2017 (7) TMI 40 - HC - Income Tax

Disallowance of enhanced lease rent liability payable to Bombay Port Trust - whether Tribunal was right in not allowing the liability on account of enhanced rent which had been charged by the applicant to its sub-lessees and assessed to tax on accrual basis? - Held that - It has been brought to our notice that before the Apex Court there was a settlement between the Bombay Port Trust and the lessees. The judgment of the Apex Court details the said fact, which is reported in a case of Jamshed Hormusji Wadia vs. Board of Trustees, Port of Mumbai and another (2004 (1) TMI 96 - SUPREME COURT OF INDIA). It has been held that the rates of rent for the period upto 31/03/1994 shall remain as suggested in the Compromise Proposal , which is reproduced in paragraph 6 (supra) by the Apex Court. AO as such will have to consider the rent as agreed in the said compromise proposal and assess it accordingly. It is submitted that for the period of 1989-90 to 1996-97, the Assessing Officer has assessed the returns as per the compromise formula. The same would be applicable for the assessment year 1988-89 also. It would be appropriate for the Assessing Officer to assess the return for the year 1988-89 as per the compromise formula and as has been assessed for the year 1989-90 to 1996-97.

Summary

Issues:
1. Disallowance of enhanced lease rent liability payable to Bombay Port Trust.
2. Disallowance of liability on account of enhanced rent charged to sublessees and assessed for tax.

Analysis:

*Issue 1: Disallowance of enhanced lease rent liability*
The Assessee, a partnership firm, disputed the increase in rent charged by Bombay Port Trust, claiming it as a contractual liability under the Mercantile System of Accounting. The Assessing Officer treated it as a contingent liability, disallowing it as a deduction. The Commissioner (Appeals) allowed the claim, but the Tribunal sided with the Revenue. The Tribunal noted the lack of unequivocal acceptance by the Assessee regarding the rent enhancement during the relevant assessment year. The Tribunal emphasized the importance of explicit acceptance, citing specific correspondence between the Assessee and the Port Trust. Ultimately, the Tribunal allowed the Revenue's appeal, leading to the reference before the High Court.

*Issue 2: Disallowance of liability on account of enhanced rent charged to sublessees*
The second issue was interlinked with the first one and depended on the assessment outcome of the first issue. The High Court decided to answer the first question in favor of the Assessee, directing the Assessing Officer to assess the return for the year 1988-89 as per the compromise formula applied for subsequent years. Consequently, the second question did not require a separate answer, as it was contingent on the assessment outcome of the first question. The High Court partially allowed the reference in favor of the Assessee based on the above considerations.

In a related development, the High Court mentioned a settlement between Bombay Port Trust and lessees before the Apex Court, detailing the compromise reached and rates of rent applicable for the relevant period. The compromise formula was to be applied for assessing the return for the year 1988-89, as done for subsequent years. The High Court highlighted the importance of cooperation from lessees in resolving disputes and cautioned against filing frivolous objections. The judgment provided detailed directions for finalizing the settlement and appointing an Adjudicator to address any objections.

In conclusion, the High Court partly allowed the reference in favor of the Assessee, directing the Assessing Officer to assess the return for the year 1988-89 as per the compromise formula applied for subsequent years, resolving the issues related to the enhanced lease rent liability and liability on enhanced rent charged to sublessees.