COMMNR. OF INCOME TAX, AHMEDABAD v. SARABHAI HOLDINGS PVT. LTD

Citation: [2008] 14 S.C.R. 988

Court: Supreme Court of India

Bench: LOKESHWAR SINGH PANTA, V.S. SIRPURKAR

Case summary

COMMNR. OF INCOME TAX, AHMEDABAD v. SARABHAI HOLDINGS PVT. LTD.pdf

Judgment text

[2008] 14 S. C. R. 988 ~' ', ~ COMMNR. OF INCOME TAX, AHMEDABAD 'Iv. SARABHAI HOLDINGS PVT. LTD. (Civil Appeal Nos. 482-483 of 2003) L OCTOBER 21, 2008 1. j- [LOKESHWAR SINGH PANTA AND V. S. SIRPURKAR, ~ JJ. ] '~ Income Tax Act, 1961 - ss. 210 and 273 (2)(a) -Assesr see getting interest from 1. 3. 1977 on the deferred sale con- ,1 '\. _ sideration which was to be paid in instalments - Subsequent modification to the effect that the instalments were to be paid w. e. f 1. 7. 1979- By Resolution dated 30. 6. 1. 978 requirement of payment of interest done away with - Demand of advance tax by Revenue for the Assessment Years 1979-80 and 1980- 81 - Interest on the deferred amount computed in the assessable income -Assessee showing NIL amount of advance tax )for AY 1979-80 and showing loss for AY 1980-81 - Assess- ...

, ment order - Courts below holding that interest to be included in the assessable income for· AY 1979-80 and not to be ineluded in the income for the AY 1980-81 - Assessing Officer " also imposing penalty uls. 273(2)(a) for furnishing untrue estimate of advance tax - Penalty confirmed by appellate court and Tribunal but set aside by High Court -On appeal held: Interest was to be computed in the assessable income for AY 1979-80 as the same had accrued vide agreement dated ~ )- 4. 3. 1-977 - Interest not to be included in the income for the AY >- 'r' 1980-81 8s the same did not accrue by virtue ~f resolution ( dated 30. 6. 1978 - Penalty rightly set aside by High Court- In ·,... the facts of the case it cannot be said that the assessee had 1-r reason to believe that the estimate of income filed by him was I untrue. f- Assessee-.. respondent sold industrial undertaking and business activity of one of its units as a going con- SARABHAI HOLDINGS PVT. LTD.

-1- cern, to its own subsidiary company (vendee company). The agreement dated 4. 3. 1977 provided an interest clat1se, whereby interest was to be payable at the rate of 11% P. A. on balance sale consideration which would remain unpaid from time to time. Vendee Company by its letter dated 15. 6. 1978 proposed to modify the terms of payment ,by charging the interest on deferred sale consideration from , 1. 7. 1979 instead of 1. 3. 77. The proposal was accepted by y. the assesee. In the meantime a resolution was passed on 30. 6. 1978 doing away with. the requirement of payment . of interest. Assessee-respondent received notices from the ap- --/ income that has not accrued at all. [Pa. ra 26] (1003-G, H; 1004-A, B) 2. The Resolution dated 30. 6. 1978 could not be given any retrospective effect so as to facilitate evasion of tax liability that had already arisen for the Assessment Year 1979-80.

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 th. e sale, which became effective from 1. 3. 1977, the intere$t _. ,(_ started accruing on that time basis, from 1. 3. 1977 deter- . ,.. mined by the amount outstanding from time to time and the rate applicable which both were stipulated in clearest possible terms in the Deed of Assignment dt. 28. 6. 1977 and the agreements which preceded it. The High Court has assessed the facts correctly and has further observed that what already accrued during the Accounting Year 1. 7. 1977 to 30. 6. 1978 could not be nullified by the Resolution dt. 30. 6. 1978. [Para 26] (1003-G; 1004-C, D, E) y 3. 1 High Court was right in setting aside the penalty, ..... inflicted against the assessee u/s. 273 (2) (a) of the Act. The assessment for the Assessment Year 1980-81 was, finalized by the Tribunal by holding that the interest could.

not be included. Therefore, the said interest could not be. treated as an income, so as to co. mpel the assessee to pay advance tax on the same. There is no justification for ~ a Show Cause Notice under Section 274 r/w Section 273 (2)(a) of the Act on the ground that the assessee had deliberately filed an untrue estimate of the advance tax which he had known or reason to believe to be untrue. The Tri- bunal as well as the High Court were right in holding the + transaction to be genuine. [Paras 25 & 30] (1008-D; 1003- D, E) 3. 2 It is not correct to say that once the interest was found to have been accrued for the Assessment Year 1979- 80 and once on that count, the income of the assessee was declared, then the penalty under Section 273(2)(a) of the Act was a natural consequence. The assessee had, '+ undoubtedly, claimed the waiving of that interest as a natural corollary of the Resolution dt. 30. 6. 1978.

