1. These are two appeals filed by the assessee and one cross-objection filed by the department. They arise out of the order dated 31-10-1984 of the learned Commissioner (Appeals) as rectified by the subsequent order dated 22-2-1985 under Section 154 of the Income-tax Act, 1961 ('the Act').
2. The assessee is Dalmia Dairy Industries Limited, a limited company.
Its status is that of a resident and ordinarily resident. The assessee-company ceased to be the subsidiary company of Dalmia Cement (Bharat) Limited with effect from 31-1-1975. It has a factory at Bharatpur where milk powder and ghee is manufactured. It has an export unit known as Dalmia Udyog and a mining unit known as Dalmia Cement Industries. The assessee has branches and depots at Delhi, Ghaziabad, Indore, Chandigarh, Digma, Ambala, Gauhati, Bombay, Calcutta, etc. Its business consists of the production of skimmed milk powder, butter and ghee as also the export of ready-made garments. It also exported ghee, hand tools and blades.
3. A preliminary objection had been taken on behalf of the department to the effect that the appeal against the order dated 31-10-1984 could not lie since that order was rectified under Section 154. However, after hearing the learned authorised representatives on both sides, we find that this objection is not sustainable as the learned Commissioner (Appeals) had merely corrected certain typographical errors in figures in the original order and since the assessee has also filed an appeal against the order under Section 154.
4. The first ground in assessee's appeal in IT Appeal No. 5718 (Delhi) of 1984 relates to the exclusion of the capital borrowed by the assessee for the purposes of computing the capital employed in its industrial undertaking for manufacture of milk products at Bharatpur for the purpose of Section 80J of the Act. This ground has to be rejected now in view of the decision of the Supreme Court in Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308 whereby the validity of Section 80J(1A) and Rule 19A of the Income-tax Rules, 1962 ('the Rules') was upheld.5. The second ground relates to the taxation of interest amounting to Rs. 6,60,591 on the assessee's fixed deposit with the First National City Bank, Calcutta. According to the assessee the interest amount was payable to it only on 21-11-1979 the date of the maturity of the fixed deposit which fell outside the assessment year in question. However, the income-tax authorities did not accept the assessee's contention holding that since the system of accounting followed by it was mercantile, the interest amount was taxable on accrued basis.
6. The learned departmental representative referred to the order dated 11-1-1980 of the Tribunal for the assessment year 1973-74 [IT Appeal No. 3434 (Delhi) of 1976-77] and also relied upon these decisions- Dr.
Shamlal Narula v. CIT [1964] 53 ITR 151 (SC), CIT v. Deoki Nandan & Sons [1982] 138 ITR 225 (Delhi) and CIT v. Vijay Laxmi Trading Co. Ltd. [1984] 147 ITR 372 (Raj.). After hearing the learned representatives on both the sides we find that the contention raised on behalf of the assessee has force. A similar question arose for the assessment year 1977-78 also in respect of an amount of Rs. 24,54,270 on another fixed deposit. The Tribunal vide its order in IT Appeal Nos. 2906 and 3017 (Delhi) of 1982 dated 31-5-1985 held that no interest accrued to the assessee before the date of maturity of the fixed deposit. In this connection paragraphs 35-40 of the said order are relevant. Following with respect the said order which is fully applicable to the facts for the assessment year in question, we hold that the amount of interest in question could not be taxed in the assessment year 1980-81 in question for which the accounting year ended on 30-9-1979. In Dr. Shamlal Manila's case (supra) the Supreme Court was considering statutory interest paid under Section 34 of the Land Acquisition Act, 1894. The same was the position in the case of Deoki Nandan & Sons (supra) decided by the Delhi High Court. In the case of Vijay Laxmi Trading Co.
Ltd. (supra), the Rajasthan High Court had proceeded on the basis that the assessee had acquired a right to receive the income, unlike in the present case. Even in a mercantile system of accounting the amount of interest cannot be taxed unless the right to receive the interest income arises (accrued). On the terms of the fixed deposit in question, therefore, since interest was not payable before its maturity, the accrued principle could not be applied. We, accordingly, hold that the interest amount was not taxable in the assessment year in question.
