By TIOL News Service

NEW DELHI, APRIL 24, 2017: THE issue is - Whether assessee can claim relief from its obligation to pay interest in terms of an arbitral award, merely because the award has been stayed by Division Bench of a Writ Court. NO IS THE VERDICT.

Facts of the case:

The assessee, NAFED entered into an Agreement with Alimenta SA Switzerland for export of 5,000 and 4,000 MT HPS groundnut during the years 1979-80 and 1980-81. An Award dated 14th September, 1990 was passed in favour of Alimenta and against NAFED whereby NAFED was required to pay Alimenta a sum of US$ 45.26 lakhs as principal together with US$ 48.81 lakhs as interest from 13th February, 1981 till the date of the Award. Alimenta initiated proceedings, where the Court made the Award rule and held that the Alimenta would be entitled to interest @ 18% per annum from the date of the Award till the date of payment. While filing returns in October 2002 and 2003 , NAFED claimed deduction of interest payable to Alimenta on outstanding amount of the award. Meanwhile, on an appeal filed by NAFED against the order making the Award rule of the Court, a Division Bench (DB) of this Court by an order d granted stay of the execution of the said decree. Alimenta then went in appeal to the Supreme Court of India by way of a Special Leave Petition ('SLP'), where NAFED was directed to either furnish a bank guarantee ('BG') or a proper security for the principal amount of the decree. The AO framed the assessment for the AY 2001-02 and disallowed the claim of interest. The claim of interest payable to Alimenta on the amount awarded was disallowed by the AO by holding that the liability was contingent and not even acknowledged in the books of accounts. As regards the assessments for AYs 1996-97 to 1998-99, NAFED's appeals were dismissed by the ITAT holding that the interest liability crystallized only in the AY 2001-02 and as such deduction of interest could not be allowed in any of the AYs earlier thereto. When the matter moved to the special bench of the ITAT, it answered the matter in favour of the Revenue on the ground that a deduction could be granted only where the incurring of liability was a certainty.

On appeal, the HC held that,

++ this Court is unable to agree with the reasoning of the ITAT as it runs contrary to the well-settled legal position explained by the Supreme Court in several decisions. In Shree Chamundi Mopeds Ltd. v. Church of South India Trust Association it was observed that: "....While considering the effect of an interim order staying the operation of the order under challenge, a distinction has to be made between quashing of an order and stay of operation of an order. Quashing of an order results in the restoration of the position as it stood on the date of the passing of the order which has been quashed. The stay of operation of an order does not, however, lead to such a result. It only means that the order which has been stayed would not be operative from the date of the passing of the stay order and it does not mean that the said order has been wiped out from existence...."

++ in the present case, with the Award having been made rule of the Court, the mere fact that the said judgment and decree was stayed by a DB would not relieve NAFED of its obligation to pay interest in terms thereof to Alimenta. Such liability commenced in the previous year in which the said judgment and decree was passed. To borrow the phraseology of the Supreme Court in Shree Chamundi Mopeds Ltd. v. Church of South India Trust Association, it cannot be said that merely because there is a stay granted by the DB of this Court that the order of the Single Judge has been "wiped out from existence."

(See 2017-TIOL-786-HC-DEL-IT)