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NEW HOLLAND TRACTORS (INDIA) PRIVATE LIMITED Vs. THE COMMISSIONER OF INCOME TAX, DELHI-V
October, 20th 2014
*           IN THE HIGH COURT OF DELHI AT NEW DELHI
+                 INCOME TAX APPEAL NOS. 182/2002 & 255/2003
                                    Reserved on :       5th September, 2014
                                     Date of decision: 25th September, 2014

        NEW HOLLAND TRACTORS (INDIA) PRIVATE LIMITED
                                                        ..... Appellant
                       Through Mr. C.S. Aggarwal, Sr. Advocate with
                       Mr. Prakash Kumar, Advocate.
                versus

        THE COMMISSIONER OF INCOME TAX, DELHI-V
                                                      ..... Respondent
                     Through Mr. N.P. Sahni, Sr. Standing Counsel.
        CORAM:
        HON'BLE MR. JUSTICE SANJIV KHANNA
        HON'BLE MR. JUSTICE V. KAMESWAR RAO

SANJIV KHANNA, J.:

        These two appeals by the assessee-New Holland Tractors (India)
Private Limited relate to Assessment Year 1996-97. In ITA No. 182/2002,
the issue raised is whether entire license fee of Rs.15,68,50,000/- received
or paid under the agreement dated 14th July, 1995 is taxable in the year of
receipt or it should be spread over three years. In ITA No. 255/2003, the
appellant-assessee has challenged order of the Income Tax Appellate
Tribunal (Tribunal, for short) upholding levy of penalty for concealment in
respect of the aforesaid amount under Section 271(1)(c) of the Income Tax
Act, 1961 (Act, for short).

2.      To have clarity and in order to appreciate the controversy, we will be
first taking up ITA No. 182/2002 as it pertains to quantum addition made
in the assessment order.

ITA No. 182/2002
3.   By order dated 24th September, 2002, the following substantial
question of law was framed:-
ITA Nos. 182/2002 & 255/2003                                      Page 1 of 26
                 Whether, in the circumstances of the case and on
                 the true and correct interpretation of tripartite
                 agreement dated 14.7.1995, the Tribunal was correct
                 in law in concluding that the entire licence fee of
                 Rs.15,68,50,000/-,received   by     the   appellant
                 company, for granting the right to use technical
                 know how, could be taxed in the assessment year
                 1996-97?

4.      The facts are that (a) in 1969 Escorts Limited (Escorts, for short) and
Ford Motor Company entered into a joint venture and established a
company, i.e. Escorts Tractors Limited (ETL, for short), in India. (b) In
1990, the entire shareholding of Ford Motor was transferred to New
Holland North America, U.K. (NHNA, for short), (c) By virtue of the joint
venture relationship, technology for various Ford tractor models, including
technology for Ford tractor model 3610 was to be made available to ETL
till the termination of the joint venture, (d)         Subsequently, NHNA
transferred their rights in various engineering component and technical
services, including the technology for Ford tractor model 3610 to its
subsidiary/appellant-assessee herein, i.e., New Holland Tractors India
Private Limited (NH India` or the assessee, for short),      (e) In July, 1995,
NHNA and Escorts mutually agreed to terminate their joint venture, (f) A
tripartite disengagement agreement dated 14th July, 1995 was executed
between the NHNA, NH India and Escorts, whereby NHNA agreed to sell
25,50,000 shares in ETL to Escorts for a consideration for Rupees
equivalent of US$ 98,00,000. (g) Further, the NH India (the appellant
assessee) agreed to licence the right to use technology of the tractor model
No. 3610, i.e., design engineering component for a period of three years for
consideration of US$ 50,00,000, to be paid in Indian Rupees (Rs
15,68,50,000/- on conversion) on non-repatriable basis. (h) In order to
facilitate transactions, the agreement stipulated an arrangement under
which an escrow bank account was opened. (i) by specified dates

ITA Nos. 182/2002 & 255/2003                                       Page 2 of 26
Escorts/ETL had to deposit payments in the escrow for the shares as well
as technical fee. (j) Upon successful implementation of the said tripartite
agreement, NH India received payment of Rs.15,68,50,000/- during the
previous year relevant to the assessment year in question. (k)
Rs.3,72,44,848/- was offered for taxation in the assessment year in
question and Rs 5,22,83,333, 5,22,83,333 and 1,50,38,486 were offered to
be taxed in the subsequent Assessment Years 1997-98, 1998-99 and 1999-
2000, respectively.

5.      The      short     question   is   whether   the   aforesaid   amount         of
Rs.15,68,50,000/-, which was received in the previous year relevant to the
assessment year in question, had accrued and, therefore, should be taxed in
the Assessment Year 1996-97 relevant to receipt year or should be
proportionately taxed over the period of three years, which would fall in
the Assessment Years 1996-97 to 1999-2000.                 The Assessing Officer,
Commissioner of Income Tax (Appeals) and Tribunal have held that the
aforesaid amount of Rs.15,68,50,000/- was taxable in the year of receipt,
i.e., Assessment Year 1996-97 as it had accrued and the accrual was not
postponed to the subsequent Assessment years 1997-98 to 1999-2000.

6.      We need not refer to the case law on the subject, what is income or
accrual of income, except by referring to the authoritative pronouncement
of this Court in Commissioner of Income Tax versus Dinesh Kumar Goel,
(2011) 331 ITR 10, wherein earlier judgments of the Supreme Court in
E.D. Sassoon and Company Limited versus Commissioner of Income
Tax, (1954) 26 ITR 27 and Calcutta Company Limited versus
Commissioner of Income Tax, West Bengal (1959) 37 ITR 1 were
elucidated and explained. In Dinesh Kumar Goel (supra), the respondent-
assessee, a coaching institute, following mercantile system of accounting
had received the total fee for the entire course on enrolment or at the time

ITA Nos. 182/2002 & 255/2003                                           Page 3 of 26
of admission, which could be for a two years duration. Question answered
was, whether the entire fee on receipt should be treated as income of the
current year or could be spread over/divided, depending upon the tenure or
period of the course for which payment was made? The question was
decided in favour of the assessee but for reasoning and findings, which do
not support the appellant-assessee in the present case. In fact the ratio is
contrary and against the appellant-assessee.

