9911796707
TMI Blog2008 (7) TMI 448X X X X Extracts X X X X X X X X Extracts X X X X ..... er, which reads as under:- "An advance of Rs. 130.69 crores was given to a foreign supplier, i.e., M/s. Karsan in 1995-96 against import of Urea, the supplies of which were not received and subsequently the contract was terminated. The company initiated Arbitration Proceedings in the International Court of Arbitration (ICA) which delivered the Award on3-12-1998in favour of company for US$ 40.69 millions along with simple interest at the rate of 5 per cent on the principal amount of US$ 37.62 millions with effect from14-11-1995till the date of payment. The Recovery Proceedings in pursuance of ICA Award are already underway against the identified assets in the name of M/s. Karsan and its executives in various countries. M/s. Karsan had filed their counter-claim during the ICA Arbitration amounting to US$ 33.63 millions and GBP 73,609.20 (INR 161.04 crores), which was rejected byICA. The party challenged the Award in District Court atAmsterdamduring March, 1999 which was rejected vide their judgment dated12-12-2001, thus, making the Award enforceable. The party filed appeal against the judgment of District Court before the Dutch High Court which has also been rejected vide its judgme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer. It was pointed out that the assessee is following mercantile system of accounting, under which the income and expenditure are recorded in the books at the time of their occurrence and not at the time of receipt thereof. Thus, if any income accrues in a year, it has to be recorded irrespective of the fact that the same was received in the year or not. Similar considerations are applicable to the accounting of the expenditure. This principle was confirmed by Hon'ble Supreme Court in the case of Indermani Jatia v. CIT [1959] 35 ITR 298. Further, an income is said to accrue or arise when the right to receive the same becomes vested in the assessee, as held by Hon'ble Supreme Court in the case of CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42. An income can be said to accrue to an assessee when it is due and the postponement of the date of payment does not effect the accrual of the income, as held by Hon'ble Supreme Court in the case of Morvi Industries Ltd v. CIT [1971] 82 ITR 835. Coming to the facts of the case, it was pointed out that the interest and litigation cost had accrued to the assessee and had also been crystallized during the year under consideration. As per submissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the principal amount and, therefore, no real income accrued to the assessee in respect of interest and litigation costs. 3.1 Coming to the legal issues, it was pointed out that the case law relied upon by the Assessing Officer was not applicable on the facts of the case of the assessee. On the other hand, reliance was placed on the decisions in the cases of Fazilka Electric Supply Co. Ltd. v. CIT [1983] 143 ITR 551 (Delhi); A.P.S. Cold Storage & Ice Factory v. CIT [1979] 119 ITR 709 (All.); UCO Bank v. CIT [1999] 237 ITR 889 (SC) and Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746 (SC). 3.2 In the alternative, it was argued that even if it is taken that the impugned income had accrued to the assessee, it cannot be taxed in one year and it should be taxed in each year of its accrual. 3.3 The learned CIT(A) forwarded the additional evidence filed before him to the Assessing Officer for his comments, which were received and made known to the assessee. After considering rival submissions, it was mentioned by him that there is a clear distinction between accrual of income and the receipt of income. The assessee was following mercantile system of accounting and, therefore, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this year. Coming to the other argument, namely, that the assessee had not even received the principal amount and, therefore, there was no question of accrual of interest and litigation income, it was mentioned that the income has to be accounted on accrual basis in mercantile system of accounting. In this system, the assessee also has a right subsequently to claim the deduction when it is felt that the amount is not recoverable. In such a situation, it may be written off from the books of account by claiming the deduction as bad debt. It was also held that the issue of real vs. notional income was decided by the Courts on altogether different facts. The assessee had also argued that interest and litigation cost should be taxed not in one year but in the years of their accrual. This argument was rejected by holding that the amount is being taxed on the basis of accrual and crystallization of the income, which happened in this year. Thus, the addition made by the Assessing Officer was sustained. 