1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY O. O.C. J. CHAMBER SUMMONS NO.1051 OF 2009 IN EXECUTION APPLICATION NO.198 OF 2009 -1. Jitendra Gopaldas s/o. Gopaldas Bhatia, R/o. Mohammed Janahi Villa No.28, Behind A1, Khifaf, EPCO Petrol Pump, Jafalia Area, Post Box 5475, Dubai. -2. Jayshree Kishanchand Bhatia, D/o. Kishanchand Bhatia, R/o. Mohammed Janahi Villa No.28, Behind A1, Khifaf, EPCO Petrol Pump, Jafalia Area, Post Box 5475, Dubai. ...Claimants.. Versus -1. Shiv Kumar Jatia s/o. Sudhakar Jatia, R/o. B-50, Gulmohar Park, New Delhi. -2. Raj Kumar Jatia, S/o. Subh Karan Jatia, R/o. Krishnabad, 5th Floor, Gamadia Road, Mumbai-400 026. ...Respondents. And -3. Magus Estates & Hotels Pvt.Ltd., company registered under the Companies Act, 1956, having its registered office at Plot No.114, E.Moses Road, Worli, Mumbai-400 018. ...Applicants. ....... Mr. Soli Cooper with Mr.V.P. Singh, Mr. Arun Siwach and Mr.Aditya Mehta i/b. Amarchand Mangaldas & S.A. Shroff & co. for the 2 Applicants. Mr. Percy Pardiwala, Sr. Advocate with Mr. Aashish Agarwal, Mrs.Anita Agarwal i/b. Mr.Sandeep Jinsiwale for the Claimants. ...... CORAM : DR. D.Y. CHANDRACHUD, J. September 18, 2009. ORAL JUDGMENT : A consent award was made in arbitral proceedings which took place between the parties to the present dispute on 26th March 2008. The consent award stipulated that an amount of Rs. 28 crores would be paid by the Applicants to the Chamber Summons, Magus Estates and Hotels Pvt. Ltd. to the Claimants. The payment was to be made by instalments under clause 1 of the consent award, which reads as follows : “1. In order to amicably resolve the dispute, Magus Estates and Hotels Pvt. Ltd. shall pay a lumpsum of Rs.28 crores as follows: a. Rs.25 lacs on 25th March 2008 by cheque No. 176758 in favour of the First Claimant dated 25th March 2008 drawn on Deutsche Bank, Fort, Mumbai; -b. Rs.25 lacs on 25th March 2008 by cheque No. 176759 in favour of the Second Claimant dated 25th March 2008 drawn on Deutsche Bank, Fort, Mumbai; 3 -c. Rs.3.75 crores on or before 30th May, 2008 by cheque No.439206 in favour of the First Claimant dated 30th May 2008 drawn on Deutsche Bank, Fort, Mumbai; -d. Rs.3.75 crores on or before 30th May 2008 by cheque No.439207 in favour of the Second Claimant dated 30th May 2008 drawn on Deutsche Bank, Fort, Mumbai; -e. Further sum of Rs.5 crores on or before 31st October 2008 by cheque No.439208 in favour of the First Claimant dated 31st October 2008 drawn on Deutsche Bank, Fort, Mumbai; -f. Further sum of Rs.5 crores on or before 31st October 2008 by cheque No.439209 in favour of the Second Claimant dated 31st October 2008 drawn on Deutsche Bank , Fort, Mumbai; g. Further sum of Rs.5 crores or or before 21st March 2009 by cheque No.439210 in favour of the First Claimant dated 21st March 2009 drawn on Deutsche Bank, Fort, Mumbai; h. Further sum of Rs.5 crores on or before 21st March 2009 by cheque No.439211 in favour of the Second Claimant dated 21st March 2009 drawn on Deutsche Bank, Fort, Mumbai.” The payment to the Claimants was to be in full and final settlement of the claim that they had raised in connection with a share purchase agreement and a shareholders’ agreement dated 30th April 2004. 4 Post dated cheques were handed over and clause 4 of the Consent Award stipulated that in the event that those cheques were not honoured, the Claimants would be entitled to a decree for the entire amount. The first two instalments of Rs.25 lakhs and Rs. 3.75 crores fell due on 25th March 2008 and 30th May 2008. These instalments were paid. 2. By a letter dated 30th September 2008, the Applicants informed the Claimants’ Advocates that they were in receipt of an opinion of the Claimants' Chartered Accountants on the question as to whether tax was deductible at source on payments which were due under the Consent Terms. The Applicants stated that future payments under the Consent Terms would be made net of TDS unless the Claimants provided a no objection certificate from the Income Tax Department indicating that no tax was deductible at source. The Applicants stated that in the event that such a no objection certificate was not provided, they would furnish stop payment instructions to their Bankers and would issue fresh cheques for an amount equivalent 5 to the instalments net of TDS due on 31st October 2008. By a reply dated 30th September 2008, the Claimants' Advocates contended that it was agreed between the parties during the course of discussion between Counsel that TDS would not be deducted since according to the Claimants