2018 (6) TMI 213 - AT - Income Tax

Business loss liability crystallized in 2007-08, confirmed in 2008-09 assessment.

The Tribunal upheld the CIT(A)'s decision, affirming that the liability for the business loss crystallized in the financial year 2007-08 when the dispute ... Disallowance of business loss on the ground of prior period expense - crystalization of liability - Year of allowability - Held that:- It is very clear that the liability of expenditure is to be considered in the year in which it is finally settled for expenditure - In view of the judgement in case of COMMISSIONER OF INCOME-TAX VERSUS RAJ MOTORS. [2005 (9) TMI 49 - ALLAHABAD HIGH COURT] held that nature of the liability was a contractual liability finally settled in AY 2008-09 therefore CIT(A) is justified in allowing the same - Decided in favor of assessee. Issues Involved:1. Disallowance of business loss by the Assessing Officer (AO).2. Determination of the year in which the liability crystallized for the assessee.Detailed Analysis:1. Disallowance of Business Loss by the Assessing Officer (AO):The assessee, a company engaged in share trading, filed its return for the assessment year 2008-09, showing a total loss of Rs. 2,13,09,743/-. During the assessment proceedings, the AO disallowed Rs. 2,16,60,640/- by treating it as a business loss related to the financial year 2000-01. The dispute arose from the National Stock Exchange (NSE)/National Securities Clearing Corporation Limited (NSCCL) wrongfully selling the assessee's shares before the pay-in date in May 2000. The assessee contested this action by filing a writ petition in the Kolkata High Court, which granted an injunction order. The matter was settled in September 2007, and the writ petition was withdrawn on 20-09-2007. The AO disallowed the loss on the grounds that it was a prior period expense.2. Determination of the Year in Which the Liability Crystallized for the Assessee:The CIT(A) allowed the assessee's claim, stating that the liability crystallized in the financial year 2007-08 when the matter was settled with NSE/NSCCL. The CIT(A) referenced several judicial authorities, including the Apex Court decisions in Indian Molasses Co. Pvt. Ltd. vs. CIT and Shree Sajjan Mills Ltd. vs. CIT, to support the view that contingent liabilities do not constitute expenditure and are not deductible. The CIT(A) held that the liability should be considered in the year it is finally settled, which in this case was the financial year 2007-08.Sequence of Facts:- The appellant company was incorporated in January 1995 and became a trading member of the NSE the same year.- The settlement period for trading starts on Wednesday and ends the following Tuesday, with payment due on the following Tuesday.- In May 2000, the appellant's outstanding deliveries were wrongfully sold by NSCCL before the pay-in date, leading to a dispute.- The appellant filed a writ petition in the Kolkata High Court, which granted an injunction order, effectively nullifying the demand from NSCCL.- The matter was disclosed as a contingent liability in the appellant's accounts.- The dispute was amicably settled in September 2007, and the appellant paid the demanded amounts in September 2007 and March 2008, leading to the withdrawal of the writ petition.Legal Precedents Cited:- Alembic Chemical Works Ltd. vs. Deputy Commissioner of Income Tax [266 ITR 47 (Guj)]: The liability is considered incurred when the dispute is amicably settled or finally adjudicated.- Commissioner of Income Tax vs. Raj Motors [248 ITR 489 (All)]: A disputed contractual liability is allowable as a deduction in the year it is finally settled.Conclusion:The Tribunal upheld the CIT(A)'s order, confirming that the liability crystallized in the financial year 2007-08 when the dispute was settled, and the writ petition was withdrawn. The appeal of the revenue was dismissed, affirming that the assessee's claim for the business loss was allowable in the assessment year 2008-09.Result:The appeal of the revenue is dismissed.