Cit vs Dalmia Dairy Industries Ltd.
2011 Latest Caselaw 2431 Del

*                       THE HIGH COURT OF DELHI AT NEW DELHI

                                                Judgment Reserved on: 27.04.2011
%                                               Judgment Delivered on:06.05.2011

+                                       ITR 38/1995


CIT                                                             ...... APPELLANT

                                                Vs


DALMIA DAIRY INDUSTRIES LTD.                                    ..... RESPONDENT

Advocates who appeared in this case:

For the Appellant : Ms Prem Lata Bansal, Sr. Advocate with Mr Deepak Anand & Ms Ruchir Bhatia, Advocates For the Defendant: Mr V.P. Gupta, Mr Basant Kumar & Ms Priya Deep, Advocates.

CORAM :-

HON'BLE MR JUSTICE SANJAY KISHAN KAUL
HON'BLE MR JUSTICE RAJIV SHAKDHER

1.       Whether the Reporters of local papers may
         be allowed to see the judgment ?          Yes
2.       To be referred to Reporters or not ?      Yes
3.       Whether the judgment should be reported        Yes
         in the Digest ?

RAJIV SHAKDHER, J

1. The captioned reference has been preferred at the behest of the Revenue. The

reference pertains to assessment year 1977-78 relevant for previous year ending on

30.09.1976. The Income Tax Appellate Tribunal (hereinafter referred to as „Tribunal‟)

by order dated 20.05.1994 has referred to us for adjudication the following question of

law:

'Whether on the facts and in the circumstances of the case, the Tribunal is right in holding that surplus of Rs 58,32,100/- is not taxable in the assessee's total income?‟

2. The brief facts, in so far as they are relevant for adjudication of the

aforementioned question, which are required to be noted (as gleaned from the orders

passed by the authorities below), are as follows: The assessee entered into an agreement

dated 24.07.1962 (hereinafter referred to as „Agreement‟) with one Mr E. Manekji of

Karachi, Pakistan for sale of its two cement factories located at Karachi and at Dandot,

Distt. Jhelum. The agreement envisaged that the purchaser, i.e., Mr Manekji would make

the payment in cash or kind or both according to the procedure laid down.

2.1 In so far as the payment in kind was concerned the procedure laid down broadly

envisaged that Mr Manekji would supply and deliver cement to the assessee in its factory

in India equal to the value of the agreed purchase price. The supply of cement was to

commence immediately after the receipt of instructions from the assessee for despatch of

the same. The supplies had to be completed over a period of 3 years.

2.2 As is obvious the values of supplies made by Mr Manekji were required to be

adjusted against the purchase price. In addition to the annual deliveries, the purchaser

was also required to supply and deliver to the assessee a further quantum of cement in

lieu of interest at the rate of 6% per annum on a weekly diminishing balance of the

purchase price.

2.3 To secure performance of its obligations under the said agreement, the purchaser

was required to furnish a bank guarantee from a scheduled bank having its office and

business in India having approval of the assessee.

2.4 For the purposes of adjudication of the present reference it is not necessary to

state in detail the other provisions of the agreement except to note that the purchaser did

furnish a bank guarantee of the National Bank of Pakistan (in short „NBP‟) for securing

the supply of the agreed annual minimum quantum of cement to the assessee. The said

guarantee was furnished on 30.09.1964.

2.5 It may also be noted that the benefits of the agreement, which enured in favour of

Mr Manekji, were passed on to a private limited company by the name of Pakistani

Progressive Cement Industries Ltd. (in short „PPCIL‟) of which he was appointed the

Managing Director. Consequent thereto, on the request of Mr Manekji a sale deed in

respect of aforementioned factories was executed by the assessee on 30.09.1964 in favour

of PPCIL.

2.6. It so happened, that the terms and conditions of the said agreement were not

honoured by PPCIL. The reason being the 1965 and 1971 wars between India and

Pakistan. With this the Government of Pakistan took recourse to emergency legislation,

whereby amongst other prohibitive measures, not only orders were issued restraining the

payment of dues to Indian nationals but also exports of cement to India was banned.

