Wp/982/2007 Of M/S. Indusind Bank Ltd v. Income-Tax Settlement Commission And 3 Ors

IN THE HIGH COURT OF JUDICATURE AT BOMBAYDigitallysigned byPURTI ORDINARY ORIGINAL CIVIL JURISDICTIONPURTIPRASADPRASADPARABPARABDate:2023.07.1118:00:19+0530WRIT PETITION NO. 982 OF 2007 Indusind Bank Ltd.Having its registered office atIndusind House, 425, Dadasaheb Bhadkamkar Marg,Mumbai – 400 004.….Petitioner V/s.1. Income Tax Settlement CommissionAdditional Bench,Mahalaxmi Chambers, Mumbai – 400 034. 2. Assistant Commissioner ofIncome Tax 2(3)having her office at Aayakar Bhavan, Maharshi Karve Road, Mumbai. 3. Commissioner of Income Tax 2384 Aaykar Bhavan, M.K. Road,Mumbai – 400 020. 4. Union of IndiaAaykar Bhavan, M.K. Road,Mumbai – 400 020.…Respondents ---- Mr. Nishant Thakkar a/w Mr. Rajesh Poojary and Ms. Jasmin Amalsadvalai/b Mulla & Mulla and Craigie Blunt & Caroe for Petitioner.Mr. Suresh Kumar for Respondents. ---- CORAM : K.R. SHRIRAM & FIRDOSH P. POONIWALLA, JJ. DATED : 23[rd] JUNE 2023 ORAL JUDGMENT : (PER : K.R. SHRIRAM, J.) 1.Petitioner, a bank in the private sector filed its return of incomefor Assessment Year 1997-98 on 1[st] December 1997. In the computation, due on Government securities and debentures held by petitioner as on 31[st]March 1997. 2.By an order dated 28[th] March 2000 2[nd] Respondent (ACIT)completed the Assessment for Assessment Year 1997-98. In the AssessmentOrder among other adjustments, the 2[nd] Respondent held that a sum ofRs.25,17,19,849/- being interest on Government securities held bypetitioner had accrued to petitioner as on 31[st] March 1997 and as such wasliable to tax under Section 5 of the Act. The 2[nd] Respondent further heldthat a sum of Rs.12,73,80,111/- being interest received by petitioner in theFinancial Year 1996-97 (Assessment Year 1997-98) and offered as incomewas in fact income of the preceding year, i.e., Assessment Year 1996-97 andwas wrongly offered to tax in Assessment Year 1997-98. Accordingly 2[nd]Respondent brought to tax in Assessment Year 1997-98 a sum ofRs.12,43,39,738/- (incorrectly mentioned as Rs.12,46,39,738/-) being thedifference between Rs.25,17,79,849/- accruing in Assessment Year 1997-98and Rs.12,73,80,111/- offered by petitioner as income for Assessment Year1997-98. 3.On 24[th] March 2000 petitioner filed an application underSection 245 C (Application for settlement of cases) of the Income Tax Act,1961 (the Act) before the Settlement Commission in respect of AssessmentYear 1997-98. The application was filed only for surrendering its claim fordepreciation on certain leased assets. 4.Petitioner’s application was admitted on 22[nd] November 2000by 1[st] Respondent, viz., The Settlement Commission. The Commissioner ofIncome Tax, in reply to the Settlement Application, filed a report under Rule9 of the Settlement Commission (Procedure) Rules, 1997, inter alia, prayingfor addition of Rs.12,43,39,738/- being the net amount of interest accruedbe brought to tax placing reliance on the findings of 2[nd] Respondent in theAssessment Order. The Settlement Commission after hearing the partiespassed an order dated 28[th] February 2007 disposing the SettlementApplication. Aggrieved by this order dated 28[th] February 2007, petitioner has filed this petition seeking the following reliefs : (a) That this Hon’ble Court be pleased to issue a Writ of Certiorarior any other writ order or direction under Article 226 of theConstitution of India calling for the records of the case leading tothe passing of the Impugned Order (Exhibit “I” hereto) and aftergoing through the same and examining the question of legalitythereof insofar as it relates to the addition and/or adjustment toInterest Income, quash, cancel and set aside the Impugned Order(Exhibit “I” hereto) insomuch as it relates to the additions/adjustments to Interest Income; has filed this petition seeking the following reliefs : (a) That this Hon’ble Court be pleased to issue a Writ of Certiorarior any other writ order or direction under Article 226 of theConstitution of India calling for the records of the case leading tothe passing of the Impugned Order (Exhibit “I” hereto) and aftergoing through the same and examining the question of legalitythereof insofar as it relates to the addition and/or adjustment toInterest Income, quash, cancel and set aside the Impugned Order(Exhibit “I” hereto) insomuch as it relates to the additions/adjustments to Interest Income; (b) That this Hon’ble Court be pleased to