Income Tax Appellate Tribunal - Delhi
Deputy Commissioner Of Income Tax vs Aggarwal And Modi Enterprises (Cinema ... on 31 October, 2002
Equivalent citations: [2003]86ITD214(DELHI), (2003)80TTJ(DELHI)1020
ORDER
T.N. Chopra, A.M.
1. These three appeals have been filed by the Revenue against the orders of the CIT(A) for asst. yrs. 1987-88, 1988-89 & 1989-90. Since main issues involved are identical, these appeals have been heard together and are disposed of by a single order.
2. The main issue common in the three appeals of the Revenue relate to claim of deduction of licence fees and interest on arrears thereof payable to NDMC.
3. The assessee is engaged in the business of running cinema hall in the name of Chanakya Cinema situated in the commercial complex known as Yashwant Palace belonging to NDMC. The assessee got the licence for running the cinema hall against payment of licence fee of 5,51,111 as per the agreement originally entered into with the NDMC authorities on 16th Sept., 1970, for a period of ten years. There was a provision in the original agreement whereby the assessee had a right to renew the licences for a further period of 10 years. After the expiry of the original lease, a fresh agreement was signed between the assessee and the NDMC authorities on 23rd Sept., 1980, by which the annual lease amount was increased from Rs. 5,51,111 to Rs. 13,50,000 which was to be paid in 12 equal monthly instalments. The assessee paid the monthly instalments for the month of October and December, 1980, under protest and also filed a suit in the Court of Sub-judge First Class, Delhi. The Sub-judge vide his order dt. 10th April, 1981, restrained the NDMC authorities from termination of the lease and eviction of the assessee. The NDMC authorities were further directed to refrain from the recovery of the enhanced amount of licence fee from the assessee till the final disposal of the suit filed by the assessee. Subsequently, the Additional Senior Sub-judge, Delhi vide its order dt. 11th Feb., 1985, vacated the aforesaid injunction. Against this decision, the assessee filed a petition before the Delhi High Court. Delhi High Court vide its order dt. 14th Jan., 1987, set aside the order of Senior Sub-judge dt. 11th Feb., 1985, and directed that the assessee will be entitled to the status quo regarding possession of the Chanakya Cinema and will carry on the business on payment of additional 30 per cent licence fee till the disposal of the suit by the Sub-judge. Since the NDMC authorities did not carry the matter before the Supreme Court, the order of the Hon'ble Delhi High Court became final.
4. At this stage, it would be relevant to mention that the Hon'ble High Court while setting aside the order of the Senior Sub-judge took note of the fact that NDMC passed a resolution dt. 25th March, 1981, whereby the NDMC has taken a policy decision to renew the licence of the licensees in the Yashwant Palace by taking additional 30 per cent licence fee only. Since the assessee was also the licensee of the Chanakya Cinema situated in the Yashwant Palace, it raised the question that the said resolution was also applicable to it and renewal of the licence agreement on 23rd Sept., 1980, has been secured by coercion or undue influence by the NDMC. The President of Yashwant Palace Traders Association filed Writ Petition No. 1961/1981 raising a question as to whether they were entitled to the benefit of said resolution of the NDMC and whether the licence could be renewed only by enhancing the fees by 30 per cent. The Supreme Court issued rule nisi on 26th July, 1982, and passed the order staying the recovery of the amount of licence fee and eviction on the condition that licensee would pay licence fee calculated @ original licence fee plus 30 per cent enhancement. The order of the Hon'ble Delhi High Court in assessee's case was thus in Keeping with the order of the Hon'ble Supreme Court.
5. The AO noticed during assessment proceedings that a sum of Rs. 13,80,000 had been debited to the P&L a/c on account of the rent payable to NDMC and further interest on arrears of rent as Rs. 5,13,282 as against the Hon'ble Delhi High Court's order to pay Rs. 7,16,444 per annum. The AO came to the conclusion that the assessee has made excess claim of licence fee and interest on arrears aggregating to Rs. 11,76,838 for asst. yr. 1987-88 mainly on the following grounds as enumerated at pp. 4 and 5 of the assessment order.
"1. As per original agreement of licence fee dt. 16th Sept., 1970, the assessee had a right to get the cinema licence renewed after the expiry of 10 years.
