“  REPORTABLE”   

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 482-483 OF 2003

Commissioner of Income Tax, Ahmedabad …. Appellant

Versus

Sarabhai Holdings Pvt. Ltd. …. Respondent

J U D G M E N T

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  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 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

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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 1986

(which emanated from the quantum proceedings in respect of  the

Assessment Years 1979-80 and 1980-81):-

For the Assessment year 1979-80 – at the instance of the assessee:-

(i) Whether on facts and in the circumstances of the case, the Tribunal was right in law in holding that the interest of Rs.66,29,236/- being the amount of interest as determined by the Income Tax Officer on a  notional  basis  from 1.7.1977 to  30.6.1978 was  liable  to  tax  on  accrual  basis  for  the Assessment Year 1979-80?

(ii) Whether on the facts and in the circumstances of the  case,  the  Tribunal  was  justified  in  law  in

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holding that the interest accrued from day-to-day as a result  of supplementary agreement and as such, the same was eligible to tax as income for Assessment Year 1979-80?

(iii) Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in law in holding that giving up of interest on the ground of commercial expediency was not justified  as  no  direct  or  indirect  benefit  had accrued to the assessee?

For the Assessment Year 1980-81 – at the instance of the Revenue:-

(i) Whether the Appellate Tribunal has not erred in law and on facts in holding that no income could be  said  to  be  accrued  to  the  assessee as  the interest would start  accruing from 1.7.1979, i.e., after the end of the accounting year?

(ii) Whether  the  finding  of  the  Tribunal  that  the interest  could not  be said to be accrued to the assessee  during  the  accounting  period  in question and hence, question of relinquishment of any right does not arise is correct in law?

Income Tax Reference No. 220 of 1995:-

Income Tax Reference No. 220 of 1995 was filed at the instance of

the assessee in respect of the penalty levied under Section 273 (2)

(a) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”)

and the Reference was worded as under:-

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“Whether on facts and in the circumstances of the case, the Tribunal was justified in law in confirming the penalty of  Rs.  4 lakhs levied under Section 273 (2)(a)  of  the Act?”

3. Before we go further, it must be clarified that insofar as Assessment

Year 1979-80 is concerned, the High Court answered the Reference No.

56 of 1986 in favour of the Revenue, while insofar as Assessment Year

1980-81  is  concerned,  the  High  Court  answered  it  in  favour  of  the

assessee and against the Revenue.  The assessee has 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.

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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  an  agreement  on  28.2.1977,  whereby,  the  assessee

agreed to transfer its industrial undertaking and business activity known as

Sarabhai Common Services Division, which was its unit.  This was to take

place with effect from 1.3.1977.  The unit was sold as going concern in

favour  of  assessee’s  own subsidiary  M/s.  Elscope  Pvt.  Ltd.  for  a  total

consideration of Rs.11,44,10,253/-.

9. Under this agreement, the amount of Rs.49 lakhs was to be paid by

way of deposit/earnest money and Rs.4.41 crores was to be set off against

the due amount from the respondent-assessee to M/s. Elscope Pvt. Ltd. as

consideration  for  equity  shares  in  Elscope  held  by  the  respondent-

assessee.  The balance sale consideration (approx. Rs.6.55 crores) was to

be paid in eight equal annual installments, starting with 1.10.1979.  Such

installment was to become payable on the 1st of October each year.

10. A further  agreement was entered into between the assessee and

Elscope on  4.3.1977.   This  agreement  provided for  an  interest clause,

which was agreed at  the rate  of  11% per  annum and that  it  would  be

payable on balance sale consideration which would remain unpaid from

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time  to  time.   In  short,  the  earlier  agreement  dt.  28.2.1977  was

varied/altered.  The interest clause was as under:-

“The purchaser shall pay simple interest at the rate of 11% per annum on the balance of the unpaid purchase consideration remaining outstanding from time to time and, if the purchaser commits  any  default  or  delay  in  paying  any  installment  or installments on the due date, the purchaser shall pay interest at such rate as is equal to the rate of interest which the vendor pays to its bankers in the ordinary course or business from the due date of payment of installment until the date of payment thereof.”

There were some other changes made in the payment terms.  However, it

is again admitted that the amount covered by the installments was going to

be Rs.4.54 crores approximately.

