Bombay High Court
Aditya Birla Chemicals (I) Limited vs Tata Motors Limited on 18 March, 2013
Author: R.D. Dhanuka
Bench: R.D. Dhanuka
1/19 ARB. PET NO.160 OF 2012.sxw
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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
ARBITRATION PETITION NO. 160 OF 2012
Aditya Birla Chemicals (I) Limited,
(Earlier known as Bihar Caustic & Chemicals
Limited), Garwha Road, P.O. Rehla 822124,
Palamau District, Jarkhand ... Petitioner
Versus
Tata Motors Limited,
A company under the Companies Act,
1956 having its registerd office at Bombay
House, Homi Mody Street, Fort,
Mumbai 400 023 ... Respondent
Dr. Birendra Saraf along with Mr. Sachin Chandarana, Mayur Bhojwani along
with Mr. Vijendra Purohit i/by M/s.Manilal Kher Ambalal & Co. for petitioner.
Mr. F. Pooniwala i/by Mr. Y.R. Shah for respondents.
CORAM : R.D. DHANUKA,J.
RESERVED ON : 20TH FEBRUARY, 2013
PRONOUNCED ON : MARCH 18, 2013
ORAL JUDGMENT :
By this petition filed under section 34 of the Arbitration & Conciliation Act, the petitioner has impugned the award dated 24 th October, 2011 made by the learned arbitrator allowing the claims made by the respondents and directing the petitioner to pay Rs.30,53,064/- with interest at the rate of 12% p.a. with effect from 19th June, 2006 till payment in respect of the claim having arisen in respect of dis-allowance of depreciation and also directing the petitioner to pay sum of Rs.26,18,000/- being penalty levied by the Income Tax Department along with interest at the rate of 12% p.a., on the respondents with effect from 30 th January ::: Downloaded on - 09/06/2013 19:45:21 ::: 2/19 ARB. PET NO.160 OF 2012.sxw 2008 till payment.
2. Some of the relevant facts for the purpose of deciding this petition are as under :
(a) The Petitioner is engaged in the business of manufacturing caustic soda and other chemicals. On 1 9th August, 1998, the respondent granted in principle sanction to extend the lease finance assistance to the petitioner for plant and machinery for an amount exceeding Rs.1,00,00,000/- on the terms and conditions mentioned therein. It was provided in the sanction letter that as per the provisions of the Income Tax Act, 1961, depreciation eligibility of the plant and machinery/equipment would be 100%. Some of the relevant clauses of the said sanction letter are extracted below :
"Depreciation Eligibility : 100% under the Income Tax Act. "
"Variation clause on Depreciation : The lessor reserves the right to increase the lease rentals so as to maintain the same post tax returns, in case of change in depreciation rate allowed on the leased assets. If the lessor is disallowed its claim on depreciation, either wholly or partly in any year during the currency of the lease, the Lessor reserves the right to increase the lease rentals in order to maintain the same post tax returns."
Clause 2.4 and 9.1 of the agreement of lease dated 21st August, 1998 entered into between the parties are extracted as under :
::: Downloaded on - 09/06/2013 19:45:21 :::3/19 ARB. PET NO.160 OF 2012.sxw "2.4 : The Lessor shall be entitled to vary the lease rental charges at any time during the continuance of this Agreement in the event of a change occurring on the basis of which the lease rentals, charged hereby are computed, namely, variables relating to depreciation rate, permitted as per the Indian Income Tax Regulations for the time being in force on declining balances of modifications in the cost of money to the Lessor. The Lessee irrevocably agrees and declares that the lease rentals charges shall be increased in correlation to increase in taxes whether sales tax ig on excise and any other related or consequential charges that may be levied on or in connection with the Lease of the Equipment under this Agreement at any time hereafter or any increase in the price of the Equipment between the date of the order placed on the manufacturer/supplier thereof and the date of its delivery."
"9.1 :The Leasee shall during the period of this lease and till the Equipment is delivered back to the Lessor in good working order and condition (fair wear and tear accepted) bear all imposts, charges and other duties, taxes and penalties as may be levied from time to time by the Government or any other authority pertaining to or in respect of this Lease and pay the same on demand by the Lessor."