2. The assessee did exercise its right of renewal on 11th Jan., 1980, and the NDMC accepted the assessee's renewal by not raising any objection and by acquiescence. This led the assessee to invest Rs. 12 lakhs in the construction and setting of 'Fantasia' restaurant at Chanakya Theatres Building with the written approval of the NDMC dt. 14th Jan., 1980.
3. That the directors of the company were forced to write and sign a letter dt. 18th Sept., 1980, and make an offer of the licence fee at the rate of Rs. 13.50 lakhs per annum and made to sign a fresh agreement dt. 23rd Sept., 1980, under coercion.
4. That the assessee paid monthly licence fee of Rs. 1,12,500 for the months of October, 1980 to March, 1981, strictly under protest and in order to get the licence renewed from the Government authorities so that the cinema could be run and made a simultaneous request to NDMC to keep the amount in excess of the original licence fee separately to the credit of the assessee.
5. That the agreement of enhancement dt. 23rd Sept., 1980, having been got signed by NDMC authorities from the directors under undue influence and coercion is illegal and not enforceable in law.
6. That in accordance with Hon'ble High Court's judgment dt. 14th Jan., 1987, the assessee is liable to pay only the original licence fee plus 30 per cent thereof till the disposal of suit sending before the Sub-judge I Class, Delhi.
7. The assessee cannot blow not and cold in the same breath. On the one hand, the assessee is challenging the very validity of the agreement dt. 23rd Sept., 1980, which it alleges to have been got signed under undue influence and coercion and on the other hand it urges the IT Department to act upon it because it is beneficiable to it.
8. The judgment of the Hon'ble Supreme Court in the case of Kedarnath Jute Mills v. CIT (1971) 82 ITR 363 (SC) is applicable insofar as the payment of contractual amount of licence fee of Rs. 5,51,111 on the basis of original licence agreement dt. 16th Sept., 1970, is concerned and further enhancement by 30 per cent by the Hon'ble Court of Delhi.
9. Since the legality of the licence agreement dt. 23rd Sept., 1980, is yet to be examined by the Court of Sub-judge I class, Delhi, the liability of the assessee in excess of the original licence fee plus 30 per cent thereof is not payable."
Similar additions have been made for asst. yrs. 1988-89 and 1989-90 by the AO on identical grounds.
6. Learned CIT(A) deleted the impugned additions for the three assessment years mainly on the ground that liability on account of enhanced licence fees as well as interest on arrears of rent has arisen during the assessment year and mainly because the assessee is disputing the liability would not be itself extinguish the same. In support of his conclusion, learned CIT(A) placed reliance on the decision of the Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd. v. Asstt. CIT (1971) 82 ITR 363 (SC) and decision of the Delhi Bench of the Tribunal in the case of Prestolite of India Ltd. v. Asstt. CIT (1989) 28 ITD 542 (Del).
7. Aggrieved, the Revenue has assailed the conclusion of the learned CIT(A) on the issue.
8. Learned Departmental Representative, assailing the conclusion of the learned CIT(A), argued that a distinction has to be made between statutory liability and a liability based upon contractual obligation. In the case of a statutory liability, the quantification or ascertainment could not postpone the accural thereof. Statutory liabilities like sales-tax, excise duty accrued, according to the provisions of law and even if such liabilities are disputed, this would not effect accrual of such liabilities in mercantile system of accounting. Learned Departmental Representative placed reliance on the judgment of Supreme Court in CIT v. Swadeshi Cotton & Flour Mills Ltd. (1964) 53 ITR 134 (SC). Further reliance is placed on the following decisions :
(i) Swadeshi Cotton Mills Co. Ltd. v. CIT (1980) 125 ITR 33 (All);
(ii) CIT v. Oriental Motor Car Co. (P) Ltd. (1980) 124 ITR 74 (All); and
(iii) CIT v. Phaton Sugar Works Ltd. (1986) 162 ITR 622 (Bom).
Regarding the Supreme Court decision in Kedamath Jute Manufacturing Co. Ltd.'s case (supra) relied upon by the learned CIT(A), the learned Departmental Representative argued that the said decision has been rendered in the context of accrual of sales-tax liability which is a statutory liability whereas in the assessee's case, the liability is contractual liability.
