Wp/983/2007 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:2023.07.2411:41:47+0530WRIT PETITION NO. 983 OF 2007 Indusind Bank Ltd. ….Petitioner V/s. Income Tax Settlement Commission and Ors.…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 P.C. : 1.Since in this matter the issue involved is the same as in WritPetition No. 982 of 2007 and the application to Settlement Commission wasdisposed by a common order dated 28[th] February 2007 which was alsoimpugned in Writ Petition No. 982 of 2007, this petition is also disposed inthe same lines as per Writ Petition No.982 of 2007. The directions giventherein shall equally apply to this petition also. For ease of reference ourorder dated 23[rd] June 2023 in Writ Petition No. 982 of 2007 is reproducedbelow : 1. Petitioner, a bank in the private sector filed its return of incomefor Assessment Year 1997-98 on 1[st] December 1997. In thecomputation, petitioner returned income of Rs.12,73,80,111/-being interest accrued as due on Government securities anddebentures 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 theAssessment Order among other adjustments, the 2[nd] Respondentcompleted the Assessment for Assessment Year 1997-98. In theAssessment Order among other adjustments, the 2[nd] Respondent held that a sum of Rs.25,17,19,849/- being interest on Governmentsecurities held by petitioner had accrued to petitioner as on 31[st]March 1997 and as such was liable to tax under Section 5 of theAct. The 2[nd]Respondent further held that a sum ofRs.12,73,80,111/- being interest received by petitioner in theFinancial Year 1996-97 (Assessment Year 1997-98) and offered asincome was in fact income of the preceding year, i.e., AssessmentYear 1996-97 and was wrongly offered to tax in Assessment Year1997-98. Accordingly 2[nd] Respondent brought to tax in AssessmentYear 1997-98 a sum of Rs.12,43,39,738/- (incorrectly mentioned asRs.12,46,39,738/-)beingthedifferencebetweenRs.25,17,79,849/- accruing in Assessment Year 1997-98 andRs.12,73,80,111/- offered by petitioner as income for AssessmentYear 1997-98. 3. On 24[th] March 2000 petitioner filed an application underSection 245 C (Application for settlement of cases) of the IncomeTax Act, 1961 (the Act) before the Settlement Commission inrespect of Assessment Year 1997-98. The application was filed onlyfor surrendering its claim for depreciation on certain leased assets. 4. Petitioner’s application was admitted on 22[nd] November 2000 by1[st]Respondent, viz., The Settlement Commission. TheCommissioner of Income Tax, in reply to the SettlementApplication, filed a report under Rule 9 of the SettlementCommission (Procedure) Rules, 1997, inter alia, praying foraddition of Rs.12,43,39,738/- being the net amount of interestaccrued be brought to tax placing reliance on the findings of 2[nd]Respondent in the Assessment Order. The Settlement Commissionafter hearing the parties passed an order dated 28[th] February 2007disposing the Settlement Application. Aggrieved by this orderdated 28[th] February 2007, petitioner has filed this petition seekingthe following reliefs : 4. Petitioner’s application was admitted on 22[nd] November 2000 by1[st]Respondent, viz., The Settlement Commission. TheCommissioner of Income Tax, in reply to the SettlementApplication, filed a report under Rule 9 of the SettlementCommission (Procedure) Rules, 1997, inter alia, praying foraddition of Rs.12,43,39,738/- being the net amount of interestaccrued be brought to tax placing reliance on the findings of 2[nd]Respondent in the Assessment Order. The Settlement Commissionafter hearing the parties passed an order dated 28[th] February 2007disposing the Settlement Application. Aggrieved by this orderdated 28[th] February 2007, petitioner has filed this petition seekingthe following reliefs : (a) That this Hon’ble Court be pleased to issue aWrit of Certiorari or any other writ order ordirection under Article 226 of the Constitution ofIndia calling for the records of the case leading tothe passing of the Impugned Order (Exhibit “I”hereto) and after going through the same andexamining the question of legality thereof insofaras it relates to the addition and/or adjustment toInterest Income, quash, cancel and set aside theImpugned Order (Exhibit “I” hereto) insomuch asit relates to the additions/ adjustments to InterestIncome; (b) That this Hon’ble Court be pleased to issue aWrit of Mandamus or any other writ order ordirection under Article 226 of the Constitution ofIndia ordering and directing the 2[nd] Respondent toassess interest income on Government Securitiesas returned by the Petitioner; issue a Writ of Prohibition or any other writ orderor direction under Article 226 of the Constitutionof India ordering and directing the 2[nd] Respondentfrom taking any action in furtherance to theImpugned Order (Exhibit “I” hereto) insofar as itrelates to the additions/adjustments to InterestIncome. (d) That the hearing and final disposal of thispetition (i) the operation of the Impugned Order insofaras it relates to the additions/adjustments toInterest Income be stayed; and (ii) the 2[nd] Respondent, her successors in office,subordinates, servants and agents be restrained byan order and injunction of this Hon’ble Court fromtaking any steps to recover Rs.16,83,56,055/-being the demand raised pursuant to theImpugned Order insofar as it pertains toadditions/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 thisHon’ble Court may deem fit. 5. Rule was issued on 3[rd] July 2007 and Ad-interim relief in termsof prayer clause (d) was granted. 