IN HIGH COURT OF DELHI AT NEW DELHI 10. ITA 161/2016 NATIONAL AGRICULTURAL COOPERATIVE MARKETING FEDERATION OF INDIA LTD. ..... Appellant Through: Mr. M.S. Syali, Senior Advocate with Mr. Satyen Sethi and Mr. Arta Trana Panda, Advocates. versus COMMISSIONER OF INCOME TAX, DELHI-XI & ANR. ..... Respondents Through: Mr. Dileep Shivpuri, Senior Standing Counsel with Mr. Sanjay Kumar and Mr. Vikash Maheshwari, Advocates. CORAM: JUSTICE S. MURALIDHAR JUSTICE CHANDER SHEKHAR ORDER % 19.04.2017 1. This appeal by National Agricultural Cooperative Marketing Federation of India Limited ( NAFED ) under Section 260A of Income Tax Act, 1961 ( Act ) is directed against order dated 16th October, 2015 passed by Income Tax Appellate Tribunal ( ITAT ) in ITA Nos. 1999 & 2000/Del/2008 for Assessment Year ( AY ) 2001-02 and 2002-03. 2. On 23rd February, 2016, while admitting this appeal Court framed following question of law for consideration: ITA No. 161 of 2016 Page 1 of 8 Whether on facts and circumstances of case and in law, Special Bench was right in law in holding that Appellant did not incur liability to pay interest to Alimenta, directed to be paid by decree dated 28.1.2000? 3. facts leading to filing of present appeal are that Appellant entered into Agreement with Alimenta SA Switzerland ( Alimenta ) on 12th January, 1980 and 3rd April, 1980 for export of 5,000 and 4,000 MT HPS groundnut during years 1979-80 and 1980-81. 4. disputes that arose from said agreements were referred to arbitration. 5. Award dated 14th September, 1990 was passed in favour of Alimenta and against NAFED whereby NAFED was required to pay Alimenta sum of US$ 45.26 lakhs as principal together with US$ 48.81 lakhs as interest from 13th February, 1981 till date of Award. 6. Alimenta initiated proceedings for recognition and enforcement under Section 5 of Foreign Awards (Recognition and Enforcement) Act, 1961 in this Court. By order dated 28th January, 2000, this Court made Award rule of Court and held that Alimenta would be entitled to interest @ 18% per annum from date of Award till date of payment. 7. In computing its income for AYs 2000-01 and 2001-02, for which returns were filed in October 2002 and 2003 respectively, NAFED, in terms of decree dated 28th January 2000, claimed deduction of interest payable to Alimenta on outstanding amount of Award. Meanwhile, on appeal filed by NAFED against order dated 28th January 2000 making ITA No. 161 of 2016 Page 2 of 8 Award rule of Court, Division Bench (DB) of this Court by order dated 28th February, 2001 granted stay of execution of said decree. 8. Alimenta then went in appeal to Supreme Court of India by way of Special Leave Petition ( SLP ) in which by order dated 5 th April, 2002, Supreme Court directed NAFED to either furnish bank guarantee ( BG ) or proper security for principal amount of decree. It is stated that NAFED then furnished BG in sum of Rs. 22.5 crores for principal amount. 9. On 8th January 2003, Supreme Court modified above order dated 5th April, 2002 and clarified that NAFED would furnish BG to be renewed from year to year failing which stay of execution of decree would automatically stand vacated. 10. Assessing Officer ( AO ) framed assessment for AY 2001- 02 on 28th December, 2007 under Sections 147 read with 143(3) of Act. claim of interest payable to Alimenta on amount awarded was disallowed by AO by holding that liability was contingent and not even acknowledged in books of accounts. 11. As regards assessments for AYs 1996-97 to 1998-99, NAFED s appeals were dismissed by ITAT by order dated 25 th January, 2008 holding that interest liability crystallised only in AY 2001-02 and as such deduction of interest could not be allowed in any of AYs earlier thereto. ITA No. 161 of 2016 Page 3 of 8 12. Notwithstanding above order dated 25th January, 2008, Commissioner of Income Tax (Appeals) [ CIT (A ] by order dated 31 st March, 2008 for AYs 2001-02 and 2002-03 upheld disallowance of interest as ordered by AO. 13. Aggrieved by above order dated 31st March 2008, NAFED filed appeals before ITAT for AYs 2001-02 and 2002-03. NAFED s appeal for AY 2003-04 was disposed of by ITAT on 18th July, 2008 allowing deduction of interest payable to Alimenta. 14. Members of ITAT hearing appeals for AYs 2001-02 and 2002-03 disagreed with earlier order dated 18th July, 2008 for AY 2003- 04. reference was made to Special Bench of ITAT to consider following question: Whether in facts and circumstances of case, where claim of damages and interest thereon is disputed by assessee in court of law, deduction can be allowed for interest claimed on such damages while computing business income? 15. By impugned order dated 16th October 2015, Special Bench answered above question in negative i.e., against Assessee NAFED and in favour of Revenue. It was held that since decree dated 28th January, 2000 was stayed by Division Bench of this Court on 28th February, 2001, there was no liability on NAFED to pay interest to Alimenta at 18%. 