9. Regarding the decision of the Delhi Tribunal in Prestolite of India Ltd.'s case (supra) cited by the CIT(A), the learned Departmental Representative submitted that the facts in that case are distinguishable inasmuch as liability on account of interest payable to the Union Bank of India on loans borrowed by the assessee represented the ascertained liability in respect of legal and binding agreement which was not disputed by the assessee. All that the assessee pleaded in the said case was for waiver or reduction of the liability due to weak financial position of the assessee. According to the learned Departmental Representative, the Delhi Tribunal's decision, based on entirely distinguishable set of facts, would not help the assessee.
10. Per contra the learned counsel of the assessee contended that the liability on account of enhanced licence fees as well as arrears on interest of lease money, even if disputed by the assessee represented an accrued liability liable to deduction for the assessment years under consideration. Learned counsel further submitted that such liabilities have been allowed by the AO in the proceeding assessment years. Learned counsel supported the order of the learned CIT(A) on the issue citing the following judgments :
(i) CIT v. Bengal Coal Co. Ltd;
(ii) CIT v. Dalmia Dairy Industries Ltd. (1991) 189 ITR 167 (Del);
(iii) CIT v. Somaiya Organics (India) Ltd. 129 Taxation 365;
(iv) CIT v. Investigation and Security Service (India) (P) Ltd (1990) 182 ITR 358 (AP); and
(v) Madira Kmya Vikraya Sangh v. CIT (1993) 203 ITR 530 (Raj).
Learned counsel further placed reliance on the following decision of the Tribunal :
(i) ITO v. Andhra Pradesh Paper Mills Ltd (1991) 41 TTJ (Hyd)(SB) 89 : (1991) 38 ITD 1 (Hyd) (SB); and
(ii) Prestolite of India Ltd. v. Asstt. CIT (supra).
11. We have considered the rival submissions as well as the order of the tax authorities. Various judicial pronouncements cited before us have also been carefully perused by us. From the facts on record, as indicated hereinbefore, it is evidently clear that the impugned liability on account of enhanced licence fee as well as interest on arrears of such fees is being claimed by the assessee as a contractual liability based on the fresh agreement dt. 23rd Sept., 1980, signed by the assessee with the NDMC authorities. However, the validity of the agreement has been disputed by the assessee by filing suit before the Courts and the Hon'ble Delhi High Court passed an order whereunder the assessee would be entitled to the status quo regarding possession of the cinema building and will carry on the business in Chanakya Cinema on payment of additional 30 per cent licence fee till the disposal of the suit by the Sub-judge. The High Court has observed that the issue whether NDMC's resolution dt. 25th March, 1981, for renewal of the licences in the Yaswant Palace by taking additional 30 per cent licence fee is applicable to the assessee and whether the agreement dt. 23rd Sept., 1980, signed by the assessee with the NDMC authorities was vitiated by coercion or undue influence are to be adjudicated by the Sub-judge. A serious dispute has thus been raised by the assessee against the enhanced liability on account of licence fee and such liability cannot be treated as ascertained liability which has crystallized before the adjudication of the disputes by the Courts. To a specific query by the Bench regarding the present status of the dispute before the Courts, learned counsel stated that a compromise had now been reached with the NDMC. However, the relevant particulars of the compromise and the date when the same has been reached could not be furnished by the learned counsel. The proposition is well established that a liability based on a contractual obligation crystallizes only when the dispute is settled amicably or by judicial adjudication. The claim of deduction of enhanced licence fee as well as interest on arrears made by the assessee for the assessment years under reference before us cannot be treated as ascertained liability incurred by the assessee under the mercantile system of accounting. The word "ascertained" is defined to mean something made known or made certain and also free from obscurity, doubt or chance. Webster IIIrd New International Dictionary defines the words "ascertained" to mean to make a thing certain established as a certainty-determined with certainty. At legal parlance, the word "ascertained" in relation to mandatory transaction would thus mean, that is certain. The Hon'ble Supreme Court has held in the case of Union of India v. Raman Foundry AIR 1974 SC 1274 that the word "debt" which is synonymous with the word liability means what is adjudicated by a judicial forum. Unless the dispute is settled by a judicial forum nothing can be said to be due and payable. In the instant case, the dispute regarding the enhanced licence fee has been pending adjudication before the Courts and, therefore, the claim of deduction made by the assessee on the basis of the enhanced licence fee, as demanded by the NDMC authorities is at the most in the realm of a contingent liability. On the basis of the order of the High Court, which has been passed in the assessee's case in conformity with the order of the Hon'ble Supreme Court dt. 26th July, 1982, in the writ petition filed by Yaswant Palace Traders Association, the assessee is required to pay 30 per cent additional licence fee till the disposal of the suit by the Sub-judge The this extent the AO has allowed deduction of licence fee as the same has accrued and arisen during the assessment years under appeal before us.