6. Mr. Thakkar submitted :- (a) Since it is the order of the Settlement Commission, the law iswell settled that a challenge to order of Settlement Commissionwhen made in a petition under Article 226 of the Constitution ofIndia the court should be concerned only with the legality ofprocedure followed and not with the validity of the order. But asheld by the Hon’ble Apex Court in Jyotendrasinhji vs. S.I. Tripathiand Ors.[1], it is also well settled that the scope of an enquiry by thecourt should also consider whether the order of the Commission isin confirmity with the provisions of law or contrary to theprovisions and that such contravention has caused prejudice topetitioner. If the order of the Commission is contrary to theprovisions of law certainly the court should interfere. (b) All the interest which the Assessing Officer (AO) wanted toadd was on Government of India securities. The interest receivedwas offered in the return of income as income, but the interestaccrued was not offered as the same was neither due nor received. This was because the interest which had not become due was notincome in the real sense. It became due on fixed dates and tillthat date, the right to income did not crystalize. (b) All the interest which the Assessing Officer (AO) wanted toadd was on Government of India securities. The interest receivedwas offered in the return of income as income, but the interestaccrued was not offered as the same was neither due nor received. This was because the interest which had not become due was notincome in the real sense. It became due on fixed dates and tillthat date, the right to income did not crystalize. (c) The Government of India securities provided for interest beingpaid on a particular date. When an agreement provides forpayment of interest on a particular date the interest does notaccrue to the holder thereof on any date prior thereto. Interestwould accrue or arise only on the date specified in the instrument. (d) A creditor has vested right to receive interest on a stated datein future does not constitute an accrual of the interest to him onany prior date. (e) When the instrument provides for such payment of interestonly on a particular date, even an action prior to such date filedwould be dismissed as pre-mature and not disclosing any cause ofaction. (f) Under such agreement the debtor is not bound to pay intereston a date earlier to one stipulated in the agreement. In the presentcase also the admitted position was that the interest was notpayable on any date other than 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 theposition that the interest accrues only on the specified open datesand not on day to day basis and the assessee cannot be preventedfrom urging in the returns that the interest in the Governmentsecurities accrued only on the specified open datesnotwithstanding 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 paidon securities and deposits it could not follow the cash system ofaccounting for corresponding income. 8. Mr. Suresh Kumar submitted that there was nothing wrong inthe procedure followed by the Commission and therefore thecourt should not interfere. Mr. Suresh Kumar also submitted thatthe conclusion arrived at by the Commission was a well reasonedconclusion and the assessee cannot pick and choose what isconvenient to him and discard what is not convenient to him. Mr.Suresh Kumar submitted that as per the provisions of Section 5 ofthe Act the total income of any person who is resident in Indiaincludes all income from whatever sources derived which accruesor arises 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, afterconsidering the judgment of the Hon’ble Apex Court inJyotendrasinhji (supra), has held that the law is very clear thatthough the order of the Commission is in the nature of a packagedeal and it may not be possible always to dissect its order and theassessee should not be permitted to accept what is favourable tohim and reject what is not, if the Court is satisfied that the orderof the Commission is contrary to the provisions of the Act, theCourt should interfere. 11. We are satisfied that the order of the Commission on thisaspect, i.e., interest accrued but not due is contrary to theprovisions of the law. The Settlement Commission in our viewhas not given any reasons also. It has simply stated that it agreeswith the CIT (D/R)’s view. The finding of the Commission readsas under : 4.3 Decision We would agree with the CIT (D/R)’s view.Income having accrued and corresponding expenditurehaving been reckoned on mercantile lasts, the interestincome shall be taxed on accrual basis for both the yearsunder consideration. 