National Agricultural ... vs Commissioner Of Income Tax
2011 Latest Caselaw 2985 Del

*      IN THE HIGH COURT OF DELHI AT NEW DELHI

+      ITAs No.1096/2008, 1138/2008, & 1146/2008

%                                      Judgment reserved on : 3rd MAY, 2011
                                     Judgment delivered on : 3rd JUNE, 2011

NATIONAL AGRICULTURAL CO-OPERTAIVE           ... APPELLANT
MARKETING FEDERATION
OF INDIA LTD.
              Through: Mr.S.Ganesh, Sr. Advocate with
                       Mr.Satyen Sethi, Advocate

                       Versus

COMMISSIONER OF INCOME TAX             ... RESPONDENT
            Through: Ms.Prem Lata Bansal, Sr. Advocate
                     with Mr.Deepak Anand.

CORAM:
HON'BLE MR. JUSTICE A.K.SIKRI
HON'BLE MR. JUSTICE M.L.MEHTA

1. Whether the Reporters of local papers                    YES
   be allowed to see the judgment?

2. To be referred to Reporter or not?                       YES

3. Whether the judgment should be                           YES
   reported in the Digest?


M.L. MEHTA, J.

1. These appeals are against the order dated 25th January, 2008

of the Income Tax Appellate Tribunal (for short "the Tribunal")

pertaining to the assessment years 1996-97, 1997-98 and

1998-99. These appeals were admitted on the following

substantial questions of law:-

(i) Whether on the facts and circumstances of the case and in law, the Tribunal was right in holding that liability to pay interest on damages awarded for breach of agreement dated 12.01.1980 to supply 50,000 metric tonnes HPS Groundnut to M/s Alimenta SA Switzerland, was not allowable deduction?

2. The appellant is a registered society primarily formed with the

object to market agriculture produce for the benefit of

producers/farmers. It was also entitled to independently carry

on its commercial activities. The appellant/assessee entered

into contract with M/s Alimenta SA Switzerland (for short

„Alimenta‟) for export of 5,000 MT HPS groundnut during the

period February to April, 1980 subject to certain terms and

conditions. On account of ban imposed by Government of

India, the assessee was prohibited from exporting balance

quantity of HPS groundnuts. Alimenta initiated arbitration

proceedings, wherein the assessee was directed to make

payment of US$ 4681000 as damages with interest @ 10.5%

from 13th February, 1981 to the date of the award i.e., 15 th

November, 1989. The assessee preferred appeal before the

Board of Appeal which confirmed the award with some

modification, i.e., the assessee was directed to pay US$

4526000 as damages with interest @ 11.25% from 13th

February, 1981 to the date of award i.e. 14th September, 1990.

