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Dalmia Dairy Industries Limited v. Income Tax Officer

Income Tax Appellate Tribunal

Jan 14, 1986

Judgment

CaseIQ

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Factual and Procedural Background

These matters are two appeals by the assessee, M/s Dalmia Dairy Industries Limited, and one cross-objection by the Department, arising from an order dated 31-10-1984 of the learned CIT(Appeals)-IX, New Delhi, which was rectified under section 154 by an order dated 22-2-1985. The assessee is a resident company engaged in manufacture of skimmed milk powder, butter and ghee, with a factory at Bharatpur, export and mining units, and numerous branches and depots. The appeals concern multiple assessment-year issues, including: (i) computation of capital employed under section 80J; (ii) taxation of interest on various fixed deposits (dispute over accrual v. receipt); (iii) inclusion under section 41(1) of unclaimed interest on bearer debentures; (iv) allowance of actuarially valued gratuity under section 40A(7); (v) taxability of sums and exchange gains arising from enforcement of foreign arbitral awards and subsequent repatriation of funds; (vi) disallowance under section 37(3) for daily allowances (not pressed); (vii) chargeability of interest under section 215; and (viii) sales-tax liability and weighted deduction under section 35B raised in the Department's cross-objection. The Tribunal heard detailed submissions and applied statutory provisions (notably section 5(1) of the Income-tax Act, and related Explanations), prior tribunal and court decisions, and the factual chronology (awards, English court proceedings, deposit and repatriation dates) to resolve the issues.

Legal Issues Presented

Whether capital borrowed by the assessee should be excluded in computing capital employed for the purposes of section 80J.
Whether interest on fixed deposits (not payable until maturity) is taxable in the relevant assessment year on accrual basis under a mercantile system or only on actual receipt/maturity.
Whether Rs. 63,773 (unclaimed interest on mortgage bearer debentures written back and transferred to capital account) is taxable under section 41(1) in the assessment year in question.
Whether actuarially valued liability for gratuity (not provided for in books) is deductible absent compliance with section 40A(7).
Whether exchange gain and other amounts received on enforcement of foreign arbitral awards (decretal sums deposited in London and later repatriated) are taxable in the assessment year 1980-81 (receipt basis) or were taxable earlier on accrual (the year when the right to receive crystallised).
Whether sums of interest received from solicitors (delayed payment of costs) and certain other minor grounds (not pressed) survive for adjudication.
Whether interest under section 215 should be charged in view of a pending waiver application and relevant prior assessment orders.
In the Department's cross-objection: whether the assessee was entitled to claim the sales-tax liability (Bharatpur unit) and whether weighted deduction under section 35B (expenses) should be allowed.

Arguments of the Parties

Appellant's (Assessee's) Arguments

On section 80J capital-employed point: (ground raised but subsequently rejected by reference to Supreme Court decision; detailed alternative arguments in record not reproduced in full in this opinion).
Interest on fixed deposits: The assessee argued that interest on the First National City Bank fixed deposit was payable only on maturity (21-11-1979) and therefore not taxable in the assessment year in question; under mercantile accounting the right to interest must have accrued before taxation on accrual basis, and on the terms of the deposit the accrual did not arise before maturity.
On the decretal sums and exchange gain: The assessee argued that (i) interest and decretal sums were received in London (3-5-1976) or at the latest when finality was attained in England (20-7-1977), and could not be taxed in India as receipts in the assessment year 1980-81; (ii) section 5 of the Income-tax Act, 1961 does not tax remittances of earlier years' income merely because they are remitted to India in a later year; (iii) Explanation 2 to section 5 prevents double taxation, and once income accrued earlier it cannot be again taxed as receipt in India; and (iv) prior practice and tribunal decisions deleting accrual-based assessments for earlier years support this stance.
On section 41(1) issue: reliance was placed on Kanga & Palkhivala commentary (position that liability barred by limitation does not amount to remission/cessation) and on the Bombay High Court decision in J.K. Chemicals Ltd. v. CIT (that mere credit entry does not establish liability).
On section 215 interest: the assessee submitted that estimates/assessments relevant to attraction of section 215 were not in place by the date the estimate was filed, and a pending waiver application before the ITO should be considered.
On sales-tax and weighted deduction points (in cross-objection): urged that CIT(A)'s allowances were correct and relied on precedents (including Calcutta High Court Chowringhee Sales Bureau decision) and that the statute's operation had not been stayed.