It was also claimed that the assessee had commercial expediency for doing the same. If the assessee in this case proceeded on the basis of Resolution dt. 30. 6. 1978, it has to be held that the assessee had reasonably believed that the income of interest which was written off by the Resolution, could not be adqed to its income. If it genuinely proceeded under that bonafide impression, then the High Court was right in writing off the penaJty and upsetting )c the view of the Tribunal. No definite conclusion can be ". f drawn that the assesse had reason to believe that the Nil estimate filed. by it was untrue. [Paras 27, 28 and 29] (1006- B, C; 1007-B; 1008-A, B; 1005-D) CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 482-483 of 2003 From the final Judgment and Order dated 6. 2. 2002 of the High Court of Gujarat at Ahmedabad in ITR Nos. 56 of 1986 & y 220 of 1995 . __ P. V. Shetty, Arunav Patnaik and Lakshmi Iyengar (for B. V. Balaram Das) for the Appellant. E. R.

Kumar, Sameer Parekh and Rukhmini Bobde (for M/ s. Parekh & Co. ) for the Respondent. The Judgment of the Court was delivered by r- V. S. SIRPURKAR, J. 1. This Judgment will dispose of two Appeals, they being Civil Appeal Nos. 482 of 2003 and 483 of 2003. These Appeals are filed by the Commissioner of I\ COMMNR. OF INCOME TAX, AHMEDABAD v. 993 ~ Income Tax, Ahmedabad (hereinafter referred to as "Revenue"). .. In both the Appeals, the Revenue challenges the common judgment passed by the Gujarat High Court, wherein, the High 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 ofdncome 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 :;,J. , Tax Reference No. 58 of 1993, the Revenue had filed an appeal against the impugned judgment dealing with the same, 7" 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 1986 - f.

"273(2) If the Assessing Officer, in the course of any proceedings in connection with the regular assessment for the assessment year commencing on the 1st day of April, 1970, or any subsequent assessment year, is satisfied that any assessee- (a) : 1s furnished under subsection (1) or sub-section (2) or sub-section (3) or subsection (5) of Section 209A, or under sub-section (1) or sub-section (2) of Section 212, an estimate of the advance tax payable by him which he knew or had reason to believe to be untrue. " . "' (b)...................................... ············ ........................... . / (c).......................................................... ·.................... " The specific wording would signify that there has to be a satisfaction of the Assessing Officer that the estimate of advance tax furnished by the assessee was not only untrue, but the assessee also knew or had reason to believe the same to ~ SARABHAI HOLDINGS PVT. LTD. [VS. SIRPURKAR, J. ] -1 be untrue.

In the present case, there can be no dispute that the claim of the assessee in respect of the Assessment Year 1979- 80 was not accepted. However, in our opinion, in the peculiar facts of this case, it cannot be said that the assessee had know/edge of its estimate of advance tax to be untrue or had reason to believe the same to be untrue. The assessee had, undoubt- 'B edly, claimed the waiving of that interest as a natural corollary -I of the Resolution dt. 30. 6. 1978. It was also claimed that the assessee had commercial expediency for doing the same. It ' was tried 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 subseque11t year, the assessee claimed the loss of about Rs. 17,000/-.

Though the attempt on the part of the assessee )I 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. 1978.

The High Court took the view that the levy of interest under Section 215 of the Act and the levy of penalty under Section 273(2)(a) of the Act stand on different footings. We have no hesitation to ac- 'l cept this view of the High Court. Indeed, while the levy of interest under Section 215 of the Act is automatic, that is not the ~ case with the penalty under Section 273(2)(a) of the Act, where the mensrea on the part of the assessee would have to be shown to the extent, it has been indicated in the language of the Sec- H. tion, where, therefore, there was some scope for the assessee to justify the estimate given by it and that the penalty could not be inflicted. Indeed, if the assessee in this case proceeded on the basis of Resolution dt. 30. 6. 1978, it has to be held that the assessee had reasonably believed that the income of interest which was written off by the Resolution, could not be added to its income.

If it genuinely proceeded under that bonafide impression, then in our opinion, the High Court was right in writing ·1f· off the penalty and upsetting the view of the Tribunal. We accept the finding of the High Court, which is in the following words: ".... no definite conclusion can be drawn that the assesse had reason to belive that the Nil estimate filed by it was untrue..... " 30. Considering the overall facts in this case, we are of the clear opinion that the High Court was right in setting aside 0 the penalty of Rs. 4 lakhs inflicted against the assessee under Section 273(2)(a) of the Act. We answer the issue accordingly. In the result, the appeals filed by the Revenue fail and the judgment of the High Court is confirmed without any costs. K. K. T. Appeals dismissed. . ...