Income Tax Appellate Tribunal - Mumbai
Western India Oil Distributing Co. Ltd. vs Assistant Commissioner Of Income-Tax on 23 February, 2000
Equivalent citations: [2001]77ITD548(MUM)
ORDER
M.V.R. Prasad, Accountant Member.
1. As these two appeals involve common points, they were heard together and are disposed of by this "common order.
I.T.A. No. 1060/Bom./91 :
2. This appeal is directed against the order of the CIT passed under section 263 of the Income-tax Act dated 14-12-1990 for the assessment year 1987-88.
3. The ground taken is that the CIT erred in taking action under section 263 for the assessment year 1987-88 and in giving direction to withdraw the deduction for the enhanced amount of rent which is disputed by the assessee in the Court.
4. The assessment for the assessment year 1987-88 had been completed by the Assessing Officer vide his order dated 7-9-1988 in which he allowed the claim for the deduction in respect of rent of Rs. 8,35,061 which included the enhanced rent claimed by Bombay Port Trust and Northern Railway from the assessee of Rs. 6,20,728 as per the following details :--
Owners of the land Total Rental liability for the year Part payment during the year Unpaid Amount B.P.T. Wadala 3,72,367 89,551 2,82,816 N. Rly.
Shakurbasti 4,23,074 85,162 3,37,9)2 Amount directed to be disallowed by the CIT, Bombay City II 6,20,728 The assessee had been a lessee of certain land belonging to Bombay Port Trust and Northern Railway and it put up some oil storage tanks on the leasehold lands for carrying on its business of distributing oil. In the year of account relevant for the assessment year 1987-88, the lessors sent notices to the assessee-company enhancing the rent and the assessee disputed the enhancement of the rent before various for a inclusive of the courts. The CIT was of the view that as the enhancement of rent was disputed by the assessee-company, there was no accrued liability for the payment of the enhanced rent and so the order of the Assessing Officer allowing deduction for the above sum of Rs. 6,20,728 was erroneous and prejudicial to the interest of the revenue and, accordingly, he took action under section 263 vide his order dated 14-12-1990 in which he gave a direction to the Assessing Officer to withdraw the said sum of Rs. 6,20,728. It is this order of the CIT which is impugned before us.
5. The learned counsel for the assessee pleaded that simply because the assessee disputed the enhancement of the rent, it does not follow that there was no accrued liability for the payment of such enhanced rent. It is also claimed that as the assessee has, admittedly, been following the mercantile system of accounting, it is entitled for the deduction of the amount of Rs. 6,20,728 notwithstanding the fact that the assessee had only created a provision for the said amount and not actually paid it. The learned counsel for the assessee has also taken us through the terms of the licence agreement dated 27-1-1960 entered into by the assessee with the Northern Railway under which as per clause 15, the railway administration had the option to revise the rent when necessary. He also invited our attention to clause 11 of the said agreement as per which no tenancy was created in favour of the assessee-licencee. He also mentioned that the provisions of the Rent Control Act do not apply against the Government in its status as lessor. As the railway administration had a right to enhance the rent unilaterally, it is claimed that there is an accrued liability for the payment of the enhanced rent demanded from the assessee, notwithstanding the fact that the assessee was making various attempts to get the demand revised downwards. It is also claimed that the assessee had received a termination notice and was running the risk of having to close its business in case the demand for higher rent was not met. So far as the demand raised by the Bombay Port Trust is concerned, the learned counsel invited our attention to the order of the Hon'ble Supreme Court in Civil Appeal Nos. of 1995 as per which the issue regarding the enhancement of rent had been restored to the Hon'ble Bombay High Court to be adjudicated upon. It is explained that the lessees filed writ petitions against the Bombay Port Trust and the petitions were allowed by a learned Single Judge of the High Court vide his judgment dated 4-10-1990. However, the Bombay Port Trust filed letters patent appeal before the Division Bench of the High Court which has been disposed of by the judgment dated 12-3-1993. The