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TMI Blog1986 (1) TMI 170X X X X Extracts X X X X X X X X Extracts X X X X ..... f ready-made garments. It also exported ghee, hand tools and blades. 3. A preliminary objection had been taken on behalf of the department to the effect that the appeal against the order dated31-10-1984could not lie since that order was rectified under section 154. However, after hearing the learned authorised representatives on both sides, we find that this objection is not sustainable as the learned Commissioner (Appeals) had merely corrected certain typographical errors in figures in the original order and since the assessee has also filed an appeal against the order under section 154. 4. The first ground in assessee's appeal in IT Appeal No. 5718 (Delhi) of 1984 relates to the exclusion of the capital borrowed by the assessee for the purposes of computing the capital employed in its industrial undertaking for manufacture of milk products at Bharatpur for the purpose of section 80J of the Act. This ground has to be rejected now in view of the decision of the Supreme Court in Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308 whereby the validity of section 80J(1A) and rule 19A of the Income-tax Rules, 1962 ('the Rules') was upheld. 5. The second ground relates to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordingly, hold that the interest amount was not taxable in the assessment year in question. 7. The third ground relates to the inclusion of Rs. 63,773 under section 41(1) of the Act. This amount represented the unclaimed interest accrued on mortgage bearer debentures of the assessee which were finally redeemable in 1970 and written back by the assessee during this year. The assessee transferred to its capital account a sum of Rs. 1,43,000 being the amount of 143 outstanding bearer debentures of Rs. 1,000 each. The learned Commissioner (Appeals) held that notwithstanding the book entries, the assessee's liability did not cease in the assessment year in question. Finding that the last acknowledgement took place in the balance sheet for the year ended 30-9-1978 the learned Commissioner (Appeals) took the view that the legal remedy for the enforcement of the liability could only cease on the expiry of three years therefrom, i.e., after 30-9-1981. He, accordingly, directed the ITO to delete the addition for the assessment year in question and to consider the taxability of the same for the assessment year 1982-83 (limited to the extent of the claims not made up to30-9-1981). The asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11. The fifth ground relates to the liability of Rs. 1,99,483 incurred for payment of gratuity to its employees under its Gratuity Scheme/Payment of Gratuity Act, 1972 in respect of the services rendered by them during the assessment year in question. According to the assessee the actuarially valued liability in respect of gratuity was not a provision and so that provisions of section 40A(7) of the Act were not applicable. However, the learned Commissioner (Appeals) held that no deduction was allowable since the amount in question had neither been paid nor spent nor provided for and set apart for a known and accrued liability. 12. After hearing the learned representatives on both the sides we find no force in this ground of appeal in view of the clear decision of the Supreme Court in the case of Shree Sajjan Mills Ltd. It was held by the Supreme Court in that case that the amount of gratuity payable to the employees (calculated on actuarial basis) but for which no provision had been made in the assessee's books of account, was not allowable as a business expenditure unless the requirements of section 40A(7) had been complied with. 13. The sixth and seventh grounds constitute t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bank guarantee. The assessee sought to enforce the awards in England (where the National Bank of Pakistan had a branch and substantial assets) firstly by summary enforcement under section 36 of the Arbitration Act, 1950 (of U.K.) and subsequently by instituting suits before the High Court in London for damages against the National Bank of Pakistan for its failure to honour the awards. The High Court inLondonvide its order dated14-4-1976held the awards to be valid, binding and enforceable inEnglandfor the following amounts: (a) Outstanding price pound 18,21,721.82 (b) Contractual interest at the rate of 6 per cent per annum from1-10-62to18-12-1967pound 5,70,173.89 (c) Interest at the rate of 6 per cent with effect from 3-1-1966 on the principal amount of the first award and at the rate of 5 per cent with effect from 23-1-1968 on the principal amount of the second award up to 14-4-1976 (date of the decree) pound 11,10,860.94 (d) Costs pound 33,073.43 Interest allowed on the decretal amount at the rate of 7.5 per cent per annum from14-4-1974till the ------------------------------------date of payment pound 35,35,830.08 ------------------------------------- 14. The Nationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e exchange rate difference, the assessee received an excess amount of Rs. 40,74,075 on account of the principal amount and Rs. 2,72,595 on the interest amount, total Rs. 43,46,670 (or Rs. 43,46,774 as per the assessee). While declaring its income for the assessment year 1980-81 in question, the assessee excluded this amount on the ground that it was not a revenue receipt but a capital receipt (sale proceeds of the cement factories). However, the ITO, after obtaining the directions of the IAC, held the amount to be taxable as a revenue receipt. 15. Before the learned Commissioner (Appeals) it was submitted on behalf of the assessee that the rupee equivalent of the decretal amount received by the assessee from the National Bank of Pakistan on 3-5-1976 worked out to Rs. 5,83,43,920 as against Rs. 5,78,11,475 on 16-11-1978 and so the assessee in fact suffered a loss of Rs. 5,32,445. It was said that the gain of Rs. 2,72,599 worked out by the ITO in relation to the amount of interest was fully offset by the aforesaid loss and so there was a net loss of Rs. 2,59,846 (Rs. 5,32,445---Rs. 2,72,599). The Commissioner (Appeals) gave a notice to the assessee on31-3-1984under section 251(2) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year in question. He submitted that the learned Commissioner (Appeals) was not right in holding that the provisions of the Foreign Exchange Regulation Act affected the concept of receipt or place of receipt of income. He submitted that the interest income transferred toIndiacould not be brought to tax in the assessment year in question under section 5(1)(a) of the Act, as income received by the assessee inIndiaduring the relevant previous year. He pointed out that for the assessment years 1966-67 to 1972-73 the department had sought to assess the interest income