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Sarabhai Chemicals (P.) Ltd. Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Ahmedabad
Decided On
Judge
Reported in(1985)13ITD653(Ahd.)
AppellantSarabhai Chemicals (P.) Ltd.
Respondentincome-tax Officer
Excerpt:
1. this set of two appeals which relate to the assessment years 1979-80 and 1980-81 are filed by the assessee. as both these appeals are inter-connected and involve common grounds they are taken up together and disposed of by this combined order for the sake of convenience.2. sarabhai chemicals (p.) ltd., the assessee (scpl), is a limited company which filed its return on 29-6-1979 declaring a total income of rs. 772 under the head 'profits and gains of business or profession' for the assessment year 1979-80. for the assessment year 1980-81 it filed its return on 27-6-1980 declaring a loss of rs. 17,345. the ito for the reasons set out in his order determined the total income for the assessment year 1979-80 at rs. 68,99,202 and that for the assessment year 1980-81 at rs. 55,70,407. it.....
Judgment:
1. This set of two appeals which relate to the assessment years 1979-80 and 1980-81 are filed by the assessee. As both these appeals are inter-connected and involve common grounds they are taken up together and disposed of by this combined order for the sake of convenience.

2. Sarabhai Chemicals (P.) Ltd., the assessee (SCPL), is a limited company which filed its return on 29-6-1979 declaring a total income of Rs. 772 under the head 'Profits and gains of business or profession' for the assessment year 1979-80. For the assessment year 1980-81 it filed its return on 27-6-1980 declaring a loss of Rs. 17,345. The ITO for the reasons set out in his order determined the total income for the assessment year 1979-80 at Rs. 68,99,202 and that for the assessment year 1980-81 at Rs. 55,70,407. It follows mercantile system of accounting and the previous year for the assessment year 1979-80 had ended on 30-6-1978 and that for the assessment year 1980-81 on 30-6-1979. With effect from 28-2-1977 the industrial undertaking of SCPL and the business activities of Sarabhai Common Services Division which was a unit of Sarabhai Chemicals were taken over by Elscope (P.) Ltd. (EPL) which in turn, after a short time transferred these undertakings to Ambalal Sarabhai Enterprises (P.) Ltd. (ASEPL). The agreement for sale was made on 28-2-1977 and the deed of assignment was executed on 28-6-1977. It was explained to the ITO that the income earning apparatus of the company has been transferred and, therefore, the only source of income with the assessee was interest from Industrial Development Corporation (IDC). The transfer of the industrial undertaking and the business of Sarabhai Chemicals Division and Sarabhai Common Services Division to EPL was effected as a going concern with all assets, property, rights and benefits thereof including the benefit of goodwill of the said business and the liabilities, duties and obligations relating to or arising out of the said business. The transfer of assets included the transfer of entire plant and machinery, other equipments, stock-in-trade, stock-in-process, finished goods, raw and packing materials, spares and other articles, licences and quotas, formulae, processed data, information concerning industrial, scientific and commercial knowledge and all other tangible and intangible assets. The consideration was determined on the basis of book value of assets as on 28-2-1977 as reduced by all current and other liabilities and provisions as on 28-2-1977 plus an amount of Rs. 10.30 crores as value of goodwill of both the divisions of the company. The ITO made detailed enquiries in regard to the aforesaid transaction. It was clarified on behalf of the assessee that immovable properties of SCPL were transferred under a duly executed registered document only on 2-2-1978. It was also stated that the assessee had not received any interest from EPL to whom its undertaking was transferred on 28-2-1977.

3. As a part of agreement of transfer of its industrial undertaking and the business to EPL, the latter had to make payment of the purchase consideration to the assessee as indicated hereinafter : (a) Rs. 49,00,000 as earnest money payable on or before 28-2-1977. (b) Rs. 4,41,00,000 to be set off, adjusted and applied for and on behalf of the company to credit and pay in full (c) Rs. 2,00,00,000 as and when demanded by the company and carrying simple interest at the rate equal to the rate of (d) Rs. 4,54,18,760.89 payable in eight equal annual instalments on the 1st October of every year beginning from 1-10-19 The ITO observed that the assessee was entitled to interest at the rate equal to the rate of interest which the company paid to its bankers on Rs. 2 crores and at the rate of 11 per cent on a sum of Rs. 4,54,18,760. A further scrutiny of balance sheet revealed that the assessee had advanced a sum of Rs. 7,45,000 to EPL. There were also advances of certain amounts to Ambalal Sarabhai Chemicals Ltd. The balance at the end of the year stood at Rs. 1,84,885. The assessee had also advanced a sum of Rs. 33,64,294 to Shahibag Entrepreneurs (P.) Ltd.--another company of the same group. The ITO observed that in respect of these advances no interest was shown as received or receivable. The ITO, therefore, called upon the assessee to show cause as to why firstly income from immovable properties which remained to be transferred by registered deed should not be taxed under Section 22 of the Income-tax Act, 1961 ('the Act'), from the beginning of the accounting period till the date of registration. Secondly, why interest on accrual basis be not taxed on the amounts due from EPL as outstanding purchase consideration and on advances made to other concerns of the assessee group. The ITO then examined the assessee's explanation in regard to the above objections in detail and determined the income from property at Rs. 2,69,194 as indicated in his order. As regards the other point the ITO observed that the asseisee was de facto an investment company. He examined the balance sheet of the assessee and analysed the position of the assets as indicated in para 9 of his order. He then referred to the account of EPL and found that no interest was charged on the outstanding balance of purchase consideration. The assessee's explanation was that according to the revised mode of payment agreed to between the assessee and EPL interest was chargeable only with effect from 1-7-1979 and as such no interest on outstanding amount for the year ended 30-6-1978 was charged or chargeable. In support of this claim the assessee relied on the minutes of the meeting of the board of directors held on 30-6-1978. As regards the interest due on the advance of Rs. 7.45 lakhs as aforesaid, the assessee's claim was that the advance was made for the purposes of business and such advance having been made to a wholly owned subsidiary no interest was charged and that no interest was claimed by the assessee as deductible from any other income. The same was true of the advance made to Shahibag Entrepreneurs Ltd. as also in regard to the advance made to Sarabhai Chemicals Division of ASEPL. The mainstay of the assessee's contention was that interest cannot be taxed on a hypothetical basis even though under mercantile system of accounting interest was taxable on the basis of accrual. It was not a general proposition of law that in each and every case where an assessee followed mercantile system of accounting the interest must be charged on accrual basis. There are well recognised exceptions thereto and in support of this contention various decisions were relied upon (to which we shall refer a little later). The ITO did not accept this contention.