7.      Section 5(i) of the Act on the scope of total income of an resident
states that it includes income of any previous year of a person, from all
sources derived; (a) received or deemed to be received in India, (b) accrues
or arises or is due to accrue or arise to the person in India, and (c) accrues
or arises to him outside India during such year. In Dinesh Kumar Goel
(supra) it was observed that when an assessee was following mercantile
system of accountancy, receipt of a particular amount in the relevant year
would be relevant at the time of accrual or arisal for the purpose of
taxation. This would make the income chargeable to tax in the particular
year, and not mere receipt of the amount. Thus, when income accrues or
arises, actual receipt of amount may not be there and it would be
chargeable to tax in the said year and equally receipt or right to receive a
particular sum under an agreement would not be sufficient, unless the right
had accrued by rendering of services and not by promising for services. In
the latter cases, the income would accrue on rendering of services. The
following quotation from E.D. Sassoon and Company Limited (supra) was
highlighted:-

             Mukerji J. has defined these terms in Rogers Pyatt Shellac and
             Co. v. Secretary of State for India (1925)1 I.T.C. 363, 371:

                    Now what is income? The term is nowhere defined
                    in the Act......... In the absence of a statutory
                    definition we must take its ordinary dictionary
                    meaning - 'that which comes in as the periodical

ITA Nos. 182/2002 & 255/2003                                             Page 4 of 26
                    produce of one's work, business, lands or
                    investments (considered in reference to its amount
                    and commonly expressed in terms of money); annual
                    or periodical receipts accruing to a person or
                    corporation" (Oxford Dictionary). The word clearly
                    implies the ideal of receipt, actual or constructive.
                    The policy of the Act is to make the amount taxable
                    when it is paid or received either actually or
                    constructively. 'Accrues,' 'arises' and 'is received' are
                    three distinct terms. So far as receiving of income is
                    concerned there can be no difficulty; it conveys a
                    clear and definite meaning, and I can think of no
                    expression which makes its meaning plainer than the
                    word 'receiving' itself. The words 'accrue' and 'arise'
                    also are not defined in the Act. The ordinary
                    dictionary meanings of these works have got to be
                    taken as the meanings attaching to them. 'Accruing'
                    is synonymous with 'arising' in the sense of
                    springing as a nature growth or result. The three
                    expressions 'accrues,' 'arises' and 'is received' having
                    been used in the section, strictly speaking 'accrues'
                    should not be taken as synonymous with 'arises' but
                    in the distinct sense of growing up by way of
                    addition or increase or as an accession or advantage;
                    while the word 'arises' means comes into existence or
                    notice or presents itself. The former connotes the
                    idea of a growth or accumulation and the latter of the
                    growth or accumulation with a tangible shape so as
                    to be receivable. It is difficult to say that this
                    distinction has been throughout maintained in the
                    Act and perhaps the two words seem to denote the
                    same idea or ideas very similar, and the difference
                    only lies in this that one is more appropriate than the
                    other when applied to particular cases. It is clear,
                    however, as pointed out by Fry L.J. in Colquhoun v.
                    Brooks (1888) 21 Q.B.D. 52 , [this part of the
                    decision not having been affected by the reversal of
                    the decision by the House of Lords (1889) 14 App.
                    Cas. 493 that both the words are used in
                    contradistinction to the word "receive" and indicate a
                    right to receive. They represent a stage anterior to
                    the point of time when the income becomes
                    receivable and connote a character of the income
                    which is more or less inchoate.`

                 One other matter need be referred to in connection with the
             section. What is sought to be taxed must be income and it cannot
             be taxed unless it has arrived at a stage when it can be called
             'income.





ITA Nos. 182/2002 & 255/2003                                                    Page 5 of 26
                 The observations of Lord Justice Fry quoted above by Mr.
             Mukerji J. were made in Colquhoun v. Brooks (1888) 21 Q.B.D.
             52while construing the provisions of 16 and 17 Victoria Chapter
             34 Section 2 schedule 'D'. The words to be construed there were
             'profits or gains, arising or accruing,' and it was observed by
             Lord Justice Fry at page 59:

                    In the first place, I would observe that the tax is in
                    respect of 'profits or gains arising or accruing.' I
                    cannot read those words as meaning 'received by.' If
                    the enactments were limited to profits and gains
                    'received by' the person to be charged, that limitation
                    would apply as much to all Her Majesty's subjects as
                    to foreigners residing in this county. The result
                    would be that no Income-tax would be payable upon
                    profits which accrued but which were not actually
                    received, although profits might have been earned in
                    the kingdom and might have accrued in the
                    kingdom. I think, therefore, that the words 'arising or
                    accruing' are general words descriptive of a right to
                    receive profits.`

             To the same effect are the observations of Satyanarayana Rao J.
             in Commissioner of Income tax Madras v. Anamallais Timber
             Trust Ltd. [1950] 18 ITR 333 (Mad) and Mukherjea J. in CIT v.
             Ahmedbhai Umarbhai and Co. [1950]181 ITR 472 (SC) where
             this passage from the judgment of Mukerji J. in Rogers Pyatt
             Shellac & Co. v. Secretary of State for India 1 I.T.C. 363 , is
             approved and adopted. It is clear therefore that income may
             accrue to an Assessee without the actual receipt of the same. If
             the Assessee acquires a right to receive the income, the income
             can be said to have accrued to him though it may be received
             later on its being ascertained. The basic conception is that he
             must have acquired a right to receive the income. There must be
             a debt owed to him by somebody. There must be as is otherwise
             expresses debitum in presenti, solvendum in future; See W.S.
             Try Ltd. v. Johnson (Inspector of Taxes) [1946]1 A.E.R. 532 ,
             and Webb v. Stenton and Ors. Garnishees 11 Q.B.D. 518 .
             Unless and until there is created in favour of the Assessee a debt
             due by somebody it cannot be said that he has acquired a right to
             receive the income or that income had accrued to him.

