2016 (8) TMI 1443 - AT - Income Tax

Disallowance on account of earlier termination of lease - crystallized liability treated as contingent in nature being the outcome of the order passed by the Queen s Bench Division, in the High Court of U. K. against suit filed for compensation of damage loss of profit by the U. K. Company - HELD THAT - AO as well as CIT (A) has fallen in certain errors while coming to the conclusion that the appellant assessee could not bring anything on record to show as to whether it has further challenged the decision passed by the High Court of Justice, UK. It was also wrongly held by CIT (A) that since elements of facts have not been discussed by the assessee, it could not be said that with certainty that liability was crystallized. CIT (A) has wrongly upheld the order of the AO wherein the AO held the liability of ₹ 20,50,00,000/- as contingent liability. In this respect, we are of the considered view that once assessee s claim for expenses of ₹ 20,50,00,000/- on account of compensation payable by the assessee has been crystallized in view of the order dated 14-5-2010 of the Queen s Bench Division of the High Court of Justice, UK. Based on the above Court Order, the assessee has provided further a sum of ₹ 6,00,00,000/- debited to the profit loss account as an exception item. Once as per the decision of the Queen s Bench Division of the High Court of Justice, UK the matter has been finally settled and in this respect AR pointed out that the entire amount has already been paid by the assessee to the Lessor and in this respect a compromise was entered into between the parties before the Indian Court and the entire decree passed by the UK Court was satisfied. It is important to mention here that it was the decree of the Queen s Bench Division of the High Court of Justice, UK which was fully satisfied from which it can be gathered that the liability of the assessee was crystallized in view of the order dated 14-05-2010 of the High Court of Justice, UK which was ultimately satisfied by the assessee by making payment to the lessor. Therefore, once the liability for making payment was crystallized by the High Court Order, then question of contingent liability does not arise. Therefore, both the AO and the learned CIT (A) was wrong in treating the liability as contingent liability of the assessee. - Decided in favour of assessee. Addition on account of provisions for Gratuity and Leave Encashment - the said issues raised before us by the assessee need verification. CIT (A) has already dealt with the grounds of PF contribution and ESIC as income u/s 2 (24) (x) read with section 36(1) (va) and it has been held by the learned CIT (A) as per the decision of CIT Vs. Jaipur Vidyut Vitran Nigam Ltd. 2014 (5) TMI 222 - RAJASTHAN HIGH COURT wherein it has been held that employees contribution towards PF, CPF and ESIC is allowable deduction u/s 36(1 (va) is paid on or before the due date i.e. before the date of filing of return of income. We following the aforesaid decision direct the AO to delete these additions. Since, the ground of Gratuity and Leave Encashment were not raised before CIT (A), therefore, in principle we agree with the decision of the Hon ble Rajasthan High Court dated 17-01-2014 and in our considered opinion, in view of the legal position as well as the facts of the case, we remit these issues back to the file of the AO to verify the claim of the assessee in this regard in view of the above decisions of the Hon ble Rajasthan High Court. Additional ground raised by the assessee is partly allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance on account of earlier termination of lease.
2. Additional ground for making addition in the book profit on account of claim for earlier termination of lease, provision for gratuity, and provision for leave encashment.

Detailed Analysis:

1. Disallowance on Account of Earlier Termination of Lease:
The assessee's appeal challenges the learned CIT (A)'s decision to treat a crystallized liability of ?20,50,00,000/- as contingent. This liability arose from an order by the Queen’s Bench Division of the High Court of Justice, UK, regarding a suit filed for compensation of damage and loss of profit by a UK company. The assessee did not appeal this decision, making the liability final and settled. The learned CIT (A) misconceived this as a contingent liability, particularly because the recovery of the settled liability was being contested in the Delhi High Court.

The Tribunal examined the facts and submissions, noting the assessee terminated a lease agreement due to high operating expenses, leading to a compensation claim by the UK company. The UK court's decision was final, and the liability was crystallized. The Tribunal found errors in the CIT (A)'s conclusion, emphasizing that the liability was not contingent but crystallized, as evidenced by the payment made by the assessee to the lessor and a compromise entered before the Indian court.

The Tribunal cited several legal precedents to support its decision, including:
- R. C. Gupta Vs CIT, Delhi-VIII: The liability was considered crystallized when a recovery suit was filed.
- Rampur Engg. Co. Ltd. Vs CIT: Liability accrues even if execution proceedings are delayed due to statutory requirements.
- Bharat Earth Movers Vs CIT: Provisions for accrued liabilities, like leave encashment, are not contingent but crystallized.

The Tribunal directed the AO to allow the claim of ?20,50,00,000/- as a crystallized liability for the year under consideration.

2. Additional Ground for Making Addition in Book Profit:
The assessee requested the admission of an additional ground related to the addition in book profit for claims of ?6,00,00,000/- for earlier termination of lease, ?13,72,96,680/- for provision for gratuity, and ?4,39,51,771/- for provision for leave encashment. The Tribunal admitted this additional ground, considering it purely legal and not requiring new evidence.

Upon review, the Tribunal applied its findings from the main ground to the additional ground concerning the earlier termination of lease, resulting in the deletion of the ?6,00,00,000/- addition. For the provisions for gratuity and leave encashment, which were not previously raised before the CIT (A), the Tribunal remitted these issues back to the AO for verification in light of the Hon’ble Rajasthan High Court's decision in CIT Vs. Jaipur Vidyut Vitran Nigam Ltd. This decision supports the deduction of employees' contributions towards PF, CPF, and ESIC if paid before the due date of filing the return.

The Tribunal directed the AO to verify the assessee's claims for gratuity and leave encashment, providing adequate opportunity for the assessee to present its case.

Conclusion:
The assessee's appeal was partly allowed for statistical purposes. The Tribunal directed the AO to treat the ?20,50,00,000/- liability as crystallized and to verify the claims for gratuity and leave encashment, following the legal precedents and providing the assessee an opportunity for a hearing. The addition of ?6,00,00,000/- for earlier termination of lease was deleted.