Brief of the Case
Delhi High Court held In the case of M/s. Aggarwal And Modi Enterprises (Cinema Project) Co. Pvt. Ltd Vs. CIT that whether a liability is ascertained or contingent is dependent on the facts of each case. Merely because a liability may be contractual or non-statutory would not make it incapable of being ascertained. Where an Assessee follows the mercantile system of accounting it is not necessary that the liability must have actually been incurred during the AY in question to enable the Assessee to claim it as an expense or deduction as the case may be. The crux of the matter is the reasonable certainty with which the liability can be ascertained. In 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.
Facts of the Case
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 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 years on the terms and conditions to be mutually agreed to between the parties. 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 the licence fee from October, 1980 to March, 1981 under protest.
On 9th April 1981, the Assessee filed Suit No. 295/1981 in the Court of the Sub Judge, First Class, Delhi. In the said suit, the Assessee challenged the increase in the licence fee and also sought a stay against dispossession. By an order dated 10th April 1981, the learned Sub Judge, First Class granted an interim stay restraining NDMC from termination of the licence. By a further order dated 22nd January 1982, the learned Sub Judge, First Class confirmed the stay and restrained NDMC from recovering the enhanced amount of the licence fee till the final disposal of the suit. In the meanwhile a resolution was passed by the NDMC on 25th March, 1981, whereby it was decided that licenses generally would be renewed for an additional licence fee of 30 per cent over the original licence fee. The Assessee then filed an application seeking amendment of the plaint in Suit No. 295/1981. While allowing the amendment by an order dated 28th February 1983, the learned Sub Judge, Third Class also restrained the NDMC from disturbing the status quo at 30 per cent of the enhanced rate of licence fee till a decision in the Suit.
Finally division Bench on 30th August 2005 held that the Assessee could not have any legitimate expectation regarding renewal of the licence and in any event not in perpetuity as they bid with open eyes for a license which was to be for a duration of 10 years with the agreement providing only one renewal. The Assessee’s Special Leave Petition (Civil) No. 21183 of 2005 challenging the aforementioned order dated 30th August 2005 was registered as Civil Appeal No. 4002 of 2007 in the Supreme Court. The said appeal was dismissed on 31st August 2007 with the Supreme Court granting time to the Assessee till 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.
For AY 1987-88, the Assessee claimed deduction of Rs. 13,50,000 towards licence fee payable and a further sum of Rs. 5,13,282.28 towards interest. The amount actually paid to the NDMC towards rent was Rs. 7,16,472 in terms of the interim order passed in the suit as upheld by the High Court. The AO allowed the licence fee actually paid and thereby disallowed the licence fee to the extent of Rs. 6,63,556. The interest amount claimed in the sum of Rs. 5,13,282, not having been actually paid by the Assessee, was disallowed. For AYs 1988-89 and 1989-90, the facts are more or less similar with the AO disallowing the licence fee to the extent not actually paid to NDMC and the interest amounts as claimed by the Assessee. For AYs 1990-91, 1991-92 and 1992-93, the AO following the orders of the earlier years and disallowed the deduction of the licence fee to the extent not paid to NDMC and interest amount.
As regards AYs 1993-94 and 1994-95 the Assessee’s claim for 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. 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 AYs 2000-01 and 2001-02, the AO followed the decision of the ITAT in the Assessee’s case for the previous AYs (i.e., ITAT orders dated 31st October 2002 and 21st October 2005) and disallowed the claim for interest while fully allowing the claim for License fee. For AY 2002-03, the entire licence fee of Rs. 54,30,450 and head office rent of Rs. 1,80,000 as well as the interest amount of Rs. 7,39,440.01 was fully allowed as deducted by the AO From AYs 2004-05 to 2008-09, the licence fee in the sum of Rs. 47,66,196, the head office rent of Rs. 1,80,000 and provision of interest amount in the sum of Rs. 7,19,078.18 was allowed in its entirety by the AO.
Contention of the Assessee
The ld counsel of the assessee submitted 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.
He further submitted that the Assessee was maintaining its accounts on the basis of the mercantile system. In terms thereof, a liability already accrued, though liable to be discharged at a future date, would be properly claimed for deduction while working out the profits and accounts in the business. It is not necessary that the deduction should be allowed only after the amount was actually paid. A condition, whose fulfilment might result in the reduction or even extinction of such liability, would not have the effect of converting that liability into a contingent liability. According to him, the liability owed in the form of licence fee and interest to the NDMC was an ‘ascertained’ liability. What the Assessee’s challenge, according to him, was towards the enhancement of the licence fee and this was not to deny the liability to pay the licence fee in terms of the original agreement entered into with NDMC.
He placed reliance on the decision of this Court in R.C. Gupta v. Commissioner of Income Tax (2008) 298 ITR 161 (Del) and the decisions referred therein namely, Kedarnath Jute Manufacturing Co. Ltd. & CIT (1971)82 ITR 363 (SC), J.K. Synthetics Limited v. O.S. Bajpai, ITO (1976) 105 ITR 864 (All), Swadeshi Cotton Mill Co. Ltd. v. CIT (1980) 125 ITR 33 (All), Union of India v. J.K. Synthetics Ltd. (1993) 199 ITR 14 (SC) and Bharat Earth Movers v. CIT (2000) 245 ITR 428 (SC). A reference was also made to the decisions in Calcutta Co. Ltd. v. Commissioner of Income Tax, West Bengal (1959) 37 ITR 1(SC), CIT v. S.P. Jaiswal Estates (P) Ltd. (1995) 214 ITR 448 (Cal) and CIT v. Dalmia Dairy Industries Ltd. (1991) 189 ITR 167 (Del).
He further stressed on the principle of consistency and pointed out that there were 14 AYs in which the case of the Assessee was accepted in toto by the Revenue and that there was no questioning of the orders of the AO in which the entire amounts that were payable towards licence fee as well as the provision of interest as claimed by the Assessee was allowed. This was the position as regards AYs 1982-83 to 1986-87, 1993-94, 1994-95, 1996-97, 2002-03, 2004-05 to 2008-09. Mr. Aggarwal referred to the decision in CIT v. Excel International Limited (2013) 358 ITR 295 (SC) which affirmed the earlier decision of the Supreme Court in Radhasoami Satsang Saomi Bagh v. CIT (1992)193 ITR 321(SC).
Contention of the Revenue
The ld counsels of the revenue submitted that it was not open to the Assessee to approbate 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.
The ld counsels further submitted that each assessment orders have to be separately considered. As far as the five 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 allowing the amount as claimed by the Assessee towards payment of licence fee and interest towards arrears of licence fee. However, from 1987-88 the scenario changed with the Assessee’s challenge to the enhanced demand for licence fee being decided by the High court vide its order dated 14th January 1987. It is only with this decision that it made it clear that the Assessee was entitled to a status quo and that it was liable to pay only original licence fees of Rs. 5,51,111 plus an additional 30%, i.e., Rs. 1,65,333/- which worked out to Rs. 7,16,444/ – per annum.
It is further submitted that the orders for any other AYs where the entire amount as claimed by the Assessee towards licence fee has been allowed will not make a difference to the legal position that the Assessee would not be entitled for claim of deduction for licence fee which in fact is not paid to NDMC. It is further contended that a distinction has to be made between a statutory liability and a liability based upon a contractual obligation. It is only in the case of a statutory liability that the actual quantification or ascertainment of liability would not postpone the accrual thereof in the mercantile system of accounting. It is further submitted that with the Assessee having seriously disputed its contractual liability, such liability could not be said to have become ascertained or crystallized till the question is finally settled by the Court. With the suit questioning legality of the agreement dated 20th September 1980 yet to be finally adjudicated by the Court, till the time of the assessments in question, the AO was justified in permitting deduction only to the extent of original licence fee plus 30%.
Held by High Court
High Court held that whether a liability is ascertained or contingent is dependent on the facts of each case. Merely because a liability may be contractual or non-statutory would not make it incapable of being ascertained. Where an Assessee follows the mercantile system of accounting it is not necessary that the liability must have actually been incurred during the AY in question to enable the Assessee to claim it as an expense or deduction as the case may be. The crux of the matter is the reasonable certainty with which the liability can be ascertained.
In 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.
Further the Assessee could not, during the pendency of the suit, claim that it had no liability under the renewed licence agreement. It was granted interim protection on the express understanding that it would abide by the interim order of the Court which was in itself an acknowledgement that the liability under the renewed licence deeds continue as long as the suit is pending. However, the only concession was that the Assessee would pay the reduced licence fee for the renewed period which was 30 per cent over and above the original licence fee. In the circumstances, there was no question of there being no liability on the Assessee whatsoever for the renewal of the licence. Merely because the Assessee had chosen to challenge in Court the enhancement of the licence fee, which was permissible to be raised by it in accordance with law, did not preclude the Assessee, which was following the mercantile system of accounting, from claiming it as a liability during the AYs in question.
The ITAT also appears to have drawn a distinction between a statutory liability and a contractual liability and opined that a deduction in respect of the contractual liability would be permissible “only when the disputes are settled.” This is contrary to the legal position as explained in various decisions of the Courts. Even where a challenge is laid to a liability arising under a contract, by a challenger initiating legal proceedings, such challenger can still for the purposes of its accounts and for the purposes of computation of its 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.
Rule of consistency
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 disallowed the difference between the claimed amount and the amount actually paid. Again, without there being any change in the circumstances in AYs 1993-94 and 1994-95, the Assessee’s claim towards payment of licence fee as well as interest is fully allowed by the AO in terms of the Agreement. Again for one AY 1995-96, the AO did not fully allow the claim. In the very next AY, 1996-97, the claim was fully allowed.
For AYs 1997-98 to 2001-2002, while the claim towards payment of licence fee was fully allowed in terms of the Agreement, the claim towards interest for arrears of rent was disallowed. Even as pointed out by the Assessee in 1997-98, the actual amount paid by it towards interest was in excess of the amount claimed by it and yet the interest amount actually paid was not allowed. However, for AY 2002-2003, the amount as claimed by the Assessee towards licence fee and interest was fully allowed. In AY 2003-2004, the interest due against arrears of licence fee up to 30th September, 2002 was disallowed. In the last set of years, i.e., AYs 2004-2005 to 2008-2009, the Assessee’s claim towards licence fee and interest was fully allowed. This is indeed an extraordinary case of the Revenue continuously changing its stand during the AYs in question.
Finally High Court held that ITAT was in error in declining the plea of the Assessee for the AYs in question with regard to the full claim of the payment towards licence fee and interest on the arrears of licence fee. The question framed is answered in the negative, i.e., in favour of the Assessee and against the Revenue.
Accordingly appeals of the assessee allowed.