4. Before us, the learned counsel for the assessee furnished in brief the background facts of the case. It was stated that the assessee had placed an advance of about Rs. 133 crore with M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal; (ii) the arbitration award was not a decree enforceable against M/s. Karsan as per decision of Hon'ble Delhi High Court in the case of Fuerst Day Lawson Ltd. v. Jindal Exports Ltd. 1999 (1) Arb. LR 571, in which it was pointed out that the satisfaction of the Court as contemplated under section 49 can be arrived at only after the Court is satisfied that none of the grounds, as mentioned in section 48(2) of the Act, exists and that if an objection is filed, as contemplated under section 48(1) of the Act by the party, is dismissed. It is only after that satisfaction which is required to arrive at by the Court under section 48 that the foreign award is enforceable is reached and recorded, then only the award becomes a deemed decree of the Court. The aforesaid provision postulates or presupposes that in order to arrive at the aforesaid satisfaction, the Court itself has the responsibility to scrutinize the award even in absence of an objection by a party to come to a satisfaction that the award does not suffer from any of the vices as mentioned in section 48(2). When it is found that none of the conditions as mentioned in the said provision are attracted, the Court would explicit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it very clear that the damages awarded to the appellant under the Arbitration Award became a decree of the Court of competent jurisdiction atAmsterdam, legally enforceable anywhere in the world as per the relevant laws of different nations. This decree and so the right to receive damages became a crystallized right when the process of appeals started by M/s. Karsan ended by the decision of High Court at Amsterdam on 22-1-2004 against which M/s. Karsan did not file any further petition. Therefore, the finality of the matter so far as decree of award is concerned had reached on22-1-2004. The subsequent events brought on record by the appellant do not alter substantially the basic right being vested in the appellant. The reliance placed by the appellant on various laws in respect of enforcement of foreign awards do not help the appellant as the facts of the present case are very different from the said cases because in those cases, the Arbitration Award itself was being sought to be executed, without a formal decree of any Court of law. In the present case, the appellant had applied for a decree in its favour and the same was passed by the District Court atAmsterdam, Third Court of Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gs were started in pursuance of the award against M/s. Karsan and its executives in various countries. However, they had filed counter-claim amounting to Rs. 161.04 crore. This claim was rejected by theICA. The award was also challenged in the District Court atAmsterdamin March, 1999, which was rejected by the District Court on12-12-2001. In the note to the account, it was mentioned that the award became enforceable on receipt of judgment of that District Court on12-12-2001. However, an appeal was filed against this judgment before the Dutch High Court. The appeal was rejected by the High Court on22-1-2004. The assessee's attorney confirmed that M/s. Karsan thereafter did not pursue the case in the Dutch Supreme Court and in view thereof, the management of the assessee-company came to the conclusion that there was no further possibility of any liability arising as a consequence of counter-claim. The case of the lower authorities is that since the dispute came to an end on22-1-2004, the income accrued to the assessee on that date in respect of interest and litigation costs. On the other hand, the case of the assessee is that the judgment of the Dutch High Court merely put an end to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income-tax Act, income is taxable when it accrues, arises or is received or when it is by fiction deemed to accrue, arise or is deemed to be received. Receipt is not the only test of chargeability to tax; if income accrues or arises, it may become liable to tax. In the case at hand, the profit had to be adjusted at the end of the year and the profit for calendar year 1955 could not be adjusted before31-12-1955. On31-12-1955, the Hindu Undivided Family was not in existence. Therefore, it was held that profit accrued to Ashokbhai on31-12-1955. Having considered the ratio of this case, it cannot be straightway said that the income accrued to the assessee on22-1-2004when the assessee's attorney confirmed that M/s. Karsan did not pursue the matter further in the Dutch Supreme Court. The fact is that the litigation came to an end on14-12-2006when the application for suspension of the award was dismissed by the Court of Appeal. 6.2 The revenue also relied on the decision of Hon'ble Supreme Court in the case of Morvi Industries Ltd. The facts of that case are that the assessee was the managing agent of its subsidiary company and was entitled to receive office allowance of Rs. 1,000 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its own business as well as income by way of share in the profits of a firm. The question before the Court was regarding accrual of income by way of share of profit in the firm for the period1-10-1950to31-3-1951. The case of the assessee was that this income was not known to the assessee before its general meeting held on17-5-1951. TheHon'ble Courtpointed out that it is a well-established proposition of law that the income may accrue to an assessee without its actual receipt. If the assessee acquires a right to receive the income, it can be said to have accrued to him though it may be received