Alimenta on 8th July, 1993 initiated proceedings for

enforcement of award and also claimed interest @ 18% per

annum from the date of award till the date of payment. On

28th January, 2000 the High Court made award as a rule of the

Court and directed the assessee to pay interest @18% per

annum from the date of award till the date of realization. On

31st October, 1996 the assessee filed return for the

assessment year 1996-97 declaring loss of Rs.21,84,140/-. The

assessee also claimed deduction of interest being the interest

for the year under consideration amounting to

Rs.5,94,37,780/- on the damages awarded for breach of

contract with Alimenta. The Assessing Officer relying upon its

order for assessment year 1995-96, wherein also similar claim

was made, disallowed the aforesaid deduction. The appeal

filed by the assessee against the order of the Assessing

Officer was rejected by the CIT(A) stating that the liability to

pay interest flows from liability to pay damage and since

liability to pay damages accrued only in the year 2000-01, on

passing of decree by the Court, therefore the assessee‟s claim

that liability to pay interest was a continuing liability and was

to be allowed for all the years till the debt was discharged,

cannot be accepted. It was observed that under the award,

interest was to be paid for the specific period, i.e., 13 th

February, 1981 to 15th November, 1989. It was observed that

there was no specific order to allow interest beyond 15th

November, 1989 and since rate of interest for the subsequent

period was also not fixed, the liability remains uncertain and

it cannot be said to have crystallized during the year. The

assessee carried out an appeal before the Tribunal who vide

its impugned order dated 25th January, 2008 held that as per

the appellate award dated 14th September, 1990, interest on

damages awarded was payable only upto the date of award

i.e., 14th September, 1990. Alimenta, in suit before the Delhi

High Court had claimed interest from the date of award till the

date of payment by the appellant. However, the liability was

disputed by the appellant who had challenged the said order

of the High Court. Therefore, the Tribunal held that on the last

date of the previous year for the assessment year under

consideration, there was no legal liability on the part of the

appellant to pay interest and that liability was crystallized only

on 28th January, 2000 (i.e., assessment year 2000-01) when

decree was passed by the Delhi High Court. It is against this

order that the assessee is in appeal before us.

3. The facts, which have been narrated above, are not in dispute.

The question that needs to be decided is as to the liability of

assessee to pay interest for the period after 14th September,

1990 (when the appellate authority passed the order).

Admittedly, as per the award of the appellate authority

interest was payable by the assessee on a sum awarded only

up to the date of the award . The date of the award here

would be taken to be the date of the order confirming the

award by the appellate authority, i.e., 14th September, 1990.

On 8th July, 1993, Alimenta filed an application before this

Court for a decree in terms of the award wherein, it also

prayed for future interest @18% per annum from the date of

award till the date of payment by the assessee. It was only

on 28th January, 2000, that this Court passed a decree making

the award as a rule of Court and directions were given to the

assessee to pay interest as claimed @18 % per annum from

the date of award till the date of payment. Here also the date

of award shall be taken to be 14th September, 1990. That

being so, this Court directed the assessee to pay interest @

18% from 14th December, 1990 till the date of payment. The

question for consideration would be as to whether the liability

could be said to have accrued to the assessee to pay this

interest before the passing of the order by this Court on 28 th

January, 2000.

4. Learned counsel for the assessee submitted that since the

award against the assessee had not only been made, but was

affirmed in appeal and the liability to pay interest on the

amount due to Alimenta was a continuing liability, the

assessee was entitled to claim deduction of interest and the

same could not be denied on the ground that assessee was

disputing the liability to pay the same. He further submitted

though by the award dated 15th November, 1989 interest was

awarded only upto the date of award, it did not mean that

there was no liability to pay interest for the subsequent

period, particularly because both in equity as well as in law,

interest is invariably awarded till the outstanding dues are

paid. Learned counsel relied upon the case of Rama Bai v.

CIT (1990) 181 ITR 400 (SC), wherein, interest under Section

28 of the Land Acquisition Act was held to have accrued year

after year from the time possession of land was taken upto

the date of actual payment of the amount of compensation.

He submitted that though the decision was rendered in the

context of land acquisition, however, the ratio is applicable to

award made by the Arbitrators. Learned counsel also relied

upon the cases of R.C.Gupta v. CIT (2008) 298 ITR 161;

Bharat Earth Movers v. CIT (2000) 245 ITR 428 (SC);

Navjivan Roller Flour and Pulse Mills Ltd. v. DCIT (2009)

315 ITR 190 and J.K. Industries Ltd. v. UOI 297 ITR 176.

Faslika Electric Supply Co. v. CIT 143 ITR 551 (Delhi)

5. On the other hand, learned counsel for the Revenue submitted

that it was only with the passing of award by the appellate

authority on 14th September, 1990 that the interest was

confirmed. She submitted that even the interest @ 18% from

the date of award till the date of realisation accrued only on

28th January, 2000, when the High Court passed the order

making the award rule of the court. Learned counsel placed

reliance on Central India Electric Supply Co. v. CIT, 247

ITR 54 (SC); P. Mariyappa Gonder v. CIT, 232 ITR 2 (SC);

CIT V. Hindustan Housing and Land Development Trust

Limited, (1986) 161 ITR 524; Paragon Constructions (I)

(P) Ltd. v. Commissioner of Income Tax and Anr., 274

ITR 413 (Delhi) and N. Sundareswaran v. Commissioner of

Income-tax, 226 ITR 142 (Kerala).