Respondent's (Department's) Arguments

On the fixed-deposit interest: the Department relied on prior Appellate Tribunal orders and a line of decisions (including Shamlal Narula, Devkinandan & Sons, Vijay Laxmi, and other authorities) to contend that interest could be taxable on an accrual basis where appropriate; Departmental representative relied on a 11-1-1980 Tribunal order and other precedents.
On decretal sums and exchange gain: the Department argued that receipt in India is the key for taxation under section 5(1)(a) and that income was not accruing in India; it relied on the situs of receipt and Explanation I to section 5. The Department noted the assessee had not declared interest on accrual basis historically and argued that the ITO had discretion under section 5(1) to tax by alternative modes subject to Explanations.
On section 41(1): urged that the ITO's order should be restored and relied upon Supreme Court authority (CIT v. Man Mohan Das).
On section 215: the Department relied on the CIT(A) order and Supreme Court authority (Addl. CIT v. Gurjargravves (I) Ltd.) to support chargeability of interest; opposed delaying or reopening issues where assessments already final or subject to prior determinations.
On cross-objection sales-tax: the Department contended the statute's validity was challenged and no state Government demand had been raised; relied on decisions such as Vijay Lakshmi Trading Co. Ltd. and Addl. CIT v. Rattan Chand to oppose allowance.
On section 35B weighted deduction: objected to prolonged opportunities to examine admissibility; urged that CIT(A)'s direction to re-examine should be limited.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Lohia Machines Ltd. v. Union of India (1985) 152 ITR 308 (SC)	Upheld validity of section 80J(1A) and rule 19A (used in context of s.80J challenge).	The Court rejected the assessee's first ground on the basis of this Supreme Court decision upholding s.80J(1A) and r.19A.
Dr. Shamlal Narula v. CIT (1964) 53 ITR 151 (SC)	Principles concerning statutory interest (Land Acquisition Act s.34) and accrual/receipt context.	The Court noted this case regarded statutory interest and distinguished its facts from the present where interest was payable only on maturity; it was considered in the accrual/receipt discussion.
CIT v. Devkinandan & Sons (1982) 138 ITR 225 (Del)	Illustration of accrual/receipt principles; similar position to Shamlal Narula in respect of statutory interest.	Referred to and contrasted with facts here; relied on to explain when accrual arises but distinguished because of difference in nature of right to receive.
CIT v. Vijay Laxmi Trading Co. Ltd. (1984) 147 ITR 372 (Raj)	Recognised accrual where assessee had acquired a right to receive income.	Used to show that where a right to receive existed earlier, accrual could be held earlier—distinguished on facts where no such right existed before maturity.
Appellate Tribunal order (31-5-1985) ITA Nos. 2906 & 3017.Del/1982	Held that interest on certain fixed deposits did not accrue before maturity (paras 36-40 referenced).	The Tribunal followed that decision as fully applicable and concluded the interest under dispute was not taxable in the assessment year in question.
J.K. Chemicals Ltd. v. CIT (1966) 62 ITR 34 (Bom)	Proposition that a mere credit entry in accounts does not of itself establish legal liability.	Relied on by the assessee in the s.41(1) dispute; the Court considered this principle in concluding the amount was not taxable in the year in question.
CIT v. Man Mohan Das (1966) 59 ITR 699 (SC)	Authority cited by Department in s.41(1) context (general principles as to cessation/ remission).	Cited by the Department; Court considered submissions but concluded on the facts that no remission or cessation had occurred in the relevant year and therefore s.41(1) did not apply.
Shree Sajjan Mills Ltd. v. CIT (1985) 156 ITR 585 (SC)	Actuarially valued gratuity not allowable as business expenditure unless requirements of s.40A(7) are complied with.	The Court applied this Supreme Court decision and held the gratuity amount was not allowable absent compliance with s.40A(7).
CIT v. Ranghav Reddi (1962) 44 ITR 720 (SC)	Inability to operate (e.g., to draw funds) is immaterial; date of receipt for cash is when moneys are paid to the assessee or his agent.	The Court cited the principle that inability to operate is immaterial for determining date of receipt, in explaining date-of-receipt versus accrual concepts under s.5.
Keshav Mills Ltd. v. CIT (1953) 32 ITR 230 (SC)	Authorities on taxation/remittance principles (cited by assessee regarding remittances of earlier years' income).	Relied on by the assessee and considered in the discussion on whether remittance of earlier-years' income can be taxed in a later year.
CIT v. Tata Locomotive & Engineering Co. Ltd. (1966) 60 ITR 405 (SC)	Authority on accrual/receipt and situs of income.	Cited by the parties; the Court treated it among authorities relevant to analysis of accrual, receipt and situs.
Commissioner of Income Tax, Mysore v. Canara Bank Ltd. (1967) 63 ITR 328 (SC)	Authority on positions similar to accrual/receipt/situs of income.	Referred to by the parties and considered in the Court's survey of precedents on accrual/receipt.
Laxmipat Singhania v. CIT (1969) 72 ITR 291 (SC)	Authority on incidence of taxation and accrual/receipt distinctions.	Referred to as part of the precedential background considered by the Court.
Benaras State Bank Ltd. v. CIT (1970) 75 ITR 167 (SC)	Authority touching on receipt/accrual/situs principles.	Referred to in the Court's review of relevant authorities.
Turner Morrison & Co. Ltd. v. CIT (1953) 32 ITR 152 (SC)	Authority cited in context of section 215/estimates and chargeability of interest.	Relied upon by the Department in submissions on section 215 issues; Court considered this with other authorities.
Bhopal Sugar Industries Ltd. v. ITO (1960) 40 ITR 618 (SC)	Case on receipt/accrual issues (cited by Department).	One of the authorities referred to by the Department in the receipt/accrual debate.
CIT v. Dharamdas Hargovandas (1961) 42 ITR 427 (SC)	Authority concerning principles of taxation (cited by Department).	Included in the list of precedents the Court considered though the opinion does not indicate a special application beyond being part of the jurisprudential background.
CIT v. Bagyalakshmi (1965) 55 ITR 660 (SC)	Relevant authority referred to in receipt/accrual jurisprudence.	Referred to when discussing precedents on accrual/receipt.
CIT v. Toshoku Ltd. (1980) 125 ITR 525 (SC)	Supreme Court authority relevant to international receipts/arbitral awards (cited).	Cited by the Department; considered along with other authorities addressing foreign receipts and their tax incidence.
CIT v. R.S. Banwari Lal (1983) 140 ITR 3 (MP) (FB)	Authority cited among others on accrual/receipt.	Included among cases surveyed by the Tribunal in reaching its conclusions on taxation timing.
CIT v. Public Utilities Investment Trust Ltd. (1983) 143 ITR 257 (Bom)	Authority in related tax jurisprudence (cited).	Referred to by the Department and considered by the Court in its review.
CIT v. Shambhulal Nathalal & Co. (1984) 145 ITR 329 (Kar)	Authority cited by the Department among line of cases on receipt/accrual.	Part of the jurisprudential background considered by the Tribunal.
Maharana Mills (P) Ltd. v. ITO (1959) 36 ITR 350 (SC)	Authority cited in relation to section 215 and estimates/chargeability of interest.	Relied upon by the assessee and considered by the Tribunal in directing the ITO to examine the pending waiver application.
CIT v. Rajalakshmi Mills Ltd. (1980) 125 ITR 141 (Mad)	Authority concerning section 215 and related principles.	Relied on by the assessee in submissions about the applicability of section 215; the Tribunal directed further consideration by the ITO.
Addl. CIT v. Gurjargravves (I) Ltd. (1978) 111 ITR 1 (SC)	Supreme Court authority cited by Department about chargeability under s.215.	Cited by the Department; the Tribunal nonetheless directed re-examination of section 215 liability in view of pending waiver application.
Chowringhee Sales Bureau v. CIT (1977) 110 ITR 385 (Cal)	Decision on sales-tax claim (cited by assessee in cross-objection).	The Tribunal accepted the assessee's reliance and, viewing that the statute had not been stayed and on consistent tribunal practice, upheld the CIT(A)'s allowance.
Addl. CIT v. Rattan Chand (1984) 149 ITR 1 (Del)	Decision relevant to sales-tax claim and treatment of such liabilities.	Cited by both sides; Tribunal noted this authority in assessing the cross-objection but upheld the CIT(A)'s order allowing the liability.

