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TMI Blog2016 (3) TMI 752X X X X Extracts X X X X X X X X Extracts X X X X ..... 3B of the Income tax Act, 1961 ("the Act"). 1.2 While doing so, the CIT (A) failed to appreciate that the amount payable to Brahanmumbai Municipal Corporation ("BMC") was not covered by the provisions of section 43 B of the Act so as to call for the disallowance. 1.3 It is submitted that in the facts and the circumstances of the case, and in law, no such disallowance was called for. 2.1 The Id. CIT (A) erred in confirming the action of the A.O. in disallowing the claim of deduction amounting to Rs. 3,02,575/- on account of labour charges paid, by invoking the provisions of section 40 (a) (ia) of the Act. 2.2 While doing so, the Id. CIT (A) failed to appreciate that the provisions of section 40 (a) (ia) were not at all applicable in the facts of the Appellant's case. 3. The brief facts of the case are that the assessee is engaged in the business of development and construction of buildings. During the course of assessment proceedings u/s 143(3) read with Section 143(2) of the Act, it was observed by the A.O. that in Profit & Loss account, the assessee has debited a sum of Rs. 12 lacs as provision for BMC payment which is shown as payable under the head current liabiliti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nment due. As per the provisions of section 43B of the Act , this transfer fee payable to BMC can be allowable only when it is actually paid. As per the submissions of the assessee, the same is still payable. Hence, the said fee cannot be allowed in the relevant assessment year due to provisions of Section 43B of the Act. Secondly, it is very much clear that in the previous year relating to this assessment year, the liability has not been crystallized being a disputed contractual liability. In mercantile system of accounting, the income & expenditure accrues when there is a right to receipt and right to payment is established and once the right is withheld by way of a dispute, then the accrual of income & expenditure is postponed till the final settlement of the dispute. It is a settled law that the disputed liability accrues only in the year of final settlement, therefore, the claim made by the assessee is not deductible. The A.O. observed that the case laws relied upon by the assessee, none of them is applicable to the present case as the facts are different. The AO held that in the present case the issue is allowability of liability which is disputed and also covered by section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 12 lacs with respect to the plot of land which was purchased by the assessee which was a leasehold land for 999 years. The original lessor is BMC and Mr. Sylvestor & Others are original lessee. The assessee has to pay transfer charges to the BMC @ 7% of agreement value and the BMC has suddenly increased the transfer charges from 7% of agreement value to 50% of value of land as per ready reckoner rate, however , the assessee has made provision of Rs. 12,00,000/- @10% of agreement value as against 50% of value of land as per ready reckoner rate to be payable in due course and the assessee has claimed expenses in the year under consideration. The ld. Counsel submitted that in view of this dispute with respect to payment of transfer fee/premium to BMC on transfer of lease-hold rights, Writ Petitions vide No. 166 of 1997, 2370 of 2006, writ petition no 1262 of 2010 and 718 of 2010 were filed by various aggrieved petitioners before the Hon'ble Bombay High Court and the said Writ Petitions were disposed of and allowed by the Hon'ble Bombay High Court , vide common judgment dated 15-02-2011 , by holding as under:- "12. The Supreme Court has thus held that whenever there is compuls ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y authority of law and nor these are contractual liabilities as per the terms of lease deed entered by and between the lessor and the lessee. The ld. Counsel also relied on the decision of the Hon'ble Supreme Court in the case of Bharat Earth Movers Limited, (2000) 245 ITR 428 (SC) and Taparia Tools Private Limited , (2015)372 ITR 605(SC). 8. The ld. D.R., on the other hand, relied on the orders of authorities below and submitted that the demand has not been paid by the assessee to the BMC and there is thus non compliance of provisions of Section 43B(a) of the Act and the authorities below has rightly made the disallowance. 