11. It  may  be  incidentally  mentioned  here  that  Elscope,  in  turn,

transferred  this  industrial  undertaking,  purchased  by  it  to  its  subsidiary

Ambalal Sarabhai Enterprises Ltd. on 25.4.1978 vide the Assignment Deed

of  the  even  date.   On  15.6.1978,  Elscope  wrote  to  the  respondent-

assessee proposing modification in terms of payment and requested, inter

alia,  that  the  interest  be  charged  on  deferred  sale  consideration  from

1.7.1979 instead of 1.3.1977.  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

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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. 15th 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. 15.6.1978, the interest was to start from 1.7.1979.  While, before this

interest was to start, the Resolution dt. 30.6.1978 was passed, doing away

with  the  requirement  of  payment  of  interest  in  terms  of  the  earlier

agreement dt. 4.3.1977.  So far so good.

13. The assessee received a notice under Section 210 of the Act on

17.10.1978, requiring it to pay the advance tax of Rs.1,22,22,757/-, while

the  second  notice  was  served  on  8.12.1978,  asking  the  respondent-

assessee to pay the advance tax of Rs.1,28,74,172/-.

14. On 14.12.1978, however, the respondent-assessee filed an estimate,

showing  NIL  amount  of  advance tax  payable  for  the  Assessment  Year

1979-80.   It  further  filed  the  returns  on  29.6.1979,  declaring  the  total

income of  Rs.772/-  for  the  Assessment  Year  1979-80.   Insofar  as  the

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Assessment Year 1980-81 is concerned, the assessee filed the returns on

27.6.1980, declaring a loss of Rs.17,345/-.  The Assessing Officer passed

an assessment order  dt.  20.9.1982,  determining the total  income to  be

Rs.68,99,202/-, which included the amount of interest accrued on deferred

sale consideration, receivable from Elscope.  The Assessing Officer also

levied interest under Section 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  under  Section  273(2)(a)  and  271(1)(c)  of  the  Act

should be initiated against the assessee.

15. Insofar as Assessment Year 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 (approximately) was added to the

taxable income of the assessee.

16. Two  separate  appeals  came  to  be  filed  at  the  instance  of  the

assessee before Commissioner of Income Tax (Appeals) [CIT (Appeals)] in

relation to the Assessment Years 1979-80 and 1980-81.  The CIT(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  of  the  assessee

regarding  the  waiver  of  interest  by  the  Resolution  dt.  30.6.1978.   Two

appeals  came  to  be  filed  before  the  Tribunal,  they  being  ITA  No.

1137/Ahd/84  concerning  the  Assessment  Year  1979-80  and  ITA  No.

1138/Ahd/84 concerning the Assessment Year 1980-81 respectively.

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17. The appeals were heard together  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 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  the interest  could not have accrued insofar  as

Assessment Year 1980-81 was concerned.

20. However, in 1988, the show Cause Notice came to be issued under

Section 274 read with Section 273 (2)(a) of the Act as to why the penalty

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should  not  be  levied  for  furnishing  an  untrue  estimate  of  advance tax.

Replies were given to this Notice.  However, by order dt.  9.8.1988, the

Assessing Officer imposed a penalty of Rs.4 lakhs upon the respondent-

assessee under Section 273(2)(a) of the Act for knowingly furnishing wrong

estimate of advance tax on 14.12.1978, which it had reason to believe to

be untrue.  An appeal came to be filed being Appeal No. CAB/IV-14/88-89,

which appeal was dismissed by the CIT (Appeals),  which confirmed the

levy of Rs.4 lakhs as penalty.  This order was challenged by way of an

appeal  before the Tribunal  being ITA No. 2572/Ahd/1989.  That  appeal

also came to be dismissed by the order of Tribunal.  However, as stated

earlier, four References came to be filed before the High Court of Gujarat,

arising  from various orders  of  Tribunal  with  respect  to  the  respondent-

assessee for  the Assessment  Year 1979-80.   In  the earlier  part  of  the

judgment,  we  have  already  shown  that  there  will  be  no  question  of

considering  the  part  of  Reference  No.  56  of  1986  relating  to  the

Assessment Year 1979-80 and Reference No. 75 of 1987, which was at

the instance of the Revenue, as also the Reference No. 58 of 1993 for the

reasons stated earlier.   The High Court  heard four References together

and delivered a common judgment dt. 6.2.2002.  In Income Tax Reference

No. 56 of 1986, insofar as it  pertains to Assessment Year 1979-80, the

High Court held in favour of Revenue and since there is no appeal by the

assessee, we need not go into that aspect.  Insofar as the said Reference

pertains to Assessment Year 1980-81, the High Court held in favour of the

assessee  and  against  Revenue,  which  finding  is  in  challenge  by  the

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Revenue.  Insofar as Income Tax Reference No. 75 of 1987 is concerned,