7. The third ground relates to the inclusion of Rs. 63,773 under Section 41(1) of the Act. This amount represented the unclaimed interest accrued on mortgage bearer debentures of the assessee which were finally redeemable in 1970 and written back by the assessee during this year. The assessee transferred to its capital account a sum of Rs. 1,43,000 being the amount of 143 outstanding bearer debentures of Rs. 1,000 each. The learned Commissioner (Appeals) held that notwithstanding the book entries, the assessee's liability did not cease in the assessment year in question. Finding that the last acknowledgement took place in the balance sheet for the year ended 30-9-1978 the learned Commissioner (Appeals) took the view that the legal remedy for the enforcement of the liability could only cease on the expiry of three years therefrom, i.e., after 30-9-1981. He, accordingly, directed the ITO to delete the addition for the assessment year in question and to consider the taxability of the same for the assessment year 1982-83 (limited to the extent of the claims not made up to 30-9-1981). The assessee feels aggrieved by the latter part of the direction of the learned Commissioner (Appeals) where taxability has been directed to be considered for the assessment year 1982-83. In its cross-objection the department is aggrieved since the amount has been held to be not taxable for the assessment year in question.
8. Before us, on behalf of the assessee, reliance was placed on page 528 of Kanga & Palkhivala's Law & Practice of Income-tax, Seventh edn.
according to which when a liability becomes barred by the law of limitation, there is neither remission nor cessation of the liability.
He also referred to the decision of the Bombay High Court in J.K.Chemicals Ltd. v. CIT [1966] 62 ITR 34 for the proposition that mere credit entry in the accounts does not establish liability. On the other hand, the learned departmental representative argued that the order of the ITO should be restored. He relied upon the decision of the Supreme Court in CIT v. Manmohan Das [1966] 59 ITR 699 and submitted that in any case the Commissioner (Appeals)'s direction did not affect the assessee prejudicially.
9. We have considered the rival submissions. In terms of Section 41(1) since it cannot be said on the facts that in the assessment year in question the assessee obtained any benefit in respect of its liability by way of remission or cessation thereof, the question of taxing the amount of Rs. 63,773 in the assessment year in question did not arise, the book entries notwithstanding. We, therefore, hold accordingly.
However, the observation of the learned Commissioner (Appeals) regarding the taxability of the amount for the assessment year 1982-83 shall not prejudice the assessee. It will be open to the assessee to raise all necessary and available defences and explanations in that regard. The result is that the ground taken in the assessee's appeal is accepted whereas the ground taken in the departmental cross-objection is rejected.
10. The fourth ground relates to the disallowance of Rs. 28,820 under Section 37(3) of the Act read with Rule 6D of the Rules relating to daily allowance granted to the assessee's employees during the period of their duties away from the headquarters. However, at the time of the hearing of the appeal, since this ground was not pressed on behalf of the assessee before us for want of details, this ground no longer survives for our consideration.
11. The fifth ground relates to the liability of Rs. 1,99,483 incurred for payment of gratuity to its employees under its Gratuity Scheme/Payment of Gratuity Act, 1972 in respect of the services rendered by them during the assessment year in question. According to the assessee the actuarialy valued liability in respect of gratuity was not a provision and so that provisions of Section 40A(7) of the Act were not applicable. However, the learned Commissioner (Appeals) held that no deduction was allowable since the amount in question had neither been paid nor spent nor provided for and set apart for a known and accrued liability.
12. After hearing the learned representatives on both the sides we find no force in this ground of appeal in view of the clear decision of the Supreme Court in the case of Shree Sajjan Mills Ltd. [1985] 156 ITR (St.) 1. It was held by the Supreme Court in that case that the amount of gratuity payable to the employees (calculated on actuarial basis) but for which no provision had been made in the assessee's books of account, was not allowable as a business expenditure unless the requirements of Section 40A(7) had been complied with.
13. The sixth and seventh grounds constitute the main grounds. The facts need to be narrated before stating the controversy. The assessee-company (earlier known as Dalmia Cement Ltd.) owned and possessed two cement factories situated at Dandot (District Jhelum) and Shantinagar (Karachi) in Pakistan. It entered into an agreement on 24-7-1962 to sell these factories in favour of one Mr. Eruch Maneckji of Karachi and/or his nominee by 31-12-1962. A number of supplemental agreements (7) were entered into to modify the method of ascertainment of purchase price and enlargement of time. The last supplemental agreement was executed on 30-6-1964 to enable the sale deed to be executed up to 30-9-1964. The sale deed was executed on 30-9-1964 for Rs. 2,33,66,678 (Pakistani Rupees) in favour of the assessee's nominee Pakistan Progressive Cement Industries Limited (PPCIL). At the request of Maneckji and PPCIL the National Bank of Pakistan executed an irrevocable bank guarantee dated 30-9-1964 undertaking to pay to the assessee-company in India (in case of failure of the vendee) in pounds sterling or in Indian rupees from its non-resident account in India.