Court's Reasoning and Analysis

The Tribunal proceeded issue by issue, applying statutory text (principally section 5(1) of the Income-tax Act, 1961 and its Explanations), accounting principles (mercantile system), the factual chronology and relevant precedents. Key elements of the reasoning are summarized below:

1. Preliminary Objection

The Department's preliminary objection that appeal could not lie against the 31-10-1984 order as it was rectified under section 154 was rejected: the rectification corrected typographical errors and the assessee had also appealed against the rectified order.

2. Section 80J Capital-Employed Ground

The Tribunal rejected the assessee's challenge to the exclusion of capital borrowed in computing capital employed under section 80J, relying on the Supreme Court decision in Lohia Machines which upheld the validity of section 80J(1A) and rule 19A.

3. Interest on Fixed Deposit (First National City Bank, Calcutta)

The Tribunal accepted the assessee's contention that interest on the fixed deposit was payable only on maturity and therefore, under mercantile accounting, could not be taxed on an accrual basis before the right to receive had arisen. The Tribunal followed an Appellate Tribunal order (31-5-1985) holding that no interest accrued before the date of maturity and applied paras 36-40 of that order to the present facts; consequently the interest amount was not taxable in the assessment year 1980-81 (accounting year ended 30-9-1979). The Court distinguished decisions concerning statutory interest (e.g., Shamlal Narula) and cases where the assessee had acquired a right to receive.

4. Inclusion Under Section 41(1) — Unclaimed Interest on Bearer Debentures

The Tribunal held that, on the facts, it could not be said that the assessee obtained any benefit by way of remission or cessation of liability in the assessment year in question. Despite book entries and transfer to capital account, the liability had not ceased in law in that year (the CIT(A) had considered the date of last acknowledgement and directed consideration for later years). The Tribunal therefore held the addition under section 41(1) was not tenable for that year; it also observed that the CIT(A)'s direction to examine taxability for assessment year 1982-83 would not prejudice the assessee and the assessee was free to raise all defences then.

5. Disallowance Under Section 37(3) (Daily Allowance)

This ground was not pressed by the assessee before the Tribunal for want of details and thus was not considered further.