He held thus : In this view of the matter I hold that the loan in question being interest bearing loans and since the assessee-company had relinquished the interest without any commercial consideration and since the two companies were intrinsically related it is a case of collusion to evade tax liabilities and, therefore, interest on accrual basis is taxable in the hands of the assessee. The above observations would, mutatis mutandis, apply to interest chargeable on other advances as well. The assessee was asked to give computation of the interest but the assessee has not given such a working. The interest income is, accordingly, estimated on the basis of the data made available. Interest is calculated at 15 per cent on product method on all advances except for a part of the deferred sale consideration. As regards interest on the remaining part of deferred sale consideration interest is calculated at 11 per cent on Rs. 4,54,18,760 as per the original agreement.

In the light of the above discussion the ITO determined the total income of the assessee at Rs. 75,01,464 in the draft order which was forwarded to the IAC as required under the provisions of Section 144B of the Act.

4. The IAC after hearing the assessee upheld the finding of the ITO in regard to the inclusion of income from property. He, however, deleted an addition of Rs. 6,02,260 in regard to the estimate of interest as proposed by the ITO, on outstanding advances made to various parties other than EPL as stated above. He thus directed the ITO to finalise the assessment with the said modification.

5. For the assessment year 1980-81 following his decision for the assessment year 1979-80 interest of Rs. 57,17,750 on accrual basis was sought to be included in the income as disclosed by the assessee. The ITO, thus, prepared a draft order on the above lines and forwarded the same for approval of the IAC under Section 144B. The IAC in light of the mistake in computation reduced the said amount to Rs. 55,67,715 and in substance approved the addition as proposed by the ITO, as accrued interest on deferred sale consideration. It may be pointed out that in coming to the above conclusion, the ITO rejected the contention of the assessee on the ground that in view of the new agreement made on the eve of the accounting year relevant to the assessment year 1980-81 there was no accrual of income by way of interest.

6. Being aggrieved the assessee carried the matter in appeal before the Commissioner (Appeals) for both the years who approached the controversy from a slightly different angle, viz., on principle of lifting of corporate veil. In this connection he mentioned that in the first place in the original agreement dated 28-2-1977 there was no specific stipulation of receiving interest on unpaid sale price.

Secondly, in the agreement recorded within four days thereafter, i.e., on 4-3-1977, it was stated in unambiguous terms that the proposal relating to payment of interest was left out due to oversight and accident. Thus, the main purpose, if not the sole purpose, of the agreement dated 4-3-1977 was to correct the mistake of omitting to mention the stipulation about interest receivable on unpaid sale price.

Thirdly, the above position held good, i.e., relating to charge of interest till the date of assignment was made on 28-6-1977. Thus, in the said deed of assignment the position relating to levy of interest, was reiterated. Fourthly, for a period of 15 months, i.e., from 4-3-1977 to 15-6-1978 the stipulation relating to levy of interest held the field unchallenged. Fifthly, on 15-6-1978, the buyer company made a proposal for amendment to which the assessee-company ungrudgingly agreed and as a result gave up interest exceeding Rs. 1.20 crores for the two years under consideration. Sixthly, the reason for the above concession was on the ground of commercial expediency in the first place and offer of the buyer company to furnish the security in the second. And lastly, the business expediency which prompted the assessee to give up the said interest was not spelt out in fact conspicuous by its absence. These facts, the Commissioner (Appeals) observed, made it abundantly clear that the agreements dated 28-2-1977, 4-3-1977 and 28-6-1977 did not mention about the giving up of interest on the twin grounds of business expediency and furnishing of security. The Commissioner (Appeals), therefore, examined the question relating to the security as offered by EPL in great detail and in this connection he pressed into service the above-referred principle of lifting of corporate veil. Prima facie the assessee's claim was that its wholly owned subsidiary was offering security for debts payable to its holding company, viz., the assessee. In this connection he referred to the decision of the House of Lords in Solomon v. Solomon & Co, Ltd. [1897] ASC 22-51. He also relied on the commentary of Palmer and Gower as also the commentary of the learned author A. Ramaiya in his treatise on the Companies Act, 1956 styled Guide to the Companies Act. He then referred to the decision in the case of CIT v. Sri Meenakshi Mills Ltd. [1967] 63 1TR 609 (SC) as also the decision in the case of Juggilal Kamlapat v. CIT [1969] 73 ITR 702 (SC) as also the decision of their Lordships of the Gujarat High Court in the case of Wood Polymer Ltd., In re.

[1977] 109 ITR 177, Imperial Chemical Industries Ltd. v. CWT [1979] 119 ITR 46 (Cal.) and M.N. Kanagasabai Chettiar v. CIT [1970] 75 ITR 672 (Mad.). These decisions, according to him, support the principle of lifting of corporate veil as applicable in India. According to the Commissioner (Appeals) that one of the circumstances in which the said principle could be applied related to transactions between subsidiary and wholly owned companies as well as taxation. Both these factors, according to the Commissioner (Appeals), were present in the instant case. The mainstay of the Commissioner (Appeals)'s findings in this regard were firstly the taxable income of the assessee was sought to be reduced by Rs. 1.20 crores over a period of two years by granting concession in the matter of payment of interest in favour of the holding company by the subsidiary company. In this connection he pointed out that there was sudden spurt in the share capital of EPL from Rs. 10 lakhs on 30-6-1976 to Rs. 500 lakhs on 30-6-1977, i.e., fifty times in one year. Out of the total increase of 490 lakhs a sum of Rs. 441 lakhs was to be adjusted against the purchase price of industrial company itself. In effect the total price payable was Rs. 1,144 lakhs and after making adjustment of Rs. 441 lakhs as aforesaid the paid-up capital would be Rs. 59 lakhs only and the net purchase price would be 703 lakhs, i.e., about 12 times. There was also sudden spurt in the gross assets of EPL which shot up to Rs. 3,500 lakhs from mere Rs. 35 lakhs earlier. EPL after effecting the above purchase sold off the entire undertaking to its wholly owned subsidiary ASEPL. He then referred to the gross assets and the profits of EPL like the spurt in the value of gross assets there was sudden spurt in the profit for the period ending 30-6-1977 which was reduced to a negligible figure in the subsequent years. These transactions, therefore, could not be styled as normal business transactions, therefore, had to be viewed with caution and circumspection. These facts alone would clearly belie the assessee's submission of giving up of interest on the ground of commercial expediency or business consideration. He then referred to the security which was offered by EPL which was receivable by it from ASEPL and came to the conclusion that there was no real consideration involved in giving up such a large amount of interest which had otherwise accrued to the assessee. He then referred to various decisions which were relied upon by the assessee (at page 18 of his order) and observed : firstly, that in all these decisions the transactions were at arms length and the principle of lifting of corporate veil was not applicable, secondly giving up of income in the cases cited was reasonable and realistic while in the instant case such a large chunk of income, i.e., Rs. 120 lakhs was sought to be given up.