(b) For the assessment year 1999-2000, the respondents filed its income tax returns. By an order dated 5th March, 2002, passed by the Assistant ::: Downloaded on - 09/06/2013 19:45:21 ::: 4/19 ARB. PET NO.160 OF 2012.sxw Commissioner of Income Tax, Range 8(3), the assessment order in response to the income tax returns filed by the respondents came to be passed for the assessment year 1999-2000 under section 143(3) of the Income Tax Act, 1961. By the said order, the depreciation claimed by the respondent in the sum of Rs.68 lacs on various leased assets including assets leased in favour of the petitioner came to be disallowed. In so far as assets leased by the respondents to various parties are concerned, the Assessing Officer took a view that the said transactions were clearly in the nature of financing the plant and machinery and therefore, question of allowing any depreciation did not arise. By the said order, the Assistant Commissioner of Income Tax ordered to initiate penalty by issuing notice under section 271(1)(c) read with section 274 of the Income Tax Act.
(c) Being aggrieved by the assessment order disallowing depreciation, the respondents filed appeal on 16th March, 2007 before the Commissioner of Income Tax (Appeals) which appeal is still pending. On 16 th March, 2007, the respondents invoked arbitration Clause and appointed Mr. Ashwin Ankhad, Advocate as sole arbitrator. On 17th August, 2007, the respondents filed statement of claim which was subsequently amended pursuant to order dated 16th December, 2008 passed by the learned arbitrator. The Petitioner filed written statement and counter claim on 31 st December, 2007. By an award dated 24th October, 2011, the learned arbitrator directed the petitioner to pay Rs.30,53,064/- with interest in view of the Income Tax department ::: Downloaded on - 09/06/2013 19:45:21 ::: 5/19 ARB. PET NO.160 OF 2012.sxw disallowing the claim of depreciation made by the respondent in respect of Assessment Year 1999-2000 and also directed the petitioner to pay Rs.26,18,000/- being penalty levied on the respondents by the tax department with interest.
3. Dr. Saraf, the learned counsel for the petitioner submits as under :
(a) that the appeal against dis-allowance of the depreciation and levying penalty filed by the respondent is pending before the appellate authority. It is submitted that the penalty was levied for non payment of income tax which was not the penalty in connection with the lease. The learned counsel submits that direction of the learned arbitrator to pay penalty amount to the respondent was beyond the scope of agreement. There was no pleading or proof in support of the said claim made by the respondent. The learned arbitrator did not consider the written arguments filed by petitioner. Various issues raised by the petitioner in the written statement as well as written arguments and more particularly in paragraph 6.5 and 6.5.4 have not been answered by the learned arbitrator.
(b) It is submitted that the learned Arbitrator failed to consider the argument of the petitioner that the penalty was not payable as it was not arising out of the claim for depreciation and such issue goes to the root of the matter. The learned counsel submits that according to income tax returns filed by the respondents, it is clear that the respondents had claimed loss of Rs.1,14,86,748/- and thus no tax liability would have accrued on such loss ::: Downloaded on - 09/06/2013 19:45:21 ::: 6/19 ARB. PET NO.160 OF 2012.sxw claimed. The learned counsel submits that even if claim of depreciation of Rs. 68 lacs would have been rightly disallowed by the income tax department, still respondent would have suffered loss which would not have attracted any payment of income tax and thus the question of any concealment or penalty would not have arisen. The learned counsel then submits that it was not the scheme propounded by the petitioner to claim 100% deprecation but was propounded by the respondents themselves. The learned counsel submits that the penalty was not incidence of taxation. It is submitted that the penalty is imposed on the person trying to evade the tax and therefore, the respondents having evaded the tax, if any were personally liable to pay the said amount and no demand for recovery of the said amount can be made against the petitioner for such evasion of tax by the respondents.
The learned counsel submits that the respondents did not give any break up and or proof of payment of Rs. 28 lacs to the petitioners. The learned counsel submits that though in the cross examination of the respondent's witness, he was called upon to give break up, the witness avoided the said question and did not give any break up.