this did not constitute income in the hands of the Claimants. According to the Claimants, enquiries with the Income Tax Department had revealed that there was no procedure for the grant of a no objection certificate and that the deduction of TDS did not form part of the Consent Terms. The Applicants’ Advocates on their part, by their letter dated 20th October 2008 reiterated that the failure of the Claimants to provide a no objection from the Income Tax Authorities indicating that tax need not be deducted at source would result in payments of instalments net of TDS. The case of the Claimants in the letter of their Advocates dated 20th October 2008 was that the Consent Terms were drafted on the basis that no tax was payable, this being the understanding of the parties. The Applicants’ Advocates noted in a letter dated 31st October 2008 that the liability to pay tax was a matter of Statute; not something that the 6 parties could decide amongst themselves and the legal opinion which was furnished by the Claimants would not bind the tax authorities. It was in that view of the matter, asserted the Applicants, that they had sought from the Claimants a no objection certificate from the authorities concerned that tax was not liable to be deducted at source. However, the Applicants recorded that on the request of the Claimants, they were allowing full encashment of a cheque dated 31st October 2008 which had fallen due for payment, but that if the Claimants were unable to obtain permission from the Tax Authorities, the next instalment would be paid with a deduction of TDS. 3. This course of correspondence continued between the Advocates for the parties and eventually, on 10th March 2009, the Applicants’ Advocates addressed a communication recording their understanding that the Claimants had, as a matter of fact, filed an application under Section 195 of the Income Tax Act, 1961 to obtain a no objection certificate of the authorities for payments being made to them without a deduction of tax at source. The Advocates for the 7 Claimants in their reply dated 12th March 2009 expressly stated that the Claimants had not made any application as alleged in the letter of the Applicants dated 10th March 2009. In response, the Applicants stated through their Advocates in an e-mail communication of 14th March 2009 that as a matter of fact, the Claimants had filed an application under Section 195 of the Income Tax Act, 1961of which the filing numbers were disclosed in the communication. There was also a statement to the effect that the Applicants verily believed that the applications were filed with the Income Tax Officer - International Taxation (3)(1) on 4th December 2008. The Applicants sought copies of the application together with orders passed thereon. On 20th March 2009, the Applicants’ Advocate reiterated the position that the Claimants, as a matter of fact, had filed an application before the Income Tax Authorities, but clarified that this application was not under Section 195 as stated in the earlier correspondence, but under Section 197. On 9th April 2009, the Applicants’ Advocate continued to reiterate that the Claimants had in the course of their correspondence feigned ignorance not only of the need, but also of 8 the procedure to obtain a tax clearance certificate and had even gone to the extent of denying that the Claimants had made such an application. As late as on 22nd May 2009, the Claimants Advocates stated that no application had ever been made under Section 195 of the Income Tax Act, 1961. 4. Eventually, it has emerged before the Court that the Applicants lodged an application under the Right to Information Act, 2005 before the Tax Authorities to disclose as to whether the Claimants had made any application under Sections 195 and 197 of the Income Tax Act, 1961. The Claimants opposed a disclosure by the Tax Authorities and the contention of the Claimants was upheld by the Department on 29th April 2009. 