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TMI Blog2008 (10) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... Court was considering Income Tax Reference (ITR) Nos. 56 of 1986, 58 of 1993, 220 of 1995 and 75 of 1987. These References were made out of the order of Income Tax Appellate Tribunal (hereinafter referred to as "the Tribunal"). 2. It is agreed before us that presently we would be concerned only with two References, they being Reference No. 56 of 1986 and Reference No. 220 of 1995. Insofar as Reference No. 75 of 1987 is concerned, though the High Court had answered in favour of Revenue and against the assessee, the assessee did not file any appeal and, therefore, that part of the High Court Judgment dealing with Income Tax Reference No. 75 of 1987 becomes final. The learned Counsel for the assessee very fairly agreed with the same. As regards the Income Tax Reference No. 58 of 1993, the Revenue had filed an appeal against the impugned judgment dealing with the same, however, this Court had dismissed the appeal filed by the Revenue on the grounds of limitation. The learned Senior Counsel Mr. P.V. Shetty, appearing on behalf of the Revenue very fairly admitted this position. We are, therefore, left with only two References, which are as under:- Income Tax Reference No. 56 of 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not challenged the judgment of the High Court insofar as Assessment Year 1979-80 is concerned, therefore, we need not consider that part of the High Court judgment, though we might be required to incidentally refer to the same. Thus, we are left with Reference No. 56 of 1986 insofar as it pertains to Assessment Year 1980-81 and the Reference No. 220 of 1995. We must again clarify that though in Reference No. 220 of 1995, the High Court found against the assessee in respect of Assessment Year 1979-80, the penalty, however, of Rs.4 lakhs was set aside. We are, therefore, concerned in Reference No. 220 of 1995, only with Assessment Year 1979-80. 4. Following factual panorama would have to be considered for properly considering the background. 5. The assessee herein indisputably, follows the Mercantile System of Accounting. 6. For Assessment Year 1979-80, the Accounting Year is 1.7.1977 to 30.6.1978, while for the Assessment Year 1980-81, the Accounting Year is 1.7.1978 to 30.6.1979. 7. The assessee, which was previously known as Sarabhai Chemicals Pvt. Ltd. has now become Sarabhai Holdings Pvt. Ltd. They would be referred to as "assessee" for short. 8. There was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.1977. It was proposed by this letter, firstly, Rs.1.84 crores (approx.) will be payable as and when demanded by the respondent-assessee and will not carry any interest and secondly, Rs.4.7 crores will be payable in 5 annual installments, the first installment becoming payable on 1.3.1987 and the said amount shall carry simple interest at the rate of 11% per annum with effect from 1.7.1979. The Elscope also offered to secure the amount of 4.7 crores to the satisfaction of the respondent-assessee. 12. On 30.6.1978, the proposal sent by Elscope vide letter dt. 15.6.1978 was decided to be accepted by the assessee and a Resolution to that effect was passed in the meeting of the Board of Directors. The said Resolution is on record and the relevant portion reads as under:- "....the Company doth hereby approve, accept and adopt the following revised mode of payment as contained in letter No. ELSCOPE/MC dt. 15 th June, 1978 received from Elscope Pvt. Ltd." It must be noted here that firstly, in keeping with its proposal, Elscope furnished to the respondent-assessee secured bonds of Ambalal Sarabhai Enterprises Ltd. Secondly, it must be noted that as proposed in the letter dt. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r and disposed of by a common order dated 15.2.1985. Insofar as Assessment Year 1979-80 is concerned, the Tribunal held that the interest had already accrued vide further agreement dt. 4.3.1977 and as such, the Resolution dt. 30.6.1978 was of no consequence, as there was no commercial expediency for making it retrospectively operative. However, it accepted the plea as regards the interest under Section 215 of the Act. The Tribunal viewed the question involved to be a highly complex issue and held that the mere fact that the decision had gone against the assessee could not be viewed as being determinative of the assessee's liability to pay advance tax. The Tribunal relied on Gujarat High Court Judgment for that purpose. 18. However, insofar as the Assessment Year 1980-81 is concerned, the Tribunal held that the amount of interest could not be included in income of assessee, since the Resolution dt. 30.6.1978 was passed prior to the commencement of the relevant Accounting Year, which was 1.7.1978 to 30.6.1979 and, therefore, it could not be said that the interest income had acrrued. 19. The Tribunal also held that it was permissible for the parties to alter the agreement rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 93, the finding of the High Court was in favour of the assessee, whereby, the High Court did away with the penalty under Section 271(1)(C) of the Act for the Assessment Year 1979-80, the appeal against which is, dismissed by this Court on the ground of limitation on 4.10.2004 in SLP(C) No. CC 8632 of 2004. Therefore, even that need not deter us. The only remaining issue was in Income Tax Reference No. 220 of 1995, wherein, the High Court held that though the finding was against the assessee for the Assessment Year 1979-80, still there would be no penalty under Section 273(2)(a) of the Act, was not justified. We would have to deal with that issue in this appeal. 