(c)The learned counsel for the petitioner then submits that the learned arbitrator did not give any directions to refund in the event of respondents succeeding in appeal filed before the appellate authority and this court while hearing the petition under section 34 of the Arbitration Act,1996 cannot issue any such directions. The learned counsel submits that judgment of this court ::: Downloaded on - 09/06/2013 19:45:21 ::: 7/19 ARB. PET NO.160 OF 2012.sxw in the case of Asian Electronics Ltd. Vs. Tata Motors Ltd. in Arbitration Petition No. 254 of 2006 would not apply to the facts of this case as the same was dealing with the claim of dis-allowance of depreciation. It is submitted that in the facts of that case, this court took a view that inspite of pendency of the appeal against the order of dis-allowance of depreciation, the claim of the respondent for revised rental would not be premature. It is submitted that in the said case there was no issue of levy of penalty and thus judgment in that case is distinguishable with the facts of hits case on issue of penalty.
4. Mr. Pooniwala, the learned counsel appearing on behalf of the respondents submits as under :
(a) The learned counsel for the respondent fairly concedes that in so far as the award of the learned arbitrator directing the petitioner to pay Rs.30,53,064/- with interest due to dis-allowance of the depreciation by the Income Tax Department is concerned, the said challenge of the petitioner to that part of the award is covered by the judgment of this court (R.D. Dhanuka,J.) in the case of Aditya Birla Chemicals (India) Ltd. Vs. Tata Motors Ltd. delivered on 9th October, 2012 in Arbitration No. 1027 of 2011 between the same parties by which this court had taken a view that the said claims was barred by law of limitation. The learned counsel however submits that in so far as direction to pay Rs.26,18,000 /- towards penalty levied by the Income Tax Department is concerned, the said claim is not ::: Downloaded on - 09/06/2013 19:45:21 ::: 8/19 ARB. PET NO.160 OF 2012.sxw barred by the law of limitation and is thus not covered by the judgment of this court in Arbitration No. 1027 of 2011. Dr. Saraf, the learned counsel for the petitioner does not dispute that the said claim awarded by the learned arbitrator is not barred by law of limitation but has impugned the said part of the award on other grounds.
(b) Mr. Pooniwala, the learned counsel submits that under clause 9.1 of the lease agreement, the petitioner had agreed to bear penalties as may be levied from time to time by the Government or any other authority pertaining to or in respect of the said lease agreement and to pay the same on demand to the lessor. It is submitted that the Assistant Commissioner of Income Tax while assessing the income of the respondent for the assessment year 1999-2000 while dealing with the lease agreement between M/s. Bihar Caustic & Chemicals Limited, predecessor of the petitioner and the respondent held that the respondent did not exercise any ownership rights of the assets and the said transaction was merely financial transaction and was not in the nature of lease transaction. It is submitted that the Income Tax Department thus disallowed depreciation claim of Rs. 68 lacs on those assets and issued notice to levy penalty under section 271(1)(c) read with section 274 of the Income Tax Act against the respondent. The learned counsel invited my attention to the order dated 29 th March, 2007 passed by the Assistant Commissioner of Income Tax, Circle 2(1) under section 271(1)(c) of the Income Tax Act, 1981 which was passed after considering all the lease ::: Downloaded on - 09/06/2013 19:45:21 ::: 9/19 ARB. PET NO.160 OF 2012.sxw agreements entered into between the respondents with various lessees including the predecessor of the petitioner. By the said order it has been held that the sum and substance of the agreements relied upon by the assessee to claim depreciation on the assets claimed to have been leased, are found to be contrary in form to a true lease agreement and the assessee has sought to cloak a pure tax evasion device. It is held that the actual transaction hidden behind this agreement was in the nature of loans to various parties for purchase of assets. It is held that the case was one of the tax evasion by carefully planned misuse of the provisions of the depreciation allowance under Income Tax Act. The learned Assistant Commissioner of Income Tax held that the assessee had furnished inaccurate particulars of its income by claiming depreciation of the transaction which was not actually a lease transaction but was finance transaction. The Income Tax department ordered the assessee to pay penalty under section 271(1)(c) of the Income Tax Act in the sum of Rs.19,25,79,529/- being 100% of the tax sought to be evaded by claiming depreciation by the respondents. Pursuant to the said order dated 29th March, 2007 passed by the Assistant Commissioner of Income