2013 (3) TMI 440 - HC - Income Tax

TDS - Denial of certificate u/s 197 - Admissibility as Income - Whether an amount which was permitted to be withdrawn against a bank guarantee represents income? - Whether when an existing arbitral award which is pending, the amount which has been awarded can be included in the income of the awardee? - Whether income tax can be levied on the right to receive compensation - Whether tax can be deducted at source even if the income has not accrued to the assessee - Petitioner is a Company incorporated in accordance with a scheme for rehabilitation sanctioned by the BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985 - The arbitral tribunal made an award in the amount of Rs. 179 crores. Held that - Under the Income Tax Act, 1961, income chargeable to tax is income that is received or is deemed to be received in India in the previous year relevant to the year in which assessment is made or the income that accrues or arises or is being accrued in India during such year. As decided in CIT vs. Shoorji Vallabhdas and Co., (1962 (3) TMI 6 - SUPREME Court the substance of the matter is the income . Also in Poona Electric Supply Co. Ltd. vs. CIT, (1965 (4) TMI 20 - SUPREME COURT) it was held that Income-tax is a tax on the real income i.e., the profits arrived at on commercial principles subject to the provisions of the Income Tax Act. . These principles were followed in the judgment in Godhra Electricity Co.Ltd. vs. CIT 1997 (4) TMI 4 - SUPREME COURT in holding that even though the assessee was following a mercantile system of accounting and had made entries in its books regarding enhanced charges for the electric supply made to the consumers, no real income had accrued in respect of those enhanced charges in view of the fact that soon thereafter the assessee had been subjected to litigation in a suit filed by the consumers. It would be wholly unreasonable to deduct tax at source on an amount which has not accrued to the Petitioner as income during the financial year in question, the entitlement of the Petitioner being contingent on the outcome of the challenge to the arbitral award. Moreover, it has also not been disputed on behalf of the Petitioner and it is fairly conceded by Counsel for the Petitioner that if the challenge to the arbitral award ends in favour of the Petitioner, the Revenue would be entitled to bring to tax the amount accrued in the corresponding year. The ITO (TDS-I), Nashik was not justified in denying a certificate u/s 197 despite the fact that such a certificate has been issued earlier for three preceding F.Ys. 2009-10, 2010-11 and 2011-12.. No other objection to the grant of a certificate u/s 197 has been asserted on behalf of the Revenue at the hearing First Respondent directed to issue a certificate u/s 197 for financial year 2012-13 - in favour of assessee.

Summary

Issues Involved:
1. Whether the interest income on the fixed deposit of Rs. 65 crores should be taxed as income accrued to the Petitioner.
2. Whether the Petitioner is entitled to a certificate under Section 197 of the Income Tax Act, 1961, for no deduction of tax at source on the interest income.

Issue-wise Detailed Analysis:

1. Taxation of Interest Income:

The primary contention revolves around whether the interest income from the fixed deposit of Rs. 65 crores should be considered as accrued income and thus taxable. The Petitioner argued that the arbitral award has not attained finality since the appeal against the decision of the Learned Single Judge is pending before the Division Bench. The Supreme Court's order allowed the withdrawal of Rs. 65 crores against a bank guarantee, but the entitlement to this amount and the interest accrued is contingent upon the final outcome of the pending proceedings. The Petitioner does not have a crystallized entitlement to the amount awarded, and thus, the interest on the fixed deposit should not be treated as accrued income.

On the other hand, the Revenue argued that the interest earned on the amount is income that has accrued to the Petitioner. The Revenue emphasized that the Petitioner has no vested right in the principal amount of Rs. 65 crores, but the interest earned is income that has accrued. They argued that the Petitioner would be entitled to a refund of tax paid with interest if the principal amount and interest need to be refunded to MSEDC.

The judgment concluded that the interest on the fixed deposit does not represent a crystallized entitlement of the Petitioner during the financial year in question. The Petitioner would have an indefeasible entitlement to the principal amount and the interest earned only if the proceedings conclude in its favor. The Court highlighted that unless the arbitral award attains finality, the interest income cannot be treated as accrued income. The Court also referenced Section 144 of the Code of Civil Procedure, 1908, which mandates restitution if a decree is modified in appeal.

2. Entitlement to Certificate under Section 197:

The Petitioner sought a certificate under Section 197 of the Income Tax Act, 1961, for no deduction of tax at source on the interest income. The Income Tax Officer (TDS-I), Nashik, rejected the application on the grounds that the Petitioner has an absolute right to receive the interest income, and thus, it is taxable.

The Court noted that the challenge to the arbitral award is pending, and the award has not attained finality. The Court emphasized that the amount of Rs. 65 crores withdrawn against a bank guarantee does not represent income accrued to the Petitioner. The interest on the fixed deposit cannot be regarded as income accrued at this stage. The Court referenced several Supreme Court judgments, including CIT vs. Shoorji Vallabhdas and Co., Poona Electric Supply Co. Ltd. vs. CIT, and Commissioner of Income Tax vs. Hindustan Housing and Land Development Trust Ltd., to support the principle that income tax is levied on real income, not hypothetical income.

The Court concluded that the ITO (TDS-I), Nashik, was not justified in denying the certificate under Section 197, especially since such a certificate had been issued for the preceding financial years 2009-10, 2010-11, and 2011-12. The Court directed the First Respondent to issue a certificate under Section 197 for the financial year 2012-13.

Conclusion:

The judgment ruled in favor of the Petitioner, stating that the interest income on the fixed deposit of Rs. 65 crores should not be treated as accrued income due to the pending challenge to the arbitral award. Consequently, the Petitioner is entitled to a certificate under Section 197 for no deduction of tax at source on the interest income for the financial year 2012-13. The rule was made absolute with no order as to costs.