5. On 8th May 2009, the Income Tax Officer (International Taxation) – TDS-4, addressed a communication to the Applicants reiterating that in the course of proceedings under Section 197, it had been brought to the notice of the Department that the Applicants 9 had paid an amount of Rs.28 crores to the Claimants in pursuance of the arbitral award dated 26th March 2008. The letter proceeded to state that under Section 195 of the Income Tax Act, 1961, any person responsible for making payment to a non-resident of any interest or other other sum chargeable under the provisions of the Act, is required at the time of deposit of such income to the payee or at the time of effecting payment in cash, cheque or draft required to deduct income tax thereon. The Applicants were informed that in the event that they failed to do so, they shall be deemed to be assessees in default, attracting a liability to pay interest at the rate of 12% per annum on the amount of tax. The Applicants were, therefore, directed to inform the Department as to whether TDS was deducted while making payment. The instalment which was due on 21st March 2009 was paid by the Applicants to the Claimants by deducting TDS. The tax deducted at source was deposited on 31st March 2009 with Axis Bank for being paid over to the Income Tax Department. 6. A detailed reference to the correspondence was necessitated 10 because the Claimants unmistakably, during the course of letters that were exchanged between the Advocates, had consistently declined the suggestion that they should make or that they had made an application to the Income Tax Authorities. Initially, the Applicants' Advocate sought details of an application made under Section 195 by the Claimants and thereafter furnished the date of the application and the inward number. The reference to Section 195 was corrected by the Applicants' Advocate to mean a reference to Section 197. Despite this, the Claimants consistently continued to deny that any application had been made. The Chamber Summons was moved before this Court for ad-interim relief on 8th July 2009 on an apprehension that the Claimants were liable to levy an attachment on the premises of the Respondents. Even during the course of the hearing of the application for ad-interim relief, this Court was not informed of the fact that, as a matter of fact, the Claimants had made an application to the Income Tax Authorities and that they were informed by the Income Tax Officer (International Taxation) that tax was liable to be paid on the full amount received by the Claimants 11 from the Applicants for computing the capital gains. During the course of the hearing of these proceedings, on a specific query of the Court, Counsel appearing on behalf of the Claimants has placed on the record, an order dated 25th March 2009, passed by the Income Tax Officer (International Taxation) -(3)(1). The order passed by the Income Tax officer indicates that the Claimants had moved an application before the Income Tax Authorities seeking a certification that there ought to be no deduction of tax in respect of payments to be received as compensation for damages from the Applicants under the terms of the arbitral award. The request of the Claimants was not acceded to by the Income Tax Officer and the order of 25th March 2009 contains the following observations: “Further as per section 48 of the I.T. Act, 1961, the full value of the consideration received or accruing has to be taken into account for computing the capital gain. It makes no difference whether or not “full consideration” is received during the previous year. Even if the full value of consideration is received in instalments in different years, the entire value of consideration has to be taken into account for computing the capital gains, which become chargeable to tax in the year of transfer. Hence the entire amount becomes chargeable to tax under the head “Capital Gains” in F.Y.2007-08 i.e. A.Y. 2008-09. The applicant’s contention that the applicant is entitled to certificate for nil 12 deduction of tax for the instalments receivable in F.Y. 2008-09 is rejected in view of the above. The due date for filing of Return of income for A.Y. 2008-09 is over and the applicant has still not filed his Return of income for the said year.” (emphasis supplied). 7. The Applicants have, on their part, instituted a suit on the Original Side of this Court for the recovery of moneys from the Claimants on account of interest levied by and paid to the Income Tax Authorities. The suit is pending. The Chamber Summons has been taken out in the Execution Application instituted by the Claimants for execution of the Consent Award. Now, it is an admitted position before the Court that of the amount of Rs.28 corres which is liable to be paid under the terms of the consent award, the Applicants have paid an amount of Rs.18 crores. The balance of Rs.10 crores has been paid over to the Income Tax Authorities after deduction of tax at source. The principle bone of contention between the parties in the Chamber Summons is as to whether the Claimants were justified in making a deduction of tax at source. 