Division Bench suggested to the Port Trust to revise the decision taken for increase of lease rent and to reduce the burden upon the lessees, and in pursuance of this direction of the Hon'ble Bombay High Court, the Bombay Port Trust filed another compromise proposal. The Hon'ble Bombay High Court considered and upheld the compromise proposals of the Port Trust and against this judgment of the Hon'ble Bombay High Court some of the aggrieved lessees, who included the original writ petitioners as well as some inter-venors, filed special leave petitions before the Hon'ble Supreme Court and the Apex Court vide the abovementioned order remitted the matter to the Hon'ble Bombay High Court with the following directions :--
"Having regard to the aforesaid submissions urged on behalf of the appellants, we are of the view that it is necessary that the 'Compromise Proposals' submitted by the Port Trust are considered by the Division Bench of the High Court in the light of the reasons given by the learned single Judge and submissions that are made by the lessees in support of the said judgment to show that the said 'Compromise Proposals' for enhancement of rent suffer from the vice of arbitrariness. Since this question has not been gone into by the Division Bench of the High Court, we consider it appropriate to set aside the impugned judgment of the Division Bench of the High Court and remit the matters to the Division Bench of the High Court for reconsideration of the appeals in the light of the submissions that are made by appellant lessees as well as intervenors with regard to the 'Compromise Proposals'. While doing so, the High Court would permit the lessees to submit their individual objections to the 'Compromise Proposals'as well as the justification for the 'Compromise Proposals' that are submitted by the Port Trust and consider the same on merits. It will be open to the respondents in the Letters Patent Appeals before the High Court as well as the intervenors to agitate the points which were agitated before the learned single Judge and which have been decided against them by the learned single Judge. If any of the appellants in these appeals had not intervened before the High Court in the Letters Patent Appeals till will be open to him to move the High Court for intervention.
The impugned judgment dated March 12,1993 is, therefore, set aside and the matters are remitted to the High Court for reconsideration. The High Court is requested to give expeditious hearing to the matters. It will be open to the parties to move the High Court for interim directions, if any. It will be open to the Port Trust to produce relevant materials before the High Court in support of the 'Compromise Proposals'.
In Civil Appeal arising out of SLP (C) No. 20056/93 Mr. Yashank Adhyaru, learned counsel for the appellant submits that the pipeline for the appellant's petroleum installation plant has been disconnected and that the Port Trust is not permitting connection of the said pipeline. It will be open to the said appellant tomovethe High Court for necessary directions in this regard.
The Civil Appeals are disposed of accordingly. No costs. Applications for intervention and transposition in the concerned appeal dismissed."
It may be mentioned that the SLP (C) No. 20056/93 mentioned above relates to the assessee-company. The crux of the argument of the learned counsel for the assessee is that there are valid demands raised by the railway administration and the Bombay Port Trust in the year of account enhancing the respective lease rents and simply because the assessee has disputed the enhancement before the courts it cannot be said that there is no liability for the payment of the enhanced rents. In support of this proposition, the learned counsel has relied upon the following decisions :--
(1) Calcutta Co. Ltd. v. CIT [1957] 37 ITR 1 (SC).
(2) Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC).
(3) CIT v. Navbharat Nirman (P.) Ltd. [1983] 141 ITR 723/[1982] 9 Taxman 174 (Delhi).
(4) Kundan Sugar Mills v. C/r[1977] 106 ITR 704 (All.).
Finally, the learned counsel for the assessee pleaded that the entire issue regarding deductibility of the enhanced rent has been considered by the Assessing Officer while completing the assessment under section 144(3) and so the action under section 263 taken by the CIT is based only on a mere change of opinion and is not permissible in view of the decision of the jurisdictional High Court in the case of CIT v. Gabriel India Ltd. [1993] 203 ITR 108 (Bom.).
