THE TRAVANCORE COCHIN CHEMICALS LIMITED,UDYOGAMANDAL vs. DCIT, ERNAKULAM

Per CHANDRA POOJARI, AM:

This appeal by the assessee is directed against the order of the CIT(A)-II, Kochi

dated 30/06/1995 and pertains to the assessment year 1992-93.

to disallowance of lease rent amounting to Rs. 97,69,077/-. In the computation of

income, the assessee claimed deduction of the above amount as lease rent upto

31/03/1989. The assessee had been holding lands on lease taken from the

Government of Kerala since 1965 and it did not accept the fixation of lease rent

made by the Government vide their order dated 25/06/1988. The assessee’s claim

I.T.A. No. 673/Coch/1995

for reduction in the lease rent was rejected by the Government of Kerala vide their

order dated 07/11/1991 and hence, it claimed the entire lease rent amount in the

assessment year 1992-93. The Assessing Officer noticed that the Government of

Kerala’s order dated 07/11/1991 was only a direction to pay the arrears of lease

rent. He also noticed that the assessee did not pay any lease rent even as on

31/03/1994. The matter was still in dispute and accordingly, the Assessing Officer

disallowed the claim of the assessee.

gave finding on this issue vide its order in ITA No. 673/Coch/1995 dated

13/09/1999 which reads as follows:

“10. We have heard the rival submissions and gone through the orders of the Revenue authorities and the papers relied on by the contending parties. First of all, it is to be noted that the liability in question is not a statutory liability. The liability arose as a result of the contract entered into between the assessee and the Government of Kerala. If it is a statutory liability, the mere dispute would not have been sufficient to postpone the accrual of the liability. In the instant case, the land was acquired and given to the assessee by the Government of Kerala during the year 1965 and the lease rent was for the first time fixed by the order of the Government dated 25/06/1988. Immediately, on receipt of the Government direction, the assessee made a representation to the Government on various grounds to reconsider the fixation of the rent. It was finally rejected by the Government vide its communication dated 7.11.1991.

I.T.A. No. 673/Coch/1995

before. In the case reported in 222 ITR 492, the Hon’ble Kerala High Court held that the liability arose by virtue of Government order. This was a case where certain amount was collected in excess by the assessee, than the amount stipulated by the Government and subsequently the Government directed the assessee to repay the amount collected in excess. The Hon’ble High Court held that the liability arose when the order was passed by the Government and not before. In the case reported in 237 ITR 115 their Lordships held that a disputed contractual liability would not accrue till the dispute was settled.

The High Court decided the issue in favour of the assessee vide judgment in ITA

No. 166/2000 dated 20/05/2005 by observing that the assessee was following

mercantile system of accounting and the payment of lease rent was finally settled

only when the Govt. order dated 07/11/1991 was received by the assessee. Hence,

the assessee was right in claiming the benefits in the accounting year 1992-93 and

rent is not a statutory levy or tax. Accordingly, the appeal of the revenue was

dismissed by the High Court. The relevant portion of the above judgment reads as

follows:

“Learned Counsel for the assessee relied on the decision of the Court in Commissiner of Income-tax V. Purushotham Gokuldas (1969) 237 ITR 115) wherein revenue contended that when ground rent is fixed on the basis of the provisions of the Forest Act, it is not a statutory levy and, therefore, when mercantile system is being followed, the assessee cannot claim deduction in the respective years, when the matter is in dispute. It can be claimed only in the year when the matter is finally settled. That was accepted 3

I.T.A. No. 673/Coch/1995

by the court and the case was decided against the assessee. In this case, the rate of rent is not fixed by the statute. It cannot be called that it is a statutory levy or tax, even though the rent was finally fixed by the Government Order. Therefore, on the basis of the ratio decided by this Court in favour of the revenue, in this case, the matter has to be decided against the revenue, as petitioner was following the mercantile system of accounting, and the matter was finally confirmed only when order dated 7.11.1991 was received by the assessee. Hence, the assessee was right in claiming the benefits in the accounting year 1992-93. In fact, there is a finding of fact by the Tribunal that rent is not a statutory levy or tax and; therefore, the Tribunal decided in favour of the assessee. In the above circumstances, the questions referred are to be answered in favour of the assessee and against the revenue and the appeal is liable to be dismissed.

