M/S.sujatha Films P. Ltd v. The Commissioner Of Income Tax, Central-I, Chennai

IN THE HIGH COURT OF JUDICATURE AT MADRAS Coram : THE HONOURABLE MR.JUSTICE P.D.DINAKARAN AND THE HONOURABLE MR.JUSTICE P.P.S.JANARTHANA RAJA Tax Case (Reference) Nos.379 to 382 of 2001(Reference Nos.309 to 312 of 2001) M/s.Sujatha Films P. Ltd.,4, Seshadri Road,Alwarpet,Chennai-18...Applicant in all cases.Vs The Commissioner of Income Tax,Central-I,Chennai. ..Respondent in all cases. Reference under Section 256(1) of the Income Tax Act, 1961 by IncomeTax Appellate Tribunal, Madras, 'A' Bench in R.A.Nos.386 to 389/Mds/97arising out of I.T.A. Nos.1647/M/90, 489/M/91, 2452 & 2453/M/92 for theassessment years 1986-87, 1987-88, 1988-89 and 1989-90 against theCommissioner of Income Tax (Appeals) IV, Madras 34, dated 26.12.1989 andmade in ITA.37/89-90/Central Circle I(1)/Madras dated 23.1.1991, made inIT.Appeal Nos.37/90-91/Central.Cir.I(1)/Madras, dated 28.8.1992 made inITA.No.33/92-93/Cent.Cir.I(1)/Mds, and dated 28.8.1992 made inITA.No.34/92-93/Cent.Cir.I(1)/Mds against the Order of the AssistantCommissioner, Central Circle I(1), Madras 34 dated 30.3.1989 and 28.3.199018.3.1992 & 24.3.1992 made in P.A.No.47-062-CQ-4719/1986-87, 1987-88,1988-89, 1989-90. JUDGMENT (Judgment of the Court was delivered by P.P.S.Janarthana Raja, J.)Income Tax Appellate Tribunal, Madras, 'A' Bench, referred the matterunder Section 256(1) of the Income Tax Act at the instance of theassessee, for opinion of this Court, raising the following questions of https://hcservices.ecourts.gov.in/hcservices/ law: 1. For the assessment years 1986-87 to 1989-90:"Whether on the facts and in the circumstances of thecase the Tribunal was justified in law in coming to theconclusion that interest at 15% was accruing on theamount of Rs.1,08,50,000/- due to the assessee by oneSri K.L.Srihari, despite the attachment of the loanunder section 226(3) of the Income-tax Act, 1961 anddespite the agreement between the assessee and thedebtor that no interest shall be chargeable or payableon the loan from 1.3.85 and that the same wasassessable as the assessee's income according to thesystem of mercantile accounts followed by it?" 2. For the assessment year 1988-89 only:"Whether on the facts and circumstances of the case,the Tribunal was correct in law in holding that thereturn filed by the assessee in response to the noticeu/s. 142(1) was a return filed under Section 139(4)and therefore the provisions applicable fordetermining time limit for completion of assessmentwas Section 153(1)(b) as amended from 1.4.89?" 2.The facts arising out of the first question of law are as under:The relevant assessment years are 1986-87 to 1989-90. Theassessee is engaged in the business of distribution of films. Theassessee company advanced a loan of Rs.2,59,50,000/- to one SriK.L.Srihari. The borrower repaid Rs.1,51,00,000/- on 22.03.84 reducingthe balance outstanding to Rs.1,08,50,000/-. On 21.2.1985, the Income TaxDepartment served a notice u/s 281B of the Act prohibiting the said SriK.L.Srihari from paying the loan amount and the interest thereon to theassessee and directing him to pay the same to the Income Tax Departmenttowards the tax arrears of the assessee. Later on, the prohibitory orderu/s 281B was substituted by an order under Section 226(3). Soonthereafter, the assessee and the debtor decided that no interest would bepayable or charged on the loan with effect from 01.03.85. In the books ofthe borrower, interest was credited to the account of the assessee companyfor the period upto 31.12.84 only as detailed below. No interest wascredited for any period thereafter. The assessee did not receive any part of the above mentioned interestin view of the prohibitory orders and also in particular, no interest wasreceived during the accounting periods relevant for the assessment yearsand hence, no interest was admitted in respect of this loan for therespective assessment years. Further, it was also explained before theAssessing Officer that the borrower had refused to pay interest as thedebt had been attached by the Income Tax Department. The AssessingOfficer came to the conclusion that non receipt of interest did not meanthat the interest had not accrued to the assessee and it was not payable.Since the assessee was maintaining the accounts on mercantile basis, theAssessing Officer included the accrued interest to the total income of theassessee. Aggrieved by the order, the assessee filed an appeal to theCommissioner of Income Tax (Appeals). The Commissioner of Income Tax(Appeals) rejected the appeal and confirmed the order of the AssessingOfficer. Aggrieved by the order, the assessee filed an appeal to theIncome Tax Appellate Tribunal. The Income Tax Appellate Tribunal heldthat, interest in question was includible in the assessable income of theassessee notwithstanding the prohibitory orders and notwithstanding thedecision of the assessee and the debtor that no interest would be payableor charged after 01.03.1985. 