TMI Blog2011 (6) TMI 872X X X X Extracts X X X X X X X X Extracts X X X X ..... off by way of this consolidated order. 6. Brief facts of the case are that, the assessee is a company, set-up with an object to carry business of generation and distribution of power. The Assessing Officer had passed order under section 143(3) r/w 254 of the Income Tax Act, 1961 (for short the Act ) consequent to the Tribunal restoring the matter to the file of Assessing Officer by its order dated 6th March 2006, as nothing turns on these proceedings, we directly refer to the facts of the issue before us. 7. The sole issue in this appeal is the taxability of interest on security deposit. This Bench has to adjudicate as to whether there was accrual of income by way of interest on security deposit placed by the assessee company with Madhya Pradesh Electricity Board (for short MPEB ). 8. The promoters of the assessee company entered into a Memorandum of Undertaking with the Madhya Pradesh State Govt. in the year 1994, under which the M.P. State Govt. agreed to enter into a Power Purchase Agreement (for short PPA ) with the separate company, to be promoted by the said promoters. Subsequently, the promoters formed and registered the assessee company in the year 1995; (ii) i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty deposit of ` 52,24,00,000. 13. The assessee filed writ petition before the Hon ble High Court of M.P., Jabalpur Bench, and the Hon ble High Court decided the issue in favour of the assessee on 13th May 2003. The Hon ble High Court quashed the order passed by MPEB forfeiting the security deposit and directed the MPEB to provide bankable escrow agreement to the assessee company in its true spirit as envisaged in its letters dated 24th July, 4th September 1998 and that the same should be done within two months from the date of the order of the Court. The Hon ble High Court further ordered that, in case, the arrangement does not materialize, MPEB should refund the amount of security deposit along with accrued interest. Later, the period was extended up to 31st March 2004, by an order dated 20th February 2004 passed by the Hon ble High Court. Thereafter, MPEB carried the matter in appeal before the Division Bench of the Hon ble M.P. High Court and the Division Bench passed an interim order directing the MPEB to deposit ` 25,00,00,000 with the Court @ ` 5,00,00,000 per month commencing from 1st September 2004 and gave the assessee company liberty to withdraw the amount deposited by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n security deposit was accruing to the assessee company on a yearly basis as the assessee company was following mercantile system of accounting. He held that the agreement between MPEB and the assessee company, as mentioned in the minutes of the meeting dated 17th June 2008, has nothing to do with the rights of the assessee company to receive not only the security deposit but also the interest thereon and that the forgoing of the deposit and the return of the money was entirely for different commercial considerations. He held that the interest is accrued @ 9% on the security deposit. He rejected the alternative contentions of the assessee that the interest income should be adjusted against the cost of the project by relying on the observations made in the order of the Tribunal in the first round of litigation. It would be relevant to mention that the Assessing Officer had accepted this alternative contention of the assessee in assessment year 2006-07. 16. Aggrieved, the assessee carried the matter in appeal, wherein the first appellate authority, in its common order for assessment years 1999-2000 to 2002-03, held that the only event that has taken place between the years 1999-20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom MPEB furnishing a Bankable Escrow Agreement, and otherwise the security deposit would be forfeited. He submits that the assessee would have right to receive the fixed deposit as well as the interest thereon, only on the happening of an event i.e., on achieving financial closure. He pointed out that, in this case, financial closure was never achieved for the reason that MPEB failed to provide a bankable escrow agreement, even after specific directions of the M.P. High Court. Under these circumstances, the learned Sr. Counsel submits that the question of accrual on income does not arise. Even otherwise, he submits that the stand of MPEB is that the assessee has failed to achieve financial closure as stipulated in the agreement and, hence, it forfeited the security deposit and even in such circumstances, there is no accrual of income. He relied on the real income theory and argued that there is no income at all. He vehemently contended that the Revenue authorities have not pointed out, the time at which the assessee has got a right to receive interest on security deposit. He pointed out to various correspondences, agreements and Court orders and submits that the entire issue is in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iii) ITO v/s M/s. Vemagiri Generation Ltd., ITA no.6352/Mum./2005, order dated 26th May 2008; 21. Learned Departmental Representative, Mr. Subachan Ram, on the other hand, opposed the contention of the learned Sr. Counsel and submits that there are two distinct set of facts in this case and the learned Sr. Counsel has inter-mixed these