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2016 (1) TMI 790 - DELHI HIGH COURT

2016 (1) TMI 790 - DELHI HIGH COURT - [2016] 381 ITR 469 - Disallowance of liability of licence fee and on account of interest on arrears of licence fee payable to N.D.M.C. for running the business at Chanakya Cinema - Ascertained or accrued liability - Held that:- There was no question of there being no liability on the Assessee whatsoever for the renewal of the licence. Merely because the Assessee had chosen to challenge in Court the enhancement of the licence fee, which was permissible to be .....

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liability for the AYs concerned.

The ITAT also appears to have drawn a distinction between 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 challeng .....

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lso 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 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.

ITAT was in error in declining .....

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Advocate For the Respondent : Ms. Suruchi Agarwal, Senior Standing Counsel with Ms. Vibhooti Malhotra, Junior Standing Counsel and Ms. Radhika Gupta, Advocate JUDGMENT 1. These are thirteen appeals by the Assessee under Section 260A of the Income Tax Act, 1961 ( the Act ) pertaining to Assessment Years (AYs) 1987-88 to 1992-93, 1995-96, 1997-98 to 2001-2002 and 2003-2004. The question of law framed by the Court vide its order dated 21st September, 2004 in ITA Nos. 353, 354 and 355 of 2003, whic .....

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f Chanakya Cinema at Yashwant Place, which belonged to the New Delhi Municipal Council ( NDMC ). In terms of an Agreement dated 16th September, 1970 entered into with the NDMC, the Assessee obtained a licence for running a cinema hall for a period of ten (10) years (i.e., from 1st October, 1970 to 30th September, 1980) against payment of licence fee of ₹ 5,51,111/- per annum. Clause 1 of the Agreement gave an option to the Assessee to get his licence renewed for a further period of ten (10 .....

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est. 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 .....

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h May, 1982 of the Additional Senior Sub Judge and restored the order dated 10th April, 1981 of the Sub Judge, First Class. 6. In the meanwhile a resolution was passed by the NDMC on 25th March, 1981, whereby it was decided that licenses generally would be renewed for an additional licence fee of 30 per cent over the original licence fee. The Assessee then filed an application seeking amendment of the plaint in Suit No. 295/1981. While allowing the amendment by an order dated 28th February 1983, .....

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nd vacated the injunction. The Assessee then filed a Revision Petition, being CR No. 206/1985 in the High Court which by an order dated 14th January 1987, set aside the order dated 11th February, 1985 of the Additional Senior Sub Judge and directed that the Assessee would be entitled to status quo and carry on the business of running Chanakya Cinema on payment of an additional 30 per cent licence fee till the disposal of the suit by the Sub Judge, First Class. The review application filed by the .....

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petition directed status quo to be maintained regarding possession of Chanakya Cinema. By a subsequent order dated 10th February 1993, the interim order was made absolute till the decision in the petition. Subsequently by order dated 25th May 2001, the High 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 .....

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d 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 proceedings under the PP Act. 12. In the meanwhile, writ pet .....

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the order that may be passed by the High Court. In the said LPA the High Court called for the records of the suit, the civil revision petition and both the decided and pending writ petitions by its order dated 29th October 2003. The interim orders were continued. 13. LPA No. 596 of 2003 was dismissed by the Division Bench on 30th August 2005. It was held that the Assessee could not have any legitimate expectation regarding renewal of the licence and in any event not in perpetuity as they bid wi .....

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he Assessee to NDMC was not decided since it was still pending adjudication. The proceedings under the PP Act revived with notices being issued under Sections 5 and 7 thereof on 15th April 2009. It is stated that these proceedings are still pending adjudication. Proceedings under the Income Tax Act 15. Turning now to the proceedings under the Act, for AYs 1982-83 and 1983-84, the Assessee filed its return claiming deduction of ₹ 10,17,130 and ₹ 13,50,000 respectively towards licence .....

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o ₹ 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 .....

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went in appeal before the CIT (A) who by an order dated 24th October 1990 reversed the order of the AO and deleted the additions made by the AO. The CIT (A) agreed with the Assessee that the amounts payable to NDMC towards liability had already accrued and deleted the addition made by the AO. The CIT (A) referred to the decision in Kedarnath Jute Manufacturing Co. Ltd. v. Additional Commissioner of Income Tax (1971) 82 ITR 363 (SC). 19. Aggrieved by the order of the CIT (A), the Revenue went in .....