The payment was to be made of the sale price partly in cash and partly by supply of cement. However, no cement was supplied. The said bank guarantee provided for reference of disputes to the arbitration of the International Chamber of Commerce. Armed hostilities broke out between India and Pakistan on 5-9-1965 with the result that a state of emergency was proclaimed in Pakistan and on 9-9-1965 Pakistan prohibited exports to India. The National Bank of Pakistan having failed to honour its guarantee, the dispute was referred for arbitration to the International Chamber of Commerce. Two final awards were given to the arbitrator on 1-3-1971 and 3-3-1973. Under the first award the National Bank of Pakistan was directed to pay to the assessee in India a sum equivalent to Pakistani Rs. 70,50,000 with interest at the rate of 6 per cent per annum with effect from 3-1-1966 to the date of payment. This was in respect of non-delivery of cement. Under the second award it was directed to pay to the assessee in India a sum equivalent to Pakistani Rs. 20,285,951 with interest at the rate of 5 per cent per annum with effect from 23-1-1968 to the date of payment.
Here it may be noticed that 23-1-1968 was the date of the notice of claim. Whereas 3-1-1966 was the first day of default after the period of 14 days provided in the bank guarantee. The assessee sought to enforce the awards in England (where the National Bank of Pakistan had a branch and substantial assets) firstly by summary enforcement under Section 36 of the Arbitration Act, 1950 (of U.K.) and subsequently by instituting suits before the High Court in London for damages against the National Bank of Pakistan for its failure to honour the awards. The High Court in London vide its order dated 14-4-1976 held the awards to be valid, binding and enforceable in England for the following amounts :(a) Outstanding price 18,21,721.82(b) Contractual interest at the rate of 6 per cent per annum from 1-10-62 to 18-12-1967 5,70,173.89(c) Interest at the rate of 6 per cent with effect from 3-1-1966 on the principal amount of the first award award up to 14-4-1976 (date of the decree) 11,10,860.94(d) Costs 33,073.43 14. The National Bank of Pakistan deposited the entire decretal amount with interest at the rate of 7.5 percent per annum from 14-4-1976 in the assessee's account with London branch of the Bank of India on 3-5-1976 ( 35,49,634). As per the direction of the High Court the assessee had placed the decretal amount in a fixed deposit for 18 months expiring on 7-11-1977. The fixed deposit bore interest at the rate of 11.5 per cent. However, the National Bank of Pakistan had appealed against the decision of the High Court. This appeal was dismissed on 4-5-1977 by the Court of Appeal (Civil Division). The National Bank of Pakistan took the matter to the House of Lords but they refused the leave to appeal on 20-7-1977. On the security of the fixed deposit referred to above, the assessee furnished bank guarantee from Barclays Bank International Limited to the National Bank of Pakistan. This bank guarantee got discharged when the House of Lords dismissed the leave to appeal petition of the National Bank of Pakistan. On the basis of the assessee's applications, the Government of India vide its letter dated 19-10-1977 permitted the assessee to repatriate to India on 7-11-1977 the entire amount of the fixed deposit and interest thereon. However, the Government of India, vide its letter dated 25-2-1978 did not accept the request contained in assessee's letter dated 25-12-1977 for permission to invest the decretal amount in a joint venture abroad. The Government of India directed that the amount had to be repatriated to India through the normal banking channels in accordance with the provisions of the Foreign Exchange and Regulation Act. Another development which took place thereafter was that on 7-4-1978 one Arun Kumar Gogla (one of the shareholders of the assessee-company) gave to the assessee notice of filing a civil suit before the Calcutta High Court seeking an injunction for restraining the assessee from dealing with, disposing of or distributing the money received from the National Bank of Pakistan. The Calcutta High Court passed an interim injunction order on 10-4-1978 which was vacated on 15-11-1978. On the maturity of the fixed deposit on 7-11-1977 the assessee had transferred the money to call deposit account with the City Bank, London. On the vacation of the injunction order on 15-11-1978, the assessee remitted the money to India on 16-11-1978 in its account with Bank of India, New Delhi. Because of the exchange rate difference, the assessee received an excess amount of Rs. 40,74,075 on account of the principal amount and Rs. 2,72,595 on the interest amount, total Rs. 43,46,670 (or Rs. 43,46,774 as per the assessee).