21. The Learned Senior Counsel, appearing on behalf of the Revenue very painstakingly, took us through all the findings of the High Court, as well as the Tribunal and urged that both the Tribunal as well as the High Court had erred in holding that there was no accrual of interest insofar as the Assessment Year 1980-81 was concerned. The learned Senior Counsel invited our attention to the basic agreement of transfer dt. 28.2.1977, as also to the subsequent agreement dt. 4.3.1977. We were also taken through the letter dt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tribunal and the High Court were absolutely justified. 23. We cannot understand the criticism of learned Senior Counsel appearing on behalf of the Revenue that by Resolution dt. 30.6.1978, the assessee was avoiding the payment of tax on the interest which had accrued. The genuine nature of the Resolution was not and could not be disputed. When we see the letter dt. 15.6.1978 and also note that the letter was complied with by Elscope in providing adequate security of the payable amounts, there is nothing to dispute or suspect the genuineness of the transaction. The whole transaction would have to be viewed on that backdrop. In the commercial world, the parties are always free to vary the terms of contract. Merely because by Resolution dt. 30.6.1978, the assessee agreed to defer the payment of interest, would not mean that it tried to evade the tax. What is material in the tax jurisprudence is the evasion of the tax, not the beneficial lawful adjustment therefor. Considering the genuine nature of the transaction based on the letter dt. 15.6.1978 and the Resolution dt. 30.6.1978, it cannot be said that the whole transaction was in order to evade the tax. 24. There is also n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng a valid stipulation, changed the mode of payment from the date of the Resolution and, therefore, under the changed mode of payment adopted under the Resolution dt. 30.6.1978, no interest was to accrue during the Accounting period from 1.7.1978 up to 30.6.1979 and, therefore, the reasoning of the Tribunal on that count appeared to be correct as regards the Assessment Year 1980-81 is concerned. We further confirm the finding that since no interest had accrued in the Accounting Year 1.7.1978 to 30.6.1979, there could arise no question of relinquishment of interest for any commercial expediency. There was no such question because a party cannot relinquish income that has not accrued at all. We, therefore, accept the judgment of the High Court insofar as it pertains to the Reference No. 56 of 1986. The High Court has correctly found that in view of the categorical stipulation that interest will be payable on the deferred consideration amount in respect of the sale, which became effective from 1.3.1977, the interest started accruing on that time basis, from 1.3.1977 determined by the amount outstanding from time to time and the rate applicable which both were stipulated in clearest p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olution dt. 30.6.1978, no definite conclusion can be drawn that the assessee had reason to believe that the Nil estimate filed was untrue. Merely because on assessment, the assessee's stand that the Resolution which was passed on the last day of its Accounting Year, i.e., on 30.6.1978, was not accepted on the ground that the interest that had already accrued during the Accounting Year on the strength of the contractual terms, cannot be made 'not to accrue after its actual accrual, it cannot be inferred with any certainty that the assessee had reason to believe that its Nil estimate was untrue'. The High Court has then held that the penalty under Section 273 (2)(a) of the Act is not an automatic outcome of the addition of such income. It is on this ground that the High Court has set aside the finding of the Tribunal confirming the penalty of Rs.4 lakhs levied under Section 273 (2)(a) of the Act on the assessee. 28. We must clarify here that insofar as Assessment Year 1980-81 is concerned, there will be no question of any penalty whatsoever and it had to go as it has been found on facts and law that the Resolution dt. 30.6.1978 had become effective and under the same, the inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to show that such commercial expediency arose by the subsequent agreement, whereby, the Elscope had agreed to provide the security for the amount due from it. Assessee had, therefore, furnished its estimate for the advance tax as Nil, as it claimed that it had the income of only about Rs.800/-. In the subsequent year, the assessee claimed the loss of about Rs.17,000/-. Though the attempt on the part of the assessee was to give up the accrued interest in the name of commercial expediency, there was no valid justification to relinquish the same, as has been found by the High Court. The High Court has also specifically found that the only aim was to avoid payment of tax which had become due on the basis of the accrual of interest and commercial expediency was only a dignified guard in which the arrangement made to evade the tax was sought to be covered. However, it was shown to the High Court that the penalties levied under Section 273(2)(a) of the Act were determined in case of two companies of the same Group, they being, Fabriquip Pvt. Ltd. and Packart Pvt. Ltd., wherein, it was held that the Resolution passed on 30.06.1978 for the foregoing interest had become applicable from 1.7 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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