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TMI Blog2008 (10) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... of Revenue and against the assessee, the assessee did not file any appeal and, therefore, that part of the High Court Judgment dealing with Income Tax Reference No. 75 of 1987 becomes final. The learned Counsel for the assessee very fairly agreed with the same. As regards the Income Tax Reference No. 58 of 1993, the Revenue had filed an appeal against the impugned judgment dealing with the same, however, this Court had dismissed the appeal filed by the Revenue on the grounds of limitation. The learned Senior Counsel Mr. P.V. Shetty, appearing on behalf of the Revenue very fairly admitted this position. We are, therefore, left with only two References, which are as under:- Income Tax Reference No. 56 of 1986 (which emanated from the quantum proceedings in respect of the Assessment Years 1979-80 and 1980-81):- For the Assessment year 1979-80 - at the instance of the assessee:- (i) Whether on facts and in the circumstances of the case, the Tribunal was right in law in holding that the interest of Rs.66,29,236/- being the amount of interest as determined by the Income Tax Officer on a notional basis from 1.7.1977 to 30.6.1978 was liable to tax on accrual basis for the Assessment Y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee in respect of Assessment Year 1979-80, the penalty, however, of Rs.4 lakhs was set aside. We are, therefore, concerned in Reference No. 220 of 1995, only with Assessment Year 1979-80. 4. Following factual panorama would have to be considered for properly considering the background. 5. The assessee herein indisputably, follows the Mercantile System of Accounting. 6. For Assessment Year 1979-80, the Accounting Year is 1.7.1977 to 30.6.1978, while for the Assessment Year 1980-81, the Accounting Year is 1.7.1978 to 30.6.1979. 7. The assessee, which was previously known as Sarabhai Chemicals Pvt. Ltd. has now become Sarabhai Holdings Pvt. Ltd. They would be referred to as "assessee" for short. 8. There was an agreement on 28.2.1977, whereby, the assessee agreed to transfer its industrial undertaking and business activity known as Sarabhai Common Services Division, which was its unit. This was to take place with effect from 1.3.1977. The unit was sold as going concern in favour of assessee's own subsidiary M/s. Elscope Pvt. Ltd. for a total consideration of Rs.11,44,10,253/-. 9. Under this agreement, the amount of Rs.49 lakhs was to be paid by way of deposit/earnest m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respondent-assessee. 12. On 30.6.1978, the proposal sent by Elscope vide letter dt. 15.6.1978 was decided to be accepted by the assessee and a Resolution to that effect was passed in the meeting of the Board of Directors. The said Resolution is on record and the relevant portion reads as under:- "....the Company doth hereby approve, accept and adopt the following revised mode of payment as contained in letter No. ELSCOPE/MC dt. 15th June, 1978 received from Elscope Pvt. Ltd." It must be noted here that firstly, in keeping with its proposal, Elscope furnished to the respondent-assessee secured bonds of Ambalal Sarabhai Enterprises Ltd. Secondly, it must be noted that as proposed in the letter dt. 15.6.1978, the interest was to start from 1.7.1979. While, before this interest was to start, the Resolution dt. 30.6.1978 was passed, doing away with the requirement of payment of interest in terms of the earlier agreement dt. 4.3.1977. So far so good. 13. The assessee received a notice under Section 210 of the Act on 17.10.1978, requiring it to pay the advance tax of Rs.1,22,22,757/-, while the second notice was served on 8.12.1978, asking the respondent-assessee to pay th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... involved to be a highly complex issue and held that the mere fact that the decision had gone against the assessee could not be viewed as being determinative of the assessee's liability to pay advance tax. The Tribunal relied on Gujarat High Court Judgment for that purpose. 18. However, insofar as the Assessment Year 1980-81 is concerned, the Tribunal held that the amount of interest could not be included in income of assessee, since the Resolution dt. 30.6.1978 was passed prior to the commencement of the relevant Accounting Year, which was 1.7.1978 to 30.6.1979 and, therefore, it could not be said that the interest income had acrrued. 19. The Tribunal also held that it was permissible for the parties to alter the agreement regarding the charging of interest in the wake of the fact that the said Resolution was found to be a genuine Resolution. The Tribunal came to the finding that the interest could not have accrued insofar as Assessment Year 1980-81 was concerned. 20. However, in 1988, the show Cause Notice came to be issued under Section 274 read with Section 273 (2)(a) of the Act as to why the penalty should not be levied for furnishing an untrue estimate of advance tax. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat though the finding was against the assessee for the Assessment Year 1979-80, still there would be no penalty under Section 273(2)(a) of the Act, was not justified. We would have to deal with that issue in this appeal. 