Thirdly, the interest was forgone for valid reasons like bad financial condition of the company or the firm, etc., such a situation was absent in the instant case. Lastly, in the above-cited cases there were no written agreements or in case the written agreements were made there was a clear stipulation about the intention to charge interest, etc.

These decisions according to the Commissioner (Appeals), therefore, were not at all applicable. He, thus, concluded that the interest was clearly receivable by the assessee in accordance with the agreement dated 4-3-1977 and was rightly brought to tax for the assessment year 1979-80. For the same reasons he upheld the addition of interest for the assessment year 1980-81.

7. Being aggrieved the assessee has come up in appeal before us for both the years. Shri S.P. Mehta, the learned Counsel for the assessee, at the outset referred to the sale made to the subsidiary EPL on 28-2-1977 which was made effective from 1-3-1977. He next pointed out that a supplementary agreement was entered into on 4-3-1977 in order to set right an omission which was noticed qua original agreement of 28-2-1977. Thereafter there is a deed of assignment under which the entire undertaking was conveyed to EPL and the conveyance was made on 2-2-1978. On 15-6-1978 a proposal was made by EPL for a modification of terms of payment (to which we shall refer to a little later) which was duly accepted by the board of directors of the assessee-company by its resolution dated 30-6-1978 and it was in terms of these arrangements that the original agreement stood revised or so to say superseded and the interest which would have accrued under the original agreement as modified by a later agreement dated 4-3-1977 stood waived. Shri Mehta then submitted that as a matter of fact the vendee company, namely, EPL in its turn had transferred the said undertaking along with the other industrial undertakings to ASEPL on 1-7-1977. Shri Mehta then submitted that the original agreement was accepted as a valid agreement and, therefore, the modification to the terms of the original agreement must be treated as valid and operative. It was not proper, therefore, for the authorities below to hold that the agreement was void. It was equally not proper on the part of the authorities below to hold that the transaction was a sham one. In fact the revised arrangement was made with a view to conserve the resources of the company. No undue benefit was obtained by the assessee by the said waiver as in fact the ultimate benefit has flown to a public limited company. The theory of 'lifting of veil' had no application to the facts of the case. In other words, according to Shri Mehta, once the original agreement was accepted as genuine (that is agreement dated 28-2-1977) and the supplementary agreement dated 4-3-1977 must also be held to be valid.

The third agreement relating to waiver of interest is not disputed as non-genuine but what is sought to be challenged is the ultimate effect of such arrangements. Thus, the revenue's grievance is that by making rearrangement as aforesaid in regard to the payments of instalments by the purchaser, the vendor had given up its right to substantial amount of interest which cannot be treated as an act of prudence or motivated by commercial expediency. Shri Mehta was at pains to state that the entire transaction had to be seen from an overall angle. When an industrial undertaking valued at about more than Rs. 1,144 lakhs was sought to be transferred the effect in terms of interest would also be substantial in terms of money. From an overall angle it cannot be said to be so substantial as to doubt the motive of the asses-see about the desirability of the transaction in question. The main reason which has persuaded the assessee-company to enter into the revised arrangement was the substantial security being offered by EPL. The transactions were effectively entered into between the holding company and the subsidiary company and the distinction between the two has been well recognised and if the lifting of veil principle was applied it would amount to payment to self and, therefore, effectively, from this angle no income could be said to have accrued to the assessee. Therefore, the judgments referred to in this connection by the Commissioner (Appeals) had no application. It must be remembered, Shri Mehta argued, that the assessee maintained mercantile system of accounting and the income was sought to be taxed on the basis of accrual or notional basis. There was no effective receipt of income. Therefore, the entire question had to be approached from the principle of real income as laid down by the Supreme Court in the case of CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144. Shri Mehta then referred to a decision in CIT v. Calcutta Discount Co. Ltd. [1973] 91 ITR 8 (SC) and submitted that if an assessee were to so arrange its affairs to reduce its tax burden such arrangement cannot be discredited or discarded. In other words, the fact that the assessee has been able to make the arrangement so as to reduce its tax burden should be considered as a measure commercially expedient and no adverse inference was called for resulting in saddling of a substantial tax liability of the assessee.

8. Shri B.R. Shah, the learned standing counsel, submitted that there was no dispute about the main agreement which was entered into on 28-2-1977. Thereafter a supplemental agreement was entered into on 4-3-1977 under which it was decided to charge interest on unpaid purchase price in the manner stipulated in the agreement. This supplemental agreement was entered into with a view to correct an omission which had crept in the original agreement. Thus, the supplemental agreement was part and parcel of the original agreement and was effective from the same date as the original agreement. A deed of assignment was made on 28-6-1977 and a deed of conveyance was made on 2-2-1978. While on one hand the transactions relating to transfer of the undertaking were covered by the above agreements there was no deed by the vendee in regard to the alleged waiver of interest which is said to have taken place by the subsequent arrangement. A letter written by the vendee on 15-6-1978 was confirmed by resolution on 30-6-1978 under which revised arrangement was said to have been made and the said arrangement, according to the assessee, had superseded the agreements entered into by the assessee as aforesaid. The above letter of the vendee and the resolution by the assessee did not amount to modification of the terms of the original agreement. At the most the same could be described as a proposal and counter proposal which could not be treated as an understanding at law. The proposal and the counter proposal as aforesaid only made unsecured debt a secured one but this has resulted in waiver, according to the assessee, of substantial amount of interest which had accrued to it. In other words, Shri Shah's submission was that the subsequent arrangement said to have been made by the assessee on the proposal made by the vendor did not supersede the original agreement or understanding and, therefore, the arrangement reached originally under the two agreements dated 28-2-1977 and 4-3-1977 still held the field. Therefore, the contention of the assessee founded on the ground that there was waiver of interest had no basis at all.