3.The counsel appearing for the assessee submitted that the IncomeTax Department had served a Prohibitory Order u/s 281B and subsequentlynotice u/s 226(3) prohibiting Sri K.L.Srihari from paying the principal aswell as the interest to the assessee. In view of this, Sri K.L.Sriharihad written a letter dated 01.03.1985 to the assessee stating that nointerest would be paid to the assessee till such time prohibitory orderswere in force. As a result, the assessee had not received any interestfrom Sri K.L.Srihari till date and hence not taxable. 4.The learned counsel for the Revenue submitted that the attachmentdid not make any difference in respect of accrual of interest. Theattachment was for a short period and the assessee had not foregone theright to receive principal as well as interest from Sri K.L.Srihari. 5.We heard the counsel. We have perused the materials and also theletter written by Sri K.L.Srihari on 08.03.1985 to the assessee whichreads as under: "M/s.Sujatha Films Private Ltd.,27, Wallace Garden,III Street,Madras-600 006. Dear Sirs,Sub: Loan taken from you and interest payable thereon– reg. Ref: Letter from Income-tax Officer, Company Circle IV(1), Madras dt.25.2.1985 Your letter dt.1-3-1985 ----------------------------------------Please refer to your letter cited above. Incontinuation of the discussion I had with you on theabove subject, this is to confirm that henceforth nointerest is payable by me on the balances due to youfrom 1-3-1985 and you will not be charging anyinterest. 5.We heard the counsel. We have perused the materials and also theletter written by Sri K.L.Srihari on 08.03.1985 to the assessee whichreads as under: "M/s.Sujatha Films Private Ltd.,27, Wallace Garden,III Street,Madras-600 006. Dear Sirs,Sub: Loan taken from you and interest payable thereon– reg. Ref: Letter from Income-tax Officer, Company Circle IV(1), Madras dt.25.2.1985 Your letter dt.1-3-1985 ----------------------------------------Please refer to your letter cited above. Incontinuation of the discussion I had with you on theabove subject, this is to confirm that henceforth nointerest is payable by me on the balances due to youfrom 1-3-1985 and you will not be charging anyinterest. It is clear from the above letter that Sri K.L.Srihari had discussedthe matter relating the attachment of the amount or the loan taken by him.Obviously after attachment, Sri K.L.Srihari could not pay the interest aswell as principal to the assessee company and after discussion, SriK.L.Srihari had written that no interest was payable by him on the balancedue to the assessee from 01.03.1985. This letter was written because theamount receivable by the assessee from Sri K.L.Srihari stood attached bythe Income Tax Department and Sri K.L.Srihari could not have paid a singlepaisa to the assessee after attachment by the Income tax Department underSection 226(3) of the Income Tax Act. The said letter dated 08.03.1985written by Sri K.L.Srihari did not prevent the accrual of interestaccording to the provisions of law. The assessee was aware of the factthat the accrual of interest was not effected by the letter dated08.03.1985 and that was why the assessee company had not taken any legalaction against Sri K.L.Srihari because in so far as attachment underSection 226(3) by the Assessing Officer continue, Sri K.L.Srihari couldnot pay interest to the assessee. The assessee had given advance to SriK.L.Srihari and had obtained pronote from him. The assessee company wasmaintaining the accounts by following the mercantile system of accounting.Under the mercantile system of accounting, income is liable to be taxed onthe basis of its accruing or arising to the assessee. In the mercantilesystem of accounting, accrual of income is independent of its receipt. Solong as the amount is due to the assessee, the system of accounting wouldenvisage the amount being treated as having accrued to the assessee. Theprofit or loss at the end of the accounting year is based not on thedifference between what was actually paid out, but on the differencebetween the right to receive and the liability to pay. If the income hasaccrued earlier and the assessment treats it as taxable during the year ofaccrual, it is not open to the Revenue to treat it as an income in theyear of receipt in a case where the assessee follows the mercantile basis of accounts. In the case of Morvi Industries Ltd. Vs. C.I.T. reported in82 ITR 835, the Supreme Court held that the