2016 (5) TMI 41 - HC - Income Tax

Amount of repayment - whether not liable to be deducted in computing the income in the year of receipt itself? - whether Tribunal is right in law in holding that only 1/5th of the amount can be claimed as deduction in each of the five years? - Held that - As rightly pointed out by the Commissioner of Income Tax (Appeals), the buyer of a plot of land was issued with a bank guarantee, so that the cost of the plot paid by him is repaid by the bank, after the expiry of five years. In order to enable the bank to do this, the assessee creates a Fixed Deposit. Therefore, the Tribunal found that the liability was incurred immediately, but the payment was postponed. But unfortunately, the Tribunal took a different view merely on the ground that the Fixed Deposit stood in the name of the assessee and not in the name of the buyer of the plot. This is completely a misconceived view, in view of the fact that two consequences would follow if the Fixed Deposit Receipt is taken in the name of the buyer of the plot. The first is that the interest accrued on the Fixed Deposit would be the income of the buyer of the plot. The buyers may not agree to such a course of action. The appellant/assessee has accounted for the interest accruing on the Fixed Deposit Receipts, as their own income and the same has been accepted by the Department. The second consequence that may flow out of the issue of Fixed Deposit Receipt in favour of the buyers of the plots is that they may foreclose the same and take away the proceeds even before the expiry of the period of five years. This may result in the bank not offering the benefit of a special scheme known as Money Multiplier Scheme . Therefore, the Commissioner was right in holding that the decision of the Supreme Court in M/s Calcutta Company Limited 1959 (5) TMI 3 - SUPREME Court , would apply squarely to the facts of the case. Once it is clear that the liability arose on the date of the contract but what was postponed was only the payment, there is no escape from the conclusion that the assessee can claim the expenditure in the year of Fixed Deposit Receipt. Hence, the questions of law are answered in favour of the assessee.

Summary

Issues:
1. Whether the entire amount of repayment is liable to be deducted in computing income in the year of receipt itself?
2. Whether only 1/5th of the amount can be claimed as a deduction in each of the five years?

Analysis:
1. The appellant introduced a "Money Back Novel Scheme" where buyers of land were assured repayment of the entire land cost after five years. The Assessing Officer spread the repayment liability over five years. The Commissioner of Income Tax (Appeals) found that the liability arose at the time of the contract and allowed the entire amount as expenditure. However, the Tribunal relied on a different case law and reversed the decision. The High Court held that the liability arose at the time of the contract, and the expenditure could be claimed in the year of Fixed Deposit Receipt.

2. The Commissioner of Income Tax (Appeals) found that the liability was incurred immediately, but the payment was postponed until after five years. The Tribunal wrongly interpreted the case law cited and held that the Fixed Deposit should have been in the name of the buyer of the plot. The High Court disagreed, stating that the liability arose at the time of the contract, and the payment was only postponed. The court held that the decision in favor of the assessee, allowing the expenditure in the year of Fixed Deposit Receipt.

3. The High Court concluded that the liability to repay the buyers of the plots arose at the time of the contract, and the payment was postponed until after five years. The court found that the Fixed Deposit created by the assessee was to ensure repayment to the buyers and that the liability was immediate. The court allowed the Tax Case Appeal, holding that the expenditure could be claimed in the year of Fixed Deposit Receipt.