issue a Writ ofMandamus or any other writ order or direction under Article 226of the Constitution of India ordering and directing the 2[nd]Respondent to assess interest income on Government Securities asreturned by the Petitioner; (c) That this Hon’ble Court be pleased to issue a Writ ofProhibition or any other writ order or direction under Article 226of the Constitution of India ordering and directing the 2[nd]Respondent from taking any action in furtherance to the ImpugnedOrder (Exhibit “I” hereto) insofar as it relates to the additions/adjustments to Interest Income. (d) That the hearing and final disposal of this petition (i) the operation of the Impugned Order insofar as itrelates to the additions/adjustments to Interest Income bestayed; and (ii) the 2[nd] Respondent, her successors in office,subordinates, servants and agents be restrained by an order and injunction of this Hon’ble Court from taking anysteps to recover Rs.16,83,56,055/- being the demandraised pursuant to the Impugned Order insofar as itpertains to additions/adjustments to Interest Income. (e) for ad-interim reliefs in terms of prayers (d) above; (f) For costs of the Petition; (g) For such other and further reliefs as this Hon’ble Court maydeem fit. 5.Rule was issued on 3[rd] July 2007 and Ad-interim relief in terms of prayer clause (d) was granted. 6.Mr. Thakkar submitted :- (a)Since it is the order of the Settlement Commission, the law is wellsettled that a challenge to order of Settlement Commission when made in apetition under Article 226 of the Constitution of India the court should beconcerned only with the legality of procedure followed and not with thevalidity of the order. But as held by the Hon’ble Apex Court inJyotendrasinhji vs. S.I. Tripathi and Ors.[1], it is also well settled that thescope of an enquiry by the court should also consider whether the order ofthe Commission is in confirmity with the provisions of law or contrary to theprovisions and that such contravention has caused prejudice to petitioner. Ifthe order of the Commission is contrary to the provisions of law certainlythe court should interfere. (b)All the interest which the Assessing Officer (AO) wanted to add wason Government of India securities. The interest received was offered in the 1 1993 Supp (3) SCC 389 (SC) return of income as income, but the interest accrued was not offered as thesame was neither due nor received. This was because the interest whichhad not become due was not income in the real sense. It became due onfixed dates and till that date, the right to income did not crystalize. (c)The Government of India securities provided for interest being paidon a particular date. When an agreement provides for payment of intereston a particular date the interest does not accrue to the holder thereof on anydate prior thereto. Interest would accrue or arise only on the date specifiedin the instrument. (d)A creditor has vested right to receive interest on a stated date infuture does not constitute an accrual of the interest to him on any priordate. (e)When the instrument provides for such payment of interest only on aparticular date, even an action prior to such date filed would be dismissedas pre-mature and not disclosing any cause of action. (c)The Government of India securities provided for interest being paidon a particular date. When an agreement provides for payment of intereston a particular date the interest does not accrue to the holder thereof on anydate prior thereto. Interest would accrue or arise only on the date specifiedin the instrument. (d)A creditor has vested right to receive interest on a stated date infuture does not constitute an accrual of the interest to him on any priordate. (e)When the instrument provides for such payment of interest only on aparticular date, even an action prior to such date filed would be dismissedas pre-mature and not disclosing any cause of action. (f)Under such agreement the debtor is not bound to pay interest on adate earlier to one stipulated in the agreement. In the present case also theadmitted position was that the interest was not payable on any date otherthan that mentioned in the security. (g)The ITAT, in the case of petitioner’s own case, for subsequentAssessment Years from 1998-99 onwards, has accepted the position that the interest accrues only on the specified open dates and not on day to day basisand the assessee cannot be prevented from urging in the returns that theinterest in the Government securities accrued only on the specified opendates notwithstanding that credit has been taken in the Profit and LossAccount for the interest on day to day basis. 