6. Gratuity (Section 40A(7))

The Tribunal rejected the assessee's contention that actuarially valued gratuity not accounted for in books was deductible. It followed the Supreme Court decision in Shree Sajjan Mills that such actuarial liabilities are not allowable unless the conditions of section 40A(7) are complied with.

7. Main Issue — Taxability of Decretal Sums, Interest and Exchange Gain

The Tribunal gave detailed consideration to section 5(1) (clauses (a), (b), (c)), Explanations 1 and 2, and the sequence of material dates:

Arbitral awards dated 1-3-1971 and 3-3-1973 did not by themselves result in accrual because enforcement and acceptance were not final.
High Court (London) order dated 14-4-1976 and subsequent deposit by National Bank of Pakistan into the assessee's London account on 3-5-1976: on these dates the assessee did not have free dominion over funds (deposit was subject to court directions, fixed deposit placement and appeals), hence no accrual/receipt in India arose then.
Court of Appeal dismissal on 4-5-1977 did not create finality because House of Lords leave was pending; the critical date was 20-7-1977 when the House of Lords refused leave to appeal — it was on that date that the Tribunal held the right to receive the decretal amount (and interest up to that date) arose.
20-7-1977 falls in the accounting period relevant to assessment year 1978-79 (1-10-1976 to 30-9-1977): accordingly the income by way of outstanding price, contractual interest and award interest up to that date accrued in earlier years and could not be taxed in assessment year 1980-81.
Interest on the fixed deposit placed as directed by the High Court matured on 7-11-1977 — that date falls in the accounting period for assessment year 1979-80, so accrual for interest on that deposit is to be considered in that year, not in 1980-81. Repatriation (remittance) to India in November 1978 was only a remittance of amounts already accrued earlier and could not be taxed again under Explanation 2 to section 5.

The Tribunal emphasized that a receipt occurs at one place and that transfer of funds between places by the recipient is a domestic operation and does not create a fresh receipt. The distinction between accrual (a right to receive) and receipt (actual receipt) is central and Explanation 2 prevents double inclusion of income once it has accrued or been taxed on accrual basis.

8. Miscellaneous — Costs, Other Small Grounds and Section 215 Interest

Costs awarded were reduced from taxable receipts as directed by the CIT(A). Certain small grounds (e.g., £5,174 interest from solicitors; daily allowance under s.37(3)) were not pressed and thus not considered. Regarding section 215 interest, because the assessee's waiver application was pending before the ITO the Tribunal directed the ITO to examine chargeability of interest under s.215 on the existing record after giving the assessee an opportunity of being heard.

9. Cross-Objection Issues — Sales-tax and Section 35B Weighted Deduction

On the sales-tax (Rs.16,42,297) the Tribunal accepted the CIT(A)'s allowance: it noted the statutory liability arose under the West Bengal Sales-tax Act and the statute's operation had not been stayed by the Calcutta High Court; also the Tribunal relied on consistent acceptance by the Appellate Tribunal in earlier years (notably the 31-5-1985 order) that the assessee's claim is allowable. On the section 35B weighted deduction, because the ITO had not examined admissibility under sub-clauses of s.35B(1)(b), the Tribunal saw no justification for interfering with the CIT(A)'s direction that the ITO should examine the items.

Holding and Implications

Holding:

The Tribunal's operative conclusions (as stated in the opinion) are:

Assessee's appeals ITA No. 5718.Del/84 and ITA No. 2614.Del/1985 are partly allowed.
The first ground (section 80J capital-employed exclusion) is rejected in view of Lohia Machines (SC).
The interest of Rs. 6,60,951 on the fixed deposit (First National City Bank, Calcutta) was not taxable in the assessment year 1980-81 because interest accrued only on maturity; the Tribunal followed the Appellate Tribunal's earlier order to that effect.
The inclusion of Rs. 63,773 under section 41(1) was not sustained for the assessment year in question; the assessee's ground on this point was accepted and the Department's cross-objection on that specific addition was rejected (subject to the CIT(A)'s direction about later years which the Tribunal held would not prejudice the assessee's rights to defend).
Actuarially valued gratuity was not allowable without compliance with section 40A(7) (Shree Sajjan Mills applied), and that ground of appeal failed.
Sums and exchange gains arising from enforcement of the foreign awards could not be taxed in assessment year 1980-81 because the rights to receive accrued earlier (principally on 20-7-1977) and thus, by virtue of section 5(1) read with Explanation 2, could not again be taxed as receipts in India in 1980-81.
Certain grounds not pressed were treated as abandoned and not considered further (e.g., daily allowance, solicitor interest of £5,174).
Section 215 interest chargeability was left to the ITO to examine after affording the assessee an opportunity of being heard because a waiver application was pending.
The Department's cross-objection CO No.108.Del/85 was rejected overall; the CIT(A)'s allowance of the sales-tax liability and directions on s.35B were upheld.