later on, when it is ascertained. The legal position is that a liability depending upon a contingency is not a debt in praesenti or in futuro till the contingency happens. But if it is a debt, the fact that the amount has to be ascertained does not make it any the less a debt if the liability is certain and what remains is only a quantification of the amount. Having considered this decision, we are of the view that it is not on all fours with the facts of the case of instant assessee. As pointed out earlier, the question is whether, on receipt of information from the attorney that M/s. Karsa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the case are that the assessee was a licensee under the Punjab Electricity Supply Act. This business was taken over by the Government of Punjab on23-7-1949, in pursuance of proceedings under section 7(1) of the Indian Electricity Act, 1910. The proceedings in this regard were started on 13-3-1947 when Secretary to the Government of Punjab issued a letter to the assessee to the effect that the Government had decided to purchase the electricity supply undertaking under clause 9(1) of the license granted to the assessee. Compensation of Rs. 3,17,691 was fixed as payable to the assessee. The assessee did not agree with the amount of compensation and agitated for its increase. Accordingly, a letter dated5-5-1952was written to the Secretary placing the correct value of compensation at Rs. 10,80,000. The assessee also hinted at arbitration in case its valuation was not accepted and suggested the name of the arbitrator in the matter on its behalf. There was delay on the part of the Government in appointing its arbitrator and, thus, the assessee's arbitrator became the sole arbitrator of the case. However, his appointment was set aside by the Court. Thereafter, the Government nominated i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceeding whatsoever. Indeed, in such a case, the parties are not barred even from filing a suit on the original cause of action. No party can be prejudiced or benefited by the mere existence of such an award. It may be that effect can be given to the award if both parties consent to abide by its terms. But that will be on the ground that the parties have by mutual agreement settled a dispute between themselves and perhaps in that situation the liability can be said to have been admitted and so to have accrued when the award is given. But where proceedings are taken under section 14 of the Arbitration Act, 1940, the position is different. In such a case, until the proceedings in Court conclude, the award as such is unenforceable. Moreover, when the award is filed into Court and a decree on its terms sought, it is open to the Court to consider it in all its aspects. The Court can set aside, modify or remit the award for fresh consideration and it cannot be taken for granted that the Court will make a decree on its terms. We are, therefore, of opinion that the assessee did not get an enforceable right (which is what is material for purposes of accrual) until the award had been made a r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g accrued." Thus, two propositions of law emerge from this decision regarding arbitration award made within the territories ofIndia, namely, that - (i) the assessee becomes entitled to the amount only when no dispute remains in regard thereto and the award had become final, and (ii) the award attains enforceability only when it is made a rule of Court. From the decision in the case of Fuerst Day Lawson Ltd., it becomes clear that the position of a foreign award is not different from the position of an Indian award. Therefore, the aforesaid legal propositions are applicable in respect of a foreign award also. Coming to the facts of this case, it is seen that the litigation with M/s. Karsan ended on14-12-2006. Thus, it can be said that on this date, the award became final. This date does not fall in the year under consideration, but is far removed in future from31-3-2004. Further, the award was not made a rule of the Court either atMonacoorHyderabadin the current year. Therefore, none of the conditions mentioned above was satisfied in this year. The learned CIT(A) also mentioned that the assessee was vigorously pursuing cases in respect of criminal breach of trust. This, to our mind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r is in force, it would be binding on the departmental authorities, in view of the provisions of section 119 to ensure a uniform and proper administration and application of the Act. Thus, the question was answered in favour of the assessee and against the revenue. The learned counsel also relied on the decision of the Tribunal in the case of Space Financial Services, in which it was held that after careful consideration of the issue, it is found that there is no possibility of recovery of loan of Rs. 1,70,70,000 from SFL and ASEIL. In view thereof, the claim of bad debt in this regard was allowed as the amount was write off in the books of account. In view thereof, it was further held that the penal interest on that amount was also liable to be written off as irrecoverable. Therefore, the question of providing for penal interest did not arise. Accordingly, it was held that the 100wer authorities were not correct in making the