on accrual basis but it was deleted by the Tribunal. Referring to paragraphs 40 to 50 of the order of the Tribunal for the assessment year 1977-78, he pointed out that interest was held taxable on de die in diem basis. In this connection he also referred to paragraph 36 of the order dated 1-1-1980 of the Tribunal for the assessment year 1973-74 [IT Appeal No. 3434 (Delhi) of 1976-77] and said that the position of Rs. 1,45,60,141 was exactly the same. He referred to the provisions of section 4(1)(b)(ii) of the Indian Income-tax Act, 1922 vis-a-vis the provisions of section 5 of the 1961 Act. Reference was also made by him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ITO had the discretion to tax the income in either of the modes mentioned in clauses (a), (b) and (c) subject to the provisions of Explanations 1 and 2. He pointed out that deduction had been made by the learned Commissioner (Appeals) in view of Explanation 2. Reference was also made by him to the assessee's past history. He pointed out that in the assessment years 1964-65 and 1965-66 no interest income was shown by the assessee and against the order of the Tribunal a reference was pending before the Hon'ble Delhi High Court. Next he pointed out that for the assessment years 1966-67 to 1972-73 interest income assessed by the ITO on accrual basis was deleted by the Tribunal and that for the assessment years 1966-67 to 1969-70 the department's reference applications were dismissed by the Tribunal and the High Court also refused to grant reference. He pointed out that for the assessment years 1970-71 to 1972-73 the same was the position and after the references were rejected by the Tribunal and the High Court, the Supreme Court also rejected the special leave petition of the department on9-11-1976. For the assessment years 1973-74 and 1974-75 interest income was assessed in the h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rival submissions as also the decisions referred to above. We have also gone through the paper books filed by the parties and have carefully considered the same. Section 5(1) provides that the total income of any previous year of a person who is a resident, includes all income, from whatever source derived, which--- (a) is received or is deemed to be received inIndiain such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him inIndiaduring such year ; or (c) accrues or arises to him outsideIndiaduring such year. Income may accrue or arise on one place and it may be received at a different place. A receipt can occur only at one place unlike accrual or arisal which may occur in more than one place. Income cannot be received twice. Income may be received directly or through an agent. Subsequent to such receipt if the funds are transferred by the recipient from one place to himself at another place, it will be a domestic operation and the transfer will not yield a receipt, much less an income. The principle is of importance firstly in determining the year of receipt and secondly for ascertaining the incidence of taxation. The s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion to the word 'receipt' and indicates a right to receive. They represent a stage anterior to the point of time when the income becomes receivable and connote a character of income which is more or less inchoate and which is something less than receipt. The assessee should have acquired a right to receive payment though the receipt may take place later (debitum in praesenti, solvendum in futuro). There may be no accrual or arisal if the right to receive is not perfect or is in doubt or in jeopardy. In the present case the method of accounting followed by the assessee is mercantile. The accounting period relevant to the assessment year 1980-81 is from1-10-1978to30-9-1979. There are a number of material dates and the question of taxability has to be examined after considering their effect vis-a-vis the provisions of section 5 referred to above. The first dates are the dates of the two final awards, namely1-3-1971and3-3-1973by which the arbitrator directed the National Bank ofPakistanto make payment to the assessee-company as already mentioned above. However, no income can be said to have accrued on their basis because these awards had not been accepted and the assessee had to appro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al of income which had already taken place. So also the fact that the injunction granted by the Calcutta High Court remained operative from10-4-1978to15-11-1978did not make any difference. Similar was the position on16-11-1978when the assessee remitted the money in its account with the Bank of India,New Delhi. Since the accrual was earlier than final receipt inIndia, the final receipt cannot be regarded as income. It was only a remittance. We have also seen that under section 5(1), read with Explanation 2 once the income was taxable with reference to20-7-1977on accrual basis, the question of its being taxed not on that basis but on the basis of subsequent receipt or transfer inIndiacould not arise. The right to receive interest on the fixed deposit also accrued only on 7-11-1977, which does not fall in the assessment year 1980-81 in question but in the assessment year 1979-80. Since the principal amount or interest did not accrue in the assessment year 1980-81 in question, the question of exchange rate difference can only be considered in the relevant year and not in the assessment year 1980-81 in question. We do not accept the department's submission that since the assessee did no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erned, the grounds relate to the points covered by grounds 6 and 7 in the other appeal as also to the rectification of the figures. These points have already been dealt with there. 23. Lastly, we come to the department's cross-objection C.O. No. 108 (Delhi) of 1985. The first objection relates to the liability for sales tax amounting to Rs. 16,42,297 in the assessee's Bharatpur Dairy Unit. The liability had occurred under West Bengal Sales Tax Act, 1954 on the sale of skimmed milk powder. The ITO, however, disallowed the claim. The learned Commissioner (Appeals) allowed the claim on the basis of the orders from the assessment year 1974-75 onwards. 24. Before us the learned departmental representative pointed out that the validity of the statute had been challenged by the assessee before the High Court and that no demands had been raised by the State Government. Reliance was also placed by him on these decisions---Vijay Lakshmi Trading Co. Ltd.'s case and Addl. CIT v. Rattan Chand Kapoor [1984] 149 ITR 1 (Delhi). On the other hand, the learned counsel for the assessee supported the order of the learned Commissioner (Appeals) and relied upon the decision of the Calcutta High Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X
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