Implications:

The direct effects on the parties are: (a) certain additions made by the ITO were deleted for the assessment year in question (notably the interest on the fixed deposit and the Rs.63,773 under s.41(1)); (b) the assessee remains subject to the consequences of earlier accrual-based taxation in the years where accrual was held to have occurred (e.g., accrual on 20-7-1977 and maturity 7-11-1977 for interest); (c) the assessee cannot claim actuarial gratuity deduction without complying with section 40A(7); (d) the ITO is directed to reconsider section 215 interest in light of the pending waiver application; and (e) the CIT(A)'s favorable treatment on sales-tax and direction to examine s.35B items is sustained. The Tribunal applied and followed existing authorities rather than announcing any novel legal proposition; the opinion resolves timing (accrual v. receipt) disputes on these facts and instructs precise years in which the various items of income should be considered for taxation (i.e., not in AY 1980-81). No new precedent beyond the application of cited authorities was created by this decision.

Show all summary ...

V.P Elhence, J.M:— These are two appeals filed by the assessee and one cross objection filed by the department. They arise out of the order dt. 31-10-1984 of the ld. CIT(Appeals)-IX, New Delhi as rectified by the subsequent order dt. 22-2-1985 under s. 154.

2. The assessee is M/s 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 w.e.f 31-1-1975. It has a factory at Bharatpur where milk powder and ghee is manufactured. It has an export unit Dalima Udyog and a mining unit known as Dalmia Cement Industries. The assessee has branches and depots at Delhi, Ghaziabad, Indore, Chandigarh, Digrha, 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 toois and blades.

3. A preliminary objection had been taken on behalf of the department to the effect that the appeal against the order dt. 31-10-1984 could not lie since that order was rectified under s. 154. However, after hearing the ld. authorised representatives on both sides, we find that this objection is not sustainable as the ld. CIT (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 s. 154.

4. The first ground in assessee's appeal ITA No. 5718.Del/84 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 s. 80J. This ground has to be rejected now in view of the decision of the Supreme Court in Lohia Machines Limited v. Union of India (1985) 44 CTR (SC) 328 : (1985) 152 ITR 308 (SC) whereby the validity of s. 80J(1A) and r. 19A was upheld.

5. The second ground relates to the taxation of interest amounting to Rs. 6,60,951 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 IT 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 ld. departmental representative referred to the order dt. 11-1-1980 of the Appellate Tribunal for the asst. yr. 1973-74 (I.T.A No. 3434.Del/76-77) and also relied upon the following decisions

1. Dr. Shamlal Narula v. CIT(1964) 53 ITR 151 (SC)

2. CIT v. Devkinandan and Sons(1982) 138 ITR 225 (Del)

3. CIT v. Vijay Laxmi Trading Co. Ltd. (1983) 36 CTR (Raj) 329 : (1984) 147 ITR 372 (Raj)

7. After hearing the ld. representatives on both the sides we find that the contention raised on behalf of the assessee has force. A similar question arose for the asst. yr. 1977-78 also in respect of an amount of Rs. 24,54,270 on another fixed deposit. The Appellate Tribunal vide its order dt. 31-5-1985 (I.T.A Nos. 2906 & 3017.Del/1982) held that no interest accrued to the assessee before the date of maturity of the fixed deposit. In this connection paras 36-40 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 asst. yr. 1980-81 in question for which the accounting year ended on 30-9-1979. In Dr. Shamlal Narula's case (supra) the Supreme Court was considering statutory interest paid under s 34 of the Land Acquisition Act, 1894 The same was the position in the case of Devkinandan and Sons (supra) decided by the Delhi High Court. In the case of Vijay Laxmi Trading Co. Limited (supra) 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 accrual principle could not be applied. We, accordingly, hold that the interest amount was not taxable in the assessment year in question.

8. The third ground relates to the inclusion of Rs. 63,773 under s. 41(1). 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 ld. CIT(Appeals) held that notwithstanding the book entries, the asses-see's liability did not cease in the assessment year in question. Finding that the last acknowledgment took place in the balance sheet for the year ended 30-9-1978 the ld. CIT(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 asst. yr. 1982-83 (limited to the extent of the claims not made upto 30-9-1981). The assessee feels aggrieved by the latter part of the direction to be considered for the asst. yr. 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.

9. Before us, oh behalf of the assessee, reliance was placed on page 528 of Kanga & Palkhivala's “The Law and Practice of Income-tax” (Seventh Edition) 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 (Bom) for the proposition that mere credit entry in the accounts does not establish liability. On the other hand, the departmental representative argued that the order of the ITO should be. restored. He relied upon the decision of the Supreme Court in CIT v. Man Mohan Das (1966) 59 ITR 699 (SC) and submitted that in any case the CIT(Appeals) direction did not affect the assessee prejudicially.

10. We have considered the rival submissions. In terms of s. 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 remis sion or cessation there of, 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 ld. CIT(Appeals) regarding the taxability of the amount for the asst. yr. 1982-83 shall not preju dice 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 tak en in the assessee's appeal is accepted whereas the gro und taken in the Departmental cross objection is re jected.

11. The fourth ground relates to the disallowance of Rs. 28,820 under s. 37(3) read with r. 6D relating to daily allowance granted to the assessee's employees during the period of their duties away from the head quarters. 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.