addition of Rs. 3,41,400 on account of penal interest on accrual basis. We have considered these submissions of the learned counsel. We find that the real issue in the case of UCO Bank was regarding the applicability of the circular of the Board in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finding of the learned CIT(A), in which he upheld an addition of Rs. 24,43,49,000 on account of the valuation of the closing stock. In this connection, it is mentioned in the assessment order that on perusal of Note No. 13 on Account, it was seen that the assessee under-valued the stock to the tune of Rs. 24,43,49,000. It was mentioned in the note that in view of the revised policy of the Government relating to regulation of subsidy for production beyond hundred per cent of capacity, the company had considered the Import Parity Price (IPP) instead of Group Concession Rate (GCR) for determination of realizable value (wherever IPP was lower) in respect of the stock of urea lying in silo after dispatches up to 100 per cent of capacity. Consequently, the profit of the year was lower by an amount of Rs. 24,43,49,000. It was explained that the Ministry of Chemicals and Fertilizers, Department of Fertilizers, vide its letter dated 4-7-2003, infer alia, issued parameters with effect from 1-4-2003 regarding sale of urea beyond 100 per cent of the reassessed capacity. These parameters stipulate that manufacturing units would be allowed to sell urea in respect of 100 per cent of reassessed ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owned three units, located at Nangal, Bhatinda and Panipat. It was pointed out that fertilizers are controlled commodities, to be sold at the price fixed by the Government. At the same time, the Government furnishes subsidy to meet the deficiency arising on account of the controlled price. The Government realized that the subsidy granted was more than the intended subsidy wherever the capacity utilization was more than 100 per cent, leading to lower cost of production. Therefore, the aforesaid instruction was issued that in such situation, the subsidy will be granted on the principle of IPP, with the prior approval of the Department of Fertilizers. The sale price of urea was fixed at Rs. 4,830 per MT, while the cost price was Rs. 11,728 PMT in Nangal unit, Rs. 10,861 PMT in Bhatinda and Rs. 10,582 PMT in Panipat unit. The IPP was Rs. 8,021 in Nangal unit, Rs. 7,967 in Bhatinda unit and Rs. 7,989 in Panipat unit. Therefore, wherever stock consisted of the item produced in excess of 100 per cent utilization of the capacity, the assessee valued the same at IPP. This was done because the cost price was much higher than the sale price and the IPP fell between the cost price and the sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the mercantile system of accounting unascertained and contingent liabilities ate not an allowable deduction. Therefore, appellant is not correct in reducing the valuation of present day stock on basis of anticipation of an event or applicability of price which itself is dependent on several uncertainties. The undervaluation of stock to extent of Rs. 24,43,49,000, therefore, represents claim of contingent liability and the Assessing Officer had rightly disallowed the same. Assessing Officer's action is, therefore, upheld." 7.3 We have considered the facts of the case and rival submissions. It is the agreed position of the rival parties that the assessee is entitled to the valuation of stock on market price or cost price, whichever is lower. From the data available on page 86 of the paper book, summarized above, it is seen that the average cost price of production was more than Rs. 10,000 PMT, while the sale price was Rs. 4,830 PMT. The assessee valued the stock, as described above, in Nangal unit at Rs. 8,021 PMT; in Bhatinda unit at Rs. 7,967 PMT and in Panipat unit at Rs. 7,989 PMT. Obviously, this was done in expectation of the subsidy to be received from the Government. This c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ul life thereof. Thus, it was held that the assessee was not right in writing off the whole of the inventory of loose tools in one year and the addition made by the Assessing Officer was confirmed. 8.1 The case of the learned counsel was that the accounts had been audited by a chartered accountant and in view thereof, the loose tools were written off in the year in which the same were purchased and issued. He referred to the argument of the learned CIT(A) that AS-10 and not AS-2 was applicable. However, his case was that there was no mala fide involved in changing the method of writing off of the loose tools. 8.2 In reply, the learned DR relied on paragraphs 7.2, 7.3 and 7.4 of the order of the learned CIT(A), which read as under:- "7.2 I have considered appellant's reply. It is clear that till the current previous year appellant was treating loose tools as having useful life of 3 years and each year 1/3rd of its value was being charged off to P & L account. However, in current year, appellant on basis of AS-2 standards charged full value of tools to P & L account at time of issue and while doing so also changed to P & L account as consumed the opening stock of loose tools. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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