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TMI Blog2011 (7) TMI 1202X X X X Extracts X X X X X X X X Extracts X X X X ..... iny and notice under sec. 143(2) was issued on 7.08.2006 and duly served on the assessee. In compliance to the statutory notice issued by the AO, the assessee s Authorized Representative and the person from the Finance Department of the assessee company had appeared before the AO and filed various details or information or evidences as called for from time to time. 4. The assessee company is engaged in the business of manufacturing and trading of Nitrogenous fertilizers and other related industrial products. During the assessment proceedings, the AO perused a note No.3 of Schedule `M of the notes to accounts annexed with the annual audited accounts for the relevant year and he found that the assessee had not offered interest accrued amounting to ₹ 664.71 lakhs during the year under consideration. The said note was extracted at Page 4 of the assessment order by the AO. It was further observed by the AO that as on 31.03.2004 interest and litigation cost recoverable from M/s. Karsan was shown at ₹ 24,647.22 lakhs as against amount of ₹ 25,311.93 lakhs as on 31.03.2005. The AO further observed that interest had accrued as per the award given by the Dutch High Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessment Year 2004-05 under consideration and therefore, no income accrued in the relevant year. The relevant portion of the Tribunal s order passed in Assessment Year 2004-05 is extracted below:- 6. We have considered the facts of the case and rival submissions. The facts are that the assessee had placed an advance of ₹ 133.69 crore with M/s Karsan in the year 1995-96 for import of urea. The supplies were not received and subsequently the agreement was terminated. The agreement contained an arbitration clause, in view of which arbitration proceedings were initiated by the assessee in the ICA. The court delivered its judgment on 3.12.1998 in favour of the assessee to the effect that the assessee was entitled to receive the aforesaid advance from M/s Karsan along with interest @ 5% p.a. on the principal amount w.e.f. 14.11.1995 till the date of the payment. The assessee was also entitled to receive litigation charges from M/s Karsan. The recovery proceedings 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 ₹ 161.04 crore. This claim was rejected by the ICA. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the karta of a Hindu Undivided Family held on behalf of the family a share of five annas in the rupee in profits and loss of a firm, whose accounts were to be adjusted at the end of the calendar year. The HUF was partitioned on 12.11.1955 and the assessee was allotted the five annas share in the firm. Consequently, he became the full fledged owner of the income by way of share in profits of the firm. The question was whether any part of the income from the firm for calendar year 1955 was liable to be included in the income of the family? The determination of the question involved the time of accrual of profits to individual partners in the firm. The court came to the conclusion that the date when Ashokbhai acquired the right to receive the share of profit, there was no subsisting joint family and his share of profit was not received by him on behalf of the assessee. Therefore, it was held that no part of the profits could be taxed in the hands of the family. It was also pointed out that under 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es where only a hypothetical entry is made for the income which does not materialize. Applying the aforesaid principle, it was held that the income was given up unilaterally by the assessee after it had accrued to it. Therefore, the assessee could not escape the tax liability. The case before us is not one of foregoing of income after it became one. Thus, the facts are distinguishable. The real question before us is whether the income accrued to the assessee on 21.1.2004 on receiving the information that M/s Karsan did not pursue the matter in Dutch Supreme Court, in a situation when there was further litigation in the matter, which came to an end on 14.12.2006? We are of the view that the ratio of the case discussed above, does not lead to a conclusion that interest and litigation charges definitely accrued to the assessee on 22.1.2004. 6.3 The revenue also relied on the decision of Hon ble Supreme Court in the case of Shri Goverdhan Ltd. (supra). The facts of the case are that the assessee derived income from 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emed decree by virtue of the provisions of section 49 of the Act. Coming to the facts of instant assessee, it is an admitted position that the Court of Monaco rejected the application of the assessee to pass a decree in its favour. Similar proceedings were pending in the City Civil Court at Hyderabad. Thus, no competent court recorded the satisfaction u/s 49 to make the award as a deemed decree. Filling the form before the court showing the assessee to be a decree holding cannot lead to a conclusion that a decree was passed in its favour for the reason that the forms are so prescribed. The award becomes enforceable only when it becomes the rule of a competent court, which did not happen in this year. Therefore, we are of the view that this case supports the argument of the ld counsel that the award did not become enforceable in this year and, thus, there was no accrual of income under mercantile system of accounting. 