9. The learned standing counsel then submitted in the alternative that in the transactions of this type the substance of the matter must be looked into. Assuming for the sake of arguments that the later arrangement reached by the assessee with the vendor was effective, it amounted relinquishment or remission of the interest which had already accrued to the assessee and the subsequent understanding was reached according to the assessee on the plea that the vendee had offered security of a debt which was hitherto unsecured. It must be remembered, Shri Shah submitted, that the supplemental agreement was not a novatio but designed to rectify the original agreement. No new rights or obligations were created under the revised arrangement which is said to have taken place by the vendor's letter dated 15-6-1978 and the resolution of the assessee on 30-6-1978. He then referred to the fact that, according to the original agreement, a sum of Rs. 6.55 crores was payable in eight equal instalments beginning from 1-10-1979 in respect of which a charge was created by a deed of assignment dated 28-6-1977.

The interest would, therefore, run from 1-3-1977. The interest thus having been accrued from the said date, the only ground on which the assessee could conceivably claim relief was on the ground of remission in favour of the vendee based on principle of commercial expediency which prompted the assessee to give up such a large claim of interest.

The benefit said to have been received by the assessee in lieu of waiver of interest was that the unsecured debt had become secured. This fact was hardly sufficient to support the claim of the assessee on the ground of commercial expediency. It must be remembered that there was a close relationship between the assessee and EPL, the former being a holding company and the latter wholly owned subsidiary company. ASEPL again is the subsidiary of the first vendee. Now if the substance of the transaction was looked at in 1977 the assessee vendor had transferred an undertaking to EPL with subscribed capital of Rs. 10 lakhs only. The net value of undertaking was Rs. 11,44,10,253.

Secondly, EPL was incurring losses. That apart, originally no security was thought off advisable because EPL, as pointed out earlier, was a wholly owned subsidiary company. Now if the transaction was looked at from purely a commercial angle, no prudent man would transfer his undertaking to a company with almost negligible subscribed capital (negligible having regard to the value of the undertaking transferred) which was incurring losses and as pointed out by the Commissioner (Appeals) except for the year during which the undertaking was transferred both in the preceding as well as in succeeding year there was practically no activity carried on by EPL. The amount of interest foregone worked out to about Rs. 1.20 crores and for giving up this substantial claim the payment of instalment was shifted and the debt was said to have secured. Much has been made of the conversion of unsecured debt into a secured one. This submission is without force or foundation. It overlooks the provisions of Section 55 of the Transfer of Property Act, 1882 under which a charge is created for unpaid price.

This would mean that in effect even if no security was offered the assessee's claim was secured by a charge under the said provisions. The taxing authorities have clearly seen through the game and have found that within four months the entire undertaking was transferred by EPL to ASEPL which was a public limited company and the majority shareholding thus was by the public. Therefore, if the interest payable by ASEPL was not allowed the shareholders who were members of the public would stand to lose. That apart the transaction was on the last day of the year which showed that the assessee having earned the interest thought of a device to avoid its tax liability by adopting a circuitous method in form of revision of the arrangement. The ultimate aim, therefore, was neither to benefit the subsidiary company nor ASEPL nor any worthwhile benefit accrued to the assessee on the ground of commercial expediency except that it tried to avoid its legitimate liability to tax on substantial amount of interest which had accrued to it. The learned standing counsel then referred to the decisions of the authorities below and supported their orders.

10. Shri Mehta in reply pointed out that the offer was designed to vary the original terms of agreement which was set out in letter of 15-6-1978 and was accepted by resolution of 30-6-1978. The result was that the terms of the original agreement stood modified to the extent indicated in the resolution from the date of the original agreement.

Secondly, a relinquishment of interest need not be for commercial consideration and such relinquishment was permissible in law. The whole object and purpose had to be viewed from a larger context and the aim was to form a public limited company to which other companies were also transferred. Therefore, the commercial expediency test has to be appreciated from a broad point of view and not from a narrower point of view by applying the test of quid pro quo. That apart, the interest accrued on the date when the instalment fell due and not prior to the said date and the said date was beyond the last day of the financial year and, therefore, there was no accrual of interest. In fact, according to Shri Mehta, it was a real income test which was applicable even if the income is given up before it accrued, it is not income due and as such not taxable. The concept of accrual of income is well known--that is to create a debt in favour of another person or to create an obligations enforceable at law. Both the parties, viz., the vendor and the vendee by their mutual act had agreed to relinquish their mutual rights and obligations before the end of the previous year, i.e., before the income actually accrued and, therefore, it was not necessary to back up the relinquishment by any consideration or support the same on principle of commercial expediency.

11. It may be stated that both the parties have referred to certain decisions to which we shall refer to a little later.

12. We have considered the rival submissions. In order to appreciate the controversy it is necessary in the first place to set out the relevant clauses of the agreement which have a material bearing on facts which obtain in the instant case. The original agreement was entered into on 28-2-1977 in which the mode of payment of the purchase consideration was set out as under: 1. The sum of Rs. 49,00,000 shall be paid as and by way of deposit or earnest money forthwith upon the execution of these presents.

2. The vendor holds 4,90,000 equity shares in the purchaser company of the face value of Rs. 100 each on which a sum of Rs. 10 per share has been paid. The sum of Rs. 4,41,00,000 out of the purchase price under this agreement shall be set off and applied by the purchaser for and on behalf of the vendor to credit and pay in full the balance uncalled capital to the extent of Rs. 90 per share in respect of the said 4,90,000 equity shares in the purchaser.

3. The balance of the purchase price shall be paid by the purchaser to the vendor in 8 equal annual instalments, the first of such instalments shall become due and payable on the 1st October, 1979 and each subsequent instalment shall become due and payable on the 1st day of October in each respective year as hereinafter provided.

The payment of moneys in the manner aforesaid on or before the stipulated dates shall be of the essence of the contract. Provided, however, that in case the purchaser fails to pay any instalments on the due date, then, in such event, notwithstanding and in addition to any other rights and remedies accruing or available to the vendor, the vendor shall be entitled to call upon the purchaser to pay interest at such rate as is equal to the rate of interest payable by the vendor to its bankers in the ordinary course of business from the due date of payment of the instalment until the date of actual payment thereof.

Thereafter a supplementary agreement was entered into on 4-3-1977. The following paragraphs of the said agreement are relevant : II. C. It was also agreed as a part of the transaction for the sale and transfer of the undertaking and businesses aforesaid that the balance of the purchase price remaining outstanding from time to time shall carry simple interest at the rate of 11 per cent per annum and that, if the purchaser commits any default or delay in paying any instalment or instalments on due date, the purchaser shall pay interest at such rate as is equal to the rate of interest which the vendor pays to its bankers in the ordinary course of business from the due date of payment of instalment until the date of actual payment thereof.