facts and that he would like to place the facts in their perspective. He submits that there is no dispute on the receivability of the interest. He contends that the M.P. Government and MPEB had granted full guarantee to the assessee company and its financial institution and it is wrong on the part of the learned Sr. Counsel to state that there was no security in this case. He submits that it was the assessee who had disputed the wording in the bankable escrow agreement and it has nothing to do with the accrual of interest on security deposit. He drew the attention of the Bench to Page-235 of the assessee s paper book which is the letter written by MPEB to the assessee company on 26th April 1999, wherein it is stated that the matured amount has been reinvested for a further period of six months and that the interest earned is @ 9%. He submits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itions in the escrow agreement. He distinguished the case laws cited by the learned Departmental Representative. 24. Rival contentions were heard. On a careful consideration of the facts and circumstances of the case and on perusal of the papers on record, as well as the case laws cited before us, we hold as follows:- i) The sole issue that arises for our adjudication is, whether or not the assessee had a right to receive interest under the facts and circumstances of the case. If the assessee has no right to receive interest, then, it cannot be held that the interest has accrued. This principle is well settled by a number of judgments, some of which are given below:- 1. CIT vs. A. Gajapathy Naidu, 58 ITR 114 (SC) (Page-1 of D ) - In this case the assessee supplied bread to a Government Hospital during the period 1st April, 1948 to 31st March, 1949. After the close of the year the assessee represented to Government that he had incurred loss. The Government paid compensation for the loss which was received during accounting year 1950-51 relevant to asst. yr. 1951- 52. It was held that the said profit is to be included in asst. yr. 1951- 52 and could not be related back to ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iod, the security deposit will be released to the IPPs along with interest accrued. The interest rate shall be computed as per rate given by SBI for fixed deposits for the concerned maturity period. [emphasis own] iv) To make things more clear, at Page-191 of the assessee s paper book, MPEB, vide its letter no.07-11/IPC-Gen./Escrow-1215 dated 4th September 1998, states as follows:- (1) Financial Closure has to be achieved by you within two (2) months from the date of providing a Bankable Draft Escrow Agreement. (2) In case of financial closure is not achieved by you within the specified period of 2 months, then the security amount deposited by you along with your offer under reference will be forfeited and the allotment of Escrow protection will stand cancelled. v) From the above, it is clear that the assessee would have a right to receive the deposit along with interest only on achieving financial closure. In other words, if financial closure is not achieved, the assessee has no right to receive back the security deposit, let alone the interest thereon. vi) We have to also see the manner in which the MPEB understood their commitment to return the deposit al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e date of this letter otherwise 2% security deposit will be forfeited. Public is suffering badly due to non-addition of power generating capacity in the State for which your client is equally responsible. v) MPEB, vide their letter dated 13th July 2002, forfeited the security deposits. It concluded as follows:- MPEB offered various workable alternatives to Bina Power to resolve the issue so that the work on power project may start but there was no positive response of Bina Power on any of the alternatives. It appears that Bina Power are not interested in execution of project and are only interested in refund of their S.D. which is not as per contract hence there is no option left with MPEB except to pass this order to forfeit S.D. of M/s. Bina Power. Thus, MPEB was of the opinion that the assessee has no right to receive either the security deposit or the interest thereon. vi) The assessee challenged the forfeiture in a Writ Petition filed before the M.P. High Court, wherein the Court, vide order dated 13th May 2003, held as follows:- 19. In the result, this petition is allowed. The order of the respondent M.P. Electricity Board (or the M.P. State Electrici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te of ` 5.00 crores (Rupees Five Crores) per month commencing from 1.9.2004. This deposit should be made under the notice of the First Respondent. b) The first respondent wil lbe at liberty to withdraw the amount deposited by the appellant as per clause (a) above as and when deposited by the appellant, by furnishing an unconditional bank guarantee of the nationalised bank in favour of the Court (represented by Registrar General) of this Court) for repayment in the event of appellant s success in the appeal. c) In addition to the deposit of ` 25 crores, as aforesaid, the appellant Board shall furnish an unconditional bank guarantee of a nationalised bank for ` 50 crores (Rupees Fifty crores) in favour of the Court (represented by Registrar General) within a period of two months from today. d) The