7.Per contra, it was the case of respondents that as the applicantwas following mercantile system of accounting for interest paid on securitiesand deposits it could not follow the cash system of accounting forcorresponding income. 8.Mr. Suresh Kumar submitted that there was nothing wrong inthe procedure followed by the Commission and therefore the court shouldnot interfere. Mr. Suresh Kumar also submitted that the conclusion arrivedat by the Commission was a well reasoned conclusion and the assesseecannot pick and choose what is convenient to him and discard what is notconvenient to him. Mr. Suresh Kumar submitted that as per the provisionsof Section 5 of the Act the total income of any person who is resident inIndia includes all income from whatever sources derived which accrues orarises or is deemed to accrue or arise in India. 9.We do not agree with the submissions made by Mr. SureshKumar. 10.As held by this court in Mahindra and Mahindra Ltd. vs. Union of India through Secretary and Ors.[2], the High Court, after considering thejudgment of the Hon’ble Apex Court in Jyotendrasinhji (supra), has heldthat the law is very clear that though the order of the Commission is in thenature of a package deal and it may not be possible always to dissect itsorder and the assessee should not be permitted to accept what is favourableto him and reject what is not, if the Court is satisfied that the order of theCommission is contrary to the provisions of the Act, the Court shouldinterfere. 11.We are satisfied that the order of the Commission on thisaspect, i.e., interest accrued but not due is contrary to the provisions of thelaw. The Settlement Commission in our view has not given any reasonsalso. It has simply stated that it agrees with the CIT (D/R)’s view. Thefinding of the Commission reads as under : 4.3 Decision We would agree with the CIT (D/R)’s view. Income havingaccrued and corresponding expenditure having been reckoned onmercantile lasts, the interest income shall be taxed on accrual basisfor both the years under consideration. 12.In Director of Income Tax (International Taxation) vs. Credit Suisse First Boston (Cyprus) Ltd.[3] the question of law that came up forconsideration was whether interest can be said to have accrued to the assessee on 31[st] March in respect of securities held by it on that day 2 2022 SCC OnLine Bom 3155 3 (2013) 351 ITR 323 (Bom) 4.3 Decision We would agree with the CIT (D/R)’s view. Income havingaccrued and corresponding expenditure having been reckoned onmercantile lasts, the interest income shall be taxed on accrual basisfor both the years under consideration. 12.In Director of Income Tax (International Taxation) vs. Credit Suisse First Boston (Cyprus) Ltd.[3] the question of law that came up forconsideration was whether interest can be said to have accrued to the assessee on 31[st] March in respect of securities held by it on that day 2 2022 SCC OnLine Bom 3155 3 (2013) 351 ITR 323 (Bom) although the interest was not due or payable on that day. The court afterconsidering various judgments came to the conclusion that the right toreceive the interest on the Government securities vested in the respondentonly on the due date mentioned in the securities. Consequently, the interestaccrued on the securities only on the due date and cannot be said to haveaccrued to assessee on any date other than the dates stipulated therein. Thecourt also rejected the contention of revenue that interest accrues for brokenperiod between two consecutive dates stipulated in the agreement/instrument for payment of interest. The court went on to hold that if theassessee held the security upto 31[st] March and sold the same thereafter, butbefore the date on which interest was payable as stipulated in the security,interest cannot be said to have accrued to the assessee. 13.The Commission has not articulated as to why it did not agreewith the submissions made by the assessee’s representative. The assessee’srepresentative admittedly had also relied upon the judgment in E.D.Sassoon & Co. Ltd. & Ors. vs. CIT[4] where the Hon’ble Apex Court held“Unless and until the assessee acquires a right to receive income, the incomecannot be said to have been accrued to him”. Following this judgment ofthe Hon’ble Apex Court, the ITAT, Jaipur Bench in State Bank of Bikaner &Jaipur vs. Deputy Commissioner of Income Tax[5] held that “in the case ofinterest on securities, the income fructifies to the assessee only when the 4 (1954) 26 ITR 27 (SC) 5 74 ITD 203 (Jaipur) securities yield interest”. The ITAT had also relied upon CIT vs. ShoorjiVallabhdas & Co.