21. The Learned Senior Counsel, appearing on behalf of the Revenue very painstakingly, took us through all the findings of the High Court, as well as the Tribunal and urged that both the Tribunal as well as the High Court had erred in holding that there was no accrual of interest insofar as the Assessment Year 1980-81 was concerned. The learned Senior Counsel invited our attention to the basic agreement of transfer dt. 28.2.1977, as also to the subsequent agreement dt. 4.3.1977. We were also taken through the letter dt. 15.6.1978, as also the Resolution dt. 30.6.1978 and on that basis, the Ld. Senior Counsel urged that this was nothing, but an attempt on the part of the assessee to avoid payment of tax on the interest which it was bound to pay. The learned Senior Counsel urged that considering the whole transaction and the relations between the assessee Company and the transferee Company, the assessee Company tried to wriggle out the liability to pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in providing adequate security of the payable amounts, there is nothing to dispute or suspect the genuineness of the transaction. The whole transaction would have to be viewed on that backdrop. In the commercial world, the parties are always free to vary the terms of contract. Merely because by Resolution dt. 30.6.1978, the assessee agreed to defer the payment of interest, would not mean that it tried to evade the tax. What is material in the tax jurisprudence is the evasion of the tax, not the beneficial lawful adjustment therefor. Considering the genuine nature of the transaction based on the letter dt. 15.6.1978 and the Resolution dt. 30.6.1978, it cannot be said that the whole transaction was in order to evade the tax. 24. There is also no dispute that the assessee was following the Mercantile System of Accounting and that the Accounting Year for the Assessment Year 1980-81 was 1.7.1978 to 30.6.1979. The High Court has correctly held and confirmed the Tribunal's finding that insofar as the accrued interest for the Assessment Year 1979-80 was concerned, since the interest had already accrued to the assessee, it cannot be wiped out later on by passing a Resolution dt. 30. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no interest had accrued in the Accounting Year 1.7.1978 to 30.6.1979, there could arise no question of relinquishment of interest for any commercial expediency. There was no such question because a party cannot relinquish income that has not accrued at all. We, therefore, accept the judgment of the High Court insofar as it pertains to the Reference No. 56 of 1986. The High Court has correctly found that in view of the categorical stipulation that interest will be payable on the deferred consideration amount in respect of the sale, which became effective from 1.3.1977, the interest started accruing on that time basis, from 1.3.1977 determined by the amount outstanding from time to time and the rate applicable which both were stipulated in clearest possible terms in the Deed of Assignment dt. 28.6.1977 and the agreements which preceded it. The High Court has assessed the facts correctly and has further observed in para 14.7 that what already accrued during the Accounting Year 1.7.1977 to 30.6.1978 could not be nullified by the Resolution dt. 30.6.1978, however, the same rule could not be applicable to the subsequent Accounting Year, when the interest had not accrued. We, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms, cannot be made 'not to accrue after its actual accrual, it cannot be inferred with any certainty that the assessee had reason to believe that its Nil estimate was untrue'. The High Court has then held that the penalty under Section 273 (2)(a) of the Act is not an automatic outcome of the addition of such income. It is on this ground that the High Court has set aside the finding of the Tribunal confirming the penalty of Rs.4 lakhs levied under Section 273 (2)(a) of the Act on the assessee. 28. We must clarify here that insofar as Assessment Year 1980-81 is concerned, there will be no question of any penalty whatsoever and it had to go as it has been found on facts and law that the Resolution dt. 30.6.1978 had become effective and under the same, the interest was already deferred and, therefore, there was no accrual of interest in that year. However, the question is as to whether the High Court was right in absolving the assessee of the penalty, which was inflicted even for the year 1979-80. The learned Senior Counsel, appearing on behalf of Revenue very earnestly argued that once the interest was found to have been accrued for the Assessment Year 1979-80 and once on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... give up the accrued interest in the name of commercial expediency, there was no valid justification to relinquish the same, as has been found by the High Court. The High Court has also specifically found that the only aim was to avoid payment of tax which had become due on the basis of the accrual of interest and commercial expediency was only a dignified guard in which the arrangement made to evade the tax was sought to be covered. However, it was shown to the High Court that the penalties levied under Section 273(2)(a) of the Act were determined in case of two companies of the same Group, they being, Fabriquip Pvt. Ltd. and Packart Pvt. Ltd., wherein, it was held that the Resolution passed on 30.06.1978 for the foregoing interest had become applicable from 1.7.1978. The High Court took the view that the levy of interest under Section 215 of the Act and the levy of penalty under Section 273(2)(a) of the Act stand on different footings. We have no hesitation to accept this view of the High Court. Indeed, while the levy of interest under Section 215 of the Act is automatic, that is not the case with the penalty under Section 273(2)(a) of the Act, where the mensrea on th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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