While declaring its income for the assessment year 1980-81 in question, the assessee excluded this amount on the ground that it was not a revenue receipt but a capital receipt (sale proceeds of the cement factories). However, the ITO, after obtaining the directions of the IAC, held the amount to be taxable as a revenue receipt.
15. Before the learned Commissioner (Appeals) it was submitted on behalf of the assessee that the rupee equivalent of the decretal amount received by the assessee from the National Bank of Pakistan on 3-5-1976 worked out to Rs. 5,83,43,920 as against Rs. 5,78,11,475 on 16-11-1978 and so the assessee in fact suffered a loss of Rs. 5,32,445. It was said that the gain of Rs. 2,72,599 worked out by the ITO in relation to the amount of interest was fully offset by the aforesaid loss and so there was a net loss of Rs. 1,59,846 (Rs. 5,32,445-Rs. 2,72,599). The Commissioner (Appeals) gave a notice to the assessee on 31-3-1984 under Section 251(2) of the Act. The learned Commissioner (Appeals) held that the entire amount of taxable income received during the assessment year in question less the amount taxed in earlier years on accrual basis, was taxable in the assessment year in question on receipt basis ; and that the element of exchange gain ceased to have a separate identity or existence. He observed that even if for the sake of convenience and argument, the separate existence of an exchange gain were to be visualised, it could represent the difference between 'A', i.e., the book entries for the amount received from the National Bank of Pakistan and 'B' the amount actually received in India in Indian rupees. He held that instead of the inclusion of two separate amounts of interest income amounting to Rs. 7,32,262 (receipt on deposit in London Bank for the period 1-10-1978 to 15-11-1978) and the 'exchange gain' amounting to Rs. 43,46,674, i.e., Rs. 50,78,936, the ITO should have taxed an aggregate amount of Rs. 2,41,93,585 (Rs. 4,18,64,626 -Rs. 1,76,71,041) being the taxable income received during the year (inclusive of the various elements of interest and the so-called 'exchange gain'). The learned Commissioner (Appeals) directed the ITO to do so which meant an enhancement of Rs. 1,91,14,649 on this count. As a results of the order passed by the learned Commissioner (Appeals) under Section 154 the amount of Rs. 1,91,14,649 was substituted by Rs. 1,45,60,141 and the amount of Rs. 2,41,93,585 was changed to Rs. 1,96,39,077. He felt that the figure of taxable/taxed income computed on the above basis could vary on the basis of the result of the litigation pending for earlier years. He also felt that depending upon the finalisation of the disputed issues relating to accrual of income in these years, the ITO may have to redetermine the amount taxable on receipt and accrual basis mentioned hereinabove. The ITO was, therefore, directed to carry out such subsequent modifications of the computation of total income on this count from time to time on the above lines. So far as the receipt against costs awarded are concerned, he reduced them from the taxable receipts.
16. Now in the appeal before us Shri R. Ganeshan, the learned counsel for the assessee, pointed out that interest income had hitherto not having been taxed on accrual basis and, therefore, the receipt basis could not be applied for the assessment year in question. He submitted that the learned Commissioner (Appeals) was not right in holding that the provisions of the Foreign Exchange Regulation Act affected the concept of receipt or place of receipt of income. He submitted that the interest income transferred to India could not be brought to tax in the assessment year in question under Section 5(1)(a) of the Act, as income received by the assessee in India during the relevant previous year. He pointed out that for the assessment years 1966-67 to 1972-73 the department had sought to assess the interest income on accrual basis but it was deleted by the Tribunal. Referring to paragraphs 40 to 50 of the order of the Tribunal for the assessment year 1977-78 (supra), he pointed out that interest was held taxable on de die in diem basis. In this connection he also referred to paragraph 36 of the order dated 1-1-1980 of the Tribunal for the assessment year 1973-74 [IT Appeal No.3434 (Delhi) of 1976-77] and said that the position of Rs. 1,45,60,141 was exactly the same. He referred to the provisions of Section 4(1)(b)(ii) of the Indian Income-tax Act, 1922 vis-a-vis the provisions of Section 5 of the 1961 Act. Reference was also made by him to the commentary of Kanga and Palkhivala on the Law and Practice of Income-tax, Seventh edn., Vol. 1 at p. 160 for the proposition that Section 5 does not charge to tax in any case remittances of earlier years' income into India, i.e., income received