D. The parties hereto declare, acknowledge and confirm that the proposal relating to payment of interest on the unpaid purchase price remaining outstanding from time to time was through oversight and accident not incorporated in the principal agreement. The parties hereto being the same as parties to the principal agreement desire expressly to incorporate and record the same in the said agreement for sale by executing this supplemental agreement for sale to the principal agreement dated the 28th February, 1977.

Thereafter, on 28-6-1977, three days before the commencement of the previous year relevant to the year under appeal, a detailed deed of assignment was executed under which the mode of payment was indicated as under: III. Pursuant to the said agreement for sale read with the supplemental agreement dated the 4th March, 1977 the purchaser has out of the purchase price of Rs. 11,44,18,760.39 paid to the vendor : (a) Rs. 49,00,000 as earnest money paid on or before 28th February, 1977. (b) Rs. 4,41,00,000 being the amount set off, adjusted and applied for and on behalf of the vendor to credit and pay in full the uncalled capital at Rs. 90 per share on 4,90,000 (c) Rs. 2,00,00,000 as and when demanded by the vendor, and will carry interest at the rate as is equal to the rate of (d) Rs. 4,54,18,760 is payable as under and will carry interest at 11 per cent per annum on the amount remaining The purchaser has agreed to pay the balance of the purchase price, viz., Rs. 4,54,18,760.89 to the vendor in eight equal annual instalments, the first of such instalments shall be due and payable on the 1st October, 1979 and each subsequent instalment payable on the 1st day of October, in each respective year as under : Rs. 56,77,345 being approximately 12 per cent on or before 1-10-1979 Rs. 56,77,345 being approximately 12 per cent on or before 1-10-1980 Rs. 56,77,345 being approximately 12 per cent on or before 1-10-1981 Rs. 56,77,345 being approximately 12 per cent on or before 1-10-1982 Rs. 56,77,345 being approximately 12J per cent on or before 1-10-1983 Rs. 56,77,345 being approximately 12 per cent on or before 1-10-1984 Rs. 56,77,345 being approximately 12 per cent on or before 1-10-1985 Rs. 56,77,345 being approximately 12 per cent on or before 1-10-1986 The payment of the instalments together with the interest at the rate of 11 per cent per annum thereon in the manner and on the dates aforesaid shall be of the essence of the contracts : provided, however, that in case the purchaser fails to pay any instalment on the due date then in such event notwithstanding and in addition to any other rights and remedies accruing or available to the vendor, the vendor shall be entitled to call upon the purchaser to pay interest on such instalment at such rate as is equal to the rate of interest payable by the vendor to its bankers in the ordinary course of business from the due date of payment of the instalment until the date of actual payment thereof.

13. It may be noticed that pursuant to the transfer of assignment and business undertaking and business of Sarabhai Chemicals and Sarabhai Common Services, the assessee was entitled to receive a sum of Rs. 1,144.19 lakhs from EPL in the manner indicated above. The EPL proposed a modification in the terms of payment by its letter dated 15-6-1978 which was approved and accepted by the appellant company. Under the terms, the balance of purchase consideration amounting to Rs. 6,54,10,253 is payable as follows :(a) Rs. 1,84,10,253.49 as and when demanded by the company and will not carry any interest.(b) Rs. 4,70,00,000 will be payable in five equal annual instalments, the first of such instalments becoming due and In respect of the said sum of Rs. 470 lakhs payable EPL has offered to secure the same to the satisfaction of the appellant company. Thus, the terms of the payment originally agreed to, were modified as indicated above, and the revised terms of payment which provided for security became operative right from the inception, i.e., from 1st March, 1977, the date on which the undertaking was transferred. In accordance with the revised terms, no interest is chargeable on that portion of unpaid purchase price which is payable on demand, and is chargeable on the balance sum of Rs. 470 lakhs only with effect from 1st July, 1979.

Consequently, the appellant company did not charge any interest on the balance of deferred sale consideration.

14. The crux of the controversy is whether or not any interest could be said to have accrued to the assessee during the relevant previous year which was liable to tax in his hands. Broadly speaking the assessee's contention that by the subsequent arrangement with EPL there was a modification in the terms of payment of interest as a result of which there was no accrual of income while the revenue's case is that income having been accrued was liable to tax and if the assessee were to claim a benefit it must establish that there was commercial expediency in giving up the income which had accrued to it and, therefore, no income was chargeable on accrual basis. Therefore, it is necessary to consider the relevant decisions on the subject which have evolved certain principles which are applicable to the controversy at issue before us.

We shall, therefore, proceed first to deal with those decisions on which reliance has been placed by either side before us as well as before the authorities below and also such decisions which in our opinion have a bearing on the controversy at issue. The said decisions are as follows : The contract of service between the U company and the managing agents was entire and i indivisible. The remuneration decommission became due by the U company to the managing agents, only on completion of a definite period of service and at stated periods and it was a condition precedent to the recovery of any wages or salary in respect thereof that the service or duty should be completely performed. Such remuneration constituted a debt only at the end of each such period of service and no remuneration or commission was payable to the managing agents for broken periods.

The right to receive the commission would arise and the income, profits or gains would accrue to the managing agents only at the end of the calendar year which was the terminaus a quo for the making up of the accounts and ascertaining the net profits earned by the company.

Income-tax is a levy on income. Though the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt, yet the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a 'hypothetical income', which does not materialise.

Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income even though an entry to that effect might, in certain circumstances, have been made in the books of account.

The assessee was the managing agent of several companies. For the assessment year 1952-53 (the corresponding accounting year being year ended 5th July, 1951), the managed companies were liable to pay managing agency remuneration and commission to the assessee-company to the extent of Rs. 29,000. On 16th December, 1952 the shareholders of the assessee-company passed a resolution forgoing the receipt of the allowances .... The Appellate Tribunal held that as the intention to forgo was arrived at long after the closing of the accounting year, and at the end of the accounting year the remuneration had already accrued to the assessee, the relinquishment would only mean a diversion of the profits and, therefore, could not be excluded from the total income ....

Their Lordships of the Calcutta High Court upholding the above view of the Tribunal summarised the position as follows: In the instant case, the unrealised income is liable to assessment of tax, not on the ground of constructive receipt but on the ground that it accrued during the relevant accounting year which ended on the 5th July, 1951.

(2) The mere fact that the income was forgone by the assessee beyond the accounting year by resolutions in meetings of the shareholders, cannot entitle the assessee to an exemption from liability to tax.