8.      In the said case, the students were required to make deposit of the
whole fee for the entire course, but it was held that the amount deposited
also included deposit or advance and it cannot be said that the entire
fee had become due at the time of deposit. The fee was paid in advance
presumably as there should not be any default in payment by the

ITA Nos. 182/2002 & 255/2003                                                  Page 6 of 26
students during the term of the course. The Assessing Officer had used the
term deposit and due but the said words did not mean that the income
had accrued at the time of deposit itself. The said deposit was only an
advance as all services were not to be rendered in the year in question but
were to be rendered in the subsequent years.                    Referring to Calcutta
Company Limited (supra) it was observed that advance should not be
treated as income, as otherwise an anomalous situation would arise, as
expenses were required to be deducted to arrive at net income but such
expenses were yet to be incurred in the assessment year for they had to be
incurred in future years. Taxation of the entire receipt in such situations
would lead to a highly derogatory situation for the assessee. Expression
profits or gains had to be understood in a commercial sense. There
cannot be any computation of profits and gains, until the expenditure
necessary for the purpose of earning of receipts was deducted. In other
words, the Court applied the principle of matching between the receipts
and the expenditure to determine the time of taxation or principle of
accrual.

9.      In the same decision while dealing with ITA Nos. 1093/2008 and
other connected appeals, the Division Bench referred to Section 145 of the
Act and Section 211 (3C) of the Companies Act, 1956 relating to
Accounting Standards recommended by the Institute of Chartered
Accountants of India and it was observed that companies, were required to
follow the said Accounting Standards notified by the Central Government
in consultation with the National Advisory Committee. In Accounting
Standard -1 ­ Disclosure of Accounting Policies, the definition of the word
accrual had been made in the following manner:-

                  (b) Accrual` refers to the assumption that revenues and
                 costs are accrued that is, recognised as they are earned or
                 incurred ( and not as money is received or paid) and recorded
                 in the financial statements of the period to which they relate.

ITA Nos. 182/2002 & 255/2003                                                  Page 7 of 26
        On reading the aforesaid definition, the Court observed that the term
accrual relates to revenue earned with costs incurred. Therefore, revenue
should stand earned but would not accrue unless, expenses or costs were
incurred. The aforesaid principle recognises the matching concept, i.e.,
matching of income with expenditure to arrive at net income. Thereafter,
reference was made to CIT versus Woodward Governor of India (P)
Limited, (2009) 312 ITR 254, CIT versus Bilahari Investment (P)
Limited, (2008) 299 ITR 1 and JK Industries versus Union of India,
(2008) 297 ITR 176 on the matching concept.

10.     When we apply the aforesaid legal principles to the factual matrix of
the present case, it has to be held that the decision of the Tribunal affirming
the orders of the tax authorities is correct and as per law. The parent
company of appellant-assessee and Escorts had entered into joint
ventureship in 1969 and by virtue of the said joint ventureship had during
the period 1991-94 provided technology for tractor model 3610. The
said technology was acquired or provided on or before 14th July, 1995,
when the tripartite agreement was executed. The appellant-assessee prior
to 14th July, 1995 had already incurred expenditure to create the said
technology, which was being used by ETL for manufacture of tractor
model No. 3610. As the appellant-assessee and Escorts/ETL were parting
ways with termination of their joint venture, ETL had agreed to pay
Rs.15,68,50,000/- in order to enable ETL to use the said technology for a
period of three years or upto 31st December, 1996. Clearly and certainly no
services or know-how/technology was to be supplied during the next three
years. It is not a case where technical services or other services were to be
provided during the period of three years.

11.     Appropriate, would be to reproduce the relevant clauses of the
agreement dated 14th July, 1995, which read:-
ITA Nos. 182/2002 & 255/2003                                       Page 8 of 26
                 WHEREAS, New Holland`s related company New Holland
                 U.K. Limited has assigned the right to the design engineering
                 component of Technical Services, which includes technology
                 used in the tractor model 3610 developed between 1991 and
                 1994, to NH India which will extend to Escorts the right to
                 use such design engineering component hereinafter referred
                 to as Design Engineering Services); and

                                      ARTICLE 1
                                 DISENGAGEMENT
        1.01     XXXXX
        1.02     Assignment of Design Engineering Services and Payment
                 Therefore
                 As of the Binding Date (defined in 4.01) NH India hereby
                 assigns to Escorts for a period of three years the right to use
                 the technology used in the tractor model 3610 provided to
                 ETL by New Holland U.K. Limited (Formerly New Holland
                 Ford Limited) between 1991 and 1994, subject to 2.02(b)(i),
                 (ii), (iii) and (iv). In consideration of the foregoing, Escorts
                 agrees to pay a technical fee in Indian rupees equivalent to
                 US$ 5,000,000 at the date of deposit in the Escrow Account
                 as provided in 1.04(d) below (Technical Fee), currently
                 equivalent to approximately Rs.15,30,00,000/-, after
                 deducting TDS, on a non-repatriable basis to NH India.

                 XXXXX

                                         ARTICLE II
                          TECHNICAL & PRODUCT INFORMATION

                 2.01     Production and Distribution of Ford Tractors

                 Escorts on its own and on behalf of ETL agrees not to dispute
                 the right of New Holland and its associated companies to
                 produce, distribute and sell in India the Ford brand tractors.

                 2.02     Product Differentiation

                 It is a basic concept of this Agreement that Escorts and its
                 associated companies including ETL will not manufacture
                 tractors which will be confused with Ford tractors. Confusion
                 can be caused only by four factors: use of the same brand
                 name; colour; series identification; and styling (hereinafter
                 Confusion Factors).

                 2.02(a) Up until 31 December 1996, New Holland will not
                 object to ETL continuing to produce Ford tractors under the
                 following conditions:

                 (i) product quality be maintained to Ford standards by the

ITA Nos. 182/2002 & 255/2003                                                   Page 9 of 26
                 retention by ETL of a resident engineer appointed by New
                 Holland;

                 (ii) the present styling, paint, colour, brand name and series
                 identification to be maintained as they are at the date of this
                 Agreement and to be utilised only together in combination.

                 (iii) If before 31 December 1996 ETL is required to, or
                 chooses to, drop the use of the Ford brand name, the
                 conditions of paragraph 2.02(b) will apply.

                 2.02(b) After 31 December 1996, or at such earlier date as
                 provided in 2.02(a)(iii), the Confusion Factors will be
                 handled as follows:

                 (i)     Brand Name: Escorts, ETL and their affiliated
                 companies shall not use the brand name Ford and in any case
                 shall comply with the limitations contained in Article 10.3 of
                 the Registered User Agreement dated 14 December 1990
                 between For Motor Company of Canada Limited and Escorts
                 Tractors Limited.

