2017 (8) TMI 734 - HC - Income Tax

Enhanced license fee treated as accrued liability, reopening assessments invalid.

The Court held that the enhanced licence fee payable was an accrued liability, not contingent. Reopening assessments under Section 147 was deemed invalid. ... Accrued or a contingent liability - liability of the Assessee to pay enhanced licence fee - Revisions of licence fees - Tax treatment of claim of licence fee as deduction - whether licence fee payable to the Railways to be an accrued liability? - Held that:- The undisputed fact is that the Assessee is following the mercantile system of accounting. It has to book the liability in the year in which it arises irrespective of whether it in fact discharges the liability in that year. In that sense, the liability to pay the enhanced licence fee would arise in the year in which demand is made or to which it relates irrespective of when the enhanced fee is actually paid by the Assessee. In the present case, the liability of the Assessee to pay the enhanced licence fee has, far from being excused, sought to be enforced by the Northern Railway by repeated demands notwithstanding the EO's order dated 28th March 1990. As noted earlier, the Northern Railway has preferred claim for arrears of enhanced licence fees and damages to the tune of over ₹ 45 crores against the Assessee before the sole Arbitrator appointed by it. The demand is therefore very much alive and is subject matter of adjudication in arbitration proceedings. The order dated 29th March, 1990 of the EO no doubt holds the termination notice dated 23rd March, 1988 and the claim for enhanced licence fee to be bad in law. However, it does not hold that there is no liability on the Assessee to pay the enhanced licence fees as and when that is determined in accordance with law. The facts of the present case are more or less similar to the facts in Aggarwal and Modi Enterprises (Cinema Project) Co. Pvt. Ltd. v. CIT (2016 (1) TMI 790 - DELHI HIGH COURT) where it was held that the fact that there may have been a stay of the enhanced demand by a judicial order as an interim measure pending the final decision in the proceedings challenging the revision. That, however, would not amount to wiping out the liability itself. As already noted the Railways has already filed its claim before the Arbitrator for the arrears of licence fees and 'damages'. As rightly held by the CIT (A), and concurred with by the ITAT in its order dated 31st July 2009, the mere characterisation by the Northern Railway of the amount claimed by it from the Assessee as 'damages' will not, in the context of the present case, make it any less an accrued liability. It is an expenditure incurred by the Assessee corresponding to the income he derives from using the land for the purposes of his business. The Court is also not able to agree that the ITAT made a grievous error, in the order passed by it on 22nd November 2004, regarding the claim for enhanced licence fee as a deduction being allowable not in AY 1995-96 but in AY 1996-97. The argument that the ITAT may have exceeded its jurisdiction done not hold since the Revenue has, apart from not challenging the said order, implemented it fully by the consequent appeal effect order. For all of the above reasons the first issue is decided in favour of the assessee and against the Revenue by holding that the liability of the Assessee to pay enhanced licence fees for the AYs in question was an accrued liability which arose in the year in which demand was raised. Reopening of assessment - Held that:- The fact is that in some of the AYs after the date of the EO’s order, the assessments were completed under Section 143 (3) of the Act accepting the claim for enhanced licence fee on the basis of accrued liability. This has been already adverted to earlier in this order. There was therefore no fresh tangible material that came to light for the first time for the AO to form reasons to believe that income had escaped assessment. This Court has, therefore, no hesitation in coming to the conclusion that the assumption of jurisdiction under Section 147 of the Act seeking to reopen the assessment for the aforementioned AYs was not legally sustainable. - Decided in favour of assessee. Issues Involved:1. Accrued Liability vs. Contingent Liability2. Validity of Reopening of Assessments under Section 147 of the Income Tax Act3. Consistency of ITAT Orders with High Court's Remand Directions4. Allowability of Deduction for Enhanced Licence FeeDetailed Analysis:1. Accrued Liability vs. Contingent Liability:The central question was whether the enhanced licence fee payable by the Assessee to the Northern Railway was an accrued liability or a contingent liability. The Assessee argued that since it follows the mercantile system of accounting, the enhanced licence fee is an accrued liability. The Revenue contended that it was a contingent liability as the Assessee had contested the enhanced fee. The Court held that the liability to pay the enhanced licence fee is an accrued liability, which arose in the year the demand was raised. The Court noted that the Assessee’s liability to pay the enhanced fee was continuously enforced by the Northern Railway through repeated demands and arbitration proceedings, thus making it an accrued liability.2. Validity of Reopening of Assessments under Section 147 of the Income Tax Act:The validity of the assumption of jurisdiction under Section 147 was examined. The reopening of assessments was based on the alleged failure of the Assessee to disclose the Estate Officer's (EO) order dated 28th March 2000. The Court found that there was no fresh tangible material that came to light for the first time for the AO to form reasons to believe that income had escaped assessment. The Court concluded that the assumption of jurisdiction under Section 147 was not legally sustainable.3. Consistency of ITAT Orders with High Court's Remand Directions:The Court evaluated whether the ITAT's order dated 31st July 2009 was in conformity with the High Court's remand directions dated 11th December 2008. The Court found that the ITAT did not decide all aspects/issues remitted to it, specifically the validity of the assumption of jurisdiction under Section 147. However, the Court decided not to remand the matters again to the ITAT and addressed the issue itself.4. Allowability of Deduction for Enhanced Licence Fee:The Court examined whether the enhanced licence fee payable to the Northern Railway was an allowable deduction. It was held that the enhanced licence fee was an accrued liability, and the Assessee was justified in claiming it as a deduction in the year in which such liability arose. The Court noted that the Assessee’s liability to pay the enhanced fee was subject to arbitration proceedings, and the mere characterisation of the amount as 'damages' by the Northern Railway did not make it any less an accrued liability.Conclusion:The Court concluded that the enhanced licence fee payable by the Assessee was an accrued liability and not a contingent liability. The assumption of jurisdiction under Section 147 for reopening assessments was not valid. The ITAT's order dated 31st July 2009 did not fully comply with the High Court's remand directions. The enhanced licence fee was an allowable deduction in the year in which the liability arose. Consequently, the appeals filed by the Revenue were dismissed, and the corresponding cross-objections/appeals by the Assessee were disposed of in favor of the Assessee.