12. 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 actuarily valued liability in respect of gratuity was not a provision and so that provisions of s. 40A(7) were not applicable. However, the ld. CIT(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.

13. After hearing the ld. 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. v. CIT (1985) 49 CTR (SC) 193 : (1985) 156 ITR 585 (SC). 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 s. 40A(7) had been complied with.

14. 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 cemeut factories situated at Dhandot (Distt. 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 upto 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 M/s Pakistan Progressive Cement Industries Limited (PPCI). At the request of Maneckji and PPCI the National Bank of Pakistan executed an irrevocable bank guarantee dt. 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 to arbitration by the International Chamber of Commerce. Two final awards were given by 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 @6% per annum w.e.f 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 the assessee in India a sum equivalent to Pakistani Rs. 20,285,951 with interest @5% per annum w.e.f 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 s. 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 dt. 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 @6% p.a from 1.10.62 to 18-12-1967 5,70,173.89 (c) Interest @6%- w.e.f 3-1-1966 on the principal amount of the first award and @5% w.e.f 23-1-1968 on the princi-pal amount of the second award upto

14-4-1976 (date of the decree). 11.10,860.94 (d) Costs. 33,073.43 Interest allowed on the decretal amount @ 7.5% p.a from 14-4-1974 till the date of payment 35,35,830.08

15. The National Bank of Pakistan deposited the entire decretal amount with interest @7.5% 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 @11.5%. 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 Govt. of India vide its letter dt. 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 Govt. of India, vide its letter dt. 25-2-1978 did not accept the request contained in assessee's letter dt. 25-12-1977 for permission to invest the decretal amount in Joint Venture abroad. The Govt. 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 & 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 filing a civil suit before the Calcutta High Court seeking an injunction for restraining the assessee from dealing with, disposing off 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 Citabank, 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 asst. yr. 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.

16. Before the ld. CIT (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 16-11-78 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 as worked out by the ITO in relation to the amount of interest was fully off-set by the aforesaid loss and so there was a net loss of Rs. 2,59,846 (Rs. 5,32,445-Rs. 2,72,599.) The CIT (Appeals) gave a notice to the assessee on 21-3-1984 under s. 251(2). The ld. CIT (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 received as interest on deposit in London Bank for the period 1-10-1978 to 15-11-1978 and the “exchanged 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 ld. CIT (Appeals) directed the ITO to do so which meant an enhancement of Rs. 1,91,14,649 on this count. As a result of the order passed by the Id. CIT (Appeals) under s. 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 those years, the ITO may have to reedermine 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 receipts against costs awarded are concerned, he reduced them from the taxable receipts.

17. Now in the appeal before us Snri R. Ganeshan, the learned counsel for the assessee pointed out that interest income hitherto not having being taxed on accrual basis the receipt basis could not be applied for the assessment year in question. He submitted that the learned CIT (A) was not right in holding that the provisions of 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 in question under s. 5(1)(a) of the IT Act, 1961 as income received by the assessee in India during the relevant previous year. He pointed out that for the asst. yrs. 1966-67 to 1972-73 the department had sought to assess the interest income on accrual basis but it was deleted by the Appellate Tribunal. Referring to paras 40 to 50 of the order of the Appellate Tribunal for the asst. yr. 1977-78 (supra) he pointed out that interest was held taxable on “de die in diem basis”. In this connection he also referred to para 36 of the order dt. 11-1-1980 of the Appellate Tribunal for the asst. yr. 1973-74 (ITA No. 3434.Del/1976-77) and said that the position of Rs. 1,45,60,411 was exactly the same. He referred to the provisions of s. 4(1)(b)(ii) of IT Act, 1922 vis-a-vis the provisions of s. 5 of the IT Act, 1961. Reference was also made by him to the commentary of Kanga & Palkhiwala on the “Law and Practice on Income-tax” (Seventh Edition), Volume-I at page 160 for the proposition that s. 5 of the IT Act, 1961 does not charge to tax in any case remittances of earlier year's income into India i.e income received abroad in earlier years and brought into India in the relevant accounting year; whereas s. 4(1)(b)(iii) of the IT Act, 1922 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 s. 5(1)(c). He also relied upon Explanation 2 to s. 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 hot on 16-11-1978 when money was remitted by the assessee to India According to Shri Ganeshan despite the orders of the Appellate 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 the following decisions:

1. Keshav Mills Ltd. v. CIT(1953) 32 ITR 230 (SC)

2. CIT v. Tata Locomotive and Engineering Co. Ltd.(1966) 60 ITR 405 (SC)

3. Commissioner Of Income Tax, Mysore v. Canara Bank Ltd.(1967) 63 ITR 328 (SC)

4. Laxmipat Singhania v. CIT(1969) 72 ITR 291 (SC)

5. Benaras State Bank Ltd. v. CIT (1970) 75 ITR 167 (SC).

18. On the other hand Shri M.K Chakravarty, the ld. departmental representative, referring to the provisions of s. 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-I. 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 s. 5 he pointed out that the ITO had the discretion to tax the income in either of the modes mentioned in cls. (a), (b) & (c) subject to the provisions of Explanations 1 & 2. He pointed out that deduction had been made by the ld. CIT (Appeals) in view of the Explanation 2. Reference was also made by him to the assessee's past history. He pointed out that in the asst. yrs. 1964-65 and 1965-66 no interest income was shown by the assessee and against the order of the Appellate Tribunal a reference was pending before the Hon'ble Dlehi High Court: Next he pointed out that for the asst. yrs. 1966-67 to 1972-73 interest income assessed by the ITO on accrual basis was deleted by the Appellate Tribunal and that for the asst. yrs. 1966-67 to 1969-70 the Department's reference applications were dismissed by the Appellate Tribunal and the High Court also refused to grant reference. He pointed out that for the asst. yrs. 1970-71 to 1972-73 the same was the position and after the references were rejected by the Appellate Tribunal and the High Court, the Supreme Court also rejected the Special Leave Petition of the department on 9-11-1976. For the asst. yrs. 1973-74 and 1974-75 interest income was assesseed in the hands of the assessee which was upheld by the Appellate Tribunal. The reference application filed by the assessee was pending before the High Court. Similar was the position for the asst. yrs. 1975-76, 1976-77 and 1977-78. He also pointed out that for the asst. yr. 1978-79 interest income was assessed which was upheld by the CIT (Appeals) and that for the asst. yr. 1979-80 addition of interest income on fixed deposit was held to be tenable on maturity basis. The appeals for the asst. yrs. 1978-79 and 1979-80 are stated to be still pending before the Appellate Tribunal. Shri Chakravarty pointed out that s. 4 of the IT Act, 1922 was the same as s. 5 of the present Act and only the provisions had been rationalised. He submitted that the Appellate Tribunal had never examined earlier whether the interest income was assessable under s. 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 to. 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 Jublee Edition of the Com-mentry of Sampatha Iyengar on the “Law of Income-tax”. Reference was also made by him to the following decisions:

1. Turner Morrison & Co. Ltd. v. CIT(1953) 32 ITR 152 (SC)

2. KeshavMills Ltd. v. CIT(supra)

3. Bhopal Sugar Industries Ltd. v. Income Tax Officer, Bhopal (1960) 40 ITR 618 (SC)

4. CIT v. Dharamdas Hargovandas(1961) 42 ITR 427 (SC)

5. Dr. Shamlal Narula v. CIT(1964) 53 ITR 151 (SC)

6. CIT v. Bagyalakshmi(1965) 55 ITR 660 (SC)

7. CIT v. Tata Locomotive & Engineering Co. Ltd. (supra)

8. Commissioner Of Income Tax, Mysore v. Canara Bank Ltd.(supra)

9. Laxmipat Singhania v. CIT(supra)

10. Benaras State Bank Ltd. v. CIT(supra).

11. CIT v. Toshoku Ltd. (1980) 19 CTR(SC) 192 : (1980) 125 ITR 525 (SC)

12. CIT v. Deokinandan & Sons(1982) 138 ITR 225 (Del).

13. CIT v. R.S Banwari Lal (1982) 28 CTR(MP) 59 (FB) : (1983) 140 ITR 3 (MP) (FB)

14. CIT v. Public Utilities Investment Trust Limited (1982) 26 CTR (Bom) 135 : (1983) 143 ITR 257 (Bom)

15. CIT v. Shambhulal Nathalal& Co. (1984) 39 CTR (Kar) 195 : (1984) 145 ITR 329 (Kar)

19. Shri M.K Chakravarty also pointed out that the direction in the final awards dt. 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.

20. 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. Sec. 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) accures or arises or is deemed to accrue or; arise to him in India during such year; or

21. Income may accrue or arise in 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 and 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 CIT v. Ranghav Reddi (1962) 44 ITR 720 (SC) Where books are maintained on the mercantile basis/the date of receipt will be the date when the appro-priate entries are made in the books or ought to have been made according to the system adopted by the assessee. In s. 5(1)(a) the expression “deemed to be received in India “refers to fictional receipts the like of which are mentioned in ss. 7(i) and (ii), s. 41(1) & (4). s. 69, s. 198 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”. Sec. 5(])(b) and (c) deal with accrual in India and outside India. Explanation-1 makes if 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 of income. But in no case the accrual can be said to be later than the receipt. Explanation 2 to s. 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 words “accrual” or “ansal” are used in contradistinction to the word “receipt” and indicate a right to receive. They represent a stage anterior to the point of time when the income become receivable and connote a character of incoms 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 futuro”).. There may be no accrual or arisal if the right to receive is not prefect or is in doubt or jeopardy. In the present case the method of accounting followed by the assessee. is mercantile. The accounting period relevant to the asst. yr. 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 s. 5 referred to above The first dates are the dates of the 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 those 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 depo- sited 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 upto 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 asst. yr. 1980-81 but in the accounting period relevant to the asst. yr. 1978-79 (1-10-1976 to 30-9-1977). Thus, income by way of outstanding price, contractual interest and interest as per the awards upto 20-7-1977 arose in the asst. yr. 1978-79 and, therefore,. the question of taxa-bility. of the amount computed on that basis could not arse for consideration in the asst. yr. 1980-81 in question. In this context it may be noticed that the decisions of the Appellate Tribunal regarding non-accrual of income are only for the asst. yrs. 1964-65 to “1972-73.” The return by the National Bank of Pakistan of the guarantee in October, 1977 of the permission dt. 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. Sincethe 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 s. 5(1) r/w 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 asst. yr. 1980-81 in question but in the asst. yr. 1979-80. Since the principal amount or interest did not accrue in the asst. yr. 1980-81 in question, the question of exchange rate difference can only be considered in the relevant year and not in the asst. yr. 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 asst. yrs. 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 ld. CIT (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 asst. yr. 1980-81 in question. This finding governs both the grounds 6 & 7 of these appeals.

