TMI Blog2008 (7) TMI 451X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Revenue for all the years. The next issue raised is against deletion of disallowance of excessive payment made to M/s Nikita Enterprises by invoking provisions of s. 40A(2). This issue arises in the appeals by the Revenue for the asst. yrs. 1999-2000, 2000-01, 2001-02 and 2002-03. 3. In the cross-objections the assessee challenges issuance of notice under s. 148 and consequent reassessment framed under s. 147 of the Act. 4. We shall first take up the cross-objections whereby the assessee challenges assumption of jurisdiction by the AO for framing reassessment. The relevant facts are that the AO while completing regular assessment for asst. yr. 2001-02 noted that the assessee is an individual carrying on business under the proprietorship concerns, M/s Pradeep Oil Corporation and M/s Jindal Motors. M/s Pradeep Oil Corporation is engaged in the business of storage, handling of liquids and solids. M/s Pradeep Oil Corporation had been allotted apiece of land by the Railways In terms of agreement dt. 15th March, 1975 for storage of petroleum products on which it has built storage tanks and warehouses for the purpose of business. Further land was allotted by the Railways in te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vised." Issue 4 "Are the respondents in unauthorized occupation of Railway premises and if so, are they liable to pay the damages?" Conclusion -"......Accordingly I decide this issue in favour of the respondents and against the applicant thereby declaring that the respondents are not in unauthorized occupation of Railway premises and are also not liable to pay the damages." Issue 5 "What is the amount of damages the 'respondents are liable to pay?" Conclusion -"......I decided the issue in favour of the respondent and against the appellant thereby the applicant is not liable to pay any damages." Issue 6 "The decisions of the earlier issues reveal that the applicant has failed to prove the justification of the allegations made in the application against the respondent which are not only contrary to terms of the agreement, effecting from retrospectively and in a manner so frequently without any definite basis and far from any reasonableness. The demand and termination based thereon are not tenable in law and the license of the respondent cannot be terminated as stated aforesaid. Hence, in view of the submission of the aforesaid facts, documents placed on re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or asst. yrs. 2000-0 land 2001-02 on the basis of bill dt.29th July, 1999for a sum of Rs. 1,92,63,785. The assessments for asst. yrs. 1997-98, 1998-99, 1999-2000, 2000-01 and 2002-03 were completed by accepting the return filed under s. 143(1)(a) of the Act. For the first time the claim of the assessee was scrutinized in asst. yr. 2001-02 wherein the assessee claimed deduction for increased liability in respect of licence fee payable to Railways. In assessment for asst. yr. 2001-02 the AO concluded as under: "The assessee was asked to submit the bill of Railways demanding the amount by virtue of which this amount is debited to P L a/c as per the system of accounting followed by the assessee. The copy of this bill is enclosed as Annex. 1 to this order. A perusal of this bill reveals the following facts: 1. Bill is dt.29-7-1999 2. The bill mentions the following amounts as 'damages' and not the license fee, as claimed by the assessee. (a) Arrears of damages upto31-3-1999 13,13,78,784 (b) Damages from1-4-1999to31-3-2000 1,92,63,785 3. No payments have been received against the damages till date. 4. License agreement has been terminated w.e.f.23rd June, 1988. 5. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed under s. 143(3), but accepted the returns under s. 143(1)(a). In that situation there was no opinion formed by the AO in 'accepting' the returns and hence there is no change of opinion while reopening the assessment. The reopening was only when he went through the records of earlier years and gathered information on the basis of which he has prima facie reason to believe that income has escaped assessment. The action is justified. The AO had prima fade reason to believe that excessive expenditure on account of contingent liability had been claimed since the liability claimed on the basis of subsequent letters was not accrued liability but subject to the outcome of the decision by Tis Hazari Court. The, learned CIT(A) relied upon the decision of Hon'ble Delhi High Court in the case of Late R.B. Seth Ram Rattan vs. CIT (1984) 41 CTR (Del) 81 : (1985) 156 ITR 612 (Del) for the proposition that jurisdiction to reopen does not necessarily lead to the conclusion that there has been an escapement of income and the final assessment made might not be effective, but it does not mean that the AO would be devoid of jurisdiction on this ground only. He accordingly upheld the reopening of ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but did not consider the judgment of the learned CIT(A) pertaining to asst. yr. 1995-96 which was dt.30th Oct., 1998where the claim was held to be allowable as revenue expenditure. There is no change in facts and circumstances as prevailing for asst. yr. 1995-96 and for the years which are sought to be reopened. The reason to believe is to be seen on the date when the reasons are recorded. On that date since the assessee was not unauthorized occupant, the assessee cannot be said to have claimed damages but only the agreed licence fee. Though on the bill dt.29th July, 1999it is mentioned that "payment will be subject to the decision of the Court" and the figures were only for information, still the liability which had accrued under the agreement and which the Railways were under authority to revise from time to time will not be extinguished. The liability was in existence and had accrued during all these years. He submitted that since the reopening is merely on change of opinion, the same is not permissible in law. Reliance was placed on the following decisions: (1) CIT vs. Kelvinator of India Ltd. (2002) 174 CTR (Del)(FB) 617 : (2002) 256 ITR 1 (Del)(FB); and (2) Jindal Photo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1998. In that view of the situation the assessee was all along claiming excess liability without the same having been accrued. This fact came to the knowledge of the AO only during the assessment proceedings for asst. yr. 2001-02. Immediately on completion of the assessment for asst. yr. 2001-02 under s. 143(3), the AO was prima facie of the opinion that income chargeable to tax has escaped assessment for earlier years because the assessee was wrongly claiming deduction of contingent liability. Accordingly, the assessment was rightly reopened by the AO. He also submitted that when the original assessments are completed under s. 143(1)(a) but because of some information, he has reason to believe that the income chargeable to tax has escaped assessment, the AO is justified in doing so. Reliance was placed on the decision of Hon'ble Delhi High Court in the case of Mahanagar Telephone Nigam Ltd. vs. Chairman, CBDT (2000) 162 CTR (Del) 554 : (2000) 246 ITR 173 (Del) and that of the Hon'ble Supreme Court in the case of Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. (2007) 210 CTR (SC) 30 : (2007) 291 ITR 500 (SC). He accordingly pleaded that the assumption of jurisdiction for fra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arma that the question regarding the truthfulness or falsehood of the transactions reflected in the return can only be examined during the original assessment proceedings and not at any stage subsequent thereto. The argument is too broad and general in nature and does violence to the plain phraseology of ss. 147(a) and 148 of the Act and is against the settled law laid down by this Court. We have to look to the purpose and intent of the provisions. One of the purposes of s. 147 appears to us to be to ensure that a party cannot get away by wilfully making a false or untrue statement at the time of original assessment and when that falsity comes to notice, to turn around and say 'you accepted my lie, now your hands are tied and you can do nothing'. It would be a travesty of justice to allow the assessee that latitude." 7.1 The Hon'ble Supreme Court in the case of Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. held that under the scheme of s. 143(1) as substituted w.e.f. 1st April, 1989, prior to its substitution w.e.f. 1st June, 1999, what were permissible to be adjusted were (1) Only apparent arithmetical error in writing accounts, etc. (2) Loss, carried forward deduction al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . wherein the Hon'ble Court held that so long as the ingredients of s. 147 are fulfilled, the AO is free to initiate proceedings under s. 147 and failure to take steps under s. 143(3) will not render the AO powerless to initiate reassessment proceedings even when intimation under s. 143(1) had been issued. Hon'ble High Court also held that at the initiation stage what is required is "reason to believe", but not the established fact of escapement of income. At the stage of issue of notice. the only question is whether there was relevant material on which a reasonable person could have formed the requisite belief. Whether the material would conclusively prove escapement is not the concern at that stage. This is so because the formation of belief by the AO is within the realm of subjective satisfaction. 8. The only question is whether there was relevant material on which a reasonable person could have formed the requisite belief? Whether the materials would conclusively prove the escapement is not the concern at that stage? This is so because the formation of belief by the AO is within realm of subjective satisfaction. In the present case it is seen that the AO had definite informat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of Hon'ble Supreme Court in Lakhmani Mewal Das or Sheo Nath Singh vs. AAC will not apply to the present set of facts. We, therefore, uphold the order of the learned CIT(A) and dismiss the cross-objection raised by the assessee. 