[6] where the Hon’ble Apex Court has held that “if incomedoes not result at all, there cannot be a tax, even though in book keeping,an entry is made about “hypothetical income” which does not materialise”.The Settlement Commission has not dealt as to why these judgments in caseof E.D. Sassoon & Co. Ltd. (supra) and State Bank of Bikaner & Jaipur(supra) are not applicable. As held by the Bombay High Court in CreditSuisse First Boston (Cyprus) Ltd. (supra) the right to receive interest onGovernment securities vested in assessee only on the due date mentioned inthe securities. Consequently, the interest accrued on the securities only onthe due dates and cannot be said to have accrued to assessee on any dateother than the dates stipulated therein. Therefore, in our view theconclusion arrived at by the Settlement Commission under this head is notin confirmity with the provisions of law and certainly such a contraventionwould prejudice petitioner. 14.Mr. Suresh Kumar had also submitted that the judgment of theBombay High Court in Credit Suisse First Boston (Cyprus) Ltd. (supra) wasa later judgment, delivered much after the Settlement Commission passedthe impugned order. Mr. Suresh Kumar also stated that the judgment of theHigh Court relied upon by Mr.Thakkar as also the orders passed by ITAT forsubsequent Assessment Years from 1998-99 onwards were passed after the 14.Mr. Suresh Kumar had also submitted that the judgment of theBombay High Court in Credit Suisse First Boston (Cyprus) Ltd. (supra) wasa later judgment, delivered much after the Settlement Commission passedthe impugned order. Mr. Suresh Kumar also stated that the judgment of theHigh Court relied upon by Mr.Thakkar as also the orders passed by ITAT forsubsequent Assessment Years from 1998-99 onwards were passed after the order of the Settlement Commission. These submissions of Mr. SureshKumar are not acceptable. The Hon’ble Apex Court in AssistantCommissioner of Income Tax, Rajkot vs. Saurashtra Kutch Stock ExchangeLtd.[7] has held that a judicial decision acts retrospectively. The Judges donot make law, they only discover or find the correct law. The law hasalways been the same and if a subsequent decision alters the earlier one, thelater decision does not make a new law. It only discovers the correctprinciple of law which has to be applied retrospectively. The Hon’ble ApexCourt held that even an earlier decision of the court operated for quitesometime, the decision rendered later on would have retrospective effect,clarifying the legal position which was earlier not correctly understood.Paragraph no. 40 to 44 of the said judgment read as under : 40.The core issue, therefore, is whether non-considerationof a decision of Jurisdictional Court (in this case a decision of theHigh Court of Gujarat) or of the Supreme Court can be said to be a"mistake apparent from the record"? In our opinion, both - theTribunal and the High Court - were right in holding that such amistake can be said to be a "mistake apparent from the record"which could be rectified under Section 254(2). 41. A similar question came up for consideration before theHigh Court of Gujarat in Suhrid Geigy Ltd.’s case (supra). It washeld by the Division Bench of the High Court that if the point iscovered by a decision of the Jurisdictional Court rendered prior oreven subsequent to the order of rectification, it could be said to be"mistake apparent from the record" under Section 254(2) of the Actand could be corrected by the Tribunal. 42. In our judgment, it is also well-settled that a judicialdecision acts retrospectively. According to Blackstonian theory, it isnot the function of the Court to pronounce a ‘new rule’ but tomaintain and expound the ‘old one’. In other words, Judges do notmake law, they only discover or find the correct law. The law hasalways been the same. If a subsequent decision alters the earlierone, it (the later decision) does not make new law. It onlydiscovers the correct principle of law which has to be appliedretrospectively. To put it differently, even where an earlier decision of the Court operated for quite some time, the decision renderedlater on would have retrospective effect clarifying the legal positionwhich was earlier not correctly understood. 