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TMI Blog2016 (1) TMI 790X X X X Extracts X X X X X X X X Extracts X X X X ..... a statutory liability and a contractual liability and opined that a deduction in respect of the contractual liability would be permissible “only when the disputes are settled.” This is contrary to the legal position as explained in the above decisions of the Courts. Even where a challenge is laid to a liability arising under a contract, by a challenger initiating legal proceedings, such challenger can still for the purposes of its accounts and for the purposes of computation of its income tax liability claim the entire amount under challenge as an accrued liability as long as such amount is ascertainable. Corresponding adjustments would be made in the year in which the suit is finally decided or the disputes settled. That, however, would not preclude the Assessee from claiming it as an ascertained liability. The ground urged on behalf of the Assessee as regards consistency also merits acceptance. There is indeed a demonstrable inconsistency in the Revenue’s stand in the matter. While the Assessee consistently claimed liability towards licence fee, the Revenue appears to have accepted it in its entirety some years and not in some others. In AYs 1982-83 to 1986-87, the AO fully a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expiry of ten years, on 23rd September 1980, a fresh Licence Agreement was entered into between the Assessee and the NDMC. The annual licence fee was increased to ₹ 13,50,000/- payable in twelve equal monthly instalments. The Assessee is stated to have paid the licence fee from October, 1980 to March, 1981 under protest. The various rounds of litigation 4. On 9th April 1981, the Assessee filed Suit No. 295/1981 in the Court of the Sub Judge, First Class, Delhi. In the said suit, the Assessee challenged the increase in the licence fee and also sought a stay against dispossession. By an order dated 10th April 1981, the learned Sub Judge, First Class granted an interim stay restraining NDMC from termination of the licence. By a further order dated 22nd January 1982, the learned Sub Judge, First Class confirmed the stay and restrained NDMC from recovering the enhanced amount of the licence fee till the final disposal of the suit. 5. Aggrieved by the aforementioned order, the NDMC filed an appeal in the Court of Senior Sub Judge, Delhi, who by an order dated 10th May 1982, set aside the injunction granted by the learned Sub Judge, First Class. Aggrieved by this, the Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court vacated the aforementioned interim order while observing that the NDMC would not be prevented from considering the Assessee s proposals dated 15th March, 2001 and 5th April, 2001. 9. The Assessee filed a further writ petition CW No. 773/2002 seeking directions for renewal of the licence beyond 30th September, 2000. An interim order was passed in the said writ petition on 20th March, 2002 to the effect that the Assessee would not be dispossessed and that no coercive steps would be taken against it. 10. In the meanwhile the NDMC initiated proceedings under the Public Premises (Eviction of Unauthorised Occupants) Act, 1971 ( PP Act ) against the Assessee by issuing notices dated 19th March 2002/8th April, 2002 under Sections 5 and 7 of the PP Act requiring the Assessee to show cause why an eviction order should not be passed against it. 11. In the pending writ petition, i.e., CW No. 773/2002, an order was passed on 24th September 2002 recording the statement of NDMC that it would not, during the pendency of the said writ petition, pursue the proceedings under the PP Act. Consequently, by the order dated 10th October 2002 the Estate Officer, NDMC stayed further proceed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... towards payment of interest. In the case of the amounts claimed towards payment of interest, for AY 1984-85 a sum of ₹ 2,03,860.86 plus ₹ 1282.20 aggregating to ₹ 2,05,143 was claimed, for AY 1985-96 a sum of ₹ 3,40,022.92 was claimed and for AY 1986-87 a sum of ₹ 4,09,432.80 plus ₹ 15,075, aggregating to ₹ 4,24,507.80 was claimed. All these items of expenditure towards licence fee as well as interest as claimed by the Assessee were allowed by the AO. For three AYs, i.e., 1984-85 to 1986-87 these orders were allowed to be become final. 17. For AY 1987-88, the Assessee claimed deduction of ₹ 13,50,000 towards licence fee payable and a further sum of ₹ 5,13,282.28 towards interest. The amount actually paid to the NDMC towards rent was ₹ 7,16,472 in terms of the interim order passed in the suit as upheld by the High Court. The AO allowed the licence fee actually paid and thereby disallowed the licence fee to the extent of ₹ 6,63,556. The interest amount claimed in the sum of ₹ 5,13,282, not having been actually paid by the Assessee, was disallowed. 