1999 (1) TMI 22 - HC - Income Tax

Summary

Issues:
1. Whether the additional ground rent claimed by the Government is deductible as a liability in the computation of the assessee's business income for the assessment year 1983-84?

Analysis:
The judgment delivered by the High Court of Kerala pertained to a reference made by the Income-tax Appellate Tribunal regarding the deductibility of additional ground rent claimed by the Government as a liability in the assessment year 1983-84. The assessee, engaged in plywood manufacturing, failed to remove timber within the stipulated period due to labor issues, leading to a demand of Rs. 4,42,330 in additional ground rent. The Tribunal found that the liability was contractual in nature and disputed by the assessee, who followed the mercantile system of accounting. The critical question was whether a seriously disputed contractual liability could be claimed on an accrual basis by the assessee. The Tribunal observed that even though the liability originated from a contract, it took a statutory color later, as the Government was authorized to enforce payment under the Forest Act. The Tribunal held that if the assessee follows the mercantile system of accounting, the liability could be claimed in the year of accrual or when the dispute is settled.

The High Court analyzed the arguments presented by the Department and the assessee's counsel. The Department contended that the liability was not statutory and stemmed from the agreement, as there was no provision in the Act regarding this liability. The High Court concurred, emphasizing that the liability arose from the conditions in the agreement between the assessee and the Government. Regarding the timing of claiming the liability, the High Court disagreed with the Tribunal's view that the assessee had the option to claim the liability in the year of accrual or when the dispute is settled. It held that a seriously disputed accrued liability could be claimed in the year when the dispute is resolved, as in this case where a civil suit was ongoing between the parties. The High Court distinguished a statutory liability, which can be claimed in the year of accrual, regardless of disputes.

The High Court referred to a decision by the Bombay High Court in a different case to support its position. In that case, the accrued liability was not disputed, unlike the present case where the liability was under contention due to the ongoing civil suit. Ultimately, the High Court ruled in favor of the Revenue, concluding that the additional ground rent claimed by the Government was not deductible as a liability in the computation of the assessee's business income for the assessment year 1983-84.