that pertains to the levy of interest under Section 215 of the Act for the

Assessment  Year  1979-80,  the  High  Court  held  in  favour  of  Revenue.

Again, we need not go into that question in this appeal.  So also in Income

Tax Reference No. 58 of 1993, 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.  15.6.1978,  as  also  the  Resolution  dt.

30.6.1978 and on that basis, the Ld. Senior Counsel urged that this was

nothing, but an attempt on the part of the assessee to avoid payment of tax

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on the interest which it was bound to pay.  The learned Senior Counsel

urged that considering the whole transaction and the relations between the

assessee Company and the transferee Company, the assessee Company

tried to wriggle out the liability to pay the tax.  The ld. Senior Counsel also

urged that ordinarily the assessee Company could not be expected to defer

the interest as it did vide Resolution dt. 30.6.1978.  The Learned Senior

Counsel, therefore, urged that the High Court erred in confirming the order

of  the Tribunal,  insofar  as the tax liability  pertaining to the Assessment

Year  1980-81  is  concerned.   The  Learned  Senior  Counsel,  secondly,

argued that  at  any rate,  the  Tribunal  and the  High Court  had  erred in

absolving the assessee of the penalty, when it was clear that the assessee

had failed to furnish the true returns and also failed to pay the due advance

tax.   

22. As against this, Shri E.R. Kumar, learned counsel for the assessee,

assisted  by  Shri  Sameer  Parekh  and  Ms.  Rukhmini  Bobde,  Advocates

supported the judgment of the High Court and urged that  the finding in

respect  of  the  Assessment  Year  1980-81  was  correct  finding,  as  in

commercial transaction, the parties were free to negotiate to vary the terms

of the commercial transactions.  The learned counsel pointed out that the

Resolution  dt.  30.6.1978  was  indisputably  a  genuine  Resolution  and

though the said Resolution could not wipe out the interest already accrued

for  the  Assessment  Year  1979-80,  it  could  defer  the  future  liability  of

interest in the manner it did.  The learned Counsel, therefore, supported

the impugned judgment.  It was further urged that once it was held that the

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assessee  was  justified  in  acting  on  the  basis  of  the  Resolution  dt.

30.6.1978 and once it was held that there would be no liability on account

of the interest as the interest had been accrued after that date, there would

be no question of proceeding under the penalty provisions of Section 273

(2)(a) and 271(1)(c) of the Act.  The learned Counsel also supported the

finding of the Tribunal as confirmed by the High Court in respect of the

penalty under Section 271(1)(c) of the Act, being waived and pointed out

that the reasons given by the 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.

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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  no  dispute  that  the  assessee  was  following  the

Mercantile  System of  Accounting  and that  the  Accounting  Year  for  the

Assessment Year 1980-81 was 1.7.1978 to 30.6.1979.  The High Court has

correctly  held  and  confirmed  the  Tribunal’s  finding  that  insofar  as  the

accrued interest for the Assessment Year 1979-80 was concerned, since

the interest had already accrued to the assessee, it cannot be wiped out

later on by passing a Resolution dt. 30.6.1978.  The interest, indeed had

accrued in the Accounting Year which began from 1.7.1977 to 30.6.1978

and as such, the subsequent passing of the Resolution could not result into

wiping out that accrual.  The assessee could not have refused to pay tax

on that.  We are indeed not concerned with Assessment Year 1979-80, but

insofar as the Assessment Year 1980-81 is concerned, the interest had not

accrued and before it accrued, the assessee deferred the same by passing

Resolution dt. 30.6.1978.  Thus, there was a full scope to the assessee to

adjust the interest or as the case may be to defer the same which it did.

We, therefore, do not find any ill-intention on the part of the assessee to

evade the tax.   