43. Salmond in his well-known work states; "(T)he theory of case law is that a judge does not make law; hemerely declares it; and the overruling of a previous decision is adeclaration that the supposed rule never was law. Hence anyintermediate transactions made on the strength of the supposedrule are governed by the law established in the overruling decision.The overruling is retrospective, except as regards matters that areres judicataor accounts that have been settled in the meantime".(emphasis supplied) 44. It is no doubt true that after a historic decision in GolakNath v. State of Punjab AIR 1967 SC 1643, this Court has acceptedthe doctrine of ‘prospective overruling’. It is based on thephilosophy: “The past cannot always be erased by a new judicialdeclaration”. It may, however, be stated that this is an exception tothe general rule of the doctrine of precedent. 44. It is no doubt true that after a historic decision in GolakNath v. State of Punjab AIR 1967 SC 1643, this Court has acceptedthe doctrine of ‘prospective overruling’. It is based on thephilosophy: “The past cannot always be erased by a new judicialdeclaration”. It may, however, be stated that this is an exception tothe general rule of the doctrine of precedent. 15.Before we part, we should also note, in our view no reasonshave been given by the Settlement Commission. In Jyotendrasinhji (supra)Revenue had argued that the Commission is not even required or obligatedto pass a reasoned order. The Hon’ble Apex Court held that the principle ofnatural justice (audi alteram partem) has been incorporated in Section 245D itself which should mean, in our view, reasons have to be given. Reasonsare live links between the mind of the decision taker to the controversy inquestion and the decision or conclusion arrived at. 16.The Hon’ble Apex Court in Uttar Pradesh State Road TransportCorporation vs. Jagdish Prasad Gupta[8] has stated reasons introduce clarityin an order. The order howsoever brief, should indicate an application ofmind all the more when the same could be further challenged. Paragraph 8 (2009) 12 Supreme Court Cases 609 No. 8 of Uttar Pradesh State Road Transport Corporation (supra) read as under : 8. “5…. Reasons introduce clarity in an order. On plainestconsideration of justice, the High Court ought to have set forth itsreasons, howsoever brief, in its order indicative of an application ofits mind, all the more when its order is amenable to further avenueof challenge. The absence of reasons has rendered the [HighCourt's judgment] not sustainable. …. 6. Even in respect of administrative orders Lord Denning M.R. inBreen v. Amalgamated Engg. Union[1] observed: (WLR p. 750 G)“The giving of reasons is one of the fundamentals of goodadministration”. In Alexander Machinery (Dudley) Ltd. v.Crabtree[2] it was observed: "Failure to give reasons amounts to denial of justice. Reasonsare live links between the mind of the decision taker to thecontroversy in question and the decision or conclusion arrived at”. Reasons substitute subjectivity by objectivity. The emphasis onrecording reasons is that if the decision reveals the “inscrutableface of the sphinx”, it can, by its silence, render it virtuallyimpossible for the Courts to perform their appellate function orexercise the power of judicial review in adjudging the validity ofthe decision. Right to reason is an indispensable part of a soundjudicial system, reasons at least sufficient to indicate an applicationof mind to the matter before Court. Another rationale is that theaffected party can know why the decision has gone against him.One of the salutary requirements of natural justice is spelling outreasons for the order made, in other words, a speaking out. The“inscrutable face of a sphinx” is ordinarily incongruous with ajudicial or quasi-judicial performance. 17.In view of the above, we set aside the impugned order to this extent. Consequently, the Assessment Order also, to the extent mentionedabove, is quashed and set aside”. 18.In the circumstances, on this issue we direct that the matter besent to the Interim Board for Settlement constituted for the settlement ofpending applications as contemplated under Section 245 AA of the Act. The Interim Board may pass such orders as it deems fit in accordance with law after hearing the parties. 19.Petition disposed. (FIRDOSH P. POONIWALLA, J.) (K.R. SHRIRAM, J.)