CIT vs. Sarabhai Holdings (Supreme Court)

DATE: (Date of pronouncement)
DATE: October 21, 2008 (Date of publication)

Where the assessee entered into an agreement for transfer of its industrial undertaking under which the buyer agreed to pay it interest on the unpaid consideration w.e.f 1.3.1977 and subsequently on 30.6.1978 the parties agreed to defer the date of commencement of interest to 1.7.1979 and the question arose whether the interest foregone by the assessee could be assessed for the AYs 1979-80 and 1980-81 under the accrual system of accounting, HELD:

(a) As regards AY 1979-80, the interest had already accrued and could not be wiped out by the subsequent agreement. The waiver could not have retrospective effect.

(b) As regards AY 1980-81, there was full scope to the assessee to defer the interest and as this was done before accrual, the interest was not chargeable to tax.

(c) Penalty u/s 273(2)(a) is not an automatic outcome of the addition of income. Though there was no valid justification for the waiver of the interest and it was an attempt to evade tax, still mens rea would have to be shown and as a definite conclusion could not be drawn that the assessee had reason to believe that the estimate of advance tax was untrue, penalty could not be levied.