11. We are satisfied that the order of the Commission on thisaspect, i.e., interest accrued but not due is contrary to theprovisions of the law. The Settlement Commission in our viewhas not given any reasons also. It has simply stated that it agreeswith the CIT (D/R)’s view. The finding of the Commission readsas under : 4.3 Decision We would agree with the CIT (D/R)’s view.Income having accrued and corresponding expenditurehaving been reckoned on mercantile lasts, the interestincome shall be taxed on accrual basis for both the yearsunder consideration. 12. In Director of Income Tax (International Taxation) vs. CreditSuisse First Boston (Cyprus) Ltd.[3] the question of law that came upfor consideration was whether interest can be said to have accruedto the assessee on 31[st] March in respect of securities held by it onthat day although the interest was not due or payable on that day.The court after considering various judgments came to theconclusion that the right to receive the interest on the Governmentsecurities vested in the respondent only on the due date mentionedin the securities. Consequently, the interest accrued on thesecurities only on the due date and cannot be said to have accruedto assessee on any date other than the dates stipulated therein.The court also rejected the contention of revenue that interestaccrues for broken period between two consecutive dates stipulatedin the agreement/instrument for payment of interest. The courtwent on to hold that if the assessee held the security upto 31[st]March and sold the same thereafter, but before the date on whichinterest was payable as stipulated in the security, interest cannot besaid 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. Theassessee’s representative admittedly had also relied upon thejudgment in E.D. Sassoon & Co. Ltd. & Ors. vs. CIT[4] where theHon’ble Apex Court held “Unless and until the assessee acquires aright to receive income, the income cannot be said to have beenaccrued to him”. Following this judgment of the Hon’ble Apex 2 2022 SCC OnLine Bom 3155 3 (2013) 351 ITR 323 (Bom) 4 (1954) 26 ITR 27 (SC) 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 onlywhen the securities yield interest”. The ITAT had also relied uponCIT vs. Shoorji Vallabhdas & Co.[6] where the Hon’ble Apex Courthas held that “if income does not result at all, there cannot be atax, even though in book keeping, an entry is made about“hypothetical income” which does not materialise”. The SettlementCommission has not dealt as to why these judgments in case ofE.D. Sassoon & Co. Ltd. (supra) and State Bank of Bikaner & Jaipur(supra) are not applicable. As held by the Bombay High Court inCredit Suisse First Boston (Cyprus) Ltd. (supra) the right to receiveinterest on Government securities vested in assessee only on thedue date mentioned in the securities. Consequently, the interestaccrued on the securities only on the due dates and cannot be saidto have accrued to assessee on any date other than the datesstipulated therein. Therefore, in our view the conclusion arrived atby the Settlement Commission under this head is not in confirmitywith 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) was a later judgment, delivered much after the SettlementCommission passed the impugned order. Mr. Suresh Kumar alsostated that the judgment of the High Court relied upon byMr.Thakkar as also the orders passed by ITAT for subsequentAssessment Years from 1998-99 onwards were passed after theorder of the Settlement Commission. These submissions of Mr.Suresh Kumar are not acceptable. The Hon’ble Apex Court inAssistant Commissioner of Income Tax, Rajkot vs. Saurashtra KutchStock Exchange Ltd.[7] has held that a judicial decision actsretrospectively. The Judges do not make law, they only discover orfind the correct law. The law has always been the same and if asubsequent decision alters the earlier one, the later decision doesnot make a new law. It only discovers the correct principle of lawwhich has to be applied retrospectively. The Hon’ble Apex Courtheld that even an earlier decision of the court operated for quitesometime, the decision rendered later on would have retrospectiveeffect, clarifying the legal position which was earlier not correctlyunderstood. Paragraph no. 40 to 44 of the said judgment read asunder : 40. The core issue, therefore, is whether non-consideration of a decision of Jurisdictional Court (inthis case a decision of the High Court of Gujarat) or ofthe Supreme Court can be said to be a "mistakeapparent from the record"? In our opinion, both - theTribunal and the High Court - were right in holding thatsuch a mistake can be said to be a "mistake apparentfrom the record" which could be rectified under Section 5 74 ITD 203 (Jaipur) 6 (1962) 46 ITR 144 (SC) 7 (2008) 305 ITR 227 (SC) 254(2). 