12. At this stage, it would be relevant to mention that principles governing the deduction of contractual liabilities under the mercantile system of accounting are different from statutory liabilities which arise under various statutes enacted by the legislature. For contractual liabilities payable by the assessee, which are disputed, deduction for such liabilities would be allowed in the assessment year in which the dispute is settled either by adjudication or compromise. This is because only on the settlement of the dispute it can be said that actual liability based on contractual obligation has crystallized or accrued against the assessee. Insofar as, statutory liabilities are concerned, such liabilities arise according to the provisions of law and do not depend on the view which the assessee may take of its rights. Therefore, even if, such liabilities are disputed or contested before the Courts, deduction in respect thereof would be allowable. The case of Kedarnath Jute Manufacturing Co. Ltd. (supra) is an instance where the liability arose as a result of statutory provision. The sales-tax liability created by the ST authorities for asst. yr. 1995-96 was disputed by the assessee and no provision in the books had been made for the payment of the disputed amounts, The view taken by the Supreme Court was that the assessee was entitled to the deduction of that sum being the amount of sales-tax which it was liable under the law to pay during the relevant amounting year. That liability did not cease to be a liability because the assessee had taken proceedings before the higher authorities for getting it reduced or wipe out so long as the contention of the assessee did not prevail. The principle laid down by the Hon'ble Supreme Court :
"Whether the assessee is entitled to a particular deduction or not, will depend on the provisions of law relevant thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter ?"
12.2. On the other hand, Kanpur Tannery Ltd. v. CIT (1958) 34 ITR 863 (All), CIT v. Swadeshi Cotton and Flow Mills (P) Ltd. (supra) and CIT v. Banwari Lal Madan Mohan (1977) 110 ITR 868 (All), can be cited as some of the instances of liability arising as a result of some contractual or similar obligations. In Swadeshi Cotton and Flour Mills (P) Ltd. (supra) the assessee was required to pay profit bonus to its employees and for the calendar year 1947, it made the payment in terms of an award made on 13th Jan., 1949, under the Industrial Disputes Act. It debited the amount in its P&L a/c for the year 1948 but in fact paid it to the employees in the calendar year 1949. That liability was treated as an allowable deduction only in 1949 when the claim to profit bonus was settled by the award of the Industrial Tribunal. The view taken was that an employer who follows the mercantile system of accounting incurs a liability towards profit bonus only when the claim, if made, is settled amicably or by industrial adjudication.
13. We may next refer to the decisions of the Allahabad High Court in Swadeshi Cotton Mills Co. Ltd. v. CIT (supra) wherein the distinction between the deduction of contractual liabilities as well as statutory liabilities which are disputed by the assessee have been elaborated enunciating the same principles which have been discussed by us earlier.
14. Reference may further be made to the decision of Bombay High Court in CIT v. Phalton Scrap Works Ltd. (supra) which has been cited by the learned Departmental Representative. It has been held at p. 629 of the Report by Their Lordships, "In our view, where a liability arising out of a contractual obligation is disputed, the assessee is entitled, in the assessment year relevant to the previous year in which the dispute is finally adjudicated upon or settled, to claim a deduction in that behalf."
15. We may now consider the various judicial pronouncements which have been cited by the learned counsel in support of deduction of the disputed licence fee. Most of these decisions have been rendered in the context of deduction of statutory liabilities like sales-tax, excise duty, etc. We have already observed that principles of deduction of such statutory liabilities which are disputed by the assessee are entirely different from that of disputed contractual liabilities.