Tax, the Income Tax Department issued notice of demand under section 156 of the Income Tax Act, 1961 calling upon the respondent to pay sum of Rs.41,85,49,604/-. The learned counsel invited my attention to the order passed by the department to demonstrate that the amount of penalty demanded by the respondent came to be appropriated by the income tax department against the refund of income tax determined in favour of the ::: Downloaded on - 09/06/2013 19:45:21 ::: 10/19 ARB. PET NO.160 OF 2012.sxw respondent and thus entire amount of penalty levied has been recovered by the tax department. The learned counsel then submits that in view of the demand of penalty by the department and recovery thereof by appropriating the said amount against the refund payable by the respondent to the department, the petitioner become liable to pay the said amount. The learned counsel submits that the learned arbitrator therefore, was right in directing the petitioner to pay the said amount towards penalty with interest to the respondent. The learned counsel submits that according to income tax department, the penalty was levied in view of the claim of depreciation having been disallowed by the department. The learned counsel invited my attention to the impugned award made by the learned arbitrator and submits that the learned arbitrator in the facts and circumstances of this case has rendered a finding that the primary default lies on the part of the petitioner herein by failing to pay differential lease rentals and the penalty imposed by the Tax Authorities upon the claimants bears a direct and proximate relationship with the amounts due to them from the respondents under the differential lease rental. The learned counsel submits that thought the appeal filed by the respondent challenging the order of penalty imposed by the department is pending, the petitioner was rightly made liable by the learned arbitrator to pay the said amount by interpreting the terms of the contract. The learned counsel submits that under clause 9.1 of the lease agreement, the petitioner is liable to make payment of such penalty levied by the Government or any other authority on demand by the lessor i.e. respondent ::: Downloaded on - 09/06/2013 19:45:21 ::: 11/19 ARB. PET NO.160 OF 2012.sxw herein. It is submitted that the finding of fact rendered by the learned arbitrator is not perverse and can not be interfered with by this court.
(c) The learned counsel submits that the petitioner is not right in his submission that the amount of penalty ordered by the learned arbitrator to be paid by the petitioner is based on no evidence. It is pointed out that the petitioner has not challenged the calculations of the penalty in the arbitration petition. The order imposing the penalty and notice of demand issued by the department and the adjustment of such penalty amount from the refund due and payable by the department to the respondent was on the record of the learned arbitrator which was not disputed by the petitioner. It is submitted that depreciation of Rs. 68 lacs was disallowed by the Income Tax Department in so far as the lease agreement with the petitioner is concerned.
The income Tax Department had computed 35% of the said amount of the depreciation disallowed by the department and levied 100% of the tax liability as penalty. The learned counsel points out that the learned arbitrator has accordingly determined those figures at the rate of 35% of Rs. 68 lacs as income tax and penalty @ 100% thereon and arrived at figure of Rs.23.80 lacs and has directed the petitioner to pay the same to the respondents. The learned counsel invited my attention to the affidavit of the witnesses examined by the respondent at page 201 and 202 of the compilation and particularly paragraph 21 by which the witness had explained the amount of depreciation disallowed by the income tax department, penalty levied by the ::: Downloaded on - 09/06/2013 19:45:21 ::: 12/19 ARB. PET NO.160 OF 2012.sxw department. The witnesses had also explained the calculation of Rs. 23.80 lacs in the said affidavit on which there was no dispute raised by the petitioner.
(d) The learned counsel for the respondent then submits that merely because the appeal is pending impugning the said order imposing penalty, the claims made by the respondent was not premature. The learned counsel submits that similar issue in respect of demand for payment of depreciation allowance was subject matter of Arbitration Petition in the case of Asian Electronics Vs. Tata Motors Ltd in Arbitration Petition No. 254 of 2006 by which this court after considering similar clauses had held that the claim arising out of dis-allowance of depreciation allowance was not premature merely because appeal was pending. It is held that cause of action had accrued and was not premature. The learned counsel submits that the principles laid down by this court in the case of Asian Electronics (supra) would apply also in respect of penalty.