                 (ii)    Colour: In order to distinguish the colour of products
                 manufactured by EL, ETL or any affiliated company from
                 those to be manufactured by New Holland and its affiliates,
                 EL, ETL and its affiliated companies shall only use colours
                 which are not blue; or Bureau of Indian Standards (September
                 1994) ISC nos. 101, 102 or 174; or Bureau of Indian
                 Standards (September 1994) blue colours with a Munsell
                 value between 0 and 2.5 or with a Munsell value between 7.5
                 and 10 (included within these two preceding ranges of blue
                 shades are Bureau of Indian Standards (September 1994) ISC
                 nos. 105, 106, 108 and 177 which are permitted). In the
                 preceding specifications of blue colours, they are mutually
                 exclusive; id est the permitted shades of blue cannot be mixed
                 with any other colour or shade of blue to form a colour which
                 would fall within the range of colours defined by Bureau of
                 Indian Standards (September 1994) as a blue colour with a
                 Munsell value of greater than 2.5 and less than 7.5.

                 (iii)   Series Identification: Neither Escorts nor ETL nor any
                 of their affiliated companies shall use the same series
                 identification as those used on Ford tractors.

                 (iv)    Styling i.e. Grill: The tractors produced by
                 ETL/Escorts and/or any of their affiliated companies shall use
                 front grills which are different from the ones presently used
                 on Ford tractors manufactured by ETL.

                 2.02(c) Until 31 December 1996 or such earlier date as

ITA Nos. 182/2002 & 255/2003                                                  Page 10 of 26
                 provided for in 2.02(a)(iii) above New Holland will not
                 interfere with, object to, or take any action that could lead to,
                 an early termination of the Registered User Agreement
                 referred to in 2.02(b)(i). New Holland will instead cooperate
                 with ETL in seeking termination of the Registered User
                 Agreement as from 31 December 1996. Notwithstanding the
                 above, ETL shall always be free to manufacture tractors
                 under any other brand name provided the tractors produced
                 by ETL conform to the conditions of 2.02(b).

12.     The aforesaid clauses unerringly state that no new technology,
upgradation or service in any form was to be provided on or after 14th July,
1995. The technology in question had already been provided and was
already in use for manufacture of tractor model 3610. It was provided and
made available between 1991 to 1994. What was permitted and allowed to
ETL was the right to continued use of such design engineering component
for a period of three years, in spite of disengagement and termination of the
joint venture agreement.

13.     The initial amount of Rs.15.30 crores stated in the tripartitate
agreement dated 14th july, 1995 got enhanced, possibly due to exchange
rate fluctuation to Rs.15,68,50,000/-. The said payment had to be deposited
in the escrow account and upon successful completion of the legal
formalities and mutual obligations, the deposit was to be received and
appropriate by the appellant-assessee. The accepted and admitted position
is that the payment was received. Upon receipt, the amount paid was no
longer a deposit or an advance but the amount which stood appropriated as
income earned. In fact, the tripartite agreement dated 14th July, 1995
provided for termination of the said agreement in certain contingencies,
before payment was made to the appellant-assessee from the escrow
account. In the present case the agreement was not terminated and was
duly implemented and as a consequence payment was received. Thus it has
to be held that decision in the case of Dinesh Kumar Goel (supra) and the
ratio and the legal position as expounded in Calcutta Company Limited

ITA Nos. 182/2002 & 255/2003                                                    Page 11 of 26
(supra) and E.D. Sassoon and Company Limited (supra) support the
contention of the Revenue and not the submissions of the appellant-
assessee. The income had duly accrued or arising during the assessment
year in question. The appellant-assessee did not have any obligation or
responsibility to carry out further activity or perform any new task, after
the agreement dated 14th July, 1995, towards know-how or technology and
on account of receipt of the licence money of Rs.15,68,50,000/-. The
assessee did not have to perform any future obligation or task. Thus,
unlike the factual matrix in Dinesh Kumar Goel (supra) where only
advance deposit was received, but in the present case the appellant-
assessee had received the entire consideration and not an advance deposit.
The amount paid was not an advance relating unperformed obligation
which had to be performed or undertaken. What the agreement postulated
was that the ETL could use the technology already made available to them
for a period of three year. This would not make the payment or deposit an
advance. Neither was the payment inchoate nor made subject to final
decision on appropriation. There was no stipulation to return or refund. A
payment would be an advance or deposit if the said amount was repayable
or the person receiving the deposit as advance had to perform and render
services post deposit in future as was the case in Dinesh Kumar Goel
(supra).

14.     When we apply the principle of matching, again the issue has to be
decided in favour of the respondent-Revenue and against the appellant-
assessee as the appellant-assessee or its affiliates or group concerns had
already incurred the expenditure on developing the technology.

15.     In the present case, we are not concerned about the tax treatment in
the hands of ETL and whether the said amount should be spread over three
years. We are concerned with the year of taxation in the hands of the

ITA Nos. 182/2002 & 255/2003                                     Page 12 of 26
appellant-assessee, the recipient, who has already performed their
obligations.

16.      In these circumstances, the appellant-assessee adopted another line
of argument. It was submitted that the appellant-assessee would have been
liable for damages in case of defective technology. Therefore the amount
received had not accrued or arisen and it would have accrued or arisen only
after end of three years. Adjunct to this argument was the submission that
there was an inbuilt or rather deemed obligation that the appellant-assessee
would ensure that the technology remained workable.

17.      The second argument as extended, it is apparent, is an afterthought
as it was not raised before the authorities or the Tribunal. In fact, in the
written submissions filed before the authorities it was accepted that parting
of information and technology had taken place in one go, but the ETL had
the right to use the technology for three years. The question of inbuilt or
implied obligations is far-fetched as it is not discernible or mentioned in
the agreement and it was not the case of the appellant-assessee that they
had to provide technology in future or after 14th July, 1995. The appellant-
assessee a signatory to the Tripartite agreement was aware that there was
no such inbuilt obligation, thus no such contention was raised earlier. This
negates the argument which we perceive is a mixed question of law and
facts.

