of reassessed capacity. The change made by the assessee involves four suppositions, namely,-(i) sale of excess production of urea above 100 per cent. of reassessed capacity while the same is still in closing stock, (ii) prior approval of the Department of Fertilizers, (iii) IPP on the date of actual sale, which may vary from the date of closing stock valuation, and (iv) supply to the Government against its requirement of import. The assessee has not filed the approval of the Department of Fertilizers. In absence thereof, the assessee was obliged to value the stock at cost price or market price, whichever is lower. Therefore, the addition of Rs. 24,43,49,000 was made to the stock, leading to an addition of an identical amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relied on the findings of the learned Commissioner of Income-tax (Appeals), furnished in paragraphs 6.7, 6.8 and 6.9, which are reproduced below for the sake of ready reference: "6.7 The reading of the above letter in my view supports the Assessing Officer's finding in the assessment order. That undervaluation has been done by the appellant on the basis of contingent parameters. The applicability of import parity price for working out net gains would depend on the following contingencies: (i) Sales are out of stock lying with the assessee and that 100 per cent. of reassessed capacity production has already taken place in the succeeding year. (ii) That prior approval of Ministry of Chemical and Fertilizers would be there and could be available. (iii) Sales are out of stock lying with the assessee and that 100 per cent. of reassessed capacity production has already taken place in succeeding year. (iv) That prior approval of the Ministry of Chemical and Fertiliser would be there and could be available. (v) That approval will be at import parity price prevailing on the day of stock valuation. (vi) That import parity price will be same on the date of sale because i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in upholding the order of the Assessing Officer. Accordingly, ground No. 3 is allowed. Ground No. 4 is against the finding of the learned Commissioner of Income-tax (Appeals), in which the disallowance of Rs. 40,43,000, made by the Assessing Officer on account of writing off the loose tools, was upheld. In this connection, it is mentioned in the assessment order that as per Note No. 10 on account, the assessee changed its accounting policy in respect of writing off of the loose tools from a period of three years to one year. In view thereof, the opening inventory of Rs. 32,12,000 was charged to revenue account in this year. Further, loose tools of the value of Rs. 21,52,000, issued during this year, were also charged to the revenue account. It was explained that the change was made in accordance with the Accounting Standards issued by the Institute of Chartered Accountants of India. The Assessing Officer considered the explanation. It was pointed out by him that loose tools were part of the machinery under section 32 and, therefore, should have been written off at 25 per cent. on written down value method. In view thereof, the depreciation was recomputed, leading to an addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argument sake, the appellant's argument, there also the Assessing Officer's action in treating the loose tools as part of the fixed assets cannot be faulted. The copy of the AS-2 enclosed by the appellant reveals the following: '4. Inventories encompass goods purchased and held for resale, for example, merchandise purchased by a retailer and held for resale, computer software held for resale, or land and other property held for resale. Inventories also encompass finished goods produced, or work in progress being produced, by the enterprise and include materials, maintenance supplies, consumables and loose tools awaiting use in the production process. Inventories do not include machinery spares which can be used only in connection with an item of fixed asset and whose use is expected to be irregular, such machinery spares are accounted for in accordance with Accounting Standard (AS) 10, accounting for fixed assets.' 7.3 The appellant's reply in appellate proceeding reproduced earlier leaves no doubt that these loose tools are not items going directly in production process. Rather as stated by the appellant, these loose tools are used for repairs of all kinds of plant and machi ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