22. The eighth ground relates to the amount of £5,174 (Rs. 78,329) received by the assessee from its solicitors M/s Stocken & Co. as interest upto 30-7-1977 on delayed payment of costs. However, since this ground was hot pressed at the time of the hearing of the appeal before us, it no longer survives for our consideration.

23. The last ground relates to the charge of inetrest under s. 215. Before the ld. CIT (Appeals) the assessee pointed out that its application for waiver was pending with the ITO. However, the ld. CIT (Appeals) rejected the ground.

24. Before us Shri Ganeshan the ld. counsel for the assessee submitted that the estimate was filed on 14-6-1979 by which time only the assessment order for the asst. yr. 1975-76 had been made and so s. 215 could not be attracted.- Reliance was placed by him on the following decisions:

1. Maharana Mills(P) Ltd. v. ITO (1959) 36 ITR] 36 ITR 350 (SC)

2. CIT v. Rajalakshmi Mills Ltd. (1980) 18 CTR (Mad) 48 : (1980) 125 ITR 141 (Mad). However, the ld. departmental representative relied upon the order of the CIT (Appeals) and also referred to the decision of the Supreme Court in Addl. CIT v. Gurjargravwes (I) Ltd. 1978 CTR (SC) 1 : (1978) 111 ITR 1 (SC). 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 char-geability of interest under s. 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.

25. So far as the assessee's appeal 1TA No. 2614.Del/85 is concerned, the grounds relate to the points covered by grounds 6 & 7 in the other appeal as also to the rectification of the figures. These point have already been dealt with there.

26. Lastly, we come to the department's cross objection CO. No. 108.Del/85. 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 ST Act, 1954 on the sale of skimmed milk powder. The ITO however disallowed the claim. The ld. CIT (Appeals) allowed the claim on the basis of the orders from asst. yr. 1974-75 onwards.

27. Before us the ld. 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 Govt. Reliance was also placed by him on the following decisions:

1. CIT v. Vijay Lakshmi Trading Co. Ltd. (1983) 36 CTR (Raj) 329 : (1984) 147 ITR 372 (Raj)

2. Addl. CIT v. Rattan Chand (1984) 43 CTR (Del) 283 : (1984) 149 ITR 1 (Del).

28. On the other hand, the ld. counsel for the assessee supported the order of the ld. CIT (Appeals) and relied upon the decision of the Calcutta High Court in Chow-ringhee Sales Bureau v. CIT (1977) 110 ITR 385 (Cal) and the decision of the Delhi High Court in the case of Rattan Chand (supra). He also pointed out that the operation of the statute had not been stayed by the High Court.

29. We have considered the rival submissions as also the decisions referred to above. The liability for pay ment of sales-tax on the sale of skimmed milk powder arose under the statute (West Bengal ST 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 asst. yr. 1974-75 the Appellate Tribunal has accepted the assessee's claim. In this connection reference may be particularly made to the order dt. 31-5-1985 for asst. yr. 1977-78 (ITA No. 2906.Del/1982). In this connection paras 27 & 28 of the Tribunal's order are relevant. For all these reasons we are of the view that the order of the ld. CIT (Appeals) does not call for any interference.

30. The second objection relates to the assessee's claim for weighted deduction under s. 35B 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 ld. CIT (Appeals) directed the ITO to examine the assessee's claim under the various sub-clauses of s. 35B(1)(b) as was directed for the asst. yr. 1979-80.

31. Before us the ld. 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 CIT (Appeals) order for the asst. yr. 1979-80 no appeal was pending before the Appellate Tribunal. However, on behalf of the assessee the order of the CIT (Appeals) was supported.

32. 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 s. 35B(1)(b), we see no justification for any interference with the order of the ld. CIT (Appeals).

33. The third objection relates to the inlcusion of Rs. 63,773 under s. 41(1). It has already been dealt along with the third ground of appeal in assessee's appeal ITA No. 5718.Del/84 and has not been accepted.

34. In the result, assessee's appeals ITA No. 5718.Del/84 and ITA No. 2614.Del/1985 are partly allowed whereas the Department's cross objection CO. No. 108.Del/1985 is rejected.