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allowing the licence fee to the extent not actually paid to NDMC and the interest amounts as claimed by the Assessee. 21. For AYs 1990-91, 1991-92 and 1992-93, the AO following the orders of the earlier years and disallowed the deduction of the licence fee to the extent not paid to NDMC and interest amount. Thereafter, the orders of the CIT (A) accepting the Assessee s plea were reversed by the ITAT by its common order dated 21st October 2005. The said common order was also common to AYs 1995-96 .....

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lowed licence fee to the extent not paid as well as the interest amounts claimed. Whereas for the AY 1998-99, the AO allowed the license fee claimed completely while disallowing the interest amounts claimed. For both the AYs, i.e., 1995-96 and 1998-99, again the CIT (A) allowed the Assessee s appeal whereas ITAT reversed it and allowed the Revenue s appeal by the common order dated 21st October 2005. 24. For AY 1996-97, the Assessee claimed for both licence fee of ₹ 13,50,000 (after apart .....

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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 .....

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05) and disallowed the claim for interest while fully allowing the claim for License fee. This was upheld by the CIT(A) and in turn affirmed by the order of the ITAT dated 20th December 2006. 28. The above narration is incomplete without adverting to the facts in respect of the intervening AYs. For AY 2002-03, the entire licence fee of ₹ 54,30,450 and head office rent of ₹ 1,80,000 as well as the interest amount of ₹ 7,39,440.01 was fully allowed as deducted by the AO. This ord .....

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that the AO allowed the amount of licence fee and interest in its entirety as claimed by the Assessee for AYs 1993-94, 1994-95, 1996-97, 2002-03 and 2004-05 to 2008-09. Also, the AO allowed the licence fee as claimed by the Assessee, in the sum of ₹ 13,50,000 for AYs 1993-94, 1994-95, 1996-97 to 2001-02, a sum of ₹ 54,30,450 for AY 2002-03, a sum of ₹ 45,49,548 for AY 2003-04, a sum of ₹ 47,66,196 for AYs 2004-05 to 2007-08 and a sum of ₹ 35,74,647 for AY 2008-09. S .....

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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 .....

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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 into with NDMC. 34. Mr. Aggarwal placed reliance on the decision of this Court in R.C. Gupta v. Commissioner of Income Tax (2008) 298 ITR 161 (Del) and the decisions referred therein namely, Kedarnath Jute Manufacturing Co. Ltd. & CIT (1971)82 ITR 363 (SC), J.K. Synthetics Limited v. O.S. Bajpai, ITO (1976) 105 ITR 864 (All) .....

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and pointed out that there were 14 AYs in which the case of the Assessee was accepted in toto by the Revenue and that there was no questioning of the orders of the AO in which the entire amounts that were payable towards licence fee as well as the provision of interest as claimed by the Assessee was allowed. This was the position as regards AYs 1982-83 to 1986-87, 1993-94, 1994-95, 1996-97, 2002-03, 2004-05 to 2008-09. Mr. Aggarwal referred to the decision in CIT v. Excel International Limited .....

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id its liability. Having taken such a stand in the suit as well as in the writ petition before the High Court, the Assessee should not be allowed to contend that its liability for payment of the licence fee and interest on the arrear of licence fee was an ascertained liability. As long as the interim order of the High Court granted status quo, which was at the instance of the Assessee itself, the Assessee was not under any obligation to make payment of the licence fee and therefore, avoided maki .....

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ent, 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 ͅ .....

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ry liability and a liability based upon a contractual obligation. It is only in the case of a statutory liability that the actual quantification or ascertainment of liability would not postpone the accrual thereof in the mercantile system of accounting. The decision in Kedarnath Jute Manufacturing (supra) is sought to be distinguished on the ground that it was rendered in the context of sales tax liability which was a statutory liability whereas in the present case the Assessee s liability is co .....

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0%. Ascertained or accrued liability 39. The question as to when a liability can be said to be ascertained one has arisen in the context of both a statutory liability and a contractual liability. An example of a statutory liability is the case of Kedarnath Jute Manufacturing Co. Ltd. (supra). There the Assessee followed the mercantile system of accounting. The relevant AY was 1955-56. The Assessee had in the calendar year 1954, i.e., the relevant previous year, incurred a liability of ₹ 1, .....

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l the quantification was effected in the assessment proceedings, since the Assessee had followed the mercantile system of accounting it was entitled to 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 .....