25. At  this  juncture,  we  cannot  forget  that  the  assessment  for  the

Assessment Year 1980-81 was finalized by the Tribunal by holding that the

interest could not be included.  We, therefore, fail to follow, as to how, the

said interest could be treated as an income, so as to compel the assessee

to  pay  advance  tax  on  the  same.   We,  therefore,  do  not  see  any

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justification for a Show Cause Notice under Section 274 read with 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.  In our opinion, the Tribunal as well as the High Court

were right in holding the transaction to be genuine.   

26. We  agree  with  the  High  Court’s  finding  that  the  law permits  the

contracting  parties  to  lawfully  change  their  stipulations  by  mutual

agreement  and,  therefore,  the  assessee  and  the  vendee  had  no  legal

impediment in modifying the terms of their contract.  We also agree with

the further finding of the High Court that the Resolution 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.  We further agree with

the High Court’s finding that it being 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

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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  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 in para 14.7 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, however, the same

rule could not be applicable to the subsequent Accounting Year, when the

interest had not accrued.  We, therefore, confirm the finding of the High

Court insofar as Reference No. 56 of 1986 is concerned and hold that the

High Court had correctly decided the Reference No. 56 of 1986 insofar as it

pertains to Assessment Year 1980-81.

24. This  takes  us  to  the  finding  of  the  High  Court  insofar  as  the

Reference No.  220 of  1995 is  concerned.  In  this  case,  the authorities

below  and  the  Tribunal  had  held  that  while  filing  the  Nil  estimate  of

advance tax on 14.12.1978, the appellant had full knowledge of the interest

income  of  Rs.66,29,236/-  which  had  accrued  and  though  all  this  was

known to the assessee, he had filed the Nil estimate knowingly or it had

reason to believe that the Nil estimate was untrue.  The High Court while

dealing with the issue, took the view that the burden was on Revenue to

establish under Section 273 (2)(a) of the Act that the assessee, when it

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filed the Nil estimate, knew or had reason to believe that it was not genuine

and  was  spurious.   The  High  Court,  however,  took  the  view  that  the

Resolution dt. 30.6.1978 was not doubted by the authorities to be spurious

and under that Resolution, the date of accrual of interest was shifted to

1.7.1979 by substituting the mode of payment as was incorporated in the

agreement and the Deed of Assignment.  It was pointed out by the High

Court further that the Nil estimate, was filed on 14.12.1978, i.e., much after

the said Resolution was passed.  The High Court, therefore, took the view

that  in  the  background  of  the  said  Resolution,  by  which  the  assessee

intended to shift the accrual of interest to 1.7.1979, it is difficult to accept

that the assessee had reason to believe that the Nil estimate was untrue.

The High Court further holds the possibility that the assessee reasonably

believed that in view of the Resolution dt. 30.6.1978, it could legitimately

file the Nil estimate, cannot be ruled out.  Further, in view of the nature of

the  change in  stipulation  of  mode  of  payment  made  by Resolution  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

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(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.

25. 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 interest  was

already deferred and, therefore,  there was no accrual of interest  in  that

year.  However, the question is as to whether the High Court was right in

absolving the assessee of the penalty, which was inflicted even for the year

1979-80.  The learned Senior Counsel, appearing on behalf of Revenue

very  earnestly  argued  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 held to be Rs.66,29,236/-, then the penalty

under Section 273(2)(a) of the Act was a natural consequence and that the

High Court should not have put a specific burden on Revenue to prove that

the estimate of  advance tax payable by it  was not  only untrue,  but the

assessee also knew and had reason to believe it to be untrue.   

26. We do not agree, considering the specific language of the Section

squarely.  The Section runs as under:

“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) has furnished under  sub-section (1) or  sub-section  (2)  or  sub-section  (3)  or  sub-section  (5)  of

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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 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 knowledge of its estimate

of  advance tax to  be  untrue  or  had reason to  believe the  same to  be

untrue.   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.

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 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

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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 accept 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 Section, 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 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…..”

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26. Considering the overall facts in this case, we are of the clear opinion that the High Court  was right in setting aside 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.  

…….………………………J.           ( Lokeshwar Singh Panta )

…….………………..…….J. ( V.S. Sirpurkar )

New Delhi; October 21, 2008  

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