NAFED v. ITAT – Special Bench Verdict to Claim the Expense Despite Stay by the Same Court

 NAFED (National Agricultural Cooperative Marketing Federation of India Limited) and Alimenta, Switzerland entered into a Contract on 12^th January 1980 (Financial year-1979-80) and 3^rd April 1980 (Financial Year 1980-81) for export of 5000 and 4000Metric Tons of HPS Groundnut. Let us the study the case to know why the court ordered the verdict to Claim the Expense Despite Stay by the Same Court.

 There was a dispute and it was taken to Arbitration for settlement, like how that happens in any case of breach of the agreement.

Below Stated are the Facts of the Case to Claim the Expense Despite Stay by the Same Court

–      On 14^th September 1990 the Arbitration Court passed an order in favour of Alimentaand asked NAFED to pay USD45.26 Lakhs as the Principal and USD48.81 Lakhs as interest (for period 13.2.1981 to 14.9.1990) as interest to Alimenta.

–       Alimenta wanted to initiate the proceedings and enforce the Arbitration Proceedings by virtue of Arbitration Order dated 28.1.2000 and get interest at the rate of18%per annum from the date of award till the date of payment.

–       By stating the Order dated 28.1.2000 NAFED appealed to deduct the Interest component payable to Alimenta from their Income for assessment year, 2000-01 and 2001-02, on the outstanding amount of the award. (Returns filed in Oct 2002 and Oct 2003 respectively). Also an Appeal was made to a Division Bench (DB) by NAFED against this Arbitration Order and it was awarded a Stay against the same on 28^th February 2001.

–       Alimenta went to the Supreme Court against the Order passed by a Division Bench by way of Special Leave Petition (SLP). On 5^th April 2002 the Supreme Court directed NAFED to furnish a BG (Bank Guarantee) or proper security for the principal amount. Hence NAFED gave a BG of Rs.22.50Crores and fought the case in the Supreme Court.

–       On 8^th January 2003, the Supreme Court modified the above order dated 5^thapril 2002 to renew the bank guarantee from year to year till the settlement is reached. And if they fail to do so the decree  will remain vacated.

NAFED

 The facts are as follows:

–        On 28.12.2007, the Assessing Officer disallowed Income tax officer the Interest claimed by NAFED in the AY2001-02 as the Interest payable did not crystalise till then.

–        On 25.1.2007, ITAT told that the interest will not be allowed to be adjusted in any of the years previous to 2001-02.

–       31.3.2008 (for AY2001-02 and 2002-03) said that the Interest so adjusted will not be allowed.

–       18.7.2008, NAFED went to Appeal to the higher level i.e. ITAT, asking it to allow the interest paid to Alimenta as allowable deduction. The members of ITAT forwarded the same to special bench.

–       16.10.2015 the Special Bench took the decision against NAFED and favouring the Income Tax Department. 16 This Court has heard the submissions of Mr. M.S. Syali, learned Senior counsel appearing for NAFED and Mr. DileepShivpuri, learned Senior Standing Counsel appearing for the Revenue. It held that since there was a Stay (28.1.2000) on payment of interest @18% NAFED was not liable to pay the interest and hence cannot be allowed as deduction.

Reason for the order to Claim the Expense Despite Stay by the Same Court

Under the mercantile system of accounting only when the incurring of liability is certain can there be a grant for deduction. There is a difference between contractual liability and statutory liability. The latter incurs only on issuance of the notice and is deductible with the issuance of the notice itself.

If the assesse has raised any dispute against the demand it “does not ruin the incurring of liability”. It happens only “when such a claim is either acknowledged or in a case of non-acceptance when a final obligation to pay is fastened coupled with the claimant acquiring a legal right to receive such an amount”.

On the basis of the above reasoning, the liability of NAFED to pay the interest was suspended.

Related Read- Appeal Proceeding under Income Tax Act