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lier 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 was not a statutory liability but a contractual one. The Assessee in that case was a developer dealing in land and property. The Supreme Court noted that .....

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year. Explaining the mercantile system of accounting, the Court referred to an earlier decision in Keshav Mills Ltd. v. Commissioner of Income Tax, Bombay (1953) 23 ITR 230 (SC) in which it was described as under: That system brings into credit what is due, immediately it becomes legally due and before it is actually received and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed. 41. The Supreme Court in Calcutta Co. Ltd. v. .....

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l one, because it is always open to the Income-tax authorities concerned to arrive at a proper estimate thereof having regard to all the circumstances of the case. 42. The Supreme Court Calcutta Co. Ltd. v. Commissioner of Income Tax, West Bengal (supra) also explained that since the Assessee was being assessed in respect of the profits and gains of its business, the same could not be determined unless and until the expenses of the obligations which have been incurred are set off against the rec .....

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. (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' ca .....

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ers v. Commission of Income Tax (supra), the Supreme Court had an occasion to explain the distinction between accrued and contingent liability. There the Assessee Company had two sets of employees - one covered by the Employees State Insurance Scheme (described as staff ) and the other not so covered (termed as officers ). The Assessee had floated beneficial schemes for its employees for encashment of leave in terms of which the officers were entitled to thirty days earned leave whereas the staf .....

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ility and during the AY 1978-79, a sum of ₹ 62,25,483/- was set apart for the purpose of encashment of the leave. Although the ITAT held the Assessee to be entitled to claim the said sum as deduction, the High Court was of the view that it was not. The Supreme Court explained as under: The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. Wha .....

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n in Metal Box Company of India Ltd. v. Their Workmen (1969) 73 ITR 53 (SC) in which inter alia it was explained as under: (i) For an assessee maintaining his accounts on mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction 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 .....

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or 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 since it was not a contingent liab .....

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sessee. The AO disallowed the claim on the ground that the amount did not relate to any purchases made during the previous year relevant to the AY in question. While the CIT(A) allowed the Assessee s appeal holding that the liability had accrued during the accounting year ending 31st March, 1979, the ITAT reversed the CIT(A). Allowing the Assessee s appeal this Court explained that the liability was capable of being estimated with reasonable certainty where a recovery suit was filed by HSL. Mere .....

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ust have actually been incurred during the AY in question to enable the Assessee to claim it as an expense or deduction as the case may be. The crux of the matter is the reasonable certainty with which the liability can be ascertained. 48. Coming to the facts of the present case it is not as if the Assessee has disputed its liability to pay licence fee. In other words during the AYs in question it continued to pay the annual licence fee to the NDMC and in those years it was protected in terms of .....

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he 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 Asses .....

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o liability under the renewed licence agreement. It was granted interim protection on the express understanding that it would abide by the interim order of the Court which was in itself an acknowledgement that the liability under the renewed licence deeds continue as long as the suit is pending. However, the only concession was that the Assessee would pay the reduced licence fee for the renewed period which was 30 per cent over and above the original licence fee. In the circumstances, there was .....

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ngs in the suit filed by it against the NDMC, as a reason to preclude the Assessee from claiming the licence fee, the head office fee and the interest on arrears payable to the NDMC in terms of the renewed licence deed as a liability for the AYs concerned. 51. The ITAT also appears to have drawn a distinction between 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 i .....

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is finally decided or the disputes settled. That, however, would not preclude the Assessee from claiming it as an ascertained liability. The rule of consistency 52. 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. .....

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lowed 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 .....

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, 2002 was disallowed. In the last set of years, i.e., AYs 2004-2005 to 2008-2009, the Assessee s claim towards licence fee and interest was fully allowed. This is indeed an extraordinary case of the Revenue continuously changing its stand during the AYs in question. The Supreme Court in Radhasoami Satsang Saomi Bagh v. CIT (supra) commented upon the approach of the Revenue in changing its stand from one AY to another, as under: "16. We are aware of the fact that strictly speaking res judic .....

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atsang Saomi Bagh (supra) cited with approval the following observations of the Privy Council in Hoystead v.Commissioner of Taxation 1926 AC 155 (PC): Parties are not permitted to begin fresh litigation because of new views they may entertain of the law of the case, or new versions which they present as to what should be a proper apprehension by the court of the legal result either of the construction of the documents or the weight of certain circumstances. If this were permitted, litigation wou .....

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