41. A similar question came up for consideration beforethe High Court of Gujarat in Suhrid Geigy Ltd.’s case(supra). It was held by the Division Bench of the HighCourt that if the point is covered by a decision of theJurisdictional Court rendered prior or even subsequentto the order of rectification, it could be said to be"mistake apparent from the record" under Section254(2) of the Act and could be corrected by theTribunal. 42. In our judgment, it is also well-settled that ajudicial decision acts retrospectively. According toBlackstonian theory, it is not the function of the Court topronounce a ‘new rule’ but to maintain and expound the‘old one’. In other words, Judges do not make law, theyonly discover or find the correct law. The law hasalways been the same. If a subsequent decision altersthe earlier one, it (the later decision) does not makenew law. It only discovers the correct principle of lawwhich has to be applied retrospectively. To put itdifferently, even where an earlier decision of the Courtoperated for quite some time, the decision renderedlater on would have retrospective effect clarifying thelegal position which was earlier not correctlyunderstood. 43. Salmond in his well-known work states; "(T)he theory of case law is that a judge does not makelaw; he merely declares it; and the overruling of aprevious decision is a declaration that the supposed rulenever was law. Hence any intermediate transactionsmade on the strength of the supposed rule are governedby the law established in the overruling decision. Theoverruling is retrospective, except as regards mattersthat are res judicataor accounts that have been settledin the meantime". (emphasis supplied) 44. It is no doubt true that after a historic decision inGolak Nath v. State of Punjab AIR 1967 SC 1643, thisCourt has accepted the doctrine of ‘prospectiveoverruling’. It is based on the philosophy: “The pastcannot always be erased by a new judicial declaration”.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 inGolak Nath v. State of Punjab AIR 1967 SC 1643, thisCourt has accepted the doctrine of ‘prospectiveoverruling’. It is based on the philosophy: “The pastcannot always be erased by a new judicial declaration”.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 evenrequired or obligated to pass a reasoned order. The Hon’ble ApexCourt held that the principle of natural justice (audi alterampartem) has been incorporated in Section 245 D itself which should mean, in our view, reasons have to be given. Reasons are live linksbetween 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 introduceclarity in an order. The order howsoever brief, should indicate anapplication of mind all the more when the same could be furtherchallenged. Paragraph No. 8 of Uttar Pradesh State Road TransportCorporation (supra) read as under : 8. “5…. Reasons introduce clarity in an order. Onplainest consideration of justice, the High Court oughtto have set forth its reasons, howsoever brief, in itsorder indicative of an application of its mind, all themore when its order is amenable to further avenue ofchallenge. The absence of reasons has rendered the[High Court's judgment] not sustainable. …. 6. Even in respect of administrative orders LordDenning M.R. in Breen v. Amalgamated Engg. Union[1]observed: (WLR p. 750 G) “The giving of reasons is oneof the fundamentals of good administration”. InAlexander Machinery (Dudley) Ltd. v. Crabtree[2] it wasobserved: "Failure to give reasons amounts to denial ofjustice. Reasons are live links between the mind of thedecision taker to the controversy in question and thedecision or conclusion arrived at”. Reasons substitute subjectivity by objectivity. Theemphasis on recording reasons is that if the decisionreveals the “inscrutable face of the sphinx”, it can, by itssilence, render it virtually impossible for the Courts toperform their appellate function or exercise the powerof judicial review in adjudging the validity of thedecision. Right to reason is an indispensable part of asound judicial system, reasons at least sufficient toindicate an application of mind to the matter beforeCourt. Another rationale is that the affected party canknow why the decision has gone against him. One ofthe salutary requirements of natural justice is spellingout reasons for the order made, in other words, aspeaking out. The “inscrutable face of a sphinx” isordinarily incongruous with a judicial or quasi-judicialperformance. 17. In view of the above, we set aside the impugned order to thisextent. Consequently, the Assessment Order also, to the extentmentioned above, is quashed and set aside. 18. In the circumstances, on this issue we direct that the matter be 8 (2009) 12 Supreme Court Cases 609 sent to the Interim Board for Settlement constituted for thesettlement of pending applications as contemplated under Section245 AA of the Act. The Interim Board may pass such orders as itdeems fit in accordance with law after hearing the parties. 19. Petition disposed. 2.Petition disposed. (FIRDOSH P. POONIWALLA, J.) (K.R. SHRIRAM, J.)