It was decided, inter alia, by the Supreme Court in the case of CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC) that where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might in certain circumstances have been made in the books of account. This decision was made on the facts that there was a bilateral contract between the managing company and the managed company during the accounting year, whereby the assessee disentitled itself from receiving the contractual commission, which obviously did not result in income during the accounting year. Such is not the case here, as no reliable evidence was placed before the Tribunal to show that the relinquishment was done on the basis of some direct negotiations between the assessee and the managed company, with respect to the sum of Rs. 29,000 during the accounting year.

(3) The real test is that if the amount is to be taxable as income the basic conception to be kept in view is that the right to receive the income must come into existence in the relevant previous year and that income can be held to arise or accrue to the assessee only when the assessee obtains a right to receive the income. In other words if the root or germ as to accretion of income was in the accounting year and if such a root or germ regarding accretion of income fructifies in the subsequent years, the account for the relevant previous year may be reopened and the figure subsequently ascertained may be inserted in the place of the original figure for the purpose of assessability to tax.

Income accrues when it becomes due. The postponement of the date of payment does not affect the accrual of income. The fact that the amount of income is not subsequently received by the assessee would not also detract from or efface the accrual of the income, although non-receipt may, in appropriate cases, be a valid ground for claiming deductions.

The mercantile system of accounting differs substantially from the cash system of book-keeping. Under the cash system, it is only actual cash receipts and actual cash payments that are recorded as credits and debits ; whereas, under the mercantile system, credit entries are made in respect of amounts due immediately they become legally due and before they are actually received. Similarly, the expenditure items for which legal liability has been incurred are immediately debited even before the amounts in question are actually disbursed. Where accounts are kept on the mercantile basis, the profits or gains are credited though they are not actually realised, and the entries thus made really show nothing more than an accrual or arising of the said profits at the material time.

...As the managing agency commission receivable could have been ascertained only after the managed company had made up its accounts and the respondent had given up the commission even before the managed company made up its accounts, and no date had been fixed in the agreement for payment of the commission, the mere fact that the respondent was maintaining its accounts on the mercantile system did not lead to the conclusion that the commission had accrued to it by the end of the relevant accounting year. The commission given up by the respondent could not be considered to be its real income....

Shiv Parkash Janakraj & Co. (P.) Ltd. v. CIT [1978] 112 ITR 872 (Punj. & Har.) : . . .That no interest had actually been paid to the assessee-company nor had it made any debit entries in its account books. No date was fixed in the agreement of loan regarding the payment of interest.

Even if the assessee-company had adopted the mercantile system of accounting, it cannot be said that income from interest had actually accrued to it on October 31, 1970.

In rendering the above decision their Lordships considered the decisions in Morvi Industries Ltd.'s case (supra) and Birla Gwalior (P.) Ltd.'s case (supra).

CIT v. Ferozepur Finance (P.) Ltd. [1980] 124 ITR 619 (Punj. & Har.) : Income-tax is levied on income, whether the accounts are maintained on mercantile system or on cash basis. If income does not result at all, there cannot be levy of tax. Even if an entry of hypothetical income is made in the books of account, where the income does not result at all as there is neither accrual nor receipt of income, no tax can be levied.

The regular mode of accounting determines only the mode of computing the taxable income and the point of time at which the tax liability is attracted. It cannot determine or affect the range of taxable income or the ambit of taxation. Where no income has resulted it cannot be said that income has accrued merely on the ground that the assessee had been following the mercantile system of accounting.

Even if the assessee makes a debit entry to that effect, still no income can be said to have accrued to the assessee. If no income has materialised, there can be no liability to tax on a hypothetical income. It is not the hypothetical accrual of income based on the mercantile system of accounting followed by the assessee that has to be taken into account, but what should be considered is whether the income has really materialised or resulted to the assessee. The question whether real income has materialised to the assessee has to be considered with reference to commercial and business realities of the situation in which the assessee has been placed and not with reference to his system of accounting.

In the above decision after considering the decisions in Shoorji Vallabhdas & Co.'s case (supra) and Morvi Industries Ltd.'s case (supra) it is observed : ...If this concept of the real accrual of income in law and the principle on which the theory of accrual is based were to be taken into account, then, in the light of the facts of this case, where we are dealing with the question of interest, which had not to take into account anything to be done or happening subsequent to the closing of the year of account and the accrual was not dependent on any subsequent making up of the accounts or the company's borrowing acts, then the subsequent conduct, subsequent to the year in which income accrued, cannot, in our opinion, be of any help to the assessee....

The real principle seems to be that the root or the germ as to accretion of income must be in the accounting year and if such root or germ fructifies in the subsequent years, that can be taken into account and not otherwise. Now, applying the same principle to the facts and circumstances of this case, if it could be demonstrated that the right of giving up, which stopped the accrual in the year of income which had been laid or planted in the year of account, then the subsequent giving up might help the assessee in the theory of real income.... (pp. 712-716) 15. A broad analysis of the above decisions reveals that the said decisions fall into two distinct categories. The first category relates to those set of decisions in which income is given up before the end of the accounting year with the result that the income is not said to accrue during the accounting year and as a consequence is not found exigible to tax. The second category relates to a set of decisions in which income is given up after the end of the accounting year, i.e., in the subsequent accounting year. That is to say after accrual and in these circumstances it is held that such giving up of income must be supported by commercial expediency. In other words in the cases relating to first category the concept of real income comes into play and even if entries are made in the books of account it is held that mere make up of entries to connote hypothetical income is not exigible to tax--Shoorji Vallabhdas & Co.'s case (supra). The same proposition is reiterated in the case of Birla Gwalior (P.) Ltd. (supra). In the second category of cases where the giving up of income is not backed by commercial expediency, it is held that income is exigible to tax on the basis of accrual. In this connection it is necessary to mention an important fact concerning the cases relating to first category. Most of the cases relate to giving up of managing agency commission. Now managing agency commission is based on percentage of profits and as the profits come into existence only at the end of the accounting year as a corollary the managing agency commission cannot but accrue at the end of the accounting year. Therefore, if such commission is given up during the accounting year the income is held not to accrue or there is no accrual of income and consequently no liability to tax. It is also held that managing agency commission cannot accrue for a broken period.

There are cases which relate to charging of interest on notional basis when the assessee maintains books of account on mercantile system of accounting. In these cases it is held mainly on the facts that as the recovery of original amount advanced is found to be doubtful, giving up of interest is held to be on the ground of commercial expediency and, therefore, the income relating to interest is not subjected to charge.

