2014 (3) TMI 148 - HC - Income Tax

Claim of deduction towards rent for the entire period between 1990 to 1997 User rent liability towards GIDC Held that - There was nothing on the record to suggest that the liability for the earlier years crystallized during the year under consideration - The assessee was following mercantile system of accounting - The assessee had to account for the expenditure during the year when the liability crystallized - There was no elaboration how such liability crystallized during the period - As the Company is having mercantile accounting system, expenses are accounted on accrual basis thus, lease rent payable to GIDC Ankleshwar/Bharuch has been accounted under Prior Period Expenses during the year - If for some reason even after laying the pipeline, the liability had not crystallized and was therefore open for the assessee to postpone the expenditure or the provision - the assessee had to demonstrate how during the current year, such liability could be claimed as having crystallized - There is nothing on the record to suggest that liability for such prior period expenses crystallized during the said period Decided against Assessee.

Issues: Claim of deduction for user rent liability towards GIDC

Analysis:
The appeal was filed challenging the judgment of the Income Tax Appellate Tribunal regarding the claim of deduction made by the assessee for a sum of Rs. 1.70 Crores towards user rent liability towards GIDC. The appellant, engaged in laying down pipelines and supplying gas, was required to pay rent to GIDC for laying pipelines in industrial areas. The Assessing Officer disallowed the claim, which was confirmed by the CIT [A]. The Tribunal allowed part of the claim for the current year but disallowed the remaining sum, stating that the liability did not crystallize during the year under consideration. The Tribunal emphasized the need for liability to be crystallized during the relevant year for claiming deduction. The appellant challenged this decision before the High Court.

The High Court considered the arguments presented by the appellant's counsel, who contended that negotiations were ongoing with GIDC regarding the rent rates, and a provision was made in the company's accounts when GIDC did not agree to reduce the rates. However, after examining the documents on record, the High Court agreed with the Tribunal's view. The Court noted that there was no evidence to suggest that the liability for earlier years had crystallized during the relevant year. The appellant followed the mercantile system of accounting and had to account for the expenditure when the liability crystallized, which, in this case, was for the period between 1990 to 1997.

The High Court further analyzed the documents provided by the appellant, including letters and statements, but found that they did not establish that the liability had crystallized during the relevant year. The appellant's explanation during assessment proceedings regarding the accounting treatment of the rent liability was considered, but it was insufficient to demonstrate that the liability had crystallized during the said period. The Court emphasized the importance of showing how the liability for prior period expenses crystallized during the relevant year to claim the deduction. Ultimately, the High Court dismissed the Tax Appeal, upholding the Tribunal's decision to disallow the deduction for the remaining sum of the rent liability related to earlier years.

In conclusion, the High Court affirmed the principle that for claiming deductions, liabilities must be shown to have crystallized during the relevant year, especially when following the mercantile system of accounting. The Court emphasized the importance of providing clear evidence and documentation to support the claim of expenditure related to prior period liabilities.

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