9. We have heard the rival contentions and also perused the material available on record including the case laws relied upon by both the sides. We have observed that the assessee has purchased a plot of land of which the original lessor is 'Brihanmumbai Muncipal Corporation'(in short 'BMC') also known as 'Municipal Corporation of Greater Mumbai' ( in short 'MCGM') and Mr. Sylvestor & Others are the original lessee. When the lessee transfers his lease-hold rights in the land owned by BMC, to other party, the said party has to pay the premium to BMC. The prevail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mand made by the Corporation in that regard, therefore, is without authority of law. 13. In these circumstances, therefore in our opinion, all these Petitions will have to be allowed. They are accordingly allowed. It is held that in the absence of any stipulation in the Lease Deed permitting the Corporation to charge any premium or any provision in law authorizing the Corporation to claim such a premium on transfer of lease hold rights, the Corporation cannot claim any premium like it has been done in this case from the assignee. Similarly in the absence of any stipulation in the Lease Deed for not obtaining prior permission of the Corporation for assignment of lease hold rights the Corporation cannot demand any transfer fees from the assignee. The amount that might have been collected by the Corporation pursuant to the demand notice which has been made in these Petitions are directed to be refunded by the Corporation after adjusting any legal demands that may be due to the Corporation from the Petitioners within a period of eight weeks from today." We have observed that the 'Brihanmumbai Municipal Corporation' (in short 'BMC') also known as 'Municipal Corporation of Greater M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udgment dated 15th February, 2011 held that the amount that might have been collected by the Corporation pursuant to the demand notice which has been made in these Writ Petitions filed with the Hon'ble Bombay High Court are directed to be refunded by the BMC after adjusting any legal demands that may be due to the BMC from the Petitioners within a period of eight weeks from the date of judgment. Against this judgment of the Hon'ble Bombay High Court, the Municipal Corporation of the Greater Mumbai also known as BMC has filed Special Leave Petition (SLP) under Article 136 of The Constitution of India before the Hon'ble Supreme Court vide SLP(C)No. 16197/2011 challenging the afore-stated judgment dated 15- 02-2011 of the Hon'ble Bombay High Court. Thus, in nut-shell it has been held by the Hon'ble Bombay High Court vide its judgment dated 15-02-2011 that these premium on transfer of lease hold rights in the land is neither a statutory due arising from provisions of any statute in force in India as the same is not collected under authority of any law in force whether Central Act or State Act or any other law in force in India nor is the said premium charged by BMC is a contractual lia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... favour of the purchaser/assignee's, both as a statutory liability as well as contractual liability. The issue is to be decided on the undisputed and admitted fact that the assessee was fully aware of the on-going legal dispute prevailing with respect to challenge of legality and validity of the premium on transfer of lease-hold rights claimed and collected by BMC being subject of challenge on legal grounds that the said premium on transfer of lease-hold rights is collected without any authority of law in force in India and hence not a statutory liability nor the said premium charged is a contractual liability in the absence of provisions/clause in the lease deed executed by and between the lessor and the lessee authorizing charging of said premium on transfer of lease-hold rights in the land owned by BMC in favour of purchasers/assignees. The assessee was aware of the legal dispute pending at the Hon'ble Bombay High Court challenging the legality and validity of the said premium@7% of agreement value on the grounds that it is neither a statutory liability nor is a contractual liability. The assessee was also aware when he made provisions in the books for accounts for the impugned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act and the same cannot be disallowed for non- compliance of provisions of Section 43B of the Act. The second contention of the Revenue is that the liability has not crystallized during the assessment year being a disputed and contingent liability as the same being un-ascertained liability and the said liability will crystallize in the year of final settlement once the legal disputes are resolved by judgments of the Courts. It is stated in the judgment of the Hon'ble Bombay High Court dated 15-02-2011 that the Writ petition bearing number 2370 of 2006 was filed by Maharashtra Chamber of Housing Industry in representative capacity and the assessee has also produced letter dated 20-09-2011 in the paper book placed at page 9 whereby the said Maharashtra Chamber of Housing Industry has updated to all their members about the recent legal development on this issue vide letter no. MCHI/SEC/11-12/107 dated 20-09-2011. The Hon'ble Bombay High Court has finally vide judgment dated 15-02-2011 held that premium on transfer of lease hold property owned