abroad in earlier years and brought it into India in the relevant accounting year ; whereas Section 4(1)(b)(iii) taxed such remittances as the income of the year in which the moneys were brought into India. He submitted that once income arising abroad was taxed on accrual basis, subsequent remittance to India could not be taxed in the hands of the assessee. According to him, in the earlier years income accrued or arose outside India under Section 5(1)(c). He also relied upon Explanation 2 to Section 5 which provides that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India. He pointed out that either interest was received by the assessee on 3-5-1976 when the National Bank of Pakistan deposited the entire sum in the assessee's account in the Bank of India (London Branch) or on 20-7-1977 when the House of Lords refused to grant leave to appeal, but definitely not on 16-11-1978 when money was remitted by the assessee to India. According to Shri Ganeshan, despite the orders of the Tribunal for the earlier years, interest accrued earlier and since it was not taxed on that basis, for whatever reason, no taxation could be made on receipt basis. He also relied upon these decisions-Keshav Mills Ltd. v.CIT [1953] 23 ITR 230 (SC), CIT v. Tata Locomotive & Engg. Co, Ltd. [1966] 60 ITR 405 (SC), CIT v. Canara Bank Ltd. [1967] 63 ITR 328 (SC), Laxmipat Singhania v. CIT [1969] 72 ITR 291 (SC) and Benares State Bank Ltd. v. CIT [1970] 75 ITR 167 (SC).
17. On the other hand Mr. Chakravorty, the learned departmental representative, referring to the provisions of Section 5(1), pointed out that the receipt of income was only taxable if the receipt was in India. In this connection, reference was also made by him to Explanation 1. He pointed out that the income in question never accrued in India. He pointed out that the relevant fact was regarding the situs of the receipt. Referring to the provisions of Section 5 he pointed out that the ITO had the discretion to tax the income in either of the modes mentioned in Clauses (a), (b) and (c) subject to the provisions of Explanations 1 and 2. He pointed out that deduction had been made by the learned Commissioner (Appeals) in view of Explanation 2. Reference was also made by him to the assessee's past history. He pointed out that in the assessment years 1964-65 and 1965-66 no interest income was shown by the assessee and against the order of the Tribunal a reference was pending before the Hon'ble Delhi High Court. Next he pointed out that for the assessment years 1966-67 to 1972-73 interest income assessed by the ITO on accrual basis was deleted by the Tribunal and that for the assessment years 1966-67 to 1969-70 the department's reference applications were dismissed by the Tribunal and the High Court also refused to grant reference. He pointed out that for the assessment years 1970-71 to 1972-73 the same was the position and after the references were rejected by the Tribunal and the High Court, the Supreme Court also rejected the special leave petition of the department on 9-11-1976. For the assessment years 1973-74 and 1974-75 interest income was assessed in the hands of the assessee which was upheld by the Tribunal. The reference application was filed by the assessee was pending before the High Court. Similar was the position for the assessment years 1975-76 to 1977-78. He also pointed out that for the assessment year 1978-79 interest income was assessed which was upheld by the Commissioner (Appeals) and that for the assessment year 1979-80 addition of interest income on fixed deposit was held to be tenable on maturity basis. The appeals for the assessment years 1978-79 and 1979-80 are stated to be still pending before the Tribunal. Shri Chakravorty pointed out that Section 4 of the 1922 Act was the same as Section 5 of the 1961 Act and only the provisions had been rationalised. He submitted that the Tribunal had never examined earlier whether the interest income was assessable under Section 5(1)(a), i.e., on the basis of receipt or deemed receipt in India. He pointed out that the assessee did not declare any interest income on accrual basis and that the department was not permitted to rely on accrual basis and, therefore, the taxation on receipt basis could not be taken exception.
He also submitted that till 20-7-1977 the assessee was a mere custodian. Reference was also made by him to last four lines of para 1 at page 562 of the Golden Jubilee edn. of the commentary of Sampath lyengar on the Law of Income-tax. Reference was also made by him to these decisions- Turner Morrison & Co. Ltd. v. CIT [1953] 23 ITR 152 (SC), Keshav Mills Ltd.'s case (supra), Bhopal Sugar Industries Ltd. v.ITO [1960] 40 ITR 618 (SC), CIT v. Dharamdas Hargovandas (1961) 42 ITR 427 (SC), Dr. Shamlal Narula's case (supra), CIT v. Bagyalakshmi & Co.
