2008 (1) TMI 1014 - HC - Income Tax

Summary

1. The primary legal issue considered by the Court was whether the income by way of outstanding price, contractual interest, and interest as per arbitration awards up to 20-7-1977 arose in the assessment year 1978-79, thereby precluding its taxation in the assessment year 1980-81. A secondary issue concerning the necessity or relevance of the Tribunal giving a finding on the year of accrual was raised but subsequently not pressed by the assessee and thus left unanswered.

2. The core question revolved around the taxability of interest income: whether it should be taxed on an accrual basis or on a receipt basis, specifically concerning interest amounts awarded by arbitration and confirmed by the House of Lords on 20-7-1977.

3. The facts revealed that the assessee sold cement factories located in Pakistan under a contract stipulating payment in India, with arbitration clauses for disputes. Due to the India-Pakistan hostilities starting 5-9-1965 and consequent embargoes, payment was delayed, leading to arbitration. The arbitration awards in favor of the assessee included principal, interest, and costs. The National Bank of Pakistan, guarantor for payment, challenged the awards unsuccessfully through various courts, culminating in the House of Lords refusing leave to appeal on 20-7-1977.

4. The assessee contended that the interest became due and payable only upon the final refusal of leave to appeal by the House of Lords on 20-7-1977, which fell within the assessment year 1978-79, making that the year of accrual for tax purposes. The revenue initially sought to tax the interest on a receipt basis in the assessment year 1977-78, despite having earlier taxed it on an accrual basis.

5. The Income-tax Appellate Tribunal ruled in favor of the assessee, holding the interest income taxable on an accrual basis, with the relevant date being 20-7-1977. The Tribunal reasoned that only on this date was the assessee entitled to receive the decretal amount and interest, thereby fixing the year of accrual as 1978-79.

6. The revenue challenged this, arguing the amount was taxable on receipt basis in the assessment year 1980-81, when the amount was actually received in India. However, this contention was inconsistent with the revenue's earlier stance and the Court's prior ruling.

7. The Court noted that in an earlier proceeding (ITC No. 159/1987), it had already held that the interest income was taxable on an accrual basis, a position accepted by both the revenue and the assessee. The Court emphasized that it was too late, after 17 years, for the revenue to contend otherwise.

8. The Court applied the principle that income accrues when the assessee becomes entitled to receive it, not necessarily when the amount is physically received. The finality of the arbitration award, confirmed by the House of Lords refusing leave to appeal, fixed the date of entitlement and thus the year of accrual.

9. The Court rejected the revenue's argument for receipt basis taxation, holding that the interest income was rightly taxed in the assessment year 1978-79 on an accrual basis. The Court relied on the consistency of prior judicial pronouncements and the principle that income accrues upon becoming due and payable.

10. The Court did not address the second referred question as it was not pressed by the assessee.

11. The Court concluded by affirming the Tribunal's decision and answering the primary question in the affirmative in favor of the assessee and against the revenue, thereby confirming that the interest income accrued in the assessment year 1978-79 and was not taxable in the assessment year 1980-81.

"The Tribunal has held in paragraph 18 of its order under consideration that the relevant date is 20-7-1977 when the House of Lords refused to grant leave to appeal to the National Bank of Pakistan. It is only on this date that the assessee was entitled to receive the decretal amount as well as the interest thereon. The date (20-7-1977) falls in the assessment year 1978-79 and, therefore, the amount could be taxed only in the assessment year 1978-79 on an accrual basis."

"It is now too late in the day, after 17 years, for the revenue to raise the contention that the amount is liable to be taxed on receipt basis. Even otherwise, we find no reason to differ with the view already expressed by this Court on an earlier occasion."

"Following the view expressed by this Court in the case of the assessee in ITA No. 159/1987 decided on 8-11-1990, we answer the question of law referred to us in the affirmative, in favour of the assessee and against the revenue."