6. The learned Departmental Representative on the other hand pleaded that the liability for the payment of enhanced rent is only a contingent liability because the assessee had disputed it and so it is claimed that the assessee is not entitled for the deduction of the enhanced rent. At any rate, it is claimed that the liability is only a contractual liability and so it is allowable only when the dispute is settled or adjudicated upon. For this proposition, he relied upon the following decisions :--
(1) CIT v. Swadeshi Cotton & Flour Mills Pvt. Ltd. [ 1964] 53 ITR 134 (SC).
(2) Standard Tea Exports v. CIT [1992] 198 ITR 573 (Ker.).
(3) CIT v. Motor Industries Co. Ltd. (No. 2) [1998] 229 ITR 137/93 Taxman 157 (Kar.), The learned DR also pointed out the CIT is within his rights to take action under section 263 and to set aside the assessment with suitable directions even when the issue is debatable and for this proposition he has relied upon the decision of the Hon'ble Gujarat High Court in the case of CIT v.
M.M. Khambhatwala [1992] 198 ITR 144. Accordingly, he supported the order under section 263.
7. In his rejoinder, the learned counsel for the assessee pleaded that the cases relied upon by the learned DR are all distinguishable. He also pointed out that even a contingent liability is allowable under certain circumstances in view of the decision of the Apex Court in the case of Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53.
8. We are of the view that the revenue deserves to succeed. At the outset, we may mention that the decision of the jurisdictional High Court in the case of Gabriel India Ltd (supra) will not come to the assistance of the assessee in a case where the assessment order passed by the Assessing Officer is erroneous and prejudicial to the interests of revenue. Now the question to be considered is whether there is any actual error in the order passed by the Assessing Officer under the provisions of section 143(3) allowing the deduction for the enhanced rent of Rs. 6,20,728. We are of the view that the Assessing Officer committed an error in allowing the deduction for this amount inasmuch as the liability for the payment of this enhanced rent has arisen in the context of a contract entered into by the assessee with the two lessors in question and the liability cannot be regarded as having accrued or crystallized in the year of account relevant for the assessment year 1987-88 as the matter was under dispute. So far as the payment to the railway administration is concerned, the assessee was contesting it before the railway authorities, as is evident from the proceedings of the Estate Officer of the Railway Administration dated 4-12-1996 in which the Accountant of the assessee-company was cross examined, which is at pages 35 to 38 of the Assessee's Paper Book (APB) and it reads as follows :--
"Union of India v.
(Western India Oil Distributing Co. Ltd.) Present : Sh. K.D. Sharma on behalf of U.OJ.
and Sh. S.K. Singla, Advocate with Sh. I.V. Patel for the Respondent. Proceedings cum orders sheet Statement of Shri I.V. Patel, Accountant of the Respondent Company.
On S.A. I have filed my affidavit on behalf of the Respondent in evidence. I reaffirm the contents deposed by me in that affidavit and state that the facts contained therein are all correct. My affidavit may be read as my examination in chief. Crass examination by the Applicant's Counsel.
At present, I have not brought the authority from the Respondent Company to depose in the present case but I have got the authority and can produce it. I have been authorised by the Board of Directors. I am conversant with the facts of the present case. The Company received Show Cause Notice for eviction only and not for damages. I have not signed the Objections against the Show Cause Notices. I have not signed the Power of Attorney in favourof the counsel Sh. S.K. Singla. Mr. M.G. Bhatt is a Director who had signed the Objections against the show cause notices ? The P.O.A. in favour of the counsel has also been signed by Mr. Bhatt, who is a Director of the company. Mr. Bhatt is still a Director of the company Shri Bhatt is stationed at Bombay. He does not attend the office daily because he is only a Director. I am also stationed at Bombay. I am working with the company since 1951 and I was present when the agreement was executed by the Railway Administration and on behalf of the Respondent Company. I have read the contents of the agreement. The agreement was signed on behalf of the Company by Shri M.J. Desai, the then Director of the Company. He is no longer the Director.
In the company, my duties include looking after the Accounts, Administration, Tax matters, Court matters etc. I have not brought my duty list today.