13 8. On behalf of the Claimants it has been urged that (i) The Consent Award in the arbitral proceedings envisaged a lumpsum payment of Rs.28 crores by the Applicants to the Claimants; (ii) The Claimants were entitled to the entire amount of Rs.28 crores without any deduction whatsoever, including on account of tax; (iii) In the absence of a specific provision for deduction of tax at source, it would not be open to the Applicants to make a deduction; (iv) Assuming that the tax was liable to be deducted, the liability to pay the tax was that of the Applicants and not of the Claimants; (v) Where payments are due under a decretal debt, the only adjustments that are permissible are those provided for in the Code of Civil Procedure, 1908; (vi) In the absence of a provision in the Consent Terms providing for adjustment of tax and in the absence of any statutory provision to the contrary, it was not open to the Applicants to deduct tax at source. 9. These submissions and the arguments which have been urged on behalf of the Applicants would now fall for determination. 14 10. It is an admitted position before the Court that both the Claimants are non-resident Indians, residing in Dubai. 11. Section 191 of the Income Tax Act,1961 provides that in the case of income in respect of which provision is not made under Chapter 17 for deducting income tax at the time of payment and in any case where income tax has not been deducted under the provisions of the Chapter, income tax would be payable by the assessee direct. The explanation to Section 191 which was inserted by the Finance Act of 2008 with retrospective effect from 1st June 2003 provides that if any person who is required to deduct any sum in accordance with the provisions of the Act, does not deduct or after so deducting fails to pay or does not pay the whole or any part of the tax, as required by the Act, and where the assessee has also failed to pay such tax directly, such person shall be deemed to be an assessee in default within the meaning of sub-section (1) of Section 201. Sections 192 to 194LA provide for deduction at source in respect of 15 various categories of income in regard to resident Indians. Section 192 applies to salaries; Section 193 to interest other than interest on securities, Section 194 to dividends, Section 194A to interest other than interest on securities; so on and so forth. Section 195 deals with payment to non-residents. Sub-section (1) of Section 195 is to the following effect : “195(1) Any person responsible for paying to a non- resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries”) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income- tax thereon at the rates in force.” Sub-section (2) of Section 195 provides that where a person responsible for paying any such sum chargeable under the Act to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine the appropriate proportion of such sum so chargeable. Upon such determination, tax 16 shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable. Sub-Section (3) of Section 195 enunciates that subject to rules, any person entitled to receive any interest or other sum on which income tax has to be deducted under sub-section (1) may similarly make an application to the assessing officer for the grant of a certificate authorising him to receive such interest or other sum without deduction of tax. Where a certificate of that nature is granted, every person responsible for the payment of the sum to the person to whom such certificate is granted shall, so long as the certificate remains in force, make payment without deducting tax thereon under sub-section (1). The next provision of which notice would have to be taken is Section 197. Section 197 stipulates that where in the case of any income of any person or sum payable to any person, income tax is required to be deducted at the time of credit or, as the case may be, at the time of payment at the rates in force under the provisions inter alia of Section 195 and the assessing officer is satisfied that the total income of the recipient justifies the deduction of income tax at any lower rates or,no 17 deduction of income tax, as the case may be, the assessing officer shall, on an application by the assessee given to him such certificate as may be appropriate. Where such a certificate is give, the person who is responsible for paying income tax shall until the certificate is cancelled, deduct income tax at rates specified in such certificate or, deduct no tax, as the case may be. 12. The Claimants in the present case, are non-resident Indians, The Applicants were required