16. It is in light of these principles that we have to examine the facts of the case before us. However, before we proceed to embark on this aspect of the matter it is necessary in our opinion to refer to the proposal made by EPL and the consequential resolution made by the assessee-company which, according to the assessee, was instrumental in revising the original agreement relating to levy of interest on unpaid purchase price. The resolution was made by the assessee consequent upon the proposal made by EPL which for the sake of convenience is out hereunder : The letter No. Elscope/MC dated 15th June, 1978 received from Elscope (P.) Ltd. setting out therein the revised mode of payment was placed on the table.

Resolved that, in respect of unpaid purchase price of Rs. 6,54,253.49 due, owing and payable by Elscope (P.) Ltd. to the company for the transfer and assignment of industrial undertaking and business of Sarabhai Chemicals Division and business of Sarabhai Common Services Division as going concerns by the company to the said Elscope (P.) Ltd., the company both hereby approve, accept and adopt the following revised mode of payment as contained in letter No. Elscope/MC dated 15th June, 1978 received from Elscope (P.) Ltd. (a) Rs. 1,84,10,253.49 as and when demanded by the company and will not carry any interest. (b) Rs. 4,70,00,000.00 will be payable in five equal annual instalments, the first of such instalments becoming due and The above resolution which was made at the end of the accounting year is a sort of watershed which divides the controversy relating to accrual of interest for the respective years under appeal. Both the sides we may say have tried to use the above resolution as a talisman to canvass their respective stands. The assessee's case is broadly that as a result of the said resolution the original arrangement to levy interest on unpaid purchase price is said to have been superseded resulting in no accrual of income for the assessment years 1979-80 as well as 1980-81. The revenue on the other hand has contended that the above resolution was not an effective one and did not result in modification of the original agreement as a result the income continued to accrue not only for the assessment year 1979-80 but also for the assessment year 1980-81. In other words, the said resolution, according to the stand taken by the learned standing counsel, was inoperative and as such not enforceable at law at all. The authorities below, we may point out, have proceeded on the footing that though there was a right to recover interest on unpaid purchase price there was relinquishment of such right without consideration, so far as the assessment year 1980-81 was concerned. With the result that such relinquishment of right which was without consideration was void and as such the income from interest continued to accrue till the end of the previous year relevant to the assessment year 1980-81. Thus, it is necessary to queer the pitch on this issue before we proceed further in the matter. The submission made by the learned standing counsel, as we have pointed out earlier, was that the resolution was in a nature of counter proposal and as such not enforceable at law. EPL had made an offer under its letter referred to above for modification of the terms of agreement by re-scheduling the instalments and by offering security and this proposal was in our opinion approved, accepted and adopted by the assessee-company. It was submitted on behalf of the revenue that the resolution authorised one of the directors of the company to communicate the decision of the board to EPL and to take necessary steps to give effect to the resolution. Nothing was brought on record to show that this part of the resolution was complied with the result that the resolution remained unimplemented. We are unable to accept this proposition. The minutes of the meeting of the board of directors of the assessee-company form part of record and it is not the case that these minutes do not represent the position indicated therein. It must, therefore, be held that the minutes and the resolution were made in normal course of the assessee's business and was effective in law. The subsequent part of the resolution authorising the director merely indicates the consequential action to be taken to follow up the decision and, therefore, it is not possible to accept the submission that the resolution was ineffective. In fact, no doubt has been cast on the above resolution by the authorities below. Of course, inference have been drawn against the assessee as to the effect of the resolution but that is a different matter. The resolution, therefore, represents the decision between the two parties inter se and must be held to be effective from 30-6-1978.

17. This brings us to consider the mainstay of the submission canvassed on behalf of the assessee as to whether or not this resolution had a retrospective effect nullifying or superseding the earlier agreement.

So far as this aspect of the matter is concerned the material which we shall presently refer suggest that the assessee's claim in this regard cannot be accepted. In the first place, the assessee entered into the agreement on 28-2-1977 for sale of the undertaking to EPL. Thereafter a supplemental agreement was made on 4-3-1977 under which it was decided to charge interest on the unpaid purchase price and the supplemental agreement was entered into as there was oversight or accident in not incorporating the condition for levy of interest in the original agreement and the supplemental agreement was to form part and parcel of the principal agreement dated 28-2-1977. Therefore, the principal agreement as well as supplemental agreement form part of the same agreement by virtue of the condition set out in the supplemental agreement which we have referred to earlier. As a consequence of this supplemental agreement a right or obligation was created in favour of the assessee for recovering interest on the unpaid purchase price. In this connection we refer to the observations of the Supreme Court in CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42.

The words 'accrue' and 'arise' are used to contradistinguish the word 'receive'. Income is said to be received when it reaches the assessee ; when the right to receive the income vested in the assessee, it is said to accrue or arise.

Income becomes taxable on the footing of accrual only after the right of the taxpayer to the income accrues or arises, and in the case of an agreement which makes profits receivable at or on the happening of a contingency, the fact that the profits are the result of transactions spread over a period which covers a period preceding the happening of that contingency would not make the receipt liable to be paid to persons other than those who are entitled to receive it on the date on which it is actually received or became receivable.

In the gross receipts of a business day after day or from transaction to transaction lies embedded or dormant profit or loss.

On such dormant profit or loss undoubtedly taxable profits, if any, of the business will be computed, but dormant profits cannot be equated to profits charged to tax under Sections 3 and 4 of the Indian Income-tax Act, 1922. The concept of accrual of profits of a business involves their determination by the method of accounting at the end of the accounting year or any shorter period determined by law.

'Profits' do not accrue from day to day or even from month to month and have to be ascertained by a comparison of assets at two stated points. Unless the right to profits comes into existence there is no accrual of profits and the destination of profits must be determined by the title thereto on the day on which they arise.

Thus, the income is said to have 'accrued' or 'arisen' when the right to receive the said income becomes vested in the assessee. Income becomes taxable on the basis of accrual when the right of the assessee to income accrues or arises. In the instant case, the income from interest on unpaid purchase price was a vested right created under the supplemental agreement, as a consequence the income from interest could be said to be accrued or arisen to the assessee during the relevant accounting year. In this connection it is pertinent to note that while the supplemental agreement forms part of the original agreement, there is no indication in the resolution to suggest that the revised mode of payment was effective from any date prior to 30-6-1978. Therefore, this is not a case where the income though given up during the year could not be said to accrue as was the case in managing agency commission, the determination of which was based on accrual of profits. The accrual of interest commenced from the beginning of the accounting year as the interest accrues from day to day. Now the only ground on which the assessee could canvass its claim for excluding the said income from chargeability is the ground based on commercial expediency. There is no material to persuade us to reach a conclusion that the income from interest was given up on the ground of commercial expediency. The only ground which was placed before us was that the unpaid purchase price which was unsecured had become secured under the revised mode of payment. This aspect of the matter does not carry the matter anywhere.

