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2022 (9) TMI 724 - HC - Income TaxAccrual of liability - Liability to pay bonus - principles for ascertaining as to when a liability does not metamorphosize into a contingent liability - HELD THAT - Having regard to the facts, the Revenue's contention, that since the respondent/assessee had the option to defray the liability towards bonus against future amount due from GE International Ltd. to the respondent/assessee, it would morph the liability which accrues from yearto-year into one which is contingent, in our view, is a submission which is unsustainable in law - The other argument of the Revenue, that GE International Ltd. could waive the receipt of bonus amount, and hence would convert the subsisting liability into a contingent liability is also an argument which, according to us, is misconceived. A careful perusal of the principles enunciated by the Supreme Court in BHARAT EARTH MOVERS VERSUS COMMISSIONER OF INCOME-TAX 2000 (8) TMI 4 - SUPREME COURT would show that both the arguments advanced by Mr Agarwal (Revenue) are answered. - The reliance by Mr Agarwal on Excel Industries Limited 2013 (10) TMI 324 - SUPREME COURT is equally misconceived. Decided against the Revenue.
Issues Involved:
1. Whether the disallowance of Rs.12,99,68,406/- by the Assessing Officer (AO) was correctly ordered. Issue-Wise Detailed Analysis: 1. Disallowance of Rs.12,99,68,406/- by the AO: The appeal challenges the order dated 25.01.2021 by the Income Tax Appellate Tribunal (Tribunal). The primary issue is whether the AO's disallowance of Rs.12,99,68,406/- was justified. The AO disallowed this amount on 29.03.2015, arguing that the liability had not arisen at that time. The AO did not have access to the Comprehensive Service Agreement (CSA) between the respondent/assessee and GE International Ltd., which was dated 20.06.2009 and expires on 31.03.2025. 2. Comprehensive Service Agreement (CSA) Clauses: The CSA required the respondent/assessee to pay a bonus based on efficiency parameters related to power generation. Specifically, if the power plant's availability was above 90%, a bonus was payable; if below 90%, a penalty was applicable. The appellant/revenue argued that the liability to pay the bonus was contingent, citing specific CSA clauses. Clause (i) stipulated payment via a letter of credit within 30 days if the owner was entitled to an availability bonus. Clause (ii) allowed the owner to either pay in cash or offset the bonus against future amounts due if not entitled to the availability bonus. 3. Arguments by Appellant/Revenue: Mr. Sunil Agarwal, representing the appellant/revenue, contended that the liability to pay the bonus was definitive and ascertained if the owner was entitled to the availability bonus. However, if not entitled, the liability was contingent, as the respondent/assessee could choose to pay in cash or offset the amount. Additionally, the CSA allowed the contractor to waive the bonus, which Mr. Agarwal argued could convert an accrued liability into a contingent one. He supported his arguments with judgments from Indian Molasses Co. (P) Ltd. vs. CIT and Commissioner of Income Tax vs. Excel Industries Ltd. 4. Arguments by Respondent/Assessee: Mr. Ved Kumar Jain, representing the respondent/assessee, argued that the liability to pay the bonus was not contingent. He stated that the liability had accrued in the relevant year and merely deferring payment did not convert it into a contingent liability. He cited the Supreme Court judgment in Bharat Earth Movers vs. Commissioner of Income-Tax, emphasizing that a business liability arising in the accounting year should be allowed as a deduction, even if payable in the future. 5. Tribunal's Findings: The Tribunal noted that the respondent/assessee had entered into a long-term CSA with GE International Ltd., valid until 31.03.2025. The CSA required ensuring 90% availability of the power plant, with bonuses or penalties accruing annually and settled at contract closure. The Tribunal found that the liability to pay the bonus had arisen in the relevant year, was definitive, and should be allowed as a deduction under Section 37(1) of the Income Tax Act. The Tribunal ruled against the appellant/revenue, reversing the CIT(A)'s order. 6. Court's Analysis: The court concurred with the Tribunal, stating that the liability to pay the bonus was not contingent. The mere deferral of payment did not transform an accrued liability into a contingent one. The court referenced the principles from Bharat Earth Movers, emphasizing that a liability arising in the accounting year, even if payable later, should be allowed as a deduction. The court dismissed the appellant/revenue's arguments, including the potential waiver of the bonus by GE International Ltd., as misconceived. 7. Conclusion: The court found no substantial question of law warranting interference with the Tribunal's order. The appeal was dismissed, affirming that the liability to pay the bonus was definitive and should be allowed as a deduction in the relevant accounting year.
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