2.7 Consequently, both PPCIL and NBP refused to honour their obligation under the

agreement. Being aggrieved the assessee referred its dispute for arbitration to the

International Chamber of Commerce (in short „ICC‟), in terms of an arbitration clause,

contained in the agreement.

2.8 Upon conclusion of the arbitration proceedings, two (2) awards dated 01.03.1971

and 03.03.1972, were passed in favour of the assessee. However, the arbitration awards

were made subject matter of further legal proceedings. Proceedings were taken out both

in the High Court at London as well as in the House of Lords. By virtue of the judgments

passed by the High Court and the House of Lords on 04.05.1977 and 20.07.1977

respectively, the arbitration awards were upheld. The litigation on merits thus came to an

end finally on 20.07.1977.

2.9. It is pertinent to note that, in the interregnum, NBP pursuant to the awards, had

paid on 31.05.1976 to the assessee a total sum of £ 35,49,634/- towards sale

consideration (qua the aforesaid factories), costs and interest. It may be noted that the

interest paid spanned a period commencing from 01.10.1962 and ending on 03.05.1976.

3. It appears that the said sum was released to the assessee on a bank guarantee

being furnished by the Barclays Bank in favour of NBP. The Barclays Bank, in turn, was

secured by a counter bank guarantee furnished in its favour by the London branch of

Bank of India. The assessee in order to give comfort to Bank of India kept the amount it

had received from NBP, in satisfaction of the award, with the London branch of Bank of

India, in the form of an interest bearing fixed deposit. The fixed deposit was made for an

initial period of 18 months which ended on 11.07.1977.

3.1 It would be important to note at this stage, as recorded in the Assessing Officer‟s

order, that by a communication dated 22.04.1980, the assessee was called upon to furnish

the terms and conditions on which the said fixed deposit was made with the Bank of

India. In response to the same, the assessee appears to have simply stated, vide letter

dated 25.04.1980, that the fixed deposit carried an interest at the rate of 11.5% (we will

presume that it is a simple rate of interest and that too per annum, as no other details are

furnished), for a period of 18 months, and that if the assessee were to liquidate the fixed

deposit it would be penalized. Importantly, the Assessing officer notes in his order that

the actual terms and conditions of the fixed deposit were, however, not furnished by the

assessee.

3.2 It is also pertinent to note that the revenue had issued show cause notice under

Section 143(3) of the Income Tax Act, 1961 (in short „I.T. Act‟) on 09.08.1979 which

was followed by another notice on 14.09.1979, whereby it proposed to apply Rule 115 of

the Income Tax Rules, 1962 (in short „I.T. Rules‟), as they stood prior to the amendment

carried out on 01.11.1977, for the purposes of converting interest income received by the

assessee in foreign currency from NBP. The application of the unamended rule to it, was

challenged by the assessee, by way of a writ petition being CWP No. 1278/1978. By

order dated 11.02.1980 this court evidently held that the revenue could not apply

provisions of unamended Rule 115, to the assessee.

3.3 The Assessing Officer in the background of this development, which occurred

during the course of assessment, thus applied the amended Rule 115 while, calculating

the "surplus", which according to him accrued on the principal sum out of the money

received from BNP, on account of fluctuation in the rate of foreign exchange. It may be

noticed that in the assessment order the Assessing Officer has entered a caveat that, the

amended Rule 115 was being applied subject to the revenue‟s right to carry the matter in

appeal to the Supreme Court. At this juncture we may note that both counsels, have not

been able to inform us, as to whether, as a matter of fact, the judgment of this court dated

11.02.1980 passed in CWP 1278/1978 was carried in appeal to the Supreme Court.

3.4. Be that as it may, the Assessing Officer came to the conclusion that a surplus, in

the sum of Rs 58,32,100/- had accrued to the assessee which according to him had to be

brought to tax. The calculation in that regard as contained in the assessment order is as

follows:

"principal amount under the Agreement dated 24.7.62 as fixed by Arbitrator: £ 18,21,721* Value of this amount in Indian rupees by applying Amended rule 115 of the IT Rules, 1962: Rs 2,66,51,778/-

        Less principal being sale price of the two cement
        Factories as per books:                                      Rs 2,08,19,678/-
                                                                     Rs 58,32,100/-"

(* It may be noted that £ 18,21,721/- is the principal amount awarded out of the total sum of £ 35,49,634/- awarded to assessee by the arbitrators).