6.5 The assessee also relied on the decision of Hon ble Delhi High Court in the case of Fazilka Electric Supply Co. Ltd. (supra). The facts of the case are that the assessee was a licensee under the Punjab Electricity Supply Act. This business was taken over by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trator that is not filed in the court and made a rule of court has no force or validity. It has no effective value and it cannot create, extinguish or pass any title or interest. In this connection, we would like to reproduce one paragraph from pages 158 and 159 of the judgment, which reads as under:- Even if it could be said that this question is comprehensive enough to raise the point now sought to be raised by the learned counsel, the Tribunal declined to refer this question as well as another question posed by the assessee relating to its method of accounting and the assessee has not pursued the matter further under section 256(2). This aspect of the matter has, therefore, not been referred to us and it is not open to the assessee to raise the issue before us. Secondly, even on the merits, the plea is not tenable. An award of an arbitrator that is not filed in Court and made a rule of Court has no force or validity. It has no effective value and it cannot create, extinguish or pass any title or interest. Nobody can rely on such award by way of attack or defence in any proceeding whatsoever. Indeed, in such a case, the parties are not barred even from filing a suit on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion both under the relevant statutory provisions as well as the earlier provisions in the Constitution which prohibited the deprivation of property without compensation. But if we consider the subject-matter as the assessee's entitlement to a particular amount which has been awarded to him, such entitlement clearly can be said to have crystallised only on the date on which the amount is awarded to him finally with no dispute possible in regard thereto. The former view proceeds on the principle that where a right clearly exists, the delay in quantification or even a dispute regarding the same is immaterial and irrelevant: a principle settled beyond doubt in regard to accrual of liabilities by the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363. The latter proceeds on the view that as long as it is not known and cannot be stated with any certainty whether any enhanced compensation at all would be given or whether, even if it is given by the District Court or the High Court, it will ultimately be sustained, it would be futile and impractical to talk of any income having accrued. Thus, two propositions of law emerge from this decision regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the interests of the revenue? The assessee was following mercantile system of accounting. However, the income by way of interest pertaining to doubtful loans was not considered as real income in the year in which it accrued, but only when it was realized. In order to support its case, the revenue has placed reliance on the decision in the case of Kerala Financial Corporation Vs. CIT (1994) 210 ITR 129 (SC) and State Bank of Travancore Vs. CIT (1986) 158 ITR 102 (SC), in which it was held that the interest which had accrued on sticky advances had to be treated as income of the assessee and taxable as such. If the advance takes the shape of a bad debt, refund of tax paid on the interest would become due and the same can be claimed by the assessee in accordance with law. The Hon ble Court pointed out that it was not in agreement with the said decision. The relevant circular of the Central Board cannot be ignored. The question is not whether a circular can over-ride or detract from the provisions of the Act. The question is whether the circular seeks to mitigate the rigor of a particular section for the benefit of the assessee in certain specified circumstances. So long as a circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en off. Thus, it was also held that interest income did not accrue to the assessee. In the case at hand, the assessee has not written off the principal amount. Therefore, the ratio of this case is also not applicable. However, we are of the view that since principal amount has not been recovered over a long period, there is no possibility as of now for the recovery of the interest and litigation cost awarded to the assessee. No legal right has been created in favour of the assessee as the award has not been made a rule of the court. In such circumstances, the assessee was right in not providing for the interest in the books of account. 6.7 The learned counsel also argued that the interest and the litigation costs did not pertain to one year and, therefore, the whole of the amount could not have been taxed in the assessment of this year only. It is clear from the award that the interest was granted at 5.5% p.a. and, therefore, the interest pertained to various years. However, the details of litigation charges have not been filed by the assessee. Therefore, we are not in a position to furnish any final finding in this matter. 6.8 In the result, ground no.2 is allowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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