(b) Income — Accrual — Variation in the contract from an
earlier date would not affect the accrual of income for the earlier period
(c) Penalty for filing untrue estimate — Can be imposed
only if the assessee knew that the estimate was untrue or had reason to
believe that it was untrue.
[CIT v. Sarabhai Holdings P. Ltd., (2008) 307 ITR 89
(SC)]
The assessee, which was previously known as Sarabhai
Chemicals Pvt. Ltd. and has become Sarabhai Holdings Pvt. Ltd. is referred to
as ‘the assessee’ for short.
There was an agreement on February 28, 1977, whereby the
assessee agreed to transfer its industrial understanding and business activity
known as Sarabhai Common Services Division, which was its unit. This was to
take place with effect from March 1, 1997. The unit was sold as going concern
in favour of the assessee’s own subsidiary M/s. Elsope Pvt. Ltd. for a total
consideration of Rs.11,44,10,253.
Under this agreement, the amount of Rs.4.41 crores was to
be set off against the amount due from the respondent-assessee to Elscope Pvt.
Ltd. as consideration for equity shares in Elscope held by the respondent-assesssee.
The balance sale consideration (approx. Rs.6.55 crores ) was to be paid in
eight equal annual instalments, starting with October 1, 1979. Such instalment
was to become payable on the 1st of October each year.
A further agreement was entered into between the assessee
and Elscope on March 4, 1977. This agreement had an interest clause, which was
provided for at the rate of 11% per annum and that it would be payable on the
balance sale consideration which would remain unpaid from time to time.
Elscope, in turn, transferred this industrial undertaking,
purchased by it to its subsidiary Ambalal Sarabhai Enrterprises Ltd. on April
25, 1978, vide the assignment deed of even date. On June 15, 1978, Elscope
wrote to the respondent-assessee proposing modification in terms of payment
and requested, inter alia, that the interest be charged on the deferred
sale consideration from 01.07.1979, instead of 01.03. 1977. It was proposed by
this letter, firstly, that Rs.1.84 crores (approx.) will be payable as and
when demanded by the respondent-assessee and will not carry any interest and,
secondly, that Rs.4.7 crores will be payable in 5 annual instalments, the
first instalment becoming payable on March 1, 1987, and the said amount shall
carry simple interest at the rate of 11% per annum with effect from July 1,
1979. Elscope also offered to secure the amount of 4.7 crores to the
satisfaction of the respondent-assessee.
On 30.6.1978, the proposal sent by Elscope, vide letter
dated June 15, 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.
In keeping with its proposal, Elscope furnished to the
respondent-assessee secured bonds of Ambalal Sarabhai Enterprises Ltd. and as
proposed in the letter dated June 15, 1978, the interest was to start from
July 1, 1979, while , before this interest was to start, the resolution dated
June 30, 1978, was passed, doing away with the requirement of payment of
interest in terms of the earlier agreement dated March 4, 1977.
The assessee received a notice u/s.210 of the Act on
October 17, 1978, requiring it to pay advance tax of Rs.1,22,22,757, while the
second notice was served on December 8, 1978, asking the respondent-assessee
to pay advance tax of Rs.1,28,74,172.
On 14.12.1978, however, the respondent-assessee filed an
estimate, showing nil amount of advance tax payable for the A.Y. 1979-80. It
further filed the returns on June 29, 1979, declaring the total income of
Rs.772 for the A.Y. 1979-80. Insofar as A.Y. 1980-81 was concerned, the
assessee filed the returns on June 27, 1980, declaring a loss of Rs.17,245.
The Assessing Officer passed an assessment order dated September 20, 1982,
determining the total income to be Rs.68,99,202, which included the amount of
interest accrued on the deferred sale consideration, receivable from Elscope.
The Assessing Officer also levied interest u/s.215 of the Act on a finding
that the assessee had failed to pay advance tax. The Assessing Officer also
directed that the penalty proceedings u/s.273(2)(a) and u/s.271(1)(c) of the
Act should be initiated against the assessee.
Insofar as A.Y. 1980-81 was concerned, an addition of
income by way of interest on the deferred sale consideration was taken into
account and the amount of Rs.55 lakhs (approx.) was added to the taxable
income of the assessee.
The Commissioner of Income-tax (Appeals) upheld the
assessment orders in both the assessment years and also confirmed the addition
of interest amount to the income of the assessee. The Appellate Authority
refused to accept the plea regarding waiver of interest by resolution dated
June 30, 1978.
For A.Y. 1979-80 the Tribunal held that the interest had
already accrued vide further agreement dated March 4, 1977, and as such, the
resolution dated June 30, 1978, was of no consequence, as there was no
commercial expediency for making it retrospectively operative. However, it
accepted the plea as regards interest u/s.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.
So far as A.Y. 1980-81 was concerned, the Tribunal held
that the amount of interest could not be included in the income of the
assessee, since the resolution dated June 30, 1978 was passed prior to the
commencement of the relevant accounting year, which was July 1, 1978 to June
30, 1979, and, therefore, it could not be said that the interest income had
accrued.
The Tribunal also held that it was permissible for the
parties to alter the agreement regarding the charging of interest in the wake
of the fact that the said resolution was found to be a genuine resolution. The
Tribunal came to the finding that interest could not have accrued insofar as
A.Y. 1980-81 was concerned.
