Supreme Court Upholds Interest Charge on Late Advance Tax Payment Despite Pending Review Petition

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Case Name:

M/s Canbank Financial Services Ltd.(wholly owned subsidiary of Canara Bank) (Rep. by S. Narayana Setty) Vs Chief Commissioner of Income Tax (High Court of Karnataka)

Writ Appeal No.5854 of 2017 (T-IT)

Date: 4th February 2020

Key Takeaways:

1. Winning a court case doesn't automatically exempt you from paying advance tax on time.

2. The date when income accrues (becomes legally yours) matters more than when you actually receive the money.

3. Filing a review petition doesn't give you a free pass on tax obligations unless there's a specific court order saying so.

Issue: 

The main question here is: Should Canbank be exempt from paying interest on late advance tax payments when they received a large sum of money from a court case, considering there was a pending review petition?

Facts:

1. Canbank had a dispute with a company called M/s. Hongkong & Shanghai Banking Corporation Limited (HSBC).

2. On July 15, 2013, the Supreme Court ruled in favor of Canbank.

3. On August 5, 2013, the Supreme Court told its registry to release the money to Canbank.

4. Canbank actually received the money (Rs.102,59,36,115) on October 3, 2013.

5. This resulted in a profit of Rs.56,01,36,301 for Canbank in the 2013-2014 financial year.

6. HSBC filed a review petition on August 14, 2013, which was dismissed on December 3, 2013.

7. Canbank paid the advance tax only in the third quarter, missing the first two quarters.

8. The tax authorities charged Canbank interest of Rs.20,21,466 under Section 234C (of Income Tax Act, 1961) for the late payment. 

Arguments:

Canbank's side:

1. They argued that they received the money after September 15, 2013 (the due date for the second installment of advance tax).

2. They also pointed out that HSBC's review petition was pending until December 3, 2013.

Tax authorities' side:

1. They said the income accrued to Canbank on July 15, 2013, when the Supreme Court ruled in their favor.

2. The second installment of advance tax was due on September 15, 2013, which Canbank missed.

Key Legal Precedents:

The main legal reference here isn't a previous case, but a CBDT (Central Board of Direct Taxes) order. It's Order No. F.No.400/29/2002-IT(B) dated 26.06.2006, which talks about waiving interest under Section 234C (of Income Tax Act, 1961). The order says that interest can be waived if income is received after the due date of advance tax installments, and if it wasn't anticipated or contemplated by the assessee. 

Judgement:

The court sided with the tax authorities. Here's why:

1. Although Canbank received the money on October 3, 2013, it legally became theirs (accrued) on July 15, 2013, when the Supreme Court ruled in their favor.

2. The Supreme Court ordered the release of funds on August 5, 2013, which was before the September 15 deadline for the second advance tax installment.

3. The court said that just filing a review petition doesn't mean you can avoid paying taxes unless there's a specific court order saying so.

4. The court agreed to waive interest for the first installment (due June 15, 2013) but said Canbank should have paid the second installment by September 15, 2013.

5. The final interest liability was set at Rs.15,16,107. 

FAQs:

Q1: Why did Canbank have to pay interest if they hadn't received the money yet?

A1: The court says that what matters is when the income legally becomes yours (accrues), not when you actually get the cash in hand.

Q2: Does filing a review petition mean you don't have to pay taxes?

A2: Nope! Unless the court specifically says you don't have to pay, you're still on the hook for taxes and advance tax payments.

Q3: Why did the court waive some of the interest but not all of it?

A3: They waived the interest for the first installment because the Supreme Court hadn't ruled yet. But they said Canbank should have paid the second installment because by then, the Supreme Court had ruled in their favor.

Q4: What's the takeaway for other companies in similar situations?

A4: If you win a court case that results in a big payout, start planning for your tax obligations right away, even if you haven't received the money yet.

Aggrieved by the order dated 21.08.2017 passed by the learned Single Judge in dismissing writ petition No.7276 of 2017, the petitioner therein is in appeal.

2. The brief facts of the case are as follows:

The appellant had a dispute with M/s.Hongkong & Shangai Banking Corporation Limited (hereinafter referred to as ‘M/s.HSBC’ for short). It went up to Supreme Court of India. On 15.07.2013, the Hon’ble Supreme Court dismissed the appeal filed by M/s.HSBC and on 05.08.2013 directed the Registry of the Supreme Court to release the money deposited by M/s.HSBC in favour of the appellant herein. Accordingly, the appellant received a sum of Rs.102,59,36,115/-, which resulted in profit of Rs.56,01,36,301/- for the financial year 2013-2014.