3.5. To complete the narrative, it appears that the assessee on maturity of the fixed

deposit i.e., on 07.11.1977, received a sum of £ 41,65,860/-. Since the assessee was

offered a better rate of interest, the said amount was once again deposited in the Bank of

America and Citi Bank. The money was finally repatriated to India only on 15.11.1978.

3.6 The Assessing Officer in coming to the conclusion that the amounts were taxable

inter alia returned broadly the following findings of fact :

(i) the amount received by the assessee on 03.05.1976 became its „absolute property‟

subject to the assessee furnishing a bank guarantee;

(ii) the receipt of the amount could not be linked to the obligation of the assessee to

furnish a bank guarantee;

(iii) the assessee was at liberty to remit the amount to India after the order of the High

Court or in any case after the judgment of the House of Lords delivered on 20.07.1977;

(iv) the amounts which were initially kept in fixed deposit for a period of 18 months,

on maturity, were invested once again with other banks and were finally remitted to India

only on 15.11.1978;

(v). based on the above it cannot be said that the funds were kept in London out of

compulsion;

(vi) furthermore, the assessee, therefore, could not link the bank guarantee furnished

in favour of NBP to the money received by it. The assessee could have remitted the

money to India at least immediately after a judgment was delivered by the House of lords

on 20.07.1977; and

(vii) lastly, the argument of the assessee that the funds were blocked or immobilized

could not be accepted.

3.6. It is pertinent to note that it is in this background that the Assessing Officer

observed as follows: "It may be true that funds kept by assessee in London were not

for any business purpose but in the light of the above discussion, it can also not be

admitted that funds were kept in London on any capital account."

3.7 In his order, the Assessing Officer also noticed another aspect, which was, that the

assessee was apprehensive that if, the said money was remitted to India it may be

attached by the revenue towards tax liability on account of interest accrued to it. In this

respect some reference has been made to proceedings in the Calcutta High Court and the

Tribunal pertaining to assessment year 1973-74. These aspects, however, do not concern

us and therefore we are not elucidating upon them. Suffice it to say that the Assessing

Officer thus concluded, that the surplus on account of the fluctuation in the rate of

exchange, ought to be added to the income of the assessee being in the nature of revenue.

3.8. Being aggrieved, the assessee carried the matter in appeal to the Commissioner of

Income Tax (Appeals) [in short „CIT(A)‟]. The CIT(A) by order dated 22.05.1982

reversed the order passed by the Assessing Officer. The material observations in regard

to the question in issue are made in paragraphs 21(a) to (c) and 22(a) to (b) of his order.

3.9. Against the order of the CIT(A) appeals to the Tribunal were preferred both by

the revenue as well as the assessee. By the impugned judgment, the Tribunal dismissed

the appeal of the revenue and partially allowed the assessee‟s appeal. What is relevant

for our purposes is that in respect of the question at hand, the revenue‟s appeal was

dismissed and the order of the CIT(A) in that regard was confirmed. The Tribunal has

dealt with the said aspect in paragraph 52 of its judgment. Suffice it to say that the

Tribunal has affirmed the order of the CIT(A) by relying adverbatim on the observations

contained in CIT(A)‟s order to which reference has been made by us hereinabove. The

revenue being aggrieved, as noticed above, has preferred the captioned reference.

4. Before us the arguments on behalf of revenue have been addressed by Ms Bansal,

senior counsel assisted by Mr Deepak Anand, while on behalf of the assessee

submissions were made by Mr V.P. Gupta.

4.1 Ms Bansal submitted that both the CIT(A) as well as the Tribunal had committed

two errors. First, by holding that the principal amount £ 18,21,721/- was held in London

on capital account. Second, (which according to her flowed from the first error) the

application of the judgment of the Supreme Court in the case of Satluj Cotton Mills Ltd.

vs CIT, West Bengal (1979) 116 ITR 1 to the present case. Ms Bansal laid stress on the

fact that the assessee‟s stand that it was forced to keep the amount in a bank account in

London due to pending litigation had been found to be incorrect by the Assessing Officer.