to make payment to them under the Consent Award. The Applicants were under a mandatory duty under Section 195, at the time when credit of such income was made to the account of the payee or at the time of payment thereof in cash, liable to deduct income tax at the rate in force. Section 197 provides that where income is required to be deducted under Section 195, the assessing officer, if he certifies that a deduction of income tax is justified at a lower rate, or if no deduction whatsoever is required, must issue a certificate in that behalf. The Claimants had on 2nd December 1998, moved an application under Section 197 seeking the 18 issuance of a certificate by the Income Tax Authorities to the effect that they were subject to nil deduction of tax at source. The prayer in the application was to the following effect : “Based on above submissions, we request your goodself to issue a certificate u/s.197 of ITA in favour of Applicant directing said M/s.Magus Estates and Hotels Private Ltd. to pay a sum of Rs.14,00,00,000/- being damages for breach of contract to applicant under aforesaid Arbitral Award without deduction of tax at source.” 13. The Income Tax Officer (International Taxation) passed an order on the application on 25th March 2009 rejecting the contention and holding that the full value of the consideration received or accruing had to be taken into account in computing capital gains. The contention of the Claimants that they were entitled to a certificate of nil deduction of tax for the instalments receivable for Financial Year 2008-2009 was rejected. The correctness of the order passed by the Income Tax Officer does not fall for determination in these proceedings. The issue before the Court is as to whether the Claimants are entitled to execute the Award in respect of the amount of Rs.10 crores which was deducted by the Applicants and paid over 19 to the Income Tax Authorities. The Applicants were informed on 8th May 2009 by the Income Tax Authorities that they were liable to deduct tax at source on payments made to the Claimants under the Consent Award and were placed on notice of the fact that should they fail to do so, they would be liable to be regarded as assessees in default. The correspondence on the record shows that the Applicants' Advocate had made repeated enquiries with the Claimants as to whether they had, as a matter of fact, moved an application before the Income Tax Authorities. Evidently, the Claimants' Advocate sought refuge under the subterfuge that an application had not been made under Section 195 of the Act. Even when the Applicants' Advocates sought a clarification on whether an application was moved under Section 197, there was neither a fair nor candid disclosure. No disclosure was forthcoming before the Court at the ad-interim stage when the application for urgent relief was considered on 8th July 2009. When the Applicants made an application for disclosure under the Right to Information Act, 2005 that too drew an obstructive response from the Claimants. The Claimants brazenly looked askance 20 even when they were confronted with the date of their application and the inward number. Eventually, it is during the course of the hearing of these proceedings, that the order of the Income Tax Officer (International Taxation) dated 29th March 2009 came to light and the direction of the Income Tax Authorities was placed on the record. There is merit in the submission of Counsel for the Respondents that an adverse inference should be drawn against the Claimants that their conduct was a brazen attempt of two Non-residents to somehow obstruct compliance by the Applicants of their obligation under Indian law. 14. Counsel appearing on behalf of the Claimants, however, submitted that no deduction could have been effected from the amount payable as a lump sum under the Arbitral award. In order to buttress the submission, reliance was placed upon a judgment of the Supreme Court in All India Reporter Ltd. vs. Ramchandra D. Datar, 1960 Bom.L. R. 431. That was a case where the services of an employee were terminated. The employee filed a suit for wrongful 21 termination in which a decree was passed by the Trial Court in the amount of Rs.42,359/- inclusive of compensation for termination of employment, arrears of salary and salary in lieu of notice and interest. The employee applied for execution of the decree. The Income Tax Officer served a notice for a direction that the employer be permitted to deduct income tax at source and pay into the treasury, income tax on the sum awarded to the