Case: Commissioner of Income Tax, Ahmedabad Vs. Sarabhai Holdings Pvt. Ltd

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 (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.28. 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.29. 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, 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 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 assessee had reason to believe that the Nil estimate filed by it was untrue....."

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]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.We agree with the High Courts 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 Courts 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 1980-81.27. 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 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 assessees 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(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.28. 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.29. We do not agree, considering the specific language of the Section squarely. The Section runs asIf 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, 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 bespecific 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 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 followingdefinite conclusion can be drawn that the assessee had reason to believe that the Nil estimate filed by it was