In an interesting tax appeal, the Supreme Court has said that reputed international chartered accountant firm Pricewaterhouse Coopers Ltd can also make a silly computing error in filing its income tax returns. PwC in this case had claimed deduction in its returns filed along with the Tax Audit Report disclosing R23 lakh towards payment of gratuity for some of its employees for 2000-01. The assessing officer had also overlooked it and omitted to make a disallowance. Subsequently, he reopened the assessment and disallowed the expenditure even after the firm filed a revised return and paid its tax liability. However, the authorities rejected PwCs claim that the error had occurred because the return was prepared by a non-CA and was signed by a director who proceeded on the basis that the return was correctly drawn up. The department initiated proceedings demanding penalty at the rate of 300%. Even the CIT, the tribunal and the Calcutta High Court ruled against the firm on the grounds that the high-calibre CA firm and a tax consultant was not expected to make a silly mistake. But the Supreme Court quashed the penalty proceedings by holding that the expertise of the firm has little or nothing to do with the inadvertent error. It was a bona fide human error, which we are all prone to make, and the imposition of penalty was not justified, it said.
Sundaram Finances taxing contingency deposits
Dismissing the appeal of non-banking finance company Sundaram Finance Ltd, the Supreme Court has held that the firm was liable to pay tax on contingency deposit collected from customers towards its sales tax liability as it formed a part of its business turnover. In this case, Sundaram Finance had collected R36.47 lakh in 1998-99 as contingent deposit on ad-hoc basis from the leasing/hire purchase customers to protect itself from sales tax liability. The sum was not kept in a separate interest bearing bank account but formed part of its business turnover. But the company did not pay tax on it on the ground that such sums were collected as contingent deposits. Both the tribunal and the Supreme Court termed it as income as that the amount collected was part of the turnover, thus tax was payable. The apex court said that in determining whether a receipt is liable to be taxed, the taxing authorities are bound to determine the true legal character of the transaction which is the source of the receipt.
Denying interest on delayed payment
While modifying the order of the Uttarakhand High Court in the case of Tehri Hydro Development Corporation Ltd vs Jai Prakash Associates, the Supreme Court has held that an arbitrator cannot award interest for the period of arbitration when an arbitration agreement clearly barred payment of such interest in a situation of non-payment or delayed payment. THDC and JAL had entered into a contract in March 1978 for execution of certain works in connection with the Tehri Hydro Dam Project. After the dispute arose on payments, the parties went to arbitration. The award was passed in January 1996, holding JAL to be entitled to R10,17,461 with interest at the rate of 6% pa from the date of invocation of the claim till the date of the award and at the rate of 12% pa from the date of the award till payment. But the arbitrators rejected the claim of the contractor to R12.50 lakh lying in deposit with the Corporation on the grounds that this amount was beyond the scope of the dispute raised in the arbitration proceeding. On appeal, the trial court not only upheld the claim of the contractor to R10,17,461 lakh but also said that JAL was entitled to the amount lying with the Corporation. Aggrieved by the lower courts order, Tehri moved the Uttaranchal HC, which in 2006 modified the trial court order by remanding the issue related to contractors entitlement claim on deposit to the arbitrator. The HC did not deal with the interest issue. This was challenged by the Corporation before the apex court. The Supreme Court while setting aside a part of the award dealing with the interest issue said that the contract agreement between the parties clearly revealed that no interest was payable to the contractor for delay in payment, either interim or final, for the works done or on any amount lying in deposit by way of guarantee, thus the grant of pendente lite interest on the claim of R10,17,461 was not justified. But it granted interest at the rate of 12% pa, as determined by the arbitrators, from the date of award till the date of payment to JAL.