Q. I put it to you that as per terms and conditions of the agreement, the L/Fee of the Respondent Company is liable to be revised as per terms and conditions and at the sole discretion of the Railway Administration, what have you to say ?
Ans. The revision in licence fee should not be increased from Rs. 36,000 to Rs. 5,00,000,00 and then to Rs. 7,00,000,00. It cannot be unreasonable.
Q. When the first revision in licence fee was made in respect of the suit land.
Ans. The first revision was made prior to 1972 and again was made in the year 1972, then the revision was made in the year 1978, then again in 1981, then in the year 1982. We have paid the revised licence fee prior to 1972 and as was made by revision in the year 1972. We have been paying @ Rs. 42,581 p.a. as licence fee. We have not paid at the higher rates as claimed by the Railway Administration.
Q. I put it to you that the revision made before 1972 and in the year 1972, you have paid the revised licence fee.
Ans. We have paid the revised licence fee prior to 1972 and in the year 1972, because according to us the revision then made were reasonable. The Railways were revising after every five years.
Q. The word 'reasonable' has not been mentioned in the agreement. Ans. Yes, it is not there.
It is correct that the Respondent Company has not paid the revised licence fee as claimed by the Railway Administration.
It is correct that as a consequence of non-payment of the revised licence fee, the Railway Administration has terminated the licence.
Q. After the termination of the licence in respect of the suit land, the respondent company is an unauthorised occupant on the suit land, what have you to say ?
Ans. In my opinion, we are not unauthorised occupant. At the time of entering into the agreement, the Railway Administration had taken one year's licence fee as deposit, which they have not returned, hence we are not unauthorised. The Railway Administration has been renewing the licence after termination from time to tune again said only once. I have not brought that letter to substantiate my contentions but the same can be produced.
Q. I put it to you that after the termination of the licence, you have no legal authority to remain in occupation on the suit land, what have you to say ?
Ans. Not according to us, this is only according to the Railway Administration.
Q. I put it to you that you have made representations against the revision and the same were rejected.
Ans. It is not true.
Q. I put it to you that the revision in licence fee was duly accepted and paid by the Respondent company without any objections, what have you to say ?
Ans. We have paid licence fee upto the revised rate of Rs. 42,581 only and nothing beyond this rate.
It is incorrect to suggest that the revisions were as per the terms of the agreement. It is further incorrect that the revisions were reasonable.
I have signed my affidavit in Bombay.
R.O. A.C. S.O./Comml.I. Statement of RW-I recorded and on the request of the Respondent, the case is adjourned to 18-12-1996 for remaining Respondents evidence. Affidavit be given in advance to the Applicants Counsel.
Estate Officer/Comml.I."
It may be observed that the assessee-company has taken various grounds disputing the enhancement of the rent by the Railway Administration. So far as the enhancement of the rent by the Bombay Port Trust is concerned, we have already reproduced hereinabove the directions of the apex court in the matter. So it is evident that the assessee has neither paid the enhanced rents nor admitted its liability for their payments. The two liabilities have arisen in the context of contracts and so has to be distinguished from a statutory liability. The cases relied upon by the learned counsel for the assessee are all distinguishable. In the case of Calcutta Co. Ltd. (supra), considered by the apex court, there is no dispute about the liability of the assessee. The assessee has admitted the liability and has only created a provision for the estimated liability. Similar is the position in the case of Navbharat Nirman (P.) Ltd. (supra) considered by the Hon'ble Delhi High Court. In this case, there is a clear liability on the part of the assessee to get the tenants evicted and the liability was not disputed and a provision for the estimated expenditure was created and deduction was claimed for the provision. Such decisions where the liability is not disputed and the provision is created on the basis of estimate are, to our mind, distinguishable from a situation like that of the assessee where the liability itself is disputed. The decision of the Apex Court in the Kedarnath Jute Mfg. Co. Ltd. (supra) is altogether on a different footing inasmuch as the issue involved therein was about statutory liability for the payment of sales tax. Similar is the position in the case of Kundan Sugar Mills (supra) considered by the Hon'ble Allahabad High Court which related to the liability for the payment of additional price of sugar under the Sugar Control Order, which is a statutory provision. So we are of the view that the decisions relied upon by the learned counsel for the assessee are all distinguishable.