(e) The learned counsel for the respondent then submits that by an order dated 2nd March, 2010 passed by the learned arbitrator, application of the respondent for amendment of their statement of claim by which the respondent had included the claim of penalty was allowed by the learned arbitrator which decision has not been challenged by the petitioner. The learned counsel submits that even in the additional written statement filed by the petitioner on 9th August, 2010, the petitioner did not dispute the ::: Downloaded on - 09/06/2013 19:45:21 ::: 13/19 ARB. PET NO.160 OF 2012.sxw quantification of the claim amount of penalty. The learned counsel submits that in para 18 to 21 of the affidavit of witnesses examined by the respondent, the petitioner had explained the amount of penalty levied by the income tax department and had annexed copies of various orders passed by the income tax department which were on record of the learned arbitrator and were not disputed. The witnesses of the respondent also had pointed out that the penalty amount was adjusted by the income tax department on 30 th January, 2008 against the refund payable to the respondent for the assessment year 1999-2000. In Para 21 of the said affidavit, it was deposed that the penalty levied on the amount of Rs. 68 lacs was Rs.23.80 lacs and interest was charged on the same was Rs. 2.38 lacs. i.e. aggregating to total amount of Rs.26.18 lacs. These calculations were not disputed by the petitioner. The learned counsel therefore, submits that in so far as direction to pay penalty amount given by the learned arbitrator is concerned, there is no infirmity in that part of the award. It is submitted that the penalty is levied in view of the claim for depreciation having been disallowed. It is submitted that as the petitioner had agreed to pay the revised rentals based on dis-allowance of depreciation by the income tax department and the penalty levied by the department was based on such dis-allowance of depreciation, the petitioner is also liable to pay penalty as agreed under clause 9.1 of the lease deed. The learned counsel submits that there is no substance in the submission made by the petitioner that the recovery of penalty has nothing to do with dis-
allowance of the deprecation by the department.
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5. On perusal of the terms and conditions recorded in the sanction letter pertaining to variation clause of deprecation, it is clear that the respondent was entitled to increase lease rentals in the event, its claim for depreciation was dis-
allowed either wholly or partly. On perusal of the said clause 9.1 of the lease agreement, it is clear that the petitioner had agreed to pay penalty as may be levied from time to time by the Government or any other authority pertaining to or in respect of the said lease agreement between the parties and had agreed to pay the same on demand by the lessor.
6. In my view, on perusal of the records including the order passed by the Income Tax Department, it is clear that the claim of depreciation made by the respondent was disallowed by the assessing officer on interpretation of the lease agreement including the agreement between the predecessor of the petitioner and the respondent. In view of such dis-allowance by rendering a finding that such agreements were entered into for evasion of tax, the income tax department had proposed to levy penalty. Perusal of the order imposing penalty by the income tax department indicates that the penalty was levied in view of dis-allowance of the depreciation claim. It is clear that the penalty was levied in respect of the lease agreement. The Petitioner is thus liable to pay penalty levied by the income tax department on the respondent which pertains to the lease agreement between the petitioner and respondent on demand by the respondent. In my view, the claim for penalty thus made by the respondent was not premature. Perusal of the record ::: Downloaded on - 09/06/2013 19:45:21 ::: 15/19 ARB. PET NO.160 OF 2012.sxw also indicate that the amount of penalty demanded and assessed by the department against the respondent has been appropriated and or adjusted against the amount of refund payable to the respondent by the income tax department. In my view, on interpretation of clause 9.1 the learned arbitrator has held that the claim for payment of penalty was not premature which is possible interpretation. In my view the principles laid down by this court in the case of Asian Electronics (supra) would apply also in the case of penalty.
7. In so far as the issue raised by the petitioner that there is no provision made by the learned arbitrator in the impugned award for the refund of the amount if paid by the petitioner and in the event of respondents succeeding in its appeal before the appellate authority and no such direction can be issued for the first time by this court while deciding the petition under section 34 is concerned, in my view, there is no substance in this submission made by the petitioner. In the event of the respondent succeeding in the appeal before the appellate authority, that would be separate cause of action for the petitioner for claiming refund at appropriate stage.