deposit by the appellant and withdrawal thereof by the first respondent and compliance with the other terms of this order, will be without prejudice and subject to final orders of this Court in the Letters Patent Appeal. List the matter on 17.8.2004, at request. [emphasis own] viii) These interim directions were directed to be in force subject to any order that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, the issue in this case is clearly covered in favour of the assessee and against the Revenue by the decision of Hon'ble Supreme Court in the case of Godhra Electricity Co. Ltd. (supra). In this case, the assessee company which had a license to generate and supply electricity, enhanced the charges for electricity. This enhancement was challenged in the Courts and ultimately, the Hon'ble Supreme Court upheld the enhancement. The assessee had passed entries in its books of account treating the increased charges as its income. Shortly thereafter, the Under Secretary to the Govt. of Gujarat wrote a letter to the company advising it to maintain status quo for the rates to the consumers. While doing so, the consumers also filed a representative Suit wherein an interim injunction was granted and, thereafter, finally, decreed in favour of the consumers by the lower Court. On these facts, the Hon'ble Supreme Court held that since the assessee was not able to collect enhanced charges, necessary entries made in its books of account represented only hypothetical income and it could not be brought to tax as it did not represent income which had really accrued even though the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble Supreme Court in Godhra Electricity Co. Ltd. (supra) and held that in the instance case, there is no real accrual of income as there is a dispute between the parties in the relevant assessment year and that the income received by the assessee will be liable to be assessed only when the arbitral proceedings come to an end. xii) Applying these principles to the facts of the case, we have to hold that as there was a dispute between the parties, and as the matter was in the Supreme Court, no real income accrued to the assessee. Finally also, as the deposit has been forfeited for whatever reason, there was no accrual of income. The fact remains that, at no point of time, MPEB or M.P. State Govt. have agreed with the demand of the assessee for return of the deposit with interest. The cases were withdrawn from the Supreme Court only because the forfeiture was accepted by the assessee. The view of the Assessing Officer that the forfeiture was accepted on different commercial consideration and hence, there is an accrual of income prior to such acceptance, in our view, is incorrect as the dispute was pending in the Courts. The order of the Single Judge of the Hon ble M.P. High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer. But that is far from saying that that liability is a liability to pay additional compensation or enhanced compensation as claimed by a party aggrieved. If there is an existing liability, the mere fact that the payment is postponed to the future would not detract that liability from becoming a debt but the liability to pay unliquidated damages or additional compensation which are inchoate or contingent would not create a debt. xiv) This judgment also applies on all fours to the facts of the case. For all the assessment years in question, the issue was before the Hon'ble Supreme Court and was subjudice. Under these circumstances, it cannot be said that there was a final determination of the rights. In such a situation, the disputed income cannot be brought to tax on the ground that there is accrual of income. xv) Now, we consider the case laws relied upon by the learned Departmental Representative. xvi) The Hon'ble Supreme Court in Toshoku Ltd. (supra), was considering the case where the dealers in tobacco in India exported to Japan and France through a nonresident sales agent. The exclusive sales agent was entitled to a commission of 3% of invoice amount. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and greater emphasis will be laid on the business aspect of the matter viewed as a whole when that can be done without disregarding the statutory language. This judgment, in fact, helps the case of the assessee for the reason that the reality of the situation is that the assessee was not in a position to realise the security deposit or interest thereon. xx) Coming to the judgment of Hon'ble Supreme Court in Babulal Narottamdas Ors (supra), the Hon'ble Supreme Court was considering the case where income was actually earned by the assessee by virtue of a resolution passed by the company. The Court held that the right to receive additional remuneration arose only on the basis of resolution and payment was deferred on account of litigation. Under these circumstances, it held that income accrued. In the case on hand, the assessee does not have right to receive either the security deposit or the interest thereon. xxi) Coming to the letter dated 26th April 1999, at Page-235 of assessee s paper book, relied on by the learned Departmental Representative, it is not of much help, as the fixed deposit in question was made by MPEB in its own name with State Bank of India ..... X X X X Extracts X X X X X X X X Extracts X X X X
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