"Assessee's Belief in Non-Accrual of Interest on Deferred Purchase Consideration Justifies Penalty Exemption under Section 273(2)(a) (of Income Tax Act, 1961)".

This judgment deals with two appeals, namely Civil Appeal Nos. 482 of 2003 and 483 of 2003, filed by the Commissioner of Income Tax, Ahmedabad (referred to as "Revenue"). These appeals challenge a common judgment of the Gujarat High Court that considered several Income Tax References (ITRs) made by the Income Tax Appellate Tribunal (referred to as "the Tribunal").

The appeals specifically focus on two references: Reference No. 56 of 1986 and Reference No. 220 of 1995. Reference No. 75 of 1987 is not considered since the assessee did not appeal the High Court's judgment, which favored the Revenue. The Revenue's appeal against Reference No. 58 of 1993 was dismissed by the court due to limitations. Therefore, only Reference No. 56 of 1986 and Reference No. 220 of 1995 remain for consideration.

Reference No. 56 of 1986 relates to the assessment years 1979-80 and 1980-81. It raises questions about the taxation of interest and the justification for relinquishing interest based on commercial expediency.

Reference No. 220 of 1995 pertains to the penalty imposed under Section 273(2)(a) (of Income Tax Act, 1961), for the assessment year 1979-80. The question is whether the Tribunal was justified in confirming the penalty.

The High Court has already given its judgment on these references, with a favorable ruling for the Revenue regarding the assessment year 1979-80 and against the Revenue for the assessment year 1980-81. The assessee has not challenged the judgment regarding the assessment year 1979-80, except for the penalty of Rs.4 lakhs, which was set aside.

To understand the background, several factual details are presented, including the accounting years, the agreement for the transfer of the assessee's industrial undertaking, and the subsequent agreements related to payment terms and interest. The resolution passed by the Board of Directors is also mentioned, which modified the interest requirements.

The assessee received notices for advance tax payment, but it filed an estimate showing no tax payable for the assessment year 1979-80. The returns filed declared minimal income for both assessment years. However, the Assessing Officer determined the total income, including interest on the deferred sale consideration, and levied interest and initiated penalty proceedings against the assessee.

The assessee appealed to the Commissioner of Income Tax (Appeals), who upheld the assessment orders and the addition of interest to the income. The appeals were further filed before the Tribunal.

The synopsis covers the background and key issues in the judgment, setting the stage for the court's considerations and subsequent decisions.

This case involves the assessment of interest income for the Assessment Years 1979-80 and 1980-81. The Tribunal held that the interest had already accrued for the Assessment Year 1979-80 based on a further agreement dated March 4, 1977, and that a resolution passed on June 30, 1978, had no retroactive effect. However, the Tribunal accepted the plea regarding interest under Section 215 (of Income Tax Act, 1961). For the Assessment Year 1980-81, the Tribunal held that the interest income could not be included since the resolution was passed before the relevant accounting year began on July 1, 1978.

In 1988, a show cause notice was issued for the imposition of a penalty for furnishing an untrue estimate of advance tax. The Assessing Officer imposed a penalty of Rs. 4 lakhs on the respondent-assessee under Section 273(2)(a) (of Income Tax Act, 1961). The penalty was upheld by the CIT (Appeals) and the Tribunal. However, the High Court absolved the assessee of the penalty, stating that there was no evidence to prove that the estimate of advance tax was knowingly untrue.

The High Court considered the genuine nature of the transaction and the validity of the resolution passed on June 30, 1978. It concluded that the assessee had reasonable grounds to believe that the Nil estimate filed by it was true. The High Court also held that the penalty under Section 273(2)(a) (of Income Tax Act, 1961) is not an automatic consequence of the addition of income.

The Supreme Court upheld the High Court's decision, stating that there was no evidence to prove that the assessee knowingly filed an untrue estimate of advance tax. It also affirmed that the resolution had a legitimate basis and that the assessee had the right to vary the terms of the contract. The Court held that the interest income for the Assessment Year 1980-81 did not accrue, and therefore, there was no justification for imposing a penalty. The appeals filed by the Revenue were dismissed, and the High Court's judgment was confirmed.

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

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

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) (of Income Tax Act, 1961)

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

and the Reference was worded as under:-

“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 Income Tax Act, 1961) 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.

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

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

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 Income Tax Act, 1961) 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

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 Income Tax Act, 1961) 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) (of Income Tax Act, 1961) and 271(1)(c) (of Income Tax Act, 1961)

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.

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 Income Tax Act, 1961). 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 (of Income Tax Act, 1961) read with Section 273(2)(a) (of Income Tax Act, 1961) as to why the penalty

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 Income Tax Act, 1961) 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

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

that pertains to the levy of interest under Section 215 (of Income Tax Act, 1961) 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 Income Tax Act, 1961) 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 Income Tax Act, 1961), 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

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

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) (of Income Tax Act, 1961) 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 Income Tax Act, 1961), 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.

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 (of Income Tax Act, 1961) 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.

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 Income Tax Act, 1961) that the assessee, when it

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 (of Income Tax Act, 1961)

(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 Income Tax Act, 1961) 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 Income Tax Act, 1961) 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

Section 209A (of Income Tax Act, 1961), or under sub-section (1) or sub-section (2) of

Section 212 (of Income Tax Act, 1961), an estimate of the advance tax payable by him

which he knew or had reason to believe to be untrue.”

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

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 Income Tax Act, 1961) 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 Income Tax Act, 1961) and the

levy of penalty under Section 273(2)(a) (of Income Tax Act, 1961) 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 Income Tax Act, 1961) is automatic, that is not the case with the penalty under Section 273(2)(a) (of Income Tax Act, 1961), 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.....”

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 Income Tax Act, 1961). 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.

( Lokeshwar Singh Panta )

( V.S. Sirpurkar )

New Delhi;

October 21, 2008