18.      The first contention that if the technology was defective, the
appellant-assessee would be liable to pay damages annihilates accrual, is
again misconceived and legally unattainable.         There is no specific
stipulation in the agreement relating to damages in case the technology
made available between 1991-94 was found to be defective. Clause No.
4.04 relied upon by the learned counsel for the appellant-assessee does not
justify or merit the said argument. The said clause reads as under:-

ITA Nos. 182/2002 & 255/2003                                     Page 13 of 26
                 4.04           Release and Hold Harmless

                 As from the date the transfer of Shares and the payments of
                 money to New Holland and/or NH India have been effected,
                 Escorts for itself and in the name of and on behalf of ETL
                 shall release any and all claims they have or may ever have
                 against New Holland, NH India or any of their related
                 companies arising out of or in connection with New
                 Holland`s investment in ETL and any other agreement
                 entered into between or among New Holland or any of its
                 related companies and Escorts, ETL or any of its related
                 companies. Similarly, as from the date the transfer of Shares
                 and the payments of money to New Holland and/or NH India
                 have been effected, New Holland shall release any and all
                 claims it has or may ever have against ETL, Escorts and its
                 related companies arising out of or in connection with its
                 investment in ETL and any other agreement entered into
                 between or among New Holland or any of its related
                 companies and Escorts, ETL and any of its related
                 companies. These releases do not include any claims that
                 may be brought as a result of the failure of a party to comply
                 with the terms of this Agreement. Each party agrees that it
                 will obtain the required corporate approval to enter this
                 Agreement and will hold the other parties harmless for any
                 consequences related to failure to obtain the required
                 approval.

        The aforesaid clause does not relate to the technology element. It
relates to payment of money, transfer of shares, etc. Even assuming the
aforesaid clause relates to damages on account of defective technology,
still the receipt in question would not become an advance or a deposit. The
contention and argument would be contrary to the principles of
accountancy and the principle of accrual of income. It is not the case of the
appellant-assessee that claim of damages is equivalent to claims for
warranty, which can be allowed on the basis of principles of matching and
on actuarial basis as held by the High Court in the case of Woodward
Governor of India (P) Limited (supra) where it was held, anticipated
losses in the shape of warranty claims based upon past data could be
allowed as an expenditure. This was not the case that was promoted and
projected by the appellant-assessee. Claim for damages under the law of


ITA Nos. 182/2002 & 255/2003                                                 Page 14 of 26
contract postulates a breach of contract and the limitation period mentioned
under Article 23 of Schedule 1 to the Limitation Act, 1963 is three years.
Unknown and off chance claim for damages in the present factual matrix is
certainly not equivalent to claim for warranty, which are to be allowed only
on the basis of past data, as products sold and consideration are taxable
and, therefore, the expenses which have to be incurred to meet the warranty
claims computed on scientific and actuarial basis, have a co-relation with
the receipt. Learned counsel for the appellant-assessee has not pointed out
even a single decision in which damages for breach of contract, effects and
negates accrual of income.

19.     Contingent liability is not an expenditure and, therefore, even when
an assessee is following mercantile system of accounting, it cannot be
allowed as a deduction under Section 37 of the Act. Unascertained liability
on account of damages cannot be allowed as an expenditure was settled by
Madras High Court in Senthikumara Nadar versus C.I.T, (1957) 32 ITR
138. The present case is not of a statutory liability, and even no claim for
damages etc. had been made. The submission, therefore, does not have any
merit as it relates to unascertained liability, the happening of which was
dependent on a doubtful and uncertain contingency in future. It could have
never happened. Indeed it never happened.

20.     Another contention raised before us was that the amount received
was inchoate receipt as there was an obligation on the part of the appellant-
assessee that the technology so made available remained capable of being
used for a period of three years. The amount received was not an inchoate
amount depending upon any contingency before it could be appropriated.
The appellant-assessee was not under an obligation to refund the said
amount under any of the clauses. Liability to pay damages under the law
of contract for breach of a contract does not make the receipt an inchoate

ITA Nos. 182/2002 & 255/2003                                     Page 15 of 26
receipt.

21.     Similarly, the contention that in the books of account the amount so
received had been bifurcated and divided into four assessment years does
not carry any force. A wrong treatment given in the books of accounts
contrary to the accountancy principles could be corrected. Income earned
should be taxed in the right year and should not be diverted or treated as
income of another years.       What the accountants may opine, may not
necessarily be a right and good law and in case of a dispute the issue has
to be decided on merits and not on the basis of the treatment in the books
of accounts. [see Tuticorin Alkali Chemicals and Fertilizers Limited
versus Commissioner of Income Tax, (1997) 227 ITR 172 (SC)].

22.     At this stage, we may record that learned Senior Standing Counsel
for the appellant-assessee has stated that if the entire amount of
Rs.15,68,50,000/- is taxed in the Assessment Year 1996-97, then the said
amount should not be taxed in the subsequent assessment years. Our
attention was also drawn to the assessment order relating to Assessment
Year 1998-99 wherein the Assessing Officer has observed that the entire
receipt of Rs.15,68,50,000/- had been brought to tax for the Assessment
Year 1997-98, but as the dispute was pending, necessary adjustment or
correction would be made depending upon the final outcome.            Senior
Standing Counsel for the revenue accepts that if Rs 15,68,50,000 is taxed
in the assessment year 1996-97, then the bifurcated differential amount
should not be taxed in the assessment years 1997-98 to 1999-2000. The
appellant-assessee would move necessary application before the Assessing
Officer and in view of the statement made by the learned Senior Standing
Counsel for the Revenue, necessary correction and adjustment will be
made in respect of Assessment Years 1997-98 and 1999-2000 in addition
to Assessment Year 1998-99. It would not be fair for the Revenue to tax

ITA Nos. 182/2002 & 255/2003                                    Page 16 of 26
the same amount twice in view of the ongoing dispute.

23.     In view of the aforesaid discussion, the substantial question of law
mentioned in paragraph 3 above, is answered in favour of the Revenue and
against the appellant assessee. The appeal ITA 182/2002 is, therefore,
dismissed and we uphold the order of the Tribunal that the entire licence
fee of Rs.15,68,50,000/- is taxable in the assessment year 1996-97.

ITA No. 255/2003

24.     By order dated 17th September, 2003, the following substantial
question of law was framed:-

                 Whether on the facts and in the circumstances of
                 the case, the Tribunal was correct in law in holding
                 that penalty under Section 271(1)(c) of the Income
                 Tax Act, 1961, was exigible on the assessee?