16. Learned counsel cited CIT v. Somaiya Organics (India) Ltd. (supra), the Court held that liability on account of excise duty was a statutory liability which would be allowed on the basis of the principle enunciated by the Hon'ble Supreme Court in Kedarnath Jute Manufacturing Co. Ltd. (supra). The decision is thus clearly distinguishable and would not apply in the case of disputed contractual liability.
17. The next decision cited by the learned counsel is CIT v. Dalmia Dairy Industries Ltd. (supra). This decision involving deduction of disputed sales tax liability has been rendered bV the Hon'ble Delhi High Court following the Supreme Court decision in Kedarnath Jute Manufacturing Co. Ltd The decision is distinguishable since it deals with the statutory liability and not a contractual liability. Similarly other decisions cited by the learned counsel, namely, 182 ITR 358 (supra) and 203 ITR 530 (supra) deal with the deduction, of statutory liabilities and not contractual liabilities. These decisions are, therefore, clearly distinguishable.
18. Learned counsel has next referred to the decision of Delhi Bench of the Tribunal in the case of Prestolite of India Ltd. v. Asstt. CIT (supra) in this decision as rightly urged by the learned Departmental Representative, the liability on account of bank interest was a certain liability in terms of legal and binding agreements which are not disputed or questioned by the assessee. The tax authorities rejected the claim of deduction merely on the ground that the assessee was pleading before the bank authorities for waiver or reduction of the liability. The Tribunal held that such request by the assessee for waiver of interest, based on adverse circumstances, would not convert a definite and accrued liability into contingent one. The decision, based on entirely different set of facts, does not help the assessee.
19. The next decision cited by the learned counsel is the Special Bench decision by Hyderabad Benches of the Tribunal in the case of ITO v. Andhra Pradesh Paper Mills Ltd. (supra). In this case, assessee's claim for deduction on the basis of revised rates of royalty charged by the State Government for supply of bamboo were challenged by the assessee by way of writ petition before the High Court. The learned Tribunal allowed the deduction on the ground that the assessee had accepted the revised rates of royalty and the liability accrued the moment bamboo was felled and collected by the assessee. The decision involves entirely different set of facts under which a finding of fact has been recorded by the Tribunal that revised rate of royalty had been accepted by the assessee. We may, however, point out that the learned Tribunal observed that the principles laid down by the Supreme Court in the case of Kedamath Jute Manufacturing Co. Ltd. (supra) relating to the accrual to statutory liability would be applicable to contractual liabilities also. Vide para 10, the Tribunal went to the extent of observing that no authority has been produced in support of the distinction between the deduction of statutory liabilities and contractual liabilities which are disputed. With great respect, we may point out that the observations of the Tribunal are not based on the correct appreciation of judicial authorities. In Kedamath Jute Manufacturing Co. Ltd. (supra), the proposition laid down by the Hon'ble Supreme Court as extracted above, expressly provides in unequivocal terms that the deduction of statutory liability would be governed by the provisions of law and not the view which the assessee might take of its rights thereunder. The proposition enunciated by Their Lordships would obviously be applicable in the case of statutory liabilities and cannot be extended for contractual liabilities which are not in any manner connected with the provisions of law. The view being taken by us is amply supported by decisions of different High Courts to which reference has been made by us earlier. For example, Swadeshi Cotton Mill Co. Ltd. v. CIT (supra), CIT v. Oriental Motor Car Co. (P) Ltd. (supra), CIT v. Phalton Sugar Works Ltd. (supra) and CIT v. Swadeshi Cotton & Flour Mills (P) Ltd. (supra), The observations of the Hon'ble Special Bench of the Tribunal are, therefore, contrary to the established legal position as borne out from the aforesaid judicial pronouncements.
20. Another argument raised by the learned counsel which remains to be considered is based on the doctrine of res judiciata or estoppel of record. He argued that enhanced licence fee as well as interest on arrears of such fee provided in the books had been allowed by the AO in the earlier assessment years and, therefore, a contrary view taken in the assessment years under appeal before us is not sustainable. We are not persuaded to accept this argument. It is well settled that the doctrine of res judiciata is not applicable to assessment proceedings and if any issue has not been examined by the AO in the preceding assessment years, that would not by itself oust the jurisdiction of the AO to consider the issue for any subsequent assessment year and arrive at a conclusion on the basis of facts and material brought on record as a result of such investigations and enquiries. The argument of the learned counsel is, therefore, without substance and is rejected.
