1985 (2) TMI 55 - AT - Income Tax

Summary

Issues Involved:
1. Accrual of income from interest on unpaid purchase price for assessment years 1979-80 and 1980-81.
2. Validity and effect of resolution modifying the terms of payment of unpaid purchase price.
3. Applicability of the principle of lifting the corporate veil.
4. Commercial expediency in relinquishment of interest income.

Issue-wise Detailed Analysis:

1. Accrual of Income from Interest on Unpaid Purchase Price for Assessment Years 1979-80 and 1980-81:
The assessee, Sarabhai Chemicals (P.) Ltd. (SCPL), claimed that no interest accrued for the assessment years 1979-80 and 1980-81 due to a revised agreement with Elscope (P.) Ltd. (EPL). The Income Tax Officer (ITO) determined that interest should be taxed on an accrual basis, arguing that the original agreement and subsequent supplemental agreement created a vested right to receive interest. The Tribunal upheld this view for the assessment year 1979-80, citing that income accrues when the right to receive it becomes vested, and the supplemental agreement formed part of the original agreement, creating an obligation to pay interest. For the assessment year 1980-81, the Tribunal found that a resolution made by SCPL's board of directors modified the original terms, resulting in no accrual of interest before 1-7-1979, thus no income accrued for that year.

2. Validity and Effect of Resolution Modifying the Terms of Payment of Unpaid Purchase Price:
The Tribunal examined the resolution passed by SCPL's board on 30-6-1978, which accepted EPL's proposal to modify the terms of payment. The ITO and the Inspecting Assistant Commissioner (IAC) argued that the resolution was ineffective and did not supersede the original agreement. However, the Tribunal held that the resolution was valid and effective from 30-6-1978, modifying the terms of the original agreement. This resolution resulted in no interest accruing for the assessment year 1980-81, as the interest was to start accruing only from 1-7-1979.

3. Applicability of the Principle of Lifting the Corporate Veil:
The Commissioner (Appeals) applied the principle of lifting the corporate veil, arguing that the transactions between SCPL and its subsidiary EPL were designed to reduce taxable income artificially. The Tribunal, however, did not find it necessary to delve into this principle. Instead, it resolved the issue based on the established principles of accrual of income and real income, determining that the interest had accrued for the assessment year 1979-80 but not for 1980-81 due to the effective resolution modifying the terms.

4. Commercial Expediency in Relinquishment of Interest Income:
The Tribunal considered whether the relinquishment of interest income was backed by commercial expediency. For the assessment year 1979-80, it found no material evidence to support that the relinquishment was commercially expedient. The only ground presented was that the unpaid purchase price became secured, which did not suffice to show commercial benefit to SCPL. Thus, the interest was rightly taxed on an accrual basis. For the assessment year 1980-81, the Tribunal noted that since no income accrued due to the modified terms, the question of relinquishment did not arise. The Tribunal emphasized that taxability depends on the actual accrual of income, not on hypothetical or moral grounds.

Conclusion:
For the assessment year 1979-80, the Tribunal upheld the inclusion of interest income on an accrual basis, rejecting the claim of modification and commercial expediency. For the assessment year 1980-81, the Tribunal deleted the addition of interest income, recognizing the effective modification of the original agreement terms and the absence of accrued income before 1-7-1979.