[1965] 55 ITR 660 (SC). Tata Locomotive & Engineering Co. Ltd.'s case (supra), Canara Bank Ltd.'s case (supra), Laxmipat Singhania's case (supra), Benares State Bank Ltd.'s case (supra), CIT v. Toshoku Ltd. [1980] 125 ITR 525 (SC), Deoki Nandan & Sons' case (supra), CIT v. R.S.Banwarilal [1983] 140 ITR 3 (MP) (FB), CIT v. Public Utilities Investment Trust Ltd. [1983] 143 ITR 236 (Bom.) and CIT v. Stiambulal Nathalal & Co. [1985] 23 Taxmam 93 (Kar.) (FB).
Shri Chakravorty also pointed out that the direction in the final awards dated 1-3-1971 and 3-3-1973 was also that the payment was to be made in India. Lastly, he submitted that if there were two possible constructions, the construction which led to evasion of tax, had to be avoided.
18. We have considered the rival submissions as also the decisions referred to above. We have also gone through the paper books filed by the parties and have carefully considered the same. Section 5(1) provides that the total income of any previous year of a person who is a resident, includes all income, from whatever source derived, which- (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year ; or Income may accrue or arise on one place and it may be received at a different place. A receipt can occur only at one place unlike accrual or arisal which may occur in more than one place. Income cannot be received twice. Income may be received directly or through an agent.
Subsequent to such receipt if the funds are transferred by the recipient from one place to himself at another place, it will be a domestic operation and the transfer will not yield a receipt, much less an income. The principle is of importance firstly in determining the year of receipt and secondly for ascertaining the incidence of taxation. The same sum of money qua income cannot be received twice.
Any income accruing or arising outside India shall not be deemed to be received in India by reason of the fact that it is taken into account in a balance sheet prepared in India. The fact that the income had accrued abroad earlier than the receipt in India would not impede the charge under the distinctive head of receipt. The receipt should be in the accounting year. In regard to cash receipt the date of receipt is the date when moneys are paid to the assessee or his agent. Inability to operate is immaterial vide the decision of the Hon'ble Supreme Court in Raghav Reddi v. CIT [1962] 44 ITR 720. Where books are maintained on the mercantile basis, the date of receipt will be the date when the appropriate entries are made in the books or ought to have been made according to the system adopted by the assessee. In Section 5(1)(a) the expression 'deemed to be received in India' refers to fictional receipts the like of which are mentioned in sections 7(0 and (ii), 41(1) and (4), 69 and 198 of the Act, etc. These receipts may be styled 'statutory receipts'. Any sum treated as receipt by the adoption of the mercantile system of accounting will not be a sum 'received' or 'deemed to be received'. Such a sum will be either 'accruing' or 'arising'.
Section 5(1)(b) and (c) deals with accrual in India and outside India.
Explanation 1 makes it clear that income accruing or arising outside India shall not be deemed to be received in India by reason only of the fact that it is taken into account in a balance sheet prepared in India. Explanation 2 declares that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India. The accrual and receipt of income can happen at the same time or the accrual precedes the receipt income but in no case the accrual can be said to be later than the receipt. Explanation 2 to Section 5 is not only a provision against double taxation but it also shows that once an income can be said to have accrued or arisen or deemed to have accrued or arisen, it cannot again be so included on the basis that it is received or deemed to be received by the assessee in India. The word 'accrual' or 'arisal' is used in contradistinction to the word 'receipt' and indicates a right to receive. They represent a stage anterior to the point of time when the income becomes receivable and connote a character of income which is more or less inchoate and which is something less than receipt. The assessee should have acquired a right to receive payment though the receipt may take place later (debitum in praesenti, solvendum in future). There may be no accrual or arisal if the right to receive is not perfect or is in doubt or in jeopardy. In the present case the method of accounting followed by the assessee is mercantile. The accounting period relevant to the assessment year 1980-81 is from 1-10-1978 to 30-9-1979. There are a number of material dates and the question of taxability has to be examined after considering their effect vis-a-vis the provisions of Section 5 referred to above. The first dates are the dates of the two final awards, namely 1-3-1971 and 3-3-1973 by which the arbitrator directed the National Bank of Pakistan to make payment to the assessee-company as already mentioned above. However, no income can be said to have accrued on their basis because these awards had not been accepted and the assessee had to approach the High Court at London. The next date is 14-4-1976, the date of the order of the High Court