Vildirect: IncomeTax-caselaws-2007-VIL-481-DEL-DT

2007-VIL-481-DEL-DT

Equivalent Citation: [2008] 298 ITR 166 (Delhi)

DELHI HIGH COURT

ITR No. 50 of 1987 and 352 of1992

Date: 04.10.2007

JASJEET FILMS P. LTD.

COMMISSIONER OF INCOME-TAX

BENCH

MADAN B. LOKUR and S. MURALIDHAR JJ.

JUDGMENT

1.In this reference under Section 256 (1) of the Income Tax Act, 1961 ('the Act'), relevant to the Assessment Year 1981-82 the following question has been referred for our opinion:

"Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal ('Tribunal') is justified in holding that the liability to pay interest was contractual liability and that the said liability having been questioned by the Assessee and the matter being subjudice the contractual liability had not accrued and arisen during the previous year under consideration and therefore, the disallowance of Rs.79,220/- was rightly made by the Income Tax Officer?"

2.The Assessee was allotted a plot of land by the Delhi Development Authority ('DDA') for the construction of a cinema building. As required by the terms of the lease entered into between the Assessee and the DDA, the Assessee completed the construction in August, 1970. On 5^th September, 1970 the DDA issued an occupancy certificate to the Assessee.

3.The Assessee raised some disputes with regard to the payment of ground rent contending that drainage, sewerage and water supply facilities had not been provided by the DDA. It was also contended by the Assessee that the land in question had been encroached upon.

4.The dispute with regard to the payment of ground rent appears to have continued for a while. The Assessee then filed a Civil Writ Petition No. 1041 of 1976 (M/s. Jasjeet Films Private Limited v. Delhi Development Authority and Ors.) in this Court in which it was prayed that a mandamus be issued to the DDA to develop the area and for a writ to quash the demand for ground rent. The writ petition was disposed of by this Court on 21^st September, 1979 on the ground that the Assessee was trying to enforce a contractual obligation and therefore, the writ petition was not the appropriate remedy.

5.The Assessee then filed a suit in this Court on 3^rd October, 1979 along with an application for injunction under Order 39 Rules 1 and 2 of the Code of Civil Procedure ('CPC'). In this suit, the Assessee prayed for a declaration to the effect that the DDA is bound in law to develop the cinema surroundings and site as assured at the time of the acceptance of the tender of the Assessee and for a further declaration that the Assessee is not liable to pay any ground rent or interest till the assured developments have been fully carried out.

6.On 9^th September, 1980 the Assessee received a letter from the DDA. Since the language used in the said letter has come in for some discussion, we propose to quote the full text of the said letter which reads as under:

"From B.S. Sehgal,

Dy. Director (OSB)

M/s. Jasjeet Films (Pvt.) Ltd.

Moti Cinema Compound,

Chandni Chowk,

Delhi.

Sub: Regarding payment of ground rent in respect of Milan Cinema plot at Karampura Shopping Centre.

Dear Sirs,

The payment of ground rent in respect of your above noted cinema plot for the period from 1.7.80 to 30.8.81, amounting to Rs.2,01,600/- (Rupees two lakh one thousand and six hundred only) has become due. It is also to inform you that an amount of Rs.1,87,134.70 pa (Rupees one lakh sixty seven thousand one hundred thirty four and paisa seventy only) is also payable by you on account of interest charges for belated payments of ground rent.

You are, therefore, requested to please make payment of the total dues stated above which comes to Rs.3,68,734.70 (Rupees three lakh sixty eight thousand seven hundred thirty four and paise seventy only).

The above amount may please be remitted in favour of the Delhi Development Authority through a bank draft within 15 days, positively failing which further necessary action will be taken, by this office.

Yours faithfully,

sd/-

(B.S. Sehgal)

Dy. Director (OSB)"

7.According to the Assessee, the demand for payment of interest for the period of delay in payment of ground rent was made for the first time in the letter dated 9^th September, 1980 issued by the DDA to the Assessee and not earlier. The Assessing Officer ('AO') rejected the plea on the ground that the said letter dated 9^th September, 1980 was a mere reminder to the Assessee to make the necessary payment of interest. The AO held that the sum of Rs.1,91,327 debited by the Assessee to the profit and loss account towards interest payable to the DDA included, a sum of Rs.79,220 pertaining to earlier years. This sum of Rs.79,220 could not be said to be a liability that accrued during the relevant previous year. Accordingly, the AO held that the said sum of Rs.79,220 could not be allowed as a deduction.

8.The appeal preferred by the Assessee was dismissed by the Commissioner of Income Tax (Appeals) ['CIT(A)']. The Assessee then appealed to the Tribunal which affirmed the view taken by the AO and the CIT (A) and held that the letter dated 9^th September, 1980 written by the DDA to the Assessee was only a reminder and not a demand for interest for the first time.

9.The claim of the Assessee, which was rejected by the Tribunal, was that since the interest amount was demanded by the DDA for the first time by its letter dated 9^th September, 1980, the Assessee was justified in debiting its profit and loss account for the said sum during that relevant previous year. It was contended before us that under the mercantile system of accounting, which the Assessee followed, the liability to pay interest can be said to have accrued when it was demanded, that is, when the DDA's letter dated 9^th September, 1980 was issued.

