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TMI Blog2013 (9) TMI 523X X X X Extracts X X X X X X X X Extracts X X X X ..... r 1996, PPA was entered into between the assessee and MPEB. The agreement provided, inter-alia, the method of tariff calculation, the payment of security, the modes of payment and other obligation of the parties; (iii) in the year 1998, prioritization of Independent Power Projects was done. The producers who would bid for the least tariff, would be prioritized. The assessee qualified. MPEB, vide letter dated 24th July 1998, demanded a security deposit of 2% of the project cost towards the assessee's commitment to achieve financial closure. The financial closure was to be achieved within a period of two months from the date of escrow agreement. The escrow agreement would provide a charge on recoverable of MPEB to the power producers. 2.1 The financial closures were to be achieved within two months of MPEB providing a bankable escrow agreement. On achieving financial closure within two months of providing a bankable escrow agreement by MPEB, the security deposit was to be returned with interest. In case, financial closure was not achieved within two months despite providing of bankable escrow agreement by MPEB, security deposit was to be forfeited. 2.2 The assessee furnished a se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hing unconditional bank guarantee of a national bank. MPEB was also directed to furnish an unconditional bank guarantee of nationalized bank for Rs.50,00,00,000. The assessee company was allowed to withdraw the above amount without prejudice and subject to final order of the Hon'ble Court in Letters Patent Appeal. 2.6 On 24th October 2005, the Division Bench of the Hon'ble High Court dismissed the appeal of the MPEB on the ground that the appeal is not maintainable. It further ordered that the interim order passed by the Court on 5th August 2004, and the arrangements made pursuant thereto, will continue to be in force subject to any order that may be passed by the Hon'ble Supreme Court in the proposed Special Leave Petition. The MPEB filed an appeal before the Hon'ble Supreme Court and the Court, vide order dated 10th February 2006, directed that the interim order passed by the High Court would continue until further orders. Meanwhile, there was a change in the management of the assessee company. The company was taken over by M/s. Jaiprakash Powers Ventures Ltd. on 15th May 2008. The new management of the assessee company accepted the forfeiture of the security deposit, vide minut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no right to receive interest, then, it cannot be held that the interest has accrued. This principle is well settled by a number of judgments, some of which are given below:- "1. CIT vs. A. Gajapathy Naidu, 58 ITR 114 (SC) (Page-1 of 'D') - In this case the assessee supplied bread to a Government Hospital during the period 1st April, 1948 to 31st March, 1949. After the close of the year the assessee represented to Government that he had incurred loss. The Government paid compensation for the loss which was received during accounting year 1950-51 relevant to asst. yr. 1951- 52. It was held that the said profit is to be included in asst. yr. 1951- 52 and could not be related back to earlier year during which the assessee actually supplied the bread. It was also held that if the assessee followed mercantile system of accounting it is to be seen as to when the right to receive, accrued. The income is assessable in the year in which the right to receive accrued. 2. CIT vs. Ashokbhai Chimanbhai, 56 ITR 42 (SC) (Page-10 of 'D') It was held that the words "accrue" and "arise" are used to contradistinguish the word "receive". Income is said to be received when it reaches the assessee; whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In case of financial closure is not achieved by you within the specified period of 2 months, then the security amount deposited by you along with your offer under reference will be forfeited and the allotment of Escrow protection will stand cancelled. v) From the above, it is clear that the assessee would have a right to receive the deposit along with interest only on achieving financial closure. In other words, if financial closure is not achieved, the assessee has no right to receive back the security deposit, let alone the interest thereon. vi) We have to also see the manner in which the MPEB understood their commitment to return the deposit along with the interest. At Page-237 of the paper book, MPEB, vide letter dated 22nd September 1999, has informed the assessee company that it is not possible to return the security deposit. At Page-243 of the paper book, vide letter dated 8th April 2000, MPEB states that escrow agreement for the project will be executed only after achieving financial closure by the assessee. The assessee also filed copy of letters from its bankers to demonstrate that they were demanding bankable escrow agreement. At Page-252 of the paper book, is a legal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e not interested in execution of project and are only interested in refund of their S.D. which is not as per contract hence there is no option left with MPEB except to pass this order to forfeit S.D. of M/s. Bina Power." Thus, MPEB was of the opinion that the assessee has no right to receive either the security deposit or the interest thereon. vi) The assessee challenged the forfeiture in a Writ Petition filed before the M.P. High Court, wherein the Court, vide order dated 13th May 2003, held as follows:- "19. In the result, this petition is allowed. The order of the respondent M.P. Electricity Board (or the M.P. State Electricity Board) dated 13th July 2002, forfeiting the security deposit of Rs.52.24 crores of the petitioner is quashed. The Board is directed to provide "Bankable Escrow Agreement" to the petitioner company in its true spirit as envisaged in its letters dated 24th July 1998 and 4th September 1998. This will be done within two months of the date of this order. The Board will get this agreement approved by the State Bank of India. The Board will made all possible efforts with the assistance of the State Government to obtain the clearances of the State Bank of Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id, the appellant Board shall furnish an unconditional bank guarantee of a nationalised bank for Rs.50 crores (Rupees Fifty crores) in favour of the Court (represented by Registrar General) within a period of two months from today. d) The deposit by the appellant and withdrawal thereof by the first respondent and compliance with the other terms of this order, will be without prejudice and subject to final orders of this Court in the Letters Patent Appeal. List the matter on 17.8.2004, at request." [emphasis own] viii) These interim directions were directed to be in force subject to any order that may be passed by the Hon'ble Supreme Court in the proposed Special Leave Petition as the Hon'ble High Court had dismissed the Wirt Appeal on the ground that it is not maintainable. The Hon'ble Supreme Court held that the interim order granted by the High Court, as extracted above, would continue up till further order, vide its judgment dated 10th February 2006. Thereafter, due to change in the Management of the assessee company, there were fresh negotiations and in the minutes of the first meeting held on 17th June 2008, between the Govt. of Madhya Pradesh, MPEB, and the assessee compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to the company advising it to maintain status quo for the rates to the consumers. While doing so, the consumers also filed a representative Suit wherein an interim injunction was granted and, thereafter, finally, decreed in favour of the consumers by the lower Court. On these facts, the Hon'ble Supreme Court held that since the assessee was not able to collect enhanced charges, necessary entries made in its books of account represented only hypothetical income and it could not be brought to tax as it did not represent income which had really accrued even though the assessee was following mercantile system of accounting. At Para-12, the Hon'ble Supreme Court noted that the letters addressed to the Under Secretary to the Govt. of Gujarat, had no legal binding effect. It held that one has to look at things from practical point of view and the directions of the State Govt. which is couched in the form of an advice cannot be ignored. At Para-14, the Court held as follows:- "9. The question whether there was real accrual of income to the assessee-company in respect of the enhanced charges for supply of electricity has to be considered by taking the probability or improbability of rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e fact remains that, at no point of time, MPEB or M.P. State Govt. have agreed with the demand of the assessee for return of the deposit with interest. The cases were withdrawn from the Supreme Court only because the forfeiture was accepted by the assessee. The view of the Assessing Officer that the forfeiture was accepted on different commercial consideration and hence, there is an accrual of income prior to such acceptance, in our view, is incorrect as the dispute was pending in the Courts. The order of the Single Judge of the Hon'ble M.P. High Court was stayed, hence, there was no enforceable right to the assessee for all these years. xiii) Hon'ble Supreme Court in Hindustan Housing & Land Development Trust Ltd. (supra), was considering the case where certain land belonging to the assessee company was acquired by the Govt. and compensation awarded. The quantum of compensation was under dispute. The High Court directed the Govt. to deposit certain amounts during the pendency of the dispute and the assessee was allowed to withdraw the same by furnishing security. The Hon'ble Supreme Court held that since the amount was in dispute, the amount of enhanced compensation cannot be bro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there was a final determination of the rights. In such a situation, the disputed income cannot be brought to tax on the ground that there is accrual of income. xv) Now, we consider the case laws relied upon by the learned Departmental Representative. xvi) The Hon'ble Supreme Court in Toshoku Ltd. (supra), was considering the case where the dealers in tobacco in India exported to Japan and France through a nonresident sales agent. The exclusive sales agent was entitled to a commission of 3% of invoice amount. The invoice amount was remitted to India and the Indian dealer debited his commission account and credited the amount of commission payable to Japanese Company which is the sales agent. in his account book and later remitted the amount to the Japanese Company. The question was, whether the commission earned by the nonresident sales agent can be brought to tax. The Court held as follows:- "Held: (i) that it could not be said that the making of the entries in the books of B amounted to receipt, actual or constructive, by the non- resident sales agents as the amounts so credited in their favour were not at their disposal or control; they could not, therefore, be charged to tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution and payment was deferred on account of litigation. Under these circumstances, it held that income accrued. In the case on hand, the assessee does not have right to receive either the security deposit or the interest thereon. xxi) Coming to the letter dated 26th April 1999, at Page-235 of assessee's paper book, relied on by the learned Departmental Representative, it is not of much help, as the fixed deposit in question was made by MPEB in its own name with State Bank of India and interest was earned by MPEB and not the assessee. The assessee was kept informed of this. This does not give a right to the assessee to receive interest. xxii) Similarly, the letters dated 27th September and 24th October 1998, are of no consequence as the Court had to finally adjudicate the issue. 25. In view of the above discussions and the legal position as applied to the facts of the case, we hold that no income by way of interest on security deposit with MPEB, as accrued to the assessee in all the assessment years under consideration. Ground no.1 is, thus, allowed. 26. As we have allowed ground no.1, it is not necessary to adjudicate the alternative ground i.e., ground no.2, as it would be an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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