6. The case of Rama Bai (supra) related to interest on enhanced

compensation payable under the Land Acquisition Act on

account of the property of the assessee acquired by the

Government. Since the property was held transferred to the

Government, compensation and solatium allotted to the

assessee was held to have accrued on the date on which

transfer took place. Therefore, the interest allowed by the

court on enhanced compensation was held to be accrued to

the assessee and, therefore, was allowed to be spread over

the years. The facts of the case are distinguishable inasmuch

as the principle applicable in such cases is that the interest is

payable on compensation and enhanced compensation as per

the provisions of Land Acquisition Act. Therefore, the income

was to accrue every year irrespective, of its quantification by

the party acquiring the land. It was under those

circumstances that interest was conceded as having accrued

to him year to year and was directed to be taxed year after

year from the date of delivery of decision till the date of order

awarding enhanced compensation. In the case of Faslika

Electric Supply Co. (supra), the dispute was with regard to

the interest payable on award of an arbitrator where there

was an acquisition of electric supply undertaking by the

Punjab Government under the Punjab Electricity Act, 1939.

This court held that interest payable on acquisition was a

liability that arose by virtue of the provisions of Indian

Electricity Act, 1910 and, therefore, would accrue from the

date of taking the possession of the electricity supply

undertaking on acquisition and should be taxed on year to

year basis, and cannot be taxed in one lump sum. It is noted

that in this case it was laid down that an award of an

arbitrator, which was not filed in the court and made rule of

the court, has no force or validity.

7. In the case of R.C. Gupta (supra), assessee had effected

certain purchases from Hindustan Steel Limited (HSL) in

respect of which sum of Rs.5,06,761/- was payable. HSL filed

a suit for recovery as assessee was disputing the liability.

Notwithstanding the dispute, the assessee claimed deduction

of the amount. This court referred to the principle as laid

down in Bharat Earth Movers v. CIT (supra) wherein it was

held that the liability was capable on being estimated with

reasonable certainty when a recovery suit was filed by HSL

against the assessee. Merely because the liability was not a

statutory one, it cannot be said that the liability was not

certain, but was merely a contingent one.

8. In the case of Navjivan Roller Flour and Pulse Mills Ltd.

(supra) also relied upon by the assessee, it was held that the

liability to pay the damages was incurred by the assessee

when the trade association passed an award for damages for

breach of contract. Merely because the award was challenged

in the appeal could not be a ground for holding that the

assessee did not incur the liability. The mere fact that the

assessee disputes a liability, is no ground for denying the

claim for deduction in respect of such liability.

9. Learned counsel for the assessee also placed reliance on

matching principle stating it to be basic and settled principle

of accounting and/or of the Income Tax laws. In this regard,

reliance was placed on the case of J.K. Industries Ltd. v.

UOI, 297 ITR 176 and it was submitted that as per this

judgment the expenditure incurred in relation to a particular

item of revenue must be matched with the revenue of that

period, because it is only then that the real income of the

assessee for that period can be determined.

10. Invoking the ratio of the aforesaid decisions, the learned

counsel submitted that the interest liability on the outstanding

amount of damages accrued, inasmuch as the award against

the assessee had already been made and the interest was

capable of estimation with reasonable certainty. Now we may

like to mention about the judgments which were cited by the

learned counsel for the revenue. In the case of Central India

Electric Supply Co. (supra), the Supreme Court rejected the

plea of the assessee that the liability had become due on its

quantification after passing of the award by the Umpire. The

Apex Court observed that the arbitrator was appointed

through the intervention of the court and, therefore, award

had to be submitted in the court by passing a decree in terms

thereof. In reference to this judgment, it was submitted by

the learned counsel that in the present case, award was filed

in the court and the same was made rule of the court only on

28th January, 2000. Based on this decision of Supreme Court,

it was further submitted that when an award is passed and is

filed in the court, the same as such is not enforceable and the

amount awarded thereunder does not become recoverable till

the civil court puts a seal on it and makes it a rule by passing

a decree in terms thereof. The award when filed in the court,

is liable to be confirmed, remitted for reconsideration or even

set aside as per the provisions of the law, therefore, the

amount becomes payable only when the award is made rule

of the court. In the case of P. Mariyappa Gonder (supra),

the Supreme Court held that the liability becomes crystallized

when the trial court determined the amount of mesne profits

in pursuance to directions given by the Supreme Court and,

therefore, liability was accrued only when it was ascertained.