25.     We have had the advantage of penning the judgment in the appeal
preferred in relation to the quantum proceedings and have held that the
assessee was wrong in not offering the whole or entire amount of the
technical fee for tax in the year of receipt. But, it does not follow that
penalty for concealment must be imposed as the quantum appeal is decided
against the assessee. The findings in the assessment proceedings cannot be
considered as conclusive and final for the purpose of imposition of penalty
under section 271(1)(c) of the Act. As per opinion expressed by the
Supreme Court in Commissioner of Income Tax, West Bengal I, and Anr.
Vs. Anwar Ali [1970] 76 ITR 696 (SC) such findings may constitute good
evidence in the penalty proceedings but it does not follow that penalty for
concealment under Section 271(1)(c) is mandatory whenever an addition or
disallowance is made. The language of Section 271(1)(c) has undergone
substantial changes since the pronouncement of the aforementioned
judgment, but the said legal position, still hold good.         In assessment


ITA Nos. 182/2002 & 255/2003                                       Page 17 of 26
proceedings, we are primarily concerned with the assessment of income i.e.
quantification and computation of total income as per the provisions of the
Act, whereas in penalty proceedings we are primarily concerned with the
conduct of the assessee. Penalty is imposed not because addition is made
but because there is concealment or furnishing of inaccurate particulars by
the assessee. This is apparent from language of Section 271(1)(c) and
Explanation 1 which are reproduced below:-




                 271. Failure to furnish returns, comply with notices,
                 concealment of income, etc.--(1) If the Assessing Officer or
                 the Deputy Commissioner (Appeals) or the Commissioner
                 (Appeals) in the course of any proceedings under this Act, is
                 satisfied that any person--

                               Xxxxxxxxxxx

                        (c) has concealed the particulars of his income or
                 furnished inaccurate particulars of such income,

                               xxxxxxxxxxxxxx

                 Explanation 1.--Where in respect of any facts material to the
                 computation of the total income of any person under this
                 Act,--

                        (A) such person fails to offer an explanation or offers
                 an explanation which is found by the Assessing Officer or
                 the Deputy Commissioner (Appeals) or the Commissioner
                 (Appeals) to be false, or

                         (B) such person offers an explanation which he is not
                 able to substantiate and fails to prove that such explanation is
                 bona fide and that all the facts relating to the same and
                 material to the computation of his total income have been
                 disclosed by him,

                 then, the amount added or disallowed in computing the total
                 income of such person as a result thereof shall, for the
                 purposes of clause (c) of this sub-section, be deemed to
                 represent the income in respect of which particulars have
                 been concealed.

26.     The word conceal` inherently and per-se refers to an element of



ITA Nos. 182/2002 & 255/2003                                                   Page 18 of 26
mens rea, albeit the expression furnishing of inaccurate particulars is
much wider in scope.           The word conceal` implies intention to hide an
item of income or a portion thereof. It amounts to suppression of truth or
a factum so as to cause injury to the other. (See CIT vs. A. Subramania
Pillai [1997] 226 ITR 403 (Mad). The word 'conceal' means to hide or to
keep secret. As held in Law Lexicon, the said word is derived from the
latin word 'concelare' which implies 'con' & 'celare' to hide. It means to
hide or withdraw from observation; to cover or keep from sight; to prevent
discovery of; to withhold knowledge of. The word 'inaccurate' in Webster's
Dictionary has been defined as 'not accurate; not exact or correct; not
according to truth; erroneous; as inaccurate statement, copy or transcript'.
The word 'particular' means detail or details of a claim or separate items of
an account [see Commissioner of Income Tax vs. Reliance Petroproducts
Pvt. Ltd. [2010] 322 ITR 158(SC)]. Thus the words furnished inaccurate
particulars is broader and would refer to inaccuracy which would cause
under-declaration or escapement of income.          It may refer to particulars
which should have been furnished or were required to be furnished or
recorded in the books of accounts etc. [See CIT vs. Raj Trading Co. (1996)
217 ITR 208 (Raj.)] Inaccuracy or wrong furnishing of income would be
covered by the said expression, though there are decisions that adhoc
addition per se without other or corroborating circumstances may not
reflect furnished inaccurate particulars. Lastly, at times and it is fairly
common, the charge of concealment and furnishing of inaccurate
particulars may overlap.

27.     The present case is not of concealment of income, but furnishing of
inaccurate particulars for assessment year 1996-97, as the entire receipt
was not declared and accounted for in the return of income of the said
assessment year. Rather, it was declared in the returns of the subsequent


ITA Nos. 182/2002 & 255/2003                                       Page 19 of 26
assessment years.

28.     As per clause (A) to Explanation 1 to section 271(1)(c), penalty is to
be imposed if an assessee fails to offer an explanation or offers an
explanation which is found by the Assessing Officer to be false. Clause
(B) to Explanation 1 provides that where the assessee offered an
explanation, but the same remained unsubstantiated, penalty should not be
imposed if the explanation is bonafide and all facts relating to the same and
material to the computation of his total income have been disclosed.
Explanation 1 is an important adjunct and supplement to Section 271(1)(c)
of the Act. It not only enacts and gives deeming effect when an addition or
disallowance is made in the assessment/quantum proceedings, but also
carves out an exception in clause (B) as to when penalty should not be
levied. Onus under clause (B) to Explanation 1 is on the assessee.

29.     We first refer to clause (A). Where no explanation is offered or the
explanation is found to be false, then in view of the conduct of the
assessee, penalty has to be imposed in terms of clause (A) to Explanation 1
to Section 271(1)(c). In the present case, clause (A) to the Explanation 1
would not apply as the assessee had offered an explanation and it cannot be
said that the explanation was found to be false. Falsity in the context of the
provision would refer to a wrong and untruthful assertion of a fact. It
would cover cases where the assessee has lied and not spoken the truth of a
fact known to him.             It would not cover cases involving wrong
interpretation of a legal position/provision or when the fact as asserted was
not factually wrong and, therefore not false, but due to legal consequences,
addition or disallowance stands made.