at London. No income can be said to have accrued on its basis because that order was itself the subject-matter of petition for leave to appeal before the House of Lords. The next date was 3-5-1976 when the National Bank of Pakistan deposited the decretal amount in the assessee's account with London Branch of the Bank of India. This deposit could not be treated as a receipt or a deemed receipt by the assessee or on his behalf in India particularly for the reason that the assessee did not have a free dominion over the money. It was a mere receipt as the right to receive it as income was absent at that time. As per the directions of the High Court, the assessee had placed the decretal amount in a fixed deposit for 18 months expiring on 7-11-1977. The next relevant date was 4-5-1977, the date of judgment of the Court of Appeal (Civil Division) by which the appeal filed by the National Bank of Pakistan was dismissed. Income again cannot be said to have accrued to the assessee on this date as the matter had not attained finality and the National Bank of Pakistan took the matter to the House of Lords. The next relevant date was 20-7-1977 when the House of Lords refused the leave to appeal to the National Bank of Pakistan. It is on this date that the right to receive the decretal amount and the interest up to that date arose, as per the order of the High Court in London referred to above. The date 20-7-1977 does not fall in the accounting year relevant to the assessment year 1980-81 but in the accounting period relevant to the assessment year 1978-79 (1-10-1976 to 30-9-1977). Thus, income by way of outstanding price, contractual interest and interest as per the awards up to 20-7-1977 arose in the assessment year 1978-79 and, therefore, the question of taxability of the amount computed on that basis could not arise for consideration in the assessment year 1980-81 in question. In this context it may be noticed that the decisions of the tribunal regarding non-accrual of income are only for the assessment years 1964-65 to 1972-73. The return by the National Bank of Pakistan of the guarantee in October 1977 or the permission dated 19-10-1977 from the Government of India to the assessee to repatriate to India on 7-11-1977 the entire amount of the fixed deposit and interest thereon did not affect the accrual of income which had already taken place. So also the fact that the injunction granted by the Calcutta High Court remained operative from 10-4-1978 to 15-11-1978 did not make any difference. Similar was the position on 16-11-1978 when the assessee remitted the money in its account with the Bank of India, New Delhi. Since the accrual was earlier than final receipt in India, the final receipt cannot be regarded as income. It was only a remittance. We have also seen that under Section 5(1), read with Explanation 2 once the income was taxable with reference to 20-7-1977 on accrual basis, the question of its being taxed not on that basis but on the basis of subsequent receipt or transfer in India could not arise. The right to receive interest on the fixed deposit also accrued only on 7-11-1977, which does not fall in the assessment year 1980-81 in question but in the assessment year 1979-80. Since the principal amount or interest did not accrue in the assessment year 1980-81 in question, the question of exchange rate difference can only be considered in the relevant year and not in the assessment year 1980-81 in question. We do not accept the department's submission that since the assessee did not declare any interest income on accrual basis and since the department was not permitted for the assessment years 1964-65 to 1972-73 to rely on accrual basis, the taxation of any amount on receipt basis as argued by the department could be justified. Thus, it is only a question as to in which assessment year (though not in the assessment year in question) the income in question would be taxable.
So far as the question of costs is concerned, the learned Commissioner (Appeals) had already held that they were not to be included in the taxable receipts. We hold accordingly that the amount in question cannot be considered for being taxed in the assessment year 1980-8! in question. This finding covers both the grounds 6 and 7 of these appeals.
19. The 8th ground relates to the amount of 5,174 (Rs. 78,329) received by the assessee from its solicitors Stocken & Co. as interest up to 30-7-1977 on delayed payment of costs. However, since this ground was not pressed at the time of the hearing of the appeal before us, it no longer survives for our consideration.
20. The last ground relates to the charge of interest under Section 215 of the Act. Before the learned Commissioner (Appeals) the assessee pointed out that its application for waiver was pending with the ITO.However, the learned Commissioner (Appeals) rejected the ground.
21. Before us Shri Ganeshan, the learned counsel for the assessee, submitted that the estimate was filed on 14-6-1979 by which time only the assessment order for the assessment year 1975-76 had been made and so Section 215 could not be attracted. Reliance was placed by him on these decisions-Maharana Mills (P.) Ltd. v. ITO [1959] 36 ITR 350 (SC) and CIT v. Rajalakshmi Mills Ltd. [1980] 125 ITR 141 (Mad.).
