TaxTMI 
TaxTMI 
2016 (1) TMI 790
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....e amount on account 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?" Background Facts 2. The Assessee was engaged in the business of running a cinema hall in the name of 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 Rs. 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) years on the terms and conditions to be mutually agreed to between the parties. 3. The Assessee applied for renewal of the licence on 11th January, 1980. A week prior to the expiry of ten years, on 23rd September 1980, a fresh Licence Agreement was entered into between the Assessee and the NDMC. The annual licence fee was increased to Rs. 13,50,000/- payable in twelve equal monthly instalments. The Assessee is stated to have paid....
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....g 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 NDMC being CM (RA) No.18/1987 was dismissed by the High Court by an order dated 21st October, 1987. 8. With the second agreement having come to an end on 30th September, 1990 and the NDMC not having renewed the licence, the Assessee filed Civil Writ No. 3244/1992 in the High Court for renewal of the licence in terms of the clause in the Agreement dated 23rd September 1980 which gave it an option for renewal. By an order dated 21st September 1992, the High Court while issuing notice in the writ 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. 773/2002 seeking directions for ren....
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....31st December 2007 to vacate the premises. The question of dues owed by the 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 Rs. 10,17,130 and Rs. 13,50,000 respectively towards licence fee payable to the NDMC and this was allowed by the Assessing Officer ('AO') and the assessment order for the said AYs became final. 16. For AY 1984-85 to 1986-87 apart from licence fee of Rs. 13,50,000 claimed by the Assessee in terms of the Agreement dated 23rd September 1980 as expenditure, an additional sum was claimed towards payment of interest. In the case of the amounts claimed towards payment of interest, for AY 1984-85 a sum of Rs. 2,03,860.86 plus Rs. 1282.20 aggregating to Rs. 2,05,143 was claimed, for AY 1985-96 a sum of Rs. 3,40,022.92 was claimed and for AY 1986-87 a sum of Rs. 4,09,432.80 plus Rs. 15,075, agg....
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....licence fee in the sum of Rs. 13,50,000 (after apart from the head office rent of Rs. 30,000) as well as the claim for interest was fully allowed by the AO. For some reason, the Revenue did not question the said orders by invoking powers under Section 263 of the Act and therefore the assessment orders for the said two AYs, i.e., 1993-94 and 1994-95 became final. 23. However for the AY 1995-96 the AO again disallowed 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 Rs. 13,50,000 (after apart from the head office rent of Rs. 30,000) as well as interest amount which were all fully allowed by the AO. This order has again not been questioned by the Revenue under Section 263 of the Act and therefore became final for the said AYs. 25. The very next year, i.e., AY 1997-98, the AO ....
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....e Assessee, in the sum of Rs. 13,50,000 for AYs 1993-94, 1994-95, 1996-97 to 2001-02, a sum of Rs. 54,30,450 for AY 2002-03, a sum of Rs. 45,49,548 for AY 2003-04, a sum of Rs. 47,66,196 for AYs 2004-05 to 2007-08 and a sum of Rs. 35,74,647 for AY 2008-09. Submissions of Senior counsel for the Assessee 31. This Court has heard the submissions of Mr. C.S. Aggarwal, learned Senior counsel for the Appellant and Ms. Suruchi Aggarwal, learned Senior standing counsel and Mr. Zoheb Hossain, learned Junior standing counsel for the Revenue respectively. 32. It is submitted by Mr. C.S. Aggarwal, learned Senior counsel for the Appellant-Assessee that the AO made an error in disallowing the licence fee payable only on the ground that the Assessee had disputed 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 t....
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.... and reprobate as regards its liability to pay the licence fee. When it came to the question of actually paying the licence fee to the NDMC the Assessee sought to avoid 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 making such payment. It is accordingly, submitted that the AO was fully justified in disallowing the claim for deduction of licence fee and the corresponding interest to the extent it was not actually paid by the Assessee to NDMC. 37. As regards the claim for consistency, it is pointed out that each assessment orders have to be separately considered. As far as the five three years are concerned, i.e., 1982-83 to 1986-87, with the Assessee having not successfully challenged its liability to make payment, the AO was justified in allo....
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....relevant previous year, incurred a liability of Rs. 1,49,776/- on account of sales tax determined as payable by the Sales Tax Authorities on the sales made by it. The sales tax demand had already been raised. The Assessee had contested the sales tax liability by filing an appeal. It had also not made any provision in its books as regards payment of the said amount. On these two grounds, the AO rejected the Assessee's claim for deduction. Holding for the Assessee, the Supreme Court held that although the sales tax liability could not be enforced till 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 in its books of accounts did not prevent it to claim the said sum as deduction either under Section 10(1) or under Section 10(2)(xv) of the Income....
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....pen 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 receipts." It was observed as under: "The expression profits and gains has to be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure which is necessary for the purpose of earning the receipts is deducted therefrom- whether the expenditure is actually incurred or the liability in respect thereof has accrued even though it may have to be discharged at some future date. As was observed by Lord Herschell in Bussel v. Town and County Bank, Ltd. (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....
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....ty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in present though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain." 44. The Supreme Court referred to an earlier decision 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 actually expended or paid; (ii) Just as receipts, though not actual receipts but accrued due are brought in for income-tax assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business; (iii) A condition subsequent, the fulfilment of which may resu....
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....ility 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 an interim order. What was being disputed by the Assessee in the suit initiated by it against the NDMC was the reasonableness of the enhancement of the licence fee at the stage of renewal of the licence. There is a distinction, therefore, to be drawn between disputing the liability as such and disputing the reasonableness of the enhancement of the licence fee. 49. What appears to have weighed with the CIT(A) as well as the ITAT in the impugned order in these cases is that in the suit filed by the 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 agree....
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....s income tax liability claim the entire amount under challenge as an accrued liability as long as such amount is ascertainable. Corresponding adjustments would be made in the year in which the suit 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. 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. Without there being any particular change in the circumstances other than the order of the High Court confirming the interim order passed by the trial court, which position continued even in AY 1982-83, the AO restricted the allowance from AYs 1987-88 to 1992-93 to actual payment of licence fee made and disal....