Similarly, in the case of Hindustan Housing and Land

Development Trust Limited (supra) also, Supreme Court

held that although the award was made by the Arbitrator in

July 1955 enhancing the compensation, the entire amount was

in dispute and in appeal filed by the State Government.

There was no absolute right to see the amount on stage and

therefore the enhanced compensation did not become income

arising or accruing to the assessee. Likewise, in the case of

Paragon Constructions (I) (P) Ltd. v. Commissioner of

Income Tax and Anr. (supra), this Court held that income

accrued to the assessee only on the date on which decision

was rendered by the Court. To the same effect was the

decision of the Kerala High Court in N. Sundareswaran

(supra) that in the absence of any material evidencing the

finalization of proceedings and quantification of damages

payable by the assessee, the claim for deduction of damages

payable cannot be allowed.

11. Referring to the aforesaid judgments, it comes to be an

established fact that there would be difference in the statutory

interest which is mandatorily payable by virtue of the

provisions of statute as in the case of Land Acquisition Act and

the interest which may be awarded by an arbitrator in relation

to any dispute between the two parties. It also comes out to

be an established fact that even if the assessee does not

accept the award, as given by the Arbitrator, and challenges

the same, the liability of the assessee still remains. But in

such a case, it may not be said with certainty as to the

amount of liability that may accrue to the assessee. In the

case of Central India Electric Supply Co.(supra), the

Supreme Court has held as under:

"The fact that the judgment and the decree of the Civil Court passed on the award was pending consideration in appeal before the High Court was also not a good ground to contend that the price was not due till the litigation with regard to the award was not over. In law the money payable under a decree becomes due for payment on the date of passing of the decree and nonetheless it is so even if the decree is appealed against and there is likelihood of the decree being set aside, modified or confirmed in appeal."

12. In the present case, it is true that the award was made by the

Arbitrator on 15th November, 1989 and the same was merged

with the award of the appellate authority made on 14th

September, 1990. This award of the Appellate Authority not

only modified the original award dated 15th November, 1989

by decreasing the amount of damages and increasing the rate

of interest from 10.5% to 11.25%, but made the same payable

from 13th February, 1981 to the date of award, i.e., 14th

September, 1990. Till such time the award was not made

enforceable and an application for enforcement was filed only

on 8th July, 1993. It is only with passing of the decree by this

Court on 28th January, 2000, that the award being made rule

of the court, became enforceable. By this decree of 28th

January, 2000, the assessee was also directed to pay interest

at the rate of 18% per annum from the date of award till date

of realization. In fact, it is from this order of the court that the

liability of the assessee to pay the interest at the rate of 18%

till the date of payment accrued. Prior to this, all that existed

was liability of damages and the liability to pay the quantified

interest accrued to the assessee only with the award

becoming rule of the court on 28th January, 2000. The liability

on account of interest prior to 28th January, 2000 was

uncertain inasmuch as it was not certain that court would

award interest and if so, at what rate. The court might or

might not have awarded interest at all or may not have even

made the award as rule of the court. All this was uncertain

prior to this order of the court and that being so, on the last

date of all the three assessment years in question, there was

no accrual of liability and, therefore, the assessee could not

claim deduction of the same for the assessment years 1996-

97, 1997-98 and 1998-99.

13. In fact the liability on account of interest was to be deductable

only when it gets crystallized into a certain liability and that

took place only on this court passing a decree and awarding

interest after the date of the award till the date of realization.

Thus, we are of the view that the liability did not crystallize in

the three assessment years 1996-97, 1997-98 and 1998-99,

but only came to be crystallized in the year 2000-2001, when

this court passed decree on 28th January, 2000 and, therefore,

the assessee could not claim deduction for the same in the

assessment years 1996-97, 1997-98 and 1998-99. We thus,

answer question in affirmative in favour of the Revenue and

against the assessee and consequently dismissed the appeal.

M.L.MEHTA (JUDGE)

A.K.SIKRI (JUDGE) JUNE 03, 2011 AK/Dev