The same was deposited in the appellant’s account on 03.10.2013. In the meantime, on 14.08.2013, M/s. HSBC filed a review petition against the judgment of the Hon’ble Supreme Court of India directing the release of money to the appellant herein. The Hon’ble Supreme Court on 03.12.2013, dismissed the review petition filed by M/s.HSBC.

3. The appellant on the ground that matter was pending before the Supreme Court, paid the required advance tax for the Assessment Year 2014- 2015 only in the third quarter. However, the authorities on the ground that advance tax was not paid in the first two quarters, charged interest under Section 234C (of Income Tax Act, 1961), amounting to Rs.20,21,466/-. The appellant challenged the same before the respondent herein seeking waiver of complete interest charged under Section 234C (of Income Tax Act, 1961). It has to be noted that the said waiver of interest is governed by CBDT’s order under Section 119(2)(a) (of Income Tax Act, 1961) in F.No.400/29/2002-IT(B) dated 26.06.2006. The relevant provision of the said order reads as follows:-

“4.1 Waiver of Interest under section 234C (of Income Tax Act, 1961): Waiver of interest charged under Section 234C (of Income Tax Act, 1961) is governed by the guidelines specified in paragraph No.2 of the Board’s order (supra) as reproduced below:- Para 2(b) Any income chargeable to income-tax under any head of income, other than Capital gains is received or accrued after due date of payment of the first or subsequent installments of advance tax, which was neither anticipated nor was in the contemplation of the assessee, and the advance tax on such income is paid in the remaining installment or installments, and the Chief Commissioner/Director General is satisfied on the facts and circumstances of the case that this is a fit case for reduction or waiver of the interest chargeable under Section 234C (of Income Tax Act, 1961) if the Income Tax Act.”

4. The respondent in its order dated 19.09.2016 has observed that the Hon’ble Supreme Court dismissed the appeal filed by M/s.HSBC on 15.07.2013 against the appellant herein and directed the Registry on 05.08.2013 to release the money to the appellant herein. The said amount was kept in fixed deposit and after TDS on interest and other deductions, the assessee company i.e., appellant herein received a pay order of Rs.102,59,36,115/- on 03.10.2013. As the Hon’ble Supreme Court dismissed the appeal against the appellant herein on 15.07.2013, the appellant became eligible to receive the sum accrued to it. The 2nd installment of income tax was due on 15.09.2013. It was only the first installment of advance tax which was due on 15.09.2013 had lapsed. Hence, the respondent passed an order waiving the interest for not paying the advance tax prior to 15.06.2013 but held that the appellant company is liable to pay interest for not paying the advance tax prior to 15.09.2013 and thus fixed interest liability at Rs.15,16,107/-.

5. The same is challenged by the appellant in the instant writ petition. The learned Single Judge taking into consideration the date on which the Hon’ble Supreme Court dismissed the appeal as against the appellant herein and after appreciating the reasoning given by the respondent in the impugned order, dismissed the writ petition. Aggrieved by the same, the petitioner therein has preferred this appeal.

6. It is the contention of the appellant that the amount was received by it on 03.10.2013, though the Hon’ble Supreme Court had dismissed the appeal on 15.07.2013 and a direction was issued to the Registry to release the amount in favour of the appellant on 05.08.2013. Thus, the amount was received after 15.09.2013, the date when the 2nd installment for advance tax became due. On this ground, the appellant has contended that the reasoning given by the respondent and the learned Single Judge are bad. The other ground raised by the appellant is that M/s.HSBC filed a review petition against the order passed by the Supreme Court and the review petition was dismissed only on 03.12.2013, which was not considered by the respondent or the learned Single Judge while passing the order.

7. Heard learned counsels for the parties.

8. Though the amount was released to the appellant on 03.10.2013, the same accrued to it on 15.07.2013 when the Hon’ble Supreme Court dismissed the appeal of M/s.HSBC. Further, the Supreme Court has directed its Registry to release the amount in favour of appellant herein on 05.08.2013. The order of CBDT dated 26.06.2006 as mentioned in paragraph 4.1 supra is clear that in such a situation, the appellant will be obliged to pay the advance tax and on the accrual of the income which in the instant case accrued on 15.07.2013. Further, in the absence of any interim order, mere filing of a review petition before the Hon’ble Supreme Court is no ground for non payment of advance tax.

For the aforementioned reasons, we do not find it to be a fit case to interfere with the order passed by the learned Single Judge. Consequently, the writ appeal is dismissed.

order as to costs.

Sd/-

JUDGE