30.     Thus, we have to examine clause (B) and whether the explanation
offered was bona fide. Clause (B) of Explanation 1, applies when an
assessee offer an explanation but it has not been able to substantiate it. In

ITA Nos. 182/2002 & 255/2003                                      Page 20 of 26
the present case, the assessee had offered an explanation and made
submission as to why the receipt should be taxed over a period of
three/four years and not in the year of receipt. The assessee was not able to
substantiate the said explanation. Accordingly, in the quantum appeal, the
question has been decided against the appellant assessee. The question will
remain whether explanation offered by the assessee was bonafide and all
facts relating to the same and material to computation of total income had
been disclosed. As far as latter part is concerned, it cannot be doubted or
even questioned that the appellant assessee had disclosed or stated all facts
relating to the explanation and material for the computation of their total
income. The quantum of receipt as mentioned by the appellant assessee
has not been doubted. Tripartite agreement was not concealed and it is not
case of the Revenue that any undisclosed income was received. Further,
the amount received has been shown as taxable in the returns filed for the
four assessment years. Therefore, the amount received was offered for tax,
though not in the right or correct assessment year.

31.     Primary issue which arises for consideration is whether the conduct
of the assessee was bonafide.           We have used very strong words like
erroneous, fallacious, untenable etc. with reference to various contentions
and submissions made by the assessee in the quantum appeal, but we do
not think we will be contradicting ourselves when we hold that the conduct
of the assessee was bonafide and the onus to show and establish bonafides
has been discharged.           The observations and adjectives used by us in the
quantum appeal rejecting the submission of the assessee have been made
after having advantage and benefit of the assessment order, appellate
orders and hearing arguments of the counsel for the appellant assessee and
the Revenue. Hindsight results in greater clarity and wisdom. Test of bona
fide has to be applied keeping in mind the position as it existed, when the


ITA Nos. 182/2002 & 255/2003                                         Page 21 of 26
return of income was filed.              The Act, i.e. the Income Tax Act, is a
complex legislation involving intricate and often debatable legal positions.
The legal issue involved may relate to principles of accountancy.
Invariably, on questions of interpretation, the assessees do adopt a legal
position which they perceived as most beneficial or suitable. This would
not be construed as lack of bona fides as long as the legal position so
adopted is not per se contrary to the language of the statute or an
undebatable legal position not capable of a different connotation and
understanding. When two legal interpretations were plausible and there
was a genuine or credible plea, penalty for concealment/furnishing of
inaccurate particulars, should not and cannot be imposed. If the view taken
by the assessee required consideration and was reasonably arguable, he
should not be penalized for taking the position. The tax statutes are
convoluted and complex and there can be manifold opinions on
interpretation and understanding of a provision or the tax treatment. In such
cases, even when the interpretation placed by the Revenue is accepted,
penalty should not be imposed if the contention of the assessee was
plausible and bona fide. Of course full facts should be disclosed. While
applying the test of bonafide, we have to also keep in mind that even best
of legal minds can have difference of opinion. It is not uncommon to have
dissenting opinion on the question of law, in the courts.

32.     On the aforesaid aspect, we would like to refer to the following
observations of the Supreme Court in the case of CIT v. Reliance
Petroproducts (P) Ltd., (2010) 11 SCC 762:-

                10. Section 271(1)(c) is as under:
                          271. Failure to furnish returns, comply with notices,
                          concealment of income, etc.--(1) If the Assessing
                          Officer or the Commissioner (Appeals) in the course
                          of any proceedings under this Act, is satisfied that
                          any person--


ITA Nos. 182/2002 & 255/2003                                                 Page 22 of 26
                          ***
                          (c) has concealed the particulars of his income or
                          furnished inaccurate particulars of such income.

                 A glance at this provision would suggest that in order to be
                 covered, there has to be concealment of the particulars of the
                 income of the assessee. Secondly, the assessee must have
                 furnished inaccurate particulars of his income. Present is not
                 the case of concealment of the income. That is not the case of
                 the Revenue either. However, the learned counsel for the
                 Revenue suggested that by making incorrect claim for the
                 expenditure on interest, the assessee has furnished inaccurate
                 particulars of the income. As per Law Lexicon, the meaning
                 of the word particular is a detail or details (in plural sense);
                 the details of a claim, or the separate items of an account.
                 Therefore, the word particulars used in Section 271(1)(c)
                 would embrace the meaning of the details of the claim made.
                 It is an admitted position in the present case that no
                 information given in the return was found to be incorrect or
                 inaccurate. It is not as if any statement made or any detail
                 supplied was found to be factually incorrect. Hence, at least,
                 prima facie, the assessee cannot be held guilty of furnishing
                 inaccurate particulars.

                 11. The learned counsel argued that submitting an incorrect
                 claim in law for the expenditure on interest would amount to
                 giving inaccurate particulars of such income. We do not
                 think that such can be the interpretation of the words
                 concerned. The words are plain and simple. In order to
                 expose the assessee to the penalty unless the case is strictly
                 covered by the provision, the penalty provision cannot be
                 invoked. By any stretch of imagination, making an incorrect
                 claim in law cannot tantamount to furnishing inaccurate
                 particulars. In CIT v. Atul Mohan Bindal[(2009) 9 SCC 589]
                 where this Court was considering the same provision, the
                 Court observed that the assessing officer has to be satisfied
                 that a person has concealed the particulars of his income or
                 furnished inaccurate particulars of such income. This Court
                 referred to another decision of this Court in Union of India
                 v.Dharamendra Textile Processors [(2008) 13 SCC 369] as
                 also the decision inUnion of India v. Rajasthan Spg. & Wvg.
                 Mills [(2009) 13 SCC 448] and reiterated in para 13 that:
                 (Atul Mohan Bindal case [(2009) 9 SCC 589] , SCC p. 597,
                 para 13)

                 13. It goes without saying that for applicability of Section
                 271(1)(c), conditions stated therein must exist.

                 12. Therefore, it is obvious that it must be shown that the

ITA Nos. 182/2002 & 255/2003                                                   Page 23 of 26
                 conditions under Section 271(1)(c) must exist before the
                 penalty is imposed. There can be no dispute that everything
                 would depend upon the return filed because that is the only
                 document, where the assessee can furnish the particulars of
                 his income. When such particulars are found to be inaccurate,
                 the liability would arise.