9. We find that the issue is squarely covered against the assessee by the decision of the Hon'ble Allahabad High Court in the case of Swadeshi Cotton Mill Co. Ltd. (supra) which had to consider the deduction of a disputed contractual amount. The relevant portion of the head note of this decision reads as follows :--
"Where the assessee follows the mercantile system of accounting the quantification of ascertainment cannot postpone accrual of a statutory liability. Whether the assessee is entitled to a particular deduction or not, in the case of a statutory liability, it will depend on the provision of law relevant therefor and not on the view which the assessee might takeof his right; nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter. On the other hand, if the liability is based on some contractual obligation, it arises only when it is ascertained. Unless the liability has become an ascertained sum of money, it no doubt exists but proceedings have yet to be taken to determine the exact amount. A vague liability to make a payment cannot be entered in the accounts.
Kanpur Tannery Ltd. v. CIT [1958] 34 ITR 863 (All.), CIT v. Swadeshi Cotton and Flour Mills (P.) Ltd [1964] 53 ITR 134 (SC) and CITv. Banwari Lal Madan Mohan [1977] 110 ITR 868 (All.) relied on.
The assessee-company was carrying on the business of manufacturing yarn and cloth. In its assessment for the assessment year 1960-61, the assessee claimed a deduction of Rs. 18,533, being the sum paid to the Ahmedabad Textile Industry Research Association towards its annual contribution for the year ending March 31, 1958. There had been some dispute between the assessee on the one hand and the Association on the other with regard to that bill and the payment was ultimately made in the previous year relevant to the assessment year 1960-61. The Tribunal, agreeing with the revenue, held that the payment related to the period April 1, 1957, to March 31, 1958, and could not be allowed in the calendar year 1959, which was the previous year for 1960-61 :
Held, that the liability in respect of Rs. 18,533 accrued in the previous year relevant to the assessment year 1960-61 and the claim of the assessee was clearly allowable.
CIT v. Swadeshi Cotton and Flour Mills (P.) Ltd. [1964] 53 ITR 134 (SC) followed."
We also find that the issue has to be decided in favour of the Department in view of the decision of the jurisdictional High Court in the case of CIT v. Phalton Sugar Works Ltd. [1986] 162 ITR 622/24 Taxman 444 (Bom.) in which it has been held that where a liability arising out of a contractual liability is disputed, the assessee is entitled to claim a deduction in the assessment year relevant to the previous year in which the dispute is finally adjudicated upon and settled. Similar is the ratio of the decision of the Hon'ble Calcutta High Court in the case of CIT v. Burlop Commercial (P.) Ltd [1993] 200 ITR 606 in which it was held that damages for breach of contract are allowable in the year in which the award of the arbitrator is received and not in the relevant assessment year in which the breach took place. By way of contrast to these decisions, the decision of the jurisdictional High Court in the case of CITv. Central Provinces Manganese Ore Co. Ltd [1978] 112 ITR 734 (Bom.) may be noticed. In this decision, the Hon'ble Bombay High Court held that a statutory liability of an assessee following the mercantile system is allowable in the year in which it arises even though it is disputed by the assessee. So it appears that there is a clear distinction so far as the year of allowability is concerned between a disputed statutory liability and a disputed contractual liability. In the case of CIT v. Dalmia Dadri Cement Ltd. [1992] 195 ITR 290, the Hon'ble Delhi High Court held that it is not an invariable or inflexible rule that a contractual liability has to be allowed only when the dispute is setiled. However, it is noteworthy that in this decision, the Hon'ble Delhi High Court which was considering a claim relating to the distribution of cement mentioned that the scheme under which the assessee had to pay the freight advantage to an association of cement producing companies was analogous to a statute. The remarks of the Hon'ble High Court, which appear at pages 309 and 310 of the Report, are as follows :--
"We may, however, hasten to add that we are not holding that, in all cases, a mere breach of contract creates an enforceable liability. It would depend on the facts and circumstances of each case. Therefore, we are of the view that, in the instant case, the liability arising under the said scheme could very well be said to be analogous to the one arising under a statute.