interest accrues when itbecomes due. The moment the interest accrues, the assessee gets vestedright with the right to claim that amount eventhough it may not have beenimmediately received. The fact that the amount is not subsequentlyreceived would also not depart from the fact of accrual. Once theassessee follows mercantile system of accounting, the interest accrues onday to day basis. It is clear that interest on loan or advance to SriK.L.Srihari had accrued to the assessee even if the amount payable by SriK.L.Srihari had been attached by the Income Tax Department under Section226(3) of the Act. The attachment under Section 226(3) by the Income TaxDepartment did not prohibit accrual of income to the assessee. As andwhen the the amount is realised by the Income Tax Department from SriK.L.Srihari, the assessee will get credit for that amount in respect oftaxes paid by the assessee. Hence there was accrual of interest and thesame is taxable. 6.The second question of law is only for the assessment year 1988-89. In respect of question No.2, the facts are as follows:For the said assessment year, the assessee was served notice underSection 139(2) on 7.10.1988, but no return was filed in compliancetherewith. Later a notice under Section 142(1) was served on 12.7.1990again calling for the return. The assessee responded to this notice byfiling the return on 13.08.1990. The assessment was completed withreference to this return on 18.03.1992. Aggrieved by the order, theassessee filed an appeal before the Commissioner of Income Tax (Appeals)and contended that the assessment was time-barred as it should have beencompleted before 13.08.1991 i.e., within one year from the date of filingthe return, the time limit prescribed under Section 153(1)(c) of theIncome Tax Act. The Commissioner of Income Tax (Appeals) rejected thecontention holding that this being a case of concealment, the time limitfor completion of assessment was eight years. Aggrieved by the order ofthe C.I.T. (A), the assessee filed an appeal before the Income TaxAppellate Tribunal. The Income Tax Appellate Tribunal submitted that theAssessing Officer had not, before the expiry of the normal time, issuedany notice u/s 271(1)(c) nor made known his intention to avail of theextended time and as such was not entitled to make the assessment afterthe expiry of one year from the date of receipt of the return. TheTribunal had however not accepted the assessee's contention. The Tribunalheld that the provisions of Section 153 have been substituted by theFinance Act 1989 and that the amended provisions of Section 153(1)(b) areapplicable to the assessment year 1988-89. 7.The learned counsel for the assessee submitted that notice underSection 139(2) was served on the assessee on 7.10.1988, but no return wasfiled by the assessee. Subsequently, notice under Section 142(1) wasserved on the assessee on 12.07.1990 for which he filed a return of incomeon 13.08.1990. The learned counsel for the assessee further submittedthat the assessment should have been completed by 13.08.1991 i.e., within one year from the date of filing the return, whereas the assessment wascompleted on 18.03.1992 which was barred by limitation. The learnedcounsel for the Revenue submitted that under the amended provisions ofSec.153(1)(b), the time limit is one year from the end of the financialyear in which a return or a revised return relating to the assessment yearcommencing on the 1[st] day of April 1988, or any earlier assessment year isfiled under sub-sec.(4) or sub-sec.(5) of Section 139, whichever is later.The provisions of Section 153 have been amended by the Finance Act, 1989and as per the amended provision, the time limit is one year from the endof the financial year in which the return of income or a revised return ofincome is filed by the assessee. 8.We heard the counsel. The assessee had filed return of income on13.08.1990 which was relevant to the financial year ending 31.03.1991.The time limit for completion of the assessment expired on 31.03.1992i.e., one year from the end of the financial year 31.03.1991. In thiscase, the assessee had filed Return of income on 13.08.1990 which wasrelevant for the financial year 01.04.1990 to 31.03.1991. Since theassessee had filed Return of income on 13.08.1990, the Assessing Officercould complete the assessment upto 31.03.1992 and since the assessmentorder in this case was passed on 18.03.1992, the same was not barred bylimitation. The provisions of Section 153(1)(b) are reproduced below:"153(1) No order of assessment shall be made underSec.143 of section 144 at any time after the expiry of -a) ------ b) one year from the end of the financial year inwhich a return or a revised return relating to theassessment year commencing on the 1[st] day of April 1998,or any earlier assessment year, is filed under sub-sec. -a) ------ b) one year from the end of the financial year inwhich a return or a revised return relating to theassessment year commencing on the 1[st] day of April 1998,or any earlier assessment year, is filed under sub-sec. (4) or sub-sec.