In this regard Ms Bansal relied upon the order passed by the Assessing Officer. She

further submitted that the reference to the purported contradiction in the findings of the

assessing officer by the CIT(A) in his order would be found to be without basis and

completely erroneous if the observations of the Assessing Officer are read in continuum

and in totality.

4.2 De hors the above, Ms Bansal further submitted, in the alternative, that in view of

the fact that the litigation had finally culminated on 20.07.1977, i.e., on a day which fell

in the subsequent assessment year (and not in the assessment year under consideration),

the issue as to whether the surplus in the sum of Rs.58,32,100/- could be brought to tax

ought to have taken up for consideration only in the succeeding assessment years. To this

extent Ms Bansal conceded that the case may have to be remanded to the Tribunal for

passing appropriate orders in the matter.

4.3. On the other hand Mr Gupta relied upon the judgment of the CIT(A) and the

Tribunal to contend that no interference was called for. More specifically, Mr. Gupta

submitted that both CIT (A) and the Tribunal had set aside the addition of surplus sum on

three grounds: First, that the principal sum of £ 18,21,721/- was kept on capital account

i.e., was a capital asset. Second, the money lay unutilized in a fixed deposit and hence,

was not used for business purposes. Third, that profit or loss would arise on account of

appreciation or depreciation in the value of foreign currency only when, there was actual

conversion of foreign currency. Since no such conversion took place, the surplus

crystallized was a notional sum, which could not be brought to tax in the assessment year

in issue. In rebuttal to the alternative submission of the learned counsel for the revenue,

Mr. Gupta contended that since this court was called upon only to answer the question of

law as framed, it could not issue a direction of the nature suggested by the revenue.

4.4 In support of his submissions, Mr Gupta relied upon the following judgments :-

CIT vs Tata Locomotive & Engg. Co. Ltd. (1966) 60 ITR 405; CIT vs Canara Bank Ltd (1967) 63 ITR 328; Liquidator of Mahamudabad Properties (P) Ltd vs CIT (1980) 124 ITR 31 and CIT vs J.V. Gupta & Sons (HUF) (2000) 241 ITR 861.

5. Having heard the learned counsel for the parties and perused the record what

emerges from the record is as follows:

5.1 The Tribunal in coming to the conclusion, which it did, has based it on deductions

all of which according to us did not entirely flow from the record. The fallacy of the

Tribunal in this regard is demonstrable from the following:

5.2 First, that the principal amount of £ 18,21,721/- was received by the assessee on

capital account, that is, was a capital asset. Since it held so, it went on to conclude based

on the principle enunciated in Satluj Cotton Mills (supra) that any appreciation or

depreciation in the value of currency had to take the same colour. Therefore, the profit

earned by the assessee, that is, a sum of Rs 58,32,100/- could not be brought to tax.

5.3 The second limb of its deductive reasoning was that since the principal sum

remained "unutilized" in the form of a fixed deposit, in the bank, in London it was not

used in the assessee‟s business and hence, necessarily retained the character of a capital

asset.

5.4 Lastly, the Tribunal held that since there was no conversion of foreign currency,

in the assessment year in issue, notional profit could not be brought to tax.

6. In so far as the first two reasons supplied by the Tribunal are concerned, in our

view, both are flawed.

