CIT v. Sarabhai Holdings Pvt. Ltd.

Civil Appeal No. 482-483 of 2003

October 21, 2008


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 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 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 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.

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