1. In these references pertaining to the asst. yr. 1980-81, the following questions of law have been referred for our opinion:
1. Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the income by way of outstanding price, contractual interest and interest as per the awards up to 20th July, 1977 arose in the asst. yr. 1978-79 and therefore the question of taxability of the amount computed on that basis could not arise for consideration in the asst. yr. 1980-81 in question?
2. Whether on the facts and in the circumstances of the case, it was relevant or necessary for the Tribunal while considering the appeals for the asst. yr. 1980-81 to give a finding that income by way of outstanding price, contractual interest and interest as per the awards up to 20th July, 1977 arose in the asst. yr. 1978-79?
2. Insofar as the second question is concerned, learned Counsel for the assessed, at whose instance the question is referred to us, does not press this question and, therefore, we return the reference in this regard unanswered.
3. Insofar as the first question is concerned, the sum and substance is whether the amount of interest in terms of the awards which were eventually upheld by the House of Lords by dismissing the special leave to appeal filed by the National Bank of Pakistan on 20th July, 1977 could be taxed on accrual basis or on receipt basis.
4. Broadly the facts are that the assessed owned and possessed cement factories in Districts Jhelum and Karachi, both being in Pakistan. The assessed entered into a sale agreement dt. 24th July, 1962 with a party in Karachi and in terms of the agreement as well as the supplemental agreements entered into, both the factories were sold for an amount of Rs. 2,33,66,678 (Pakistani rupees). The amount was to be paid to the assessed in India and in the event of failure to make the payment, the disputes between the parties could be referred to arbitration of the International Chamber of Commerce.
5. Armed hostilities broke out between India and Pakistan on 5th Sept., 1965 with the result that a state of emergency was declared in Pakistan and there was a prohibition of exports to India. At this stage, it may be mentioned that a part of the sale consideration was to be made by exporting cement manufactured in Pakistan to the assessed in India. As a result of the embargo placed by the Government of Pakistan, the amounts that were due to the assessed in cash and in kind were not remitted. Consequently, disputes arose between the parties and they were referred for arbitration to the International Chamber of Commerce.
6. The arbitrator gave a decision in favor of the assessed and the National Bank of Pakistan, which had stood guarantee for payment to the assessed, challenged the arbitration awards. The High Court in London, in the first instance, by its order dt. 14th April, 1976 held the awards to be valid, binding and enforceable. While upholding the award of the principal amount to the assessed, interest and costs were also directed to be paid to the assessed. In compliance with the decision of the High Court in London, the National Bank of Pakistan deposited the entire decretal amount with the London branch of the Bank of India on 3rd May, 1976. In terms of the direction given by the High Court in London, the assessed placed the amount in fixed deposit for 18 months.
7. The National Bank of Pakistan filed an appeal against the decision of the High Court. The appeal was taken up by the Court of Appeal (Civil Division) and dismissed on 4th May, 1977. The National Bank of Pakistan then took the matter to the House of Lords but it refused to grant leave to appeal on 20th July, 1977.
8. It is the contention of the assessed, on these facts, that the interest amount became due and payable to the assessed on 20th July, 1977 when the House of Lords declined to grant leave to the National Bank of Pakistan to file an appeal against the order of the Court of Appeal (Civil Division).
9. Nevertheless, the Revenue sought to tax the interest amount in the asst. yr. 1977-78 on receipt basis notwithstanding the fact that the Revenue had earlier taxed the interest amount due and payable to the assessed on accrual basis. This was, of course, objected to by the assessed and eventually the Tribunal took a decision in favor of the assessed and came to the conclusion that the interest amount was liable to be taxed on accrual basis.
10. Feeling aggrieved, the Revenue preferred an application for referring some questions of law to this Court under Section 256(1) of the IT Act, 1961 (for short the Act) said to be arising out of the decision of the Tribunal. However, it appears that the Tribunal declined to refer any question of law and, therefore, the Revenue preferred a petition under Section 256(2) of the Act in this Court being ITC No. 159 of 1987 requiring the High Court to direct the Tribunal to refer certain questions of law to this Court.
11. One of the questions of law that the Revenue sought reference of was to the effect whether the Tribunal was correct in law in deleting the addition of Rs. 2,11,51,264 taxed as interest income on receipt basis.
12. The petition filed by the Revenue was dismissed by this Court by an order dt. 8th Nov., 1990 and it was held as follows:
Question No. 3 arises from the fact that interest awarded by the arbitrator was being taxed both on accrual and receipt basis. According to the Department, the interest was chargeable on accrual basis while the assessed had been contending that it was chargeable on receipt basis. Counsel for the respondent informs us that the respondent has accepted the contention of the Department and as a result thereof, the said interest is chargeable in the hands of the respondent on accrual basis. The question now proposed, therefore, would not arise because this interest is to be taxed on accrual basis.
We are given to understand that the view expressed by this Court has been accepted by the Revenue and, therefore, the interest income is finally required to be taxed on accrual basis.
13. In these references that we are now dealing with, the Tribunal has also come to the same conclusion. The Tribunal has held in para 18 of its order under consideration that the relevant date is 20th July, 1977 when the House of Lords refused to grant leave to appeal to the National Bank of Pakistan. It is only on this date that the assessed was entitled to receive the decretal amount as well as the interest thereon. The date (20th July, 1977) falls in the asst. yr. 1978-79 and, therefore, the amount could be taxed only in the asst. yr. 1978-79 on an accrual basis.
14. Learned Counsel for the Revenue has contended before us that since the amount was to be received by the assessed in India, the amount is liable to be taxed on receipt basis and in the assessment year under consideration, that is, 1980-81 because the amount was actually received by the assessed in the previous year relevant to the asst. yr. 1980-81.
15. We find that this contention urged by learned Counsel for the Revenue is completely contrary to the contention urged by the Revenue for the last several years, namely, that the amount is liable to be taxed on an accrual basis. We say this because as held by this Court on 8th Nov., 1990 while disposing of ITC No. 159 of 1987 that the stand of the Revenue is that the interest is taxable on accrual basis. Even the assessed had accepted this contention of the Revenue and, therefore, there can be no doubt that the amount is liable to be taxed only on accrual basis. It is now too late in the day, after 17 years, for the Revenue to raise the contention that the amount is liable to be taxed on receipt basis. Even otherwise, we find no reason to differ with the view already expressed by this Court on an earlier occasion.
16. Following the view expressed by this Court in the case of the assessed in IT Appeal No. 159 of 1987 decided on 8th Nov., 1990, we answer the question of law referred to us in the affirmative, in favor of the assessed and against the Revenue.
The references are disposed of accordingly.