10.The question that is required to be decided is whether the authorities below were right in disallowing the amount of Rs.79,220, on the ground that it constituted the interest payable by the Assessee to the DDA for an earlier period, that is, earlier than the previous year in relation to the Assessment Year in question.

11.A perusal of the letter dated 9^th September, 1980 shows that it raised a demand for ground rent for the period from 1^st July, 1980 to 30^th June, 1981, in the sum of Rs.2,01,600 and an amount of Rs.1,67,134.70 towards interest charges for belated payment of ground rent. It is further plain to us from the language used in the letter that the said letter is not a reminder for payment of interest as held by the AO and affirmed by the CIT (A) and the Tribunal. The demand for interest in the sum of Rs.1,67,134.70 for the period of belated payment of ground rent was raised for the first time in the said letter. The first paragraph of the letter indicates the period for which the ground rent was demanded and also quantifies the amount. It also quantifies the interest amount payable on the belated payment of ground rent. The second paragraph of the letter raises a total demand of Rs.3,68,734.70 which is the aggregate of the arrears of ground rent and the interest thereon. The third paragraph of the letter requires the Assessee to remit the amount to the DDA through a bank draft within 15 days positively, failing which further necessary action would be taken against the Assessee. It is not clear to us on what basis the AO, CIT (A) and the Tribunal concluded that the said letter dated 9^th September, 1980 is only a reminder for the payment of interest.

12.The amount payable towards interest stood quantified for the first time on 9^th September, 1980 and was therefore an ascertained one. The question that arises is whether on account of the Assessee following a mercantile system of accounting it could be said that the liability, which in this case is contractual, accrued during the relevant previous year and consequently whether the AO ought to have allowed Rs.79,220 as claimed by the Assessee towards the interest payable to the DDA.

13.A similar question had arisen before us in R.C. Gupta, Delhi v.Commissioner of Income Tax, Delhi VIII [2008]297ITR 161(Delhi) ITR No. 153 of 1986 decided on 3^rd September, 2007). In that decision, we had relied upon the decision of the Supreme Court in Bharat Earth Movers v. Commissioner of Income Tax [2000] 245 ITR 428 in which the Supreme Court had laid down the principles for determining whether a business liability is an ascertained or a contingent one. It was held by the Supreme Court (p. 431-432) as follows:

"The law is settled: If a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti 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.

A few principles were laid down by this Court, the relevant of which for our purpose are extracted and reproduced as under:

(i) For an assessee maintaining his accounts on the 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 the 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 fulfillment of which may result in the reduction or even extinction of the liability, would not have the effect of converting that liability into a contingent liability;

(iv) A trader computing his taxable profits for a particular year may properly deduct not only the payments actually made to his employees but also the present value of any payments in respect of their services in that year to be made in a subsequent year if it can be satisfactorily estimated."

14.On applying the above principles laid down by the Supreme Court to the facts on hand we find that the Assessee who was maintaining his accounts on the mercantile system, incurred the liability to pay interest for the first time on 9^th September, 1980 when the DDA quantified the amount of interest payable by the Assessee. Merely because the liability was discharged by the Assessee much later, that is, in 2007 after the suit was filed by the Assessee was withdrawn by it, will not change the position.

15.Learned counsel for the Revenue relied upon the decision of the Allahabad High Court in Commissioner of Income Tax v. Raj Motors [2006] 284 ITR 489 (All) to contend that a contractual liability accrues only in the year in which it is finally settled. She also drew our attention to the decision in Swadeshi Cotton and Flour Mills P. Ltd. v. Commissioner of Income Tax [1964] 53 ITR 134 (SC) which has been referred to by the Allahabad High Court in the course of the said judgment.

16.We find that the Allahabad High Court did not at all refer to the decision of Bharat Earth Movers where the principles of law have been succinctly and categorically laid down by the Supreme Court. Further the decision in Swadeshi Cotton and Flour Mills Private Limited turned on its own facts. There the Assessee was required to pay profit bonus to its employees for the calendar year 1947 in terms of an award made on 13^th January, 1949 under the provisions of the Industrial Disputes Act. The amount in terms of the award was debited to the profit and loss account for the year 1948 but in fact paid to the employees in the calendar year 1949. The Supreme Court held that the it was only in 1949 that the claim to profit bonus was settled by an award of the Industrial Tribunal. The Supreme Court took the view that since the Assessee followed the mercantile system of accounting in that case, the liability to pay profit bonus accrued only when the claim was settled amicably or by industrial adjudication. We are of the view that the decision of Swadesh Cotton and Flour Mills Private Limited [1964] 53 ITR 134(SC)would not applicable insofar as the present case is concerned.

17.In so far as the letter dated 9^th September, 1980 is concerned, we are of the opinion that even though the liability to pay interest was finally discharged in the year 2007, the law laid down by the Supreme Court in Bharat Earth Movers [2000] 245 ITR 428 would be fully applicable and the contractual liability to pay interest accrued when it was demanded by the DDA by its letter of 9^th September, 1980. The fact that the interest amount was in fact paid later makes no difference to the legal position since the Assessee is following the mercantile system of accounting.

18.For the foregoing reasons, we are of the view that the question referred for our opinion should be answered in the negative that is in favour of the Assessee and against the Revenue. The reference stands disposed of.

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