10. We now take up the appeal of the Revenue. The first ground of appeal in all the years is regarding allowability of increased liability based on various notices, issued by Railway authorities. The assessee claimed licence fee payable to Railways for various years as under: -------------------------------------------- Asst. yr. Assessee's Basis claim of license fee (Rs.) -------------------------------------------- 1997-98 35,37,300 Notice dt. 25.7.1995 -------------------------------------------- 1998-99 35,37,300 -do- -------------------------------------------- 1999-2000 35,37,300 -do- -------------------------------------------- 2000-01 1.92 crores Notice dt 29.7.1999 -------------------------------------------- 2001-02 1.92 crores Notice dt. 29.7.1999 -------------------------------------------- 2002-03 35,37,300 Notice dt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce fee very frequently was challenged by the assessee but it did not mean that there was any denying of such liability. It is imperative to pay liability though it remained unqualified due to pendency of appeal in the Court. Whenever the liability is ultimately finalized the assessee will have to pay the same. Pending quantification the appellant is entitled to claim liability. The action of the Railway authorities of filing appeal in District Court proves that they desire to recover the liability to the extent as enhanced by them. Therefore, it follows that the liability is legally enforceable. If the liability is legally enforceable, the same is liability in praesenti. He, accordingly, held that the same is allowable. The Revenue is in further appeal before us. 11. The learned Departmental Representative. Shri Amit Mohan Govil submitted that though the Railway authorities unilaterally increased licence fees and treated the assessee as in unauthorized occupation of land, the Railways could not have done so unilaterally. In terms of the agreement with the assessee, the Railways were required to refer the matter to the Estate Officer (Land). The finding of the Estate Officer is cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not called upon to pay any increase in the liability. Therefore, the liability which is under dispute before the District Court and which is not a statutory liability is not allowable merely on the basis of letter or bill issued by the Railway authorities. Reliance was placed on the decision of Hon'ble Supreme Court in the case of Indian Molasses. 12. The learned counsel for the assessee, Shri O.S. Bajpai on the other hand, strongly relied upon the appellate order. He submitted that the issue is now settled by the Tribunal in assessee's own case where the appeal of the assessee for asst. yr. 1990-96 was being decided by the order dt.25th Nov., 2004. In the said case it has been held that the liability which arose in terms of letter of Railway authorities dt.25th July, 1995is after the close of relevant financial year and therefore, under the mercantile system the liability be considered to have accrued only in financial year relevant to asst. yr. 1995-96. Thus, the Tribunal concluded that the liability has accrued after financial year relevant to asst. yr. 1995-96. The appeals being for years after 1995-96 and hence the liability is allowable as such. This liability was held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce fee payable as well as the order of the Estate Officer (Land), Railways. No cognizance has been taken by the Tribunal of the order of the Estate Officer, dt.28th March, 1990. In that view of the situation, it cannot be said that the issue is settled by the Tribunal for years under appeal also. Since the Railways made additional claim in terms of letter dt.23rd March, 1988which was held to be unsustainable by the Estate Officer, no liability for increased sum became payable. The liability is dependent upon the decision of the District Court. The decision of the District Court has not been rendered till date. Therefore, for all the years under appeal the liability is contingent and hence not allowable as such. 14. We have carefully considered relevant facts, arguments advanced and various decisions cited. The relevant facts for the years under appeal are that the assessee is in occupation of land allotted by the Railways in terms of agreement dt.15th March, 1975and3rd Jan., 1978. In terms of such an agreement licence fees are payable. On23rd March, 1988the Railway authorities desired to terminate the licence as the assessee failed to deposit the increased licence fee and remove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of M.S.P. Senthikumara Nadar Sons vs. CIT (1957) 32 