It has to be remembered that EPL was a subsidiary of the assessee-company. The entire shareholdings of EPL have been owned and controlled by the assessee. On the other hand, the security which is offered in terms of secured debentures of ASEPL to whom the undertaking has been transferred by EPL is again a subsidiary of EPL. Therefore, the offering of secured debentures to cover the unpaid purchase price would not give some added commercial benefit to the assessee who was otherwise secured in lieu of the peculiar position which it held vis-a-vis the two companies. The principle of commercial expediency connotes accrual of benefit directly or indirectly to the assessee in course of carrying on of its business. The benefit must match the right which is sought to be given up. When substantial portion of income which had accrued to the assessee by its own act and action is sought to be given up the corresponding benefit which accrues to it must be equal if not more and sizable also. There is nothing to indicate that the benefit accruing to the assessee has outweighed the right which it was giving up. In the cases referred to earlier the managing agency commission was given up due to losses or small profits with a view to benefit the company or not to cast undue financial burden on the managed companies. Interest was sought to be given up because of the shaky position of the debtors when the recovery of principal was in doubt it would have been a futile exercise to burden the debtor with notional accrual of interest which would put the recovery of the principal sum into a jeopardy. Therefore, the concept of commercial expediency must be examined from the standpoint of a trader who gives up his right in the better interest of the company and as pointed out earlier there is nothing to show that this test has been fulfilled in the instant case. Therefore, the inevitable conclusion which can be reached in this regard is that so far as the assessment year 1979-80 is concerned there was accrual of interest as a result of the supplemental agreement as aforesaid and, therefore, the interest was rightly brought to tax on accrual basis by the authorities below. In this view of the matter, therefore, we do not consider it necessary to go into the question about lifting of veil theory dwelt upon by the Commissioner (Appeals). In our opinion, the question could be resolved by applying the first principle which is well settled in regard to the concept of accrual of income and the principle of real income. We, accordingly, decline to interfere with the decisions of the authorities below so far as this ground is concerned.

18. Now we turn to the assessment year 1980-81. As pointed out earlier the previous year had commenced on 1-7-1978 and had ended on 30-6-1979.

The resolution of the board of directors referred to above had already come into operation and the question, therefore, is whether the addition as made by the ITO and retained by the Commissioner (Appeals) was justified. In this connection we may briefly refer to the reasons set out by the ITO in support of his decision to bring to tax the impugned amount as accrued interest on deferred sale consideration.

According to the ITO, a part of the unpaid sale consideration was payable by the purchaser in eight equal instalments on 1st of October, every year beginning from 1-10-1979 with interest at 11 per cent per annum, for the said sum or the balance thereof from time to time. As per the agreement (referred to in course of the assessment year 1979-80) unpaid consideration to the extent of Rs. 2 crores was to be paid on demand and the interest at the rate charged by bankers was payable thereon. A revised agreement was entered into effective from 1-7-1979 and it was claimed, therefore, that no interest was payable on the outstanding amount for a period prior to 1-7-1979. The claim in this regard was made for the assessment years 1979-80 as well as 1980-81. The claim relating to the assessment year 1979-80 is already considered by us in the earlier paragraphs. Thus, according to the ITO, so far as the assessment year 1980-81 was concerned the same reasons which led him to bring to tax income from interest on unpaid purchase price were applicable for the year under appeal also. The distinction sought to be made as a result of the resolution, in the opinion of the ITO, did not make any difference. In the first place the modification in the original agreement was made with a view to avoid income-tax.

Secondly, a mere passing of the resolution by the board of directors had no effect as nothing was shown to substantiate the claim that interest was not charged on ground of commercial expediency. Thirdly, the security clause did not exist in the original agreement and had no effect at all, vis-a-vis, the giving up of such a large amount of interest. Relying, therefore, on his decision for the earlier year, viz., 1979-80 the ITO proposed an addition of Rs. 57,17,750 as accrued interest on deferred sale consideration and submitted the matter to the I AC under the provisions of Section 144B. The IAC after giving the hearing to the assessee came to the conclusion that the addition was justified. According to the IAC, there was relinquishment of right to receive interest and as the said relinquishment was without consideration and, therefore, the agreement was void under Section 25 of the Indian Contract Act, 1872. The reliance placed by the assessee on Section 63 of the Indian Contract Act had no effect at all and was not applicable. Thus he concluded that the assessee had right to receive interest from the date of the sale of the industrial undertaking and the interest, therefore, was chargeable on accrual basis. Reissued directions, accordingly, which were incorporated in the final order as made by the ITO. It may be stated that a calculation error was noticed in the amount of interest proposed for addition by the ITO which was corrected as a result of which the amount of interest brought to tax in the final order was determined at Rs. 55,67,750.

19. The matter was carried in appeal before the Commissioner (Appeals) who, following his decision for the assessment year 1979-80, upheld the said addition.

20. The assessee is in appeal before us. The submissions which were placed before us are already set out earlier while dealing with the appeal relating to the assessment year 1979-80 and, therefore, the same are not restated here. In our view there is a material distinction between the facts obtained in the earlier year and in the assessment year 1980-81. The material difference is caused by the resolution which was made by the board of directors under which the terms of the original agreements stood modified. As a result of the said resolution, in our opinion, no income could be said to have accrued to the assessee as the interest would start accruing from 1-7-1979, i.e., after the end of the accounting year. Secondly, since there was no accrual of income at all, there was neither any right created nor any enforceable obligation qua vendor and the vendee and, therefore, the question of relinquishment of any right did not arise at all. It is only when income accrues, i.e., a debt is created that the relinquishment of a right or a debt would arise but when there is no income at all the question of relinquishment as pointed out above is out of question.

That apart the reduction of tax liability is a consequence of the modified arrangement, it is well settled that taxability of income does not depend on ground of morality. If the income accrues the same is chargeable to tax. If it does not accrue for whatever reasons the same is not made chargeable irrespective of the motive or the benefit which may result in the process. Therefore, so far as the assessment year 19,80-81 is concerned, the inclusion of amount of interest as aforesaid, in our opinion, was not justified. We, accordingly, delete the said addition.

21 to 26. [These paras are not reproduced here as they involve minor issues.]


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