18. Against this order, the Assessee went in appeal before t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. For AY 1996-97, the Assessee claimed for both licence fee of ₹ 13,50,000 (after apart from the head office rent of ₹ 30,000) as well as interest amount which were all fully allowed by the AO. This order has again not been questioned by the Revenue under Section 263 of the Act and therefore became final for the said AYs. 25. The very next year, i.e., AY 1997-98, the AO again adopted a different approach. The entire licence fee of ₹ 13,50,000 and head office rent of ₹ 90,000 as claimed by the Assessee was fully allowed. However, the interest amount claimed in the sum of ₹ 10,43,701 was disallowed. The CIT (A) dismissed the Assessee s appeal by an order dated 27th November 2007 following the orders of the ITAT in the Assessee s own case in previous AYs (i.e., ITAT orders dated 31st October 2002 and 21st October 2005). The ITAT by its order dated 25th May 2009 affirmed this order of the CIT (A). 26. It must be mentioned at this stage that the order passed by the CIT (A) on 27th November 2007 for AY 1997-98 was common to that AY as well as AYs 1999-00 and 2003-04. The order of the ITAT dated 25th May 2009 which affirmed the order of the CIT (A) was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee had disputed its liability by initiating proceedings in the lower courts as well as in this Court and obtaining interim orders on the strength of which it was required to pay an additional 30% of the licence fee that is due till the disposal of the suit by the Sub Judge. 33. Mr. Aggarwal pointed out that the Assessee was maintaining its accounts on the basis of the mercantile system. In terms thereof, a liability already accrued, though liable to be discharged at a future date, would be properly claimed for deduction while working out the profits and accounts in the business. It is not necessary that the deduction should be allowed only after the amount was actually paid. A condition, whose fulfilment might result in the reduction or even extinction of such liability, would not have the effect of converting that liability into a contingent liability. According to him, the liability owed in the form of licence fee and interest to the NDMC was an ascertained liability. What the Assessee s challenge, according to him, was towards the enhancement of the licence fee and this was not to deny the liability to pay the licence fee in terms of the original agreement entered i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ully justified in disallowing the claim for deduction of licence fee and the corresponding interest to the extent it was not actually paid by the Assessee to NDMC. 37. As regards the claim for consistency, it is pointed out that each assessment orders have to be separately considered. As far as the five three years are concerned, i.e., 1982-83 to 1986-87, with the Assessee having not successfully challenged its liability to make payment, the AO was justified in allowing the amount as claimed by the Assessee towards payment of licence fee and interest towards arrears of licence fee. However, from 1987-88 the scenario changed with the Assessee s challenge to the enhanced demand for licence fee being decided by the High court vide its order dated 14th January 1987. It is only with this decision that it made it clear that the Assessee was entitled to a status quo and that it was liable to pay only original licence fees of ₹ 5,51,111 plus an additional 30%, i.e., ₹ 1,65,333/- which worked out to ₹ 7,16,444/ - per annum. 38. It is further submitted that the orders for any other AYs where the entire amount as claimed by the Assessee towards licence fee has been all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduct from the profits and gains of the business such liability which had accrued during the period for which the profits and gains were being computed. It was held that the liability did not cease to be a liability only because the Assessee had challenged it in the higher forum. Also the fact that the Assessee had failed to debit the liability in its books of accounts did not prevent it to claim the said sum as deduction either under Section 10(1) or under Section 10(2)(xv) of the Income Tax Act, 1922. It was held whether the Assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the Assessee might take of his rights; nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter. 40. This was in line with the earlier decision in Calcutta Co. Ltd. v. Commissioner of Income Tax, West Bengal (1959) 37 ITR 1 (SC) where the Supreme Court explained that an Assessee following the mercantile system of accounting could claim a deduction of an estimated expenditure towards development of plots purchased by it even before actually incurring the expenditure. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purpose of earning the receipts is deducted therefrom- whether the expenditure is actually incurred or the liability in respect thereof has accrued even though it may have to be discharged at some future date. As was observed by Lord Herschell in Bussel v. Town and County Bank, Ltd. (1888) 13 App. Cas. 418: The duty is to be charged upon a sum not less than the full amount of the balance of the profits or gains of the trade, manufacture, adventure, or concern'; and it appears to me that that language implies that for the purpose of arriving at the balance of profits all that expenditure which is necessary for the purposes of earning the receipts must be deducted, otherwise you do not arrive at the balance of profits, indeed, otherwise you do not ascertain, and' cannot ascertain, whether there is such a thing as profit or not. The profit of a trade or business is the surplus by which the receipts from the trade or business exceed the expenditure necessary for the purpose of earning those receipts. That seems to me to be the meaning of the word profits in relation to any trade or business. Unless and until you have ascertained that there is such a balance, no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in case of amounts actually expended or paid; (ii) Just as receipts, though not actual receipts but accrued due are brought in for income-tax assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business; (iii) A condition subsequent, the fulfilment of which may result in the reduction or even extinction of the liability, would not have the effect of converting that liability into a contingent liability; (iv) A trader computing his taxable profits for a particular year may properly deduct not only the payments actually made to his employees but also the present value of any payments in respect of their services in that year to be made in a subsequent year if it can be satisfactorily estimated. 45. The Supreme Court in Bharat Earth Movers v. Commission of Income Tax (supra) held that the provision made by the Assessee for meeting its liability under the leave encashment scheme would entitle it to deduction sin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fee. 49. What appears to have weighed with the CIT(A) as well as the ITAT in the impugned order in these cases is that in the suit filed by the Assessee an averment was made that it had not voluntarily signed on the Agreement dated 23rd September, 1980 and had averred that the Agreement having been got signed by the NDMC authorities from the Directors under undue influence and coercion is illegal and not enforceable in law. What also weighed with the ITAT is that the Assessee could not on the one hand challenge the validity of the said agreement and on the other urge the Department to act upon it because it is beneficial to the Assessee. 50. There appears to be a misconception on the question regarding an accrued liability in the hands of the Assessee in the above circumstances. In terms of the interim orders passed by the Court which were conditional upon the Assessee making a certain payment, what was being made clear was that the Assessee s contention regarding legality of the renewed licence agreement was still to be determined. In other words, the Assessee could not, during the pendency of the suit, claim that it had no liability under the renewed licence agreement. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cepted it in its entirety some years and not in some others. In AYs 1982-83 to 1986-87, the AO fully allowed the amount as claimed in respect of the licence fee as well as interest by the Assessee in terms of the Agreement dated 23rd September, 1980. Without there being any particular change in the circumstances other than the order of the High Court confirming the interim order passed by the trial court, which position continued even in AY 1982-83, the AO restricted the allowance from AYs 1987-88 to 1992-93 to actual payment of licence fee made and disallowed the difference between the claimed amount and the amount actually paid. Again, without there being any change in the circumstances in AYs 1993-94 and 1994-95, the Assessee s claim towards payment of licence fee as well as interest is fully allowed by the AO in terms of the Agreement. Again for one AY 1995-96, the AO did not fully allow the claim. In the very next AY, 1996-97, the claim was fully allowed. For AYs 1997-98 to 2001-2002, while the claim towards payment of licence fee was fully allowed in terms of the Agreement, the claim towards interest for arrears of rent was disallowed. Even as pointed out by the Assessee in 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... might suggest some traverse which had not been taken. 55. This legal position was recently reiterated by the Supreme Court it in CIT v. Excel International Limited (supra) as under: 31. It appears from the record that in several assessment years, the Revenue accepted the order of the Tribunal in favour of the assessee and did not pursue the matter any further but in respect of some assessment years the matter was taken up in appeal before the Bombay High Court but without any success. That being so, the Revenue cannot be allowed to flip-flop on the issue and it ought let the matter rest rather than spend the tax payers' money in pursuing litigation for the sake of it. 56. Consequently on the rule of consistency, the case of the Revenue for the AYs in question cannot be accepted. Conclusion 57. For the above reasons, the Court holds that the ITAT was in error in declining the plea of the Assessee for the AYs in question with regard to the full claim of the payment towards licence fee and interest on the arrears of licence fee. The question framed is answered in the negative, i.e., in favour of the Assessee and against the Revenue. 58. The impugned orders ..... X X X X Extracts X X X X X X X X Extracts X X X X
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