However, the learned departmental representative relied upon the order of the Commissioner (Appeals) and also referred to the decision of the Supreme Court in AM. CIT v. Gurjargravures (P.) Ltd. [1978] 111 ITR 1.
We have considered the rival submissions. Considering the fact that the assessee's waiver application is pending before the ITO, we direct that the question of chargeability of interest under Section 215 be examined by the ITO on the basis of the material already on the record, after giving to the assessee an opportunity of being heard.
22. So far as the assessee's appeal in IT Appeal No. 2614 (Delhi) of 1985 is concerned, the grounds relate to the points covered by grounds 6 and 7 in the other appeal as also to the rectification of the figures. These points have already been dealt with there.
23. Lastly, we come to the department's cross-objection C.O. No. 108 (Delhi) of 1985. The first objection relates to the liability for sales tax amounting to Rs. 16,42,297 in the assessee's Bharatpur Dairy Unit.
The liability had occurred under West Bengal Sales Tax Act, 1954 on the sale of skimmed milk powder. The ITO, however, disallowed the claim.
The learned Commissioner (Appeals) allowed the claim on the basis of the orders from the assessment year 1974-75 onwards.
24. Before us the learned departmental representative pointed out that the validity of the statute had been challenged by the assessee before the High Court and that no demands had been raised by the State Government. Reliance was also placed by him on these decisions-Vijay Lakshmi Trading Co. Ltd.'s case (supra) and Addl. CIT v. Rattan Chand Kapoor [1984] 149 ITR 1 (Delhi).
On the other hand, the learned counsel for the assessee supported the order of the learned Commissioner (Appeals) and relied upon the decision of the Calcutta High Court in Chowringhee Sales Bureau (P.) Ltd. v. CIT [1977] 110 ITR 385 and the decision of the Delhi High Court in the case of Rattan Chand Kapoor(supra). He also pointed out that the operation of the statute had not been stayed by the High Court.
25. We have considered the rival submissions as also the decisions referred to above. The liability for payment of sales tax on the sale of skimmed milk powder arose under the statute (West Bengal Sales Tax Act). Even though the validity of the levy had been challenged by the assessee before the Hon'ble Calcutta High Court, it is not under dispute that the operation of the statute had not been stayed by the High Court. In the result, the statutory liability arose for payment of sales tax and so the assessee was entitled to claim the liability on the basis of the provision made therefor. Apart from the above is also the fact that consistently since the assessment year 1974-75 the Tribunal has accepted the assessee's claim. In this connection reference may be particularly made to the order dated 31-5-1985 for the assessment year 1977-78 [IT Appeal No. 2906 (Delhi) of 1982]. In this connection paragraphs 27 and 28 of the Tribunal's order are relevant.
For all these reasons we are of the view that the order of the learned Commissioner (Appeals) does not call for any interference.
26. The second objection relates to the assessee's claim for weighted deduction under Section 35B of the Act on expenses amounting to Rs. 9,44,598 the details of which appear in the order of the ITO. The ITO disallowed the claim in view of the amendment with effect from 1-4-1978, the learned Commissioner (Appeals) directed the ITO to examine the assessee's claim under the various sub-clauses of Section 35B(1)(b) as was directed for the assessment year 1979-80.
27. Before us the learned departmental representative submitted that there was no reason why such protracted opportunity should be given to the assessee. He also pointed out that against the Commissioner (Appeals)'s order for the assessment year 1979-80 an appeal was pending before the Tribunal. However, on behalf of the assessee the order of the Commissioner (Appeals) was supported.
28. We have considered the rival submissions. Since the ITO did not examine the admissibility of weighted deduction on the various items of the expenses under the provisions of Section 35B(1)(b), we see no justification for any interference with the order of the learned Commissioner (Appeals).
29. The third objection relates to the inclusion of Rs. 63,773 under Section 41(1). It has already been dealt along with the third ground of appeal in assessee's appeal in IT Appeal No. 5718 (Delhi) of 1984 and has not been accepted.
30. In the result, assessee's appeals [IT Appeal No. 5718 (Delhi) of 1984 and IT Appeal No. 2614 (Delhi) of 1985] are partly allowed whereas the department's cross-objection C.O. No. 108 (Delhi) of 1985 is rejected.