16 This Court has heard submissions of Mr. M.S. Syali, learned Senior ITA No. 161 of 2016 Page 4 of 8 counsel appearing for NAFED and Mr. Dileep Shivpuri, learned Senior Standing Counsel appearing for Revenue. 17. reasoning of Special Bench of ITAT in impugned order is that under mercantile system of accounting, deduction can be granted only where incurring of liability is certainty. distinction has been drawn between contractual liability and statutory liability. latter is said to be incurred on mere issuance of demand notice which becomes deductible with issuance of such notice. In such case, fact that Assessee may have raised dispute against such demand does not ruin incurring of liability. It arises only when such claim is either acknowledged or in case of non-acceptance when final obligation to pay is fastened coupled with claimant acquiring legal right to receive such amount. It is further noted that legal obligation to pay is attached on Assessee when competent court passes order and suit is decreed against him and not during pendency of litigation. 18. On basis of this reasoning, it was concluded that as result of stay order granted by DB of this Court, liability of NAFED to pay interest @ 18% to Alimenta remained suspended from date of such stay. It is stated that it is only upon passing of consequential judgment by DB of this Court in September, 2010 that NAFED incurred legally enforceable liability to pay interest to Alimenta. Reference was made by ITAT to decisions in CIT v. Hindustan Housing & Land Development Trust Ltd.(1986) 161 ITR 524 (SC) and Jasjeet Films (P) Ltd. v. CIT (2007) 165 Taxmann 599 (Del). alternative point of view regarding ITA No. 161 of 2016 Page 5 of 8 deduction being hit by Section 40(a)(i) of Act was held to be non- applicable as underlining condition for its applicability, being otherwise eligibility of deduction for expense, becomes wanting. 19. Court is unable to agree with above reasoning of ITAT as it runs contrary to well-settled legal position explained by Supreme Court in several decisions. In Shree Chamundi Mopeds Ltd. v. Church of South India Trust Association (1992) 3 SCC 1, effect of interim order was explained as thus: While considering effect of interim order staying operation of order under challenge, distinction has to be made between quashing of order and stay of operation of order. Quashing of order results in restoration of position as it stood on date of passing of order which has been quashed. stay of operation of order does not, however, lead to such result. It only means that order which has been stayed would not be operative from date of passing of stay order and it does not mean that said order has been wiped out from existence. (emphasis supplied) 20. In Haji Lal Mohd. Biri Works v. CIT (1997) 3 SCC 659 SC it was explained by referring to decisions in Kedarnath Jute Mfg. Co. Ltd. v. CIT (1972) 3 SCC 252 and CIT v. Kalinga Tubes Ltd. (1996) 2 SCC 277 that when assessee is following mercantile system of accounting, in case of sales tax payable by assessee, liability to pay sales tax would accrue moment dealer made sales which are subject to sales tax and, at that stage, obligation to pay sales tax arises and raising of dispute in this connection before higher authorities would be irrelevant. ITA No. 161 of 2016 Page 6 of 8 21. In Kanoria Chemicals & Industries Limited v. U.P. State Electricity Board (1997) 5 SCC 772, Court explained legal position that would result in above grant of stay of government order in terms of which surcharge on electricity was payable. contention was that even if Board did not raise demand as result of stay order, obligation of consumers to pay charges at enhanced rate would be relieved. 22. In Central India Electric Supply Company v. CIT 247 ITR 54 (SC), it was explained that amount payable under arbitral Award became due when Award was made rule of Court within previous year relevant to AY in which it was made. 23. In present case, with Award having been made rule of Court by learned Single Judge of this Court, mere fact that said judgment and decree was stayed by DB would not relieve NAFED of its obligation to pay interest in terms thereof to Alimenta. Such liability commenced in previous year in which said judgment and decree was passed by learned Single Judge. To borrow phraseology of Supreme Court in Shree Chamundi Mopeds Ltd. v. Church of South India Trust Association (supra), it cannot be said that merely because there is stay granted by DB of this Court that order of learned Single Judge has been wiped out from existence. 24. For aforementioned reasons, this Court is unable to sustain impugned order of Special Bench of ITAT. Accordingly, question framed is answered in negative i.e., in favour of Assessee NAFED and against Revenue. ITA No. 161 of 2016 Page 7 of 8 25. impugned order dated 16th October, 2015 of ITAT is hereby set aside. appeal is allowed but, in circumstances, with no order as to costs. S. MURALIDHAR, J CHANDER SHEKHAR, J APRIL 20, 2017 dn ITA No. 161 of 2016 Page 8 of 8 National Agricultural Cooperative Marketing Federation of India Ltd. v. Commissioner of Income-tax, Delhi-XI & Anr