21. For the aforesaid reasons, we reverse the orders of the learned CIT(A), on the issue for the three assessment years under appeal and sustain the additions made by the AO on account of enhanced licence fee and interest thereon as under :
Asst. yr. 1987-88 Rs. 11,76,838 Asst. yr. 1988-89 Rs. 12,75,627 Asst. yr. 1989-90 Rs. 12,72,816 + Rs. 14,58,999 = Rs. 27,31,815 The aforesaid additions made by the AO for the three assessment years are thus sustained allowing the common ground of the Revenue in the three appeals.
22. Another common ground taken by the Revenue for the three assessment years is directed against the deletion of the interest on account of interest-free advances made to Mukhamal Ram Narain. For asst. yrs. 1987-88 and 1988-89, the disallowance of interest made by the AO is Rs. 49,869 each and Rs. 1989-90 the amount disallowed is Rs. 1,39,292.
23. The AO has dealt with the issue at p. 6 of the assessment order for asst. yr. 1987-88. According to the AO the following loans were advances to M/s Mukhanmal Ram Narain :
(i) Mukhamal Ram Narain, Security account Rs. 1,00,000
(ii) Mukhamal Ram Narain, jewellery account Rs. 1,55,434
(iii) Mukhamal Ram Narain, account Rs. 1,50,000 The AO pointed out that a director of the assessee-company is interested in the said sister concern. Since the assessee had paid interest to its creditors @ 16 per cent, the AO proceeded to disallow an amount of Rs. 49,869 on account of interest relatable to the aforesaid advances to the sister concern. The assessee carried the matter in appeal. The CIT(A) has discussed the issue vide para 14 of the appellate order. The CIT{A) deleted the impugned addition mainly on the ground that amounts have been advanced to M/s Mukhamal Ram Narain on grounds of business expediency inasmuch as the said firm has been let out, a showroom by the assessee on payment of rent of Rs. 20,000 per annum for carrying out jewellery business. As per the agreement dt. 18th April, 1984, the assessee agreed to advance a sum of Rs. 1,50,000 on interest @ 10 per cent and security deposit of Rs. 10,00,000. The CIT(A) further noted that the closing balance of Rs. 55,434 in the account of M/s Mukhamal Ram Narain Jewellers comprises brought forward amount of Rs. 1,12,483 as well as interest of Rs. 20,000 plus interest debited @ 10 per cent. M/s Mukhamal Ram Narain is carrying on jewellery business in the aforesaid premises of the assessee and the amounts have been advanced under the lease agreement. The said agreement has been accepted as genuine by the Revenue authorities. On these grounds, the CIT(A) deleted the disallowance.
24. We see no good ground to interfere with the conclusion of the CIT(A) and uphold the same. This ground is, therefore, dismissed.
25. In ITA No. 6509/1991, the Revenue has taken one more ground being ground No. 3 against deletion of the disallowance of Rs. 94,962 on account of expenditure incurred on construction of toilets in the cinema building. The ground reads as under :
"3. On the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting the disallowance of Rs. 94,962 on account of expenditure incurred on construction of toilets in the cinema hall by holding the same to be a revenue expenditure and by following the appellate order for earlier year on the issue. She has failed to appreciate that the expenditure incurred on construction of toilets was a capital expenditure and the issue was not involved in the appellate order for the earlier year."
26. Insofar as the earlier assessment year is concerned, the Revenue is justified in taking the plea that no such issue was involved for the earlier assessment year. Learned counsel submitted before us that expenses on the renovation of the toilets in the cinema building cannot be treated as capital expenditure. He further pointed out that such expenses on renovation have been held to be revenue expenditure by the Tribunal vide its order dt. 31st May, 1988, for asst. yr. 1981-82 in ITA No. 6211/1985. We are inclined to agree with the learned counsel that expenses on renovation constitute revenue expenditure. The conclusion of the learned CIT(A) in deleting the impugned additions is, therefore, upheld.
27. In the result, Revenue's appeal for the three assessment years are partly allowed a above.