                 13. In Dilip N. Shroff v. CIT [(2007) 6 SCC 329] this Court
                 explained the terms concealment of income and
                 furnishing inaccurate particulars. The Court went on to
                 hold therein that in order to attract the penalty under Section
                 271(1)(c), mens rea was necessary, as according to the Court,
                 the word inaccurate signified a deliberate act or omission
                 on behalf of the assessee. It went on to hold that clause (iii)
                 of Section 271(1) provided for a discretionary jurisdiction
                 upon the assessing authority, inasmuch as the amount of
                 penalty could not be less than the amount of tax sought to be
                 evaded by reason of such concealment of particulars of
                 income, but it may not exceed three times thereof. It was
                 pointed out that the term inaccurate particulars was not
                 defined anywhere in the Act and, therefore, it was held that
                 furnishing of an assessment of the value of the property may
                 not by itself be furnishing inaccurate particulars.

                 14. It was further held in Dilip N. Shroff [(2007) 6 SCC 329]
                 that the assessee must be found to have failed to prove that
                 his explanation is not only not bona fide but all the facts
                 relating to the same and material to the computation of his
                 income were not disclosed by him. It was then held that the
                 explanation must be preceded by a finding as to how and in
                 what manner, the assessee had furnished the particulars of his
                 income. The Court ultimately went on to hold that the
                 element of mens rea was essential.

                 15. It was only on the point of mens rea that the judgment in
                 Dilip N. Shroff v.CIT [(2007) 6 SCC 329] was upset. In
                 Union of India v. Dharamendra Textile Processors [(2008) 13
                 SCC 369] after quoting from Section 271 extensively and
                 also considering Section 271(1)(c), the Court came to the
                 conclusion that since Section 271(1)(c) indicated the element
                 of strict liability on the assessee for the concealment or for
                 giving inaccurate particulars while filing return, there was no
                 necessity of mens rea. The Court went on to hold that the
                 objective behind enactment of Section 271(1)(c) read with
                 the Explanations indicated with the said section was for
                 providing remedy for loss of revenue and such a penalty was
                 a civil liability and, therefore, wilful concealment is not an
                 essential ingredient for attracting civil liability as was the
                 case in the matter of prosecution under Section 276-C of the
                 Act. The basic reason why the decision in Dilip N. Shroff v.

ITA Nos. 182/2002 & 255/2003                                                  Page 24 of 26
                 CIT [(2007) 6 SCC 329] was overruled by this Court in
                 Union of India v. Dharamendra Textile Processors[(2008) 13
                 SCC 369] was that according to this Court the effect and
                 difference between Section 271(1)(c) and Section 276-C of
                 the Act was lost sight of in Dilip N. Shroff v. CIT [(2007) 6
                 SCC 329] .

                 16. However, it must be pointed out that in Union of India v.
                 Dharamendra Textile Processors [(2008) 13 SCC 369] no
                 fault was found with the reasoning in the decision in Dilip N.
                 Shroff v. CIT [(2007) 6 SCC 329] where the Court explained
                 the meaning of the terms conceal and inaccurate. It was
                 only the ultimate inference in Dilip N. Shroff v. CIT [(2007)
                 6 SCC 329] to the effect that mens rea was an essential
                 ingredient for the penalty under Section 271(1)(c) that the
                 decision in Dilip N. Shroff v. CIT [(2007) 6 SCC 329] was
                 overruled.
                                              ..........
                 18. We must hasten to add here that in this case, there is no
                 finding that any details supplied by the assessee in its return
                 were found to be incorrect or erroneous or false. Such not
                 being the case, there would be no question of inviting the
                 penalty under Section 271(1)(c) of the Act. A mere making
                 of the claim, which is not sustainable in law, by itself, will
                 not amount to furnishing inaccurate particulars regarding the
                 income of the assessee. Such claim made in the return cannot
                 amount to inaccurate particulars.
                                            ..............
                 20. We do not agree, as the assessee had furnished all the
                 details of its expenditure as well as income in its return,
                 which details, in themselves, were not found to be inaccurate
                 nor could be viewed as the concealment of income on its
                 part. It was up to the authorities to accept its claim in the
                 return or not. Merely because the assessee had claimed the
                 expenditure, which claim was not accepted or was not
                 acceptable to the Revenue, that by itself would not, in our
                 opinion, attract the penalty under Section 271(1)(c). If we
                 accept the contention of the Revenue then in case of every
                 return where the claim made is not accepted by the assessing
                 officer for any reason, the assessee will invite penalty under
                 Section 271(1)(c). That is clearly not the intendment of the
                 legislature.

33.     In view of the legal position, when we examine the question of
bonafide, we find that the assesee had discharged the said onus for the
reasons set out above. We also record that while examining the question of
bonafides, we have taken into account the conduct of the appellant assessee

ITA Nos. 182/2002 & 255/2003                                                  Page 25 of 26
in disclosing full and true particulars in return of income as well as before
the Assessing Officer at the time of assessment proceedings. In the present
case, as noticed above, there is no allegation that full details with regard to
the agreement, quantum of receipt, the factum why the payment was made
and also the fact that the receipts had been offered for taxation in four
separate assessment years, were duly disclosed and stated. We have noted
that the appellant assessee had claimed that technical know-how would be
used for three years and, therefore, consideration received was relatable to
three years. We have rejected the said contention but in case the terms of
payment and the agreement had been worded differently, the assessee may
well have succeeded. In fact the assessee did not try to draft the agreement
in a way, which could have ensured that the amount received was
bifurcated/divided as income of four assessment years.

34.      Keeping in view the entirety of facts, we do not think that in view of
the explanation offered by the assessee it is a fit case, where penalty for
concealment of income under Section 271(1)(c) should be imposed. The
assessee`s conduct shows that they had acted in a bona fide manner and
also furnished all material facts and particulars.

35.      In view of the aforesaid discussion, the substantial question of law
framed in ITA No. 255/2003, mentioned in paragraph 24, is answered in
favour of appellant assessee and against the respondent Revenue. Penalty
under Section 271(1)(c) of the Act is directed to be deleted. Appeal ITA
No. 255/2003 is disposed of accordingly. There will be no order as to
costs.
                                                               -sd-

                                                       (SANJIV KHANNA)
                                                            JUDGE
                                                                -sd-
                                                     (V. KAMESWAR RAO)
SEPTEMBER 25, 2014                                           JUDGE
VKR/kkb
ITA Nos. 182/2002 & 255/2003                                           Page 26 of 26

 
 
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