(5) of section 139, whichever is later" The provisions of Section 153 have been substituted by the FinanceAct, 1989 and the provisions of Sec.153(1)(b) are applicable for therelevant assessment year. The Assessing Officer issued notice underSection 139(2) and no return of income was filed by the assessee for thesaid assessment year within the time allowed under Section 139(2). Thereturns were filed under Section 139(4) and for such a return, theprovisions of Sec.153(1)(b) are applicable and time for completion ofassessment was to be computed from the end of the financial year in whichthe return or revised return relating to the assessment years 1988-89 and1989-90 or any earlier assessment year is filed under sub-sec.(4) or sub-sec.(5) of sec.139. In this case, the ITO had issued notices underSection 139(2) on 30.09.1988 for the assessment year 1988-89 the returnfiled by the assessee could not be considered as return filed underSection 142(1) because once notice under Section 139(2) was issued by theAssessing Officer calling for return of income for the assessment year1988-89, the Assessing Officer does not have power to call for the returnincome under Section 142(1). In this case the return of income filed bythe assessee on 13.08.1990 falls under 139(4) and the provisions of Section 153(1)(b) which were substituted by Finance Act, 1989 came intooperation. The assessment order passed by the Assessing Officer was notbarred by limitation because one year was to be counted not from the dateof filing the return but from the end of the financial year in which thereturn relating to the assessment year 1988-89 or earlier assessment yearwas filed under Sub-Section (4) or Sub-Section (5) of Section 139. Thetime available with the Assessing Officer for completion of the assessmentwas upto 31.03.1992 because the assessee had filed the return of income on13.08.1990 during the financial year 01.04.1990 to 31.03.1991 for theassessment year 1988-89 and one year was available to the AssessingOfficer from the end of 31.03.1991 for completing the assessment underSection 153(1)(b). The assessment for the assessment year 1988-89 wascompleted on 18.03.1992 before the limitation date of 31.03.1992. So, theassessment completed by the Assessing Officer was not barred bylimitation. In this case, the return was filed on 13.08.1991 and theassessment year completed on 18.02.1992. Hence, the Tribunal was right inapplying the provisions of Section 153(1)(b) and holding that theassessment was not barred by limitation. So far as the amended provisionof Section 153(1)(b) is concerned, it is only a procedural provision.Amendment to the procedure has to be applied for all the proceedings whichare pending. In the case of Commissioner of Wealth Tax Vs. Sharvan KumarSwarup and Sons reported in 210 ITR 886, the Supreme Court held as follows:"Procedural law, severally speaking is applicable topending cases. No suitor can be said to have a vestedright in procedure." 9.In view of the foregoing conclusions, we find no error orinfirmity in the order of the Tribunal and the same does not requiresinterference. Hence, we answer the both the questions of law referred tous, against the assessee, in favour of the Revenue. No costs. Sd/-Asst. Registrar. /true copy/ Sub Asst. Registrar. km To1. The Assistant Registrar,The Income Tax Appellate Tribunal,Rajaji Bhavan, III Floor,Besant Nagar, Madras 90.(5 copies) 2. The Secretary, Board of Direct Taxes, New Delhi.(3 copies). 3. The Commissioner of Income Tax,Central I, Chennai. 9.In view of the foregoing conclusions, we find no error orinfirmity in the order of the Tribunal and the same does not requiresinterference. Hence, we answer the both the questions of law referred tous, against the assessee, in favour of the Revenue. No costs. Sd/-Asst. Registrar. /true copy/ Sub Asst. Registrar. km To1. The Assistant Registrar,The Income Tax Appellate Tribunal,Rajaji Bhavan, III Floor,Besant Nagar, Madras 90.(5 copies) 2. The Secretary, Board of Direct Taxes, New Delhi.(3 copies). 3. The Commissioner of Income Tax,Central I, Chennai. 4. The Commissioner of Income Tax,(Appeals) IV, Madras 34.5. The Assistant Commissioner,Central Circle I (1), Madras 34.+ 1 CC to Ms.Pushya Sitaraman, Advocate SR NO 8490+ 1 CC to Mr.Srinath Sridevan, Advocate SR NO 8321 Tax Case (Reference) Nos.379to 382 of 2001 22.02.2006vc(co)gp/20.3.