6.1. As noticed above by us hereinabove, the Assessing Officer has categorically

found that on receipt of money by the assessee on 03.05.1976, it was required to furnish a

security to the NBP. This situation obtained evidently as a challenge had been laid to the

award in the High Court of London. We may note that none of the parties have placed on

record the orders, if any, of either the High Court at London or the House of Lords in that

regard. Even if one were to assume that the money was released on a direction of the

court, as a condition precedent, for the release of money in its favour, it cannot be said

nor has it been shown that the fixed deposit was created at the behest of any direction of

the English Courts. This was, as found by the Assessing Officer, perhaps a commercial

call that the assessee had taken to secure the interest of the Bank of India which had

furnished a counter guarantee in favour of Barclays Bank, who, in turn, as noticed by us,

had furnished a guarantee in favour of NBP. Therefore, according to us, the Assessing

Officer rightly found that it was not as if the monies received under the award had been

blocked or immobilized and hence, could not be used for business purposes. Thus, the

argument of the assessee which, found favour with the CIT(A) and the Tribunal that,

since these were unutilized funds lying in fixed deposit they could not have been used for

the purposes of business; does not find favour with us. It is precisely for this reason that

we also find it difficult to accept the reasoning of both the Tribunal and the CIT(A) that £

18,21,721/- was held by the assessee on capital account. If this reasoning were to fail, as

it does, then the judgment of the Supreme Court in Satluj Cotton Mills (supra) would

have no application.

6.2 The details of the transaction, as noticed above by us, based on the records of the

case, would clearly establish that on furnishing a bank guarantee in favour of NBP the

assessee was free to deal with the money any which way. The fact, however, remains

that there was uncertainity as to whether or not the assessee would receive any amount,

i.e., whether or not the awards would be upheld and also as regards the exact extent to

which the award would be sustained, i.e., the quantum of money that would be awarded

to the assessee. The reasoning supplied both by the Tribunal as well as the CIT(A) that

because a fixed deposit had been created with the London branch of Bank of India, the

amount was held in capital account is not borne out from the evidence on record. The

Assessing Officer‟s findings in this regard that the amount was not "immobilized" appear

to be correct.

7. This brings us to the last limb of the Tribunal‟s reasoning: which is, that the

profits, if any, could said to have arisen in favour of the assessee, only if, there was actual

conversion of the monies received by the assessee is a principle with which, we agree.

However, it is also been found as a fact that on the fixed deposit maturing the assessee

received a sum equivalent to £ 41,65,860/- which was reinvested, and thereafter, remitted

to India on 15.11.1978. Therefore, it is obvious that a conversion did take place. If that

were so, whether or not profit or loss accrued to the assessee and to what extent, would

depend upon whether appreciation or depreciation of foreign currency took place and to

what extent. Noticeably relevant material as regards this aspect is not on record.

However, what is certain is that consequent profit or loss on account of appreciation or

depreciation in the value of currency could not have arisen in the assessment year in

question. Thus, it would have to be found in favour of assessee that no profit arose in its

favour in the assessment year in question.

7.1 It is thus obvious that the issue of taxability did not arise in the year in issue.

However, whether it arose in the subsequent assessment year is an aspect which the

Tribunal will have to examine and if necessary issue appropriate directions in that regard.

7.2 Mr Gupta learned counsel for the assessee when asked for details as to what

happened in the subsequent assessment years, has not been able to supply us the

information. In fact we had adjourned the matter on 26.04.2011 to ascertain the details

with respect to the same. Mr Gupta has reported his failure to give us the necessary

information. In these circumstances we are of the view that even though we are required

to answer the question of law as framed, there is no impediment in our directing the

Tribunal to do the needful in the matter. Whether a court exercising powers under

Section 256 of the I.T. Act, it could do so in a reference is in our view answered by the

decision of this court in the case of Sushil Ansal vs CIT (2002) 254 ITR 42. The matter

is thus remanded to the Tribunal, to ascertain as to whether the assessee, on remittance of

the proceeds to India earned any profit thereon? If so, to what extent? This direction is

necessary as the question of law framed not only calls upon us to decide the principle but

also the quantum. The surplus sum has been specifically indicated in the question itself.

As noticed above by us, neither Mr Gupta nor Ms Bansal were able to enlighten us as to

whether a special leave petition was preferred by the revenue against the order dated

11.02.1980 passed by this court in CWP 1278/1978. There are thus several

imponderables. The Tribunal shall in this regard pass an appropriate orders including, if

it is felt necessary, remand the matter to the Assessing Officer.

RAJIV SHAKDHER, J

SANJAY KISHAN KAUL,J

MAY 06, 2011 kk