ITR 138 (Mad) held: "Only an ascertained liability justifies the entries in accounts maintained on mercantile basis. Deductions are not permissible for anticipated losses or contingent liabilities even if they are inevitable." The Hon'ble Allahabad High Court in the case of Kanpur Tannery Ltd. vs. CIT (1958) 34 ITR 863 (All) held: "Even under the mercantile system of accounting, a liability incurred cannot be entered in the accounts as an expenditure unless the liability has become an ascertained sum of money. Until ascertained, the liability no doubt exists, but proceedings have yet to be taken in some way or other to determine the exact amount. A vague liability to make a payment cannot be entered in the accounts." While so holding the decision of Hon'ble Madras High Court in the case of Senthikumara Nadar Sons vs. CIT was relied upon. The Hon'ble Supreme Court in the case of Indian Molasses Co. Ltd. vs. CIT held: "'Spending' in the sense of 'paying out or away' of money is the primary meaning of 'expenditure'. 'Expenditure' is what is paid out or away and is something which is gone irretrievably. Expenditure, whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aive the interest on the loans and the question of interest remained uncertain till the Government finally fixed the rate and decided to convert the interest into equity shares. The liability for interest remained unascertained till May, 1957. Till that date the liability was contingent and the same crystallized into an ascertainable liability only in accounting year 1956-57. The entire amount was held allowable as deduction from the income for the accounting year 1956-57. 14.3 In the case of Asuma Cashew Co. vs. CIT (1990) 84 CTR (Ker) 198 : (1990) 182 ITR 175 (Ker) the facts are that the assessee which is engaged in the business of export of cashew kernels, entered into a contract with a foreign party for supply of cashew kernels. The assessee did not export the kernels and committed breach of contract. The matter was referred to arbitration and the award was passed on9th Aug., 1979by which the assessee was required to pay the damages. The assessee claimed deduction for the financial year in which the breach occurred. The Hon'ble Kerala High Court held that the liability of the assessee to pay damages to the foreign party accrued only on passing of award by the arbitrator and n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring that accounting period and the liability itself was created subsequent to the close of the accounting period merely because the assessee had made a provision it was not entitled to deduction of the sum for that accounting period relevant to asst. yr. 1961-62. 15. In view of the ratio laid down in aforesaid cases it can be said that since the liability was claimed by the assessee on the basis of notice dt. 23rd March, 1988 and later on revised by Railways on 25th July, 1995 and 29th July, 1999, but since the Estate Officer (Land), Railways, has held that the enhanced liability by way of revision was contrary to law and in terms of agreement and the assessee is not liable to pay the same, the liability to pay increased sum never accrued. Even the Railways in their bill dt.29th July, 1999have admitted that the payment is subject to the decision of Court case pending. Therefore, the liability that existed as on the last day of the financial year was that prevailing prior to the enhancement made w.e.f.23rd March, 1988. The increased liabilities enhanced in terms of letters dt.23rd March, 1988,25th July, 1995and29th July, 1999were contingent upon the decision of theCivil Courtfor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee entered into agreement with firm known as M/s Nikita Enterprises. M/s Nikita Enterprises agreed to takeover the job on payment of Rs. 29,20,000. The AO held that the firm is consisting of four lady partners namely S/Smt. Pushap Lata Bansal, Mahima Gupta, Seema Gupta and Meenu Gupta. The AO for asst. yr. 2001-02 found that the amount paid by the assessee has been credited to the P L a/c. The only expenses incurred by M/s Nikita Enterprises are a sum of Rs. 5,87,400 in the form of salary and other allowances for handling the work assigned by the assessee. The AO held the difference of Rs. 23,32,600 as excessive within the meaning of s. 40A(2) and disallowed the same. The learned CIT(A) held that the assessee is receiving Rs. 37,000 per day and only Rs. 8,000 per day is paid to M/s Nikita Enterprises. The assessee and M/s Nikita Enterprises are paying the tax in the same tax brackets. The agreement is not a paper transaction but in fact given effect to. For any loss or pilferage, M/s Nikita Enterprises were liable to pay the damages. M/s Nikita Enterprises were under absolute obligation to render complaint-free services. The excessiveness or unreasonableness of the expen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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