We are, therefore, of the view that the assessee is entitled to the deduction of the freight advantage which it is liable to pass on to the CACO in the year in which this liability has been incurred under the said Scheme and the opinion expressed by the Allahabad High Court in CITv. Oriental Motor Car Co. (P.) Ltd [1980] 124 ITR 74 isnot applicable on the facts,of this case. In that case, while holding that the assessee's liability on account of infringement commission could not be allowed in the year when it was demanded by its principles, the court had observed that the amount so claimed was negotiable and till the assessee admitted its liability at a particular rate, it was not an ascertainable liability which, we feel, is a significant distinguishing feature in the present case."
(Emphasis supplied) It may be observed that the licence agreements entered into by the assessee with either the railway administration or the Bombay Port Trust cannot be regarded as analogous to any statute. They are simply contractual agreements. The assessee has not paid the enhanced rents demanded of it. It disputed the enhancements. The entire enhancement was negotiable and the exact quantum of the lease rent or licence fee payable is not ascertainable in the year of account relevant for the assessment year 1987-88. Actually, it is ascertainable only when the dispute is amicably settled or decided through adjudication. It is not the case of the assessee before us that it has accepted the liability for payment of even a portion of the enhanced rents/fees. If the assessee had admitted the liability to a limited extent, the deduction could have been allowed to the extent of the admission. In the absence of any such admission we have to hold that the entire enhancement is disputed and as such the quantum of rent payable out of the enhancement was not ascertainable.
10. As mentioned above, it cannot be said that the lease agreements entered into by the assessee either with the railway administration or with the Bombay Port Trust are like statutes. Even though the licence agreement with the railway administration dated 16-1-1961 gives the right to the railway administration to enhance the rent as noted hereinabove, such a right can be assailed on various grounds, inclusive of arbitrariness and unreasonableness. The assessee has taken this ground in the dispute raised by it and so it has to be held that the disputed rent being only in the context of a contract, cannot be equated with a statutory liability. So we are of the view that the deduction for the enhanced rent can be allowed only in the year/years in which the dispute is amicably settled or otherwise adjudicated upon by a competent court of law. It is not allowable in the assessment year 1987-88 and so to the extent the Assessing Officer allowed deduction for the amount of Rs. 6,20,728, there is an error in the order of assessment and also a prejudice caused to the interests of revenue and, accordingly, we hold that the CIT was within his rights in taking action under section 263 and in giving the direction for withdrawing the deduction in question. We accordingly dismiss the appeal subject to the condition that the amount is to be allowed in the year in which the dispute is settled or adjudicated upon, whether paid or not.
I.T.A. No. 118/Bom./91 :
11. This appeal is directed against the order of the CIT(A) dated 5-11 -1990 for the assessment year 1988-89.
12. The ground taken is that the CIT(A) erred in confirming the action of the Assessing Officer in disallowing the assessee's claim for deduction in respect of rent to the extent of Rs. 7,28,481, the details of which are as under:--
"Owners of [he land Total Rental liability for the year Pan payment during the year Unpaid Amount B.P.T. Wadala 3.72.367 89.551 2,82,816 N. Rly. Shakurbasti 4.88,232 42,581 4,45,651 7,28,467 Other 14 Amount disallowed by the Asstt. Commissioner 7.28,481*
13. We have decided this issue against the assessee in the assessee's appeal in I.T.A. No, 1060/Bom./91 for the assessment year 1987-88. It is fiot the case of the assessee that the dispute regarding the enhancement has been settled in the year of account either amicably or through adjudication. In the circumstances, we see no reason for allowing the deduction for the amount of Rs. 7,28,481 which has been disallowed by the revenue authorities.
14. The appeal is dismissed.