by BMC is not a statutory liability being without authority of any law in force in India nor a contractual liability as there is no stipu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with respect to said chargeability of premium both as a statutory liability as well as contractual liability . The cue for this is to be found in the CBDT Notification No. SO 69(E) dated 25th January 1996 issued under Section 145(2) of the Act, which states that provisions should be made for "all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information." Accounting Standard AS-29 issued by The Institute of Chartered Accountants of India (ICAI) deals with "Provisions, Contingent Liabilities and Contingent Assets'. The purpose of the accounting standards is to ensure that the balance sheet and P&L Account of an enterprise should present a true and fair view of its business affairs. Under AS 29 a 'provision' is defined to mean "a liability which could be measured only by using a substantial degree of estimation." The word 'liability' is defined as "a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits." 'Contingent Liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is also not a contractual liability as there is no provision / clause in the lease deed entered into by and between lessor and lessee which enforces and crystallizes the said charge . Thus, we hold that the liability to pay the premium to BMC on transfer of lease-hold rights of the land owned by the BMC in favour of purchaser/assignees was an un-ascertained liability being a contingent liability during the impugned assessment year as the said premium per-se both as a statutory and as well as being a contractual liability were subject matter of legal dispute and challenge before the Hon'ble Bombay High Court of which the assessee was fully aware . The assessee was also not making payment to BMC knowingly fully well that it is an unascertained and contingent liability as the matter as to legality and validity of the said premium both as statutory and contractual liability were under challenge and legal dispute being sub-judice with the Hon'ble Bombay High Court, when the assessee filed his return of income in October 2007 with the Revenue claiming the said expenditure of Rs. 12,00,000/- as deduction u/s 37(1) of the Act in the computation of income filed along with return of incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of the provisions of section 40(a)(ia) read with section 194C (2) of the Act , the AO disallowed the expenditure. While doing so, the A.O. observed that the assessee is engaged in the business of developing and construction wherein he executes contract which is entered between the buyer and himself, hence, the provisions of section 194C(2) of the Act would be applicable instead of section 194C(1) of the Act. As per the above said section 194C(2) of the Act which is applicable in the assessee's case, it is very clear that for any payment made by any person to any resident for carrying out of any work is subjected to deduction of tax at source except in the case of any individual or HUF who is not liable to the tax audit as per clause (a) or clause (b) of section 44AB of the Act, during the immediately preceding financial year in which the such sum is credited or paid to the contractor. The AO disallowed the expenditure of Rs. 3,16,656/- and added the same to the income of the assessee vide assessment order dated 23.12.2009 passed u/s 143(3) of the Act. 9.Aggrieved by the assessment orders dated 23.12.2009 passed by the A.O. u/s 143(3) of the Act, the assessee preferred an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar under consideration is 2007-08 and the law has been amended w.e.f. Ist June, 2007 whereby section 194C of the Act was amended and individual were also being made liable for deducting tax at source for payment being made to contractors as stipulated in amended Section 194C(1) of the Act. The assessee submitted that the said plea being legal plea was taken before the CIT(A) for the first time but was not adjudicated by the CIT(A) nor any remand report was called by the CIT(A). The ld counsel for the assessee relied on the decision of the Hon'ble Calcutta High Court in the case of CIT v. Shri Rinku Mallick (ITAT No. 96 of 2012, GA No. 1368 of 2012). 13.The ld. D.R., on the other hand, relied upon the orders of authorities below. 14. We have considered the rival contention and also perused the material available on record. We have observed that the assessee is engaged in the business of builder and developer. The assessee has made payment of Rs. 3,16,656/- to four parties towards labour payments and service charges. No tax have been deducted at source under the provision of section 194C of the Act and disallowance of Rs. 3,16,656/-has been made u/s 40a(ia) of the Act. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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