8. I am not inclined to accept the submission of Dr. Saraf that the scheme of claiming 100% depreciation was propounded by the respondent and petitioner was not responsible for the same. The Petitioner had submitted certificate issued by the Chartered Accountant to the respondent opining that 100% depreciation would be permissible on such transaction under the provisions of Income Tax Act, ::: Downloaded on - 09/06/2013 19:45:21 ::: 16/19 ARB. PET NO.160 OF 2012.sxw 1961. Both the parties had consciously agreed that in the case of any dis-
allowance of the depreciation by the Income Tax department, it would result in increasing the lease rentals which the petitioner would pay to the respondent. It is not in dispute that the income tax department had disallowed the claim for depreciation after rendering the finding that the lease agreements entered into with several parties including the petitioner were with intention to evade tax. The demand of penalty is interlinked with dis-allowance of depreciation claim of the respondent by the tax department. I am therefore, not inclined to accept the submission of Dr. Saraf that the penalty was not incidence of taxation and the petitioner was not responsible for the payment of any penalty. The Petitioner under the terms of the lease agreement had not only agreed to pay revised rental in view of the dis-allowance of the depreciation but had also agreed to pay penalty levied by the Government in respect of lease transaction.
9. The petitioner did not challenge the ruling given by the learned arbitrator allowing the amendment of claim by which the claim of penalty was included.
Perusal of the additional written statement indicates that though the respondents had disputed liability, did not dispute the quantum. The respondent had examined a witness by filing affidavit in lieu of examination-in-chief and annexed copies of the various orders passed by the income tax department containing demand made, recoveries of penalty effected by the tax department from the respondent.
The petitioner did not dispute the existence of such orders passed by the
department. The Petitioner also did not dispute that the penalty amount was
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already recovered by the income tax department from the refund payable to the respondent. The question of producing any further proof by the respondent therefore, do not arise.
10. Perusal of the affidavit of evidence filed by the witness of the respondents and particularly paragraph 21 indicates that the witness had explained quantification of penalty derived on amount of Rs. 68 lacs dis-allowed on the depreciation. There is no cross examination on the break up given by the witnesses of the respondent. It is not in dispute that by the order passed by the income tax department, depreciation in the sum of Rs. 68 lacs on the lease transaction between the petitioner and respondent was disallowed. The tax liability having arisen on such sum of Rs. 68 lacs was derived at Rs.23.80 lacs.
Penalty was levied and recovered by the income tax department was at the rate of 100% of the tax liability plus interest. In my view, thus there is no substance in the submission made by the petitioner that the respondent did not give any break up or proof in respect of the penalty amount demanded by the respondent and it was awarded in toto by the learned arbitrator.
11. On perusal of the impugned award, it is clear that the learned arbitrator has considered all the documents and the oral evidence laid by the parties and have rendered finding that the respondents are entitled to recover penalty amount from the petitioner and in my view such findings are not perverse. The learned arbitrator has interpreted terms of the contract and the interpretation of the learned arbitrator is in my view a possible interpretation and thus the court ::: Downloaded on - 09/06/2013 19:45:21 ::: 18/19 ARB. PET NO.160 OF 2012.sxw shall not substitute the view of the learned arbitrator by taking a different view.
12. I am also not inclined to accept the submission of the petitioner that the learned arbitrator has not discussed and or dealt with any particular issue raised by the respondent. Perusal of the entire award does not indicate that any of the submissions made by the petitioner are not dealt with and or not addressed by the learned arbitrator in the impugned award.
13. In my view, there is no merit in the submissions of the petitioner. I, therefore, pass the following order :
(a) Directions in paragraph 44(A) and (B) of the award which pertains to the amounts arising out of dis-allowance of the claim for depreciation is set aside as barred by law of limitation.
(b) Arbitration Petition is dismissed in respect of the directions given by the learned arbitrator in Paragraph 44(C) to (E) of the impugned award which pertains to the direction to pay penalty amount with interest is concerned.
(c ) Petition is partly allowed.
(d) There shall be no order as to costs.
(R.D. DHANUKA,J.)
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The learned counsel for the petitioner seeks stay of the operation of this order for the period of four weeks. The learned counsel for the respondent opposes for grant of stay. Operation of this order is stayed for the period of four weeks from today.
(R.D. DHANUKA,J.) ::: Downloaded on - 09/06/2013 19:45:21 :::