2008 (10) TMI 12 - SC - Income Tax

Modification in terms of payment - interest charged on deferred sale consideration from 1.7.1979 instead of 1.3.1977 held that under the changed mode of payment adopted under the Resolution dt. 30.6.1978, no interest was to accrue during the Accounting period from 1.7.1978 up to 30.6.1979 - HC hold that the Resolution could not be given any retrospective effect so as to facilitate evasion of tax liability that had already arisen for A.Y. 1979-80 - penalty u/s 273(2)(a) rightly set aside by HC

Summary

Issues Involved:
1. Accrual of interest for Assessment Year 1979-80.
2. Accrual of interest for Assessment Year 1980-81.
3. Penalty under Section 273(2)(a) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Accrual of Interest for Assessment Year 1979-80:
- The Tribunal held that the interest had already accrued based on the agreement dated 4.3.1977, and the subsequent resolution dated 30.6.1978 could not retrospectively nullify this accrual.
- The High Court affirmed this finding, stating that since the interest had already accrued in the accounting year from 1.7.1977 to 30.6.1978, it could not be wiped out by the later resolution.
- The assessee did not challenge this part of the judgment, making it final.

2. Accrual of Interest for Assessment Year 1980-81:
- The Tribunal found that the interest could not be included in the income for the Assessment Year 1980-81 because the resolution dated 30.6.1978 was passed before the commencement of the relevant accounting year (1.7.1978 to 30.6.1979).
- The High Court upheld this finding, noting that the resolution was genuine and legally altered the terms of the interest accrual.
- The Supreme Court agreed with the High Court, emphasizing that the resolution deferred the interest liability and there was no ill-intention to evade tax. The interest had not accrued in the accounting year 1.7.1978 to 30.6.1979, thus no income was relinquished.

3. Penalty under Section 273(2)(a) of the Income Tax Act, 1961:
- The High Court held that the burden was on the Revenue to prove that the assessee knew or had reason to believe that the Nil estimate of advance tax was untrue.
- The High Court found that the resolution dated 30.6.1978, which deferred the interest accrual, was genuine and the assessee could reasonably believe that no interest had accrued, justifying the Nil estimate.
- The Supreme Court agreed, stating that the penalty under Section 273(2)(a) requires proof of mens rea, which was not established by the Revenue. The High Court's decision to set aside the penalty was upheld.

Conclusion:
- The Supreme Court confirmed the High Court's judgment, holding that the interest for Assessment Year 1980-81 had not accrued due to the genuine resolution deferring it.
- The penalty under Section 273(2)(a) was rightly set aside as the assessee had a reasonable belief that the Nil estimate was justified.
- The appeals filed by the Revenue were dismissed, and the High Court's judgment was affirmed without any costs.