In the result, the appeal is dismissed.”

The Supreme Court remitted the issue back to the file of the Tribunal with the

following observations:

13) Having heard the learned counsel for the parties at length and on perusal of the record of the case, we are of the view that having regard to the nature of issue involved which is a mixed question of law and fact, it would be just and proper to remand the case to the Tribunal for deciding the issue afresh on merits.

14) The need to remand the case to the Tribunal, has occasioned because firstly, the question as to whether the fixation of rent and its payment is statutory or contractual and, if so, its effect while claiming deduction under the Income Tax Act and, if so, in which year of assessment is a mixed question of law and fact. Secondly, it was neither decided by any of the authorities below and nor by the Tribunal and the High Court. It may be that since the Revenue itself did not raise it before the authorities below and raised it for the first time before this Court by simply placing reliance on the provisions of the Act and the two Rules mentioned above, this Court cannot decide the same in this appeal, for the first time for want of factual material and legal issues attached to it.

15) In our considered opinion, in order to decide the issue of deduction, the nature of fixation of rent, its payment, recovery etc, and whether it is statutory or contractual, has some bearing over the question. It is also clear 4

I.T.A. No. 673/Coch/1995

that the respondent did not get any chance to meet this submission before the courts/authorities below. It is for these reasons, we are of the view that the matter needs to be remanded to the Tribunal for its proper adjudication.

16) The Tribunal being the last adjudicatory authority in hierarchy on facts would be in a better position to decide the issue after taking into account the documents filed by the parties in support of their respective contentions. Depending upon the decision of the Tribunal, the parties can carry the matter to the higher Courts.

17) We, therefore, at this stage refrain from expressing any opinion on the merits of the case and nor consider it proper to record any finding on the submissions urged either way except to record the submissions of the parties for appreciating the issues urged and leave it to the Tribunal to decide, its applicability and relevancy in accordance with law.

18) The appeal thus succeeds and is allowed. The impugned order and the order of the Tribunal are set aside.

19) The case is remanded to the Income Tax Appellate Tribunal, Cochin Bench, Cochin for deciding the appeal filed by the respondent being I.T.A. No. 673 (Coch)/1995 afresh on merits in accordance with law. Parties are, however, granted opportunity to file relevant documents in support of their submissions, if they so desire, to enable the Tribunal to decide the appeal as directed. Let the appeal be decided within six months from the date of the appearance of the parties. Parties to appear before the Tribunal on 18th September, 2017.”

this Tribunal.

Varappuzha Village (now Eloor Village), for the purpose of Company in 1965, and

was given on lease to the assessee and vide order dated 25.06.1988 and on the

recommendation of the District Collector, the Government retrospectively re-fixed

the lease rent on the market value of the land, from the year 1965. The Ld. AR

I.T.A. No. 673/Coch/1995

submitted that the assessee being a Government Company, approached the

Government to revise the retrospective enhancement of rates, which was rejected

vide orders dated 12.07.1991 and 07.11.1991. According to the Ld. AR, since the

matter was pending final consideration before the Government of Kerala, the

assessee created a provision for the enhanced lease rent upto 31.03.1989 and the

provision was added back while computing the taxable income for the A.Y 1990-91,

since the Government was still considering the request of the assessee dated

24.9.1988. The Ld. AR submitted that the Government having finalized the dispute

in the year 1991, the assessee claimed deduction of the lease rent for the A.Y 1992-

was not admissible, as it pertained to the F.Y. 1989-90. According to the Ld. AR,

the Tribunal and the High Court held that the deduction was admissible in the A.Y

1992-93, as the issue was finalized by the Government vide order dated

07.11.1991. Before the Supreme Court, the Department raised a new plea that the

rent is fixed under the Kerala Land Assignment Act and Rules, and as such, it is a

statutory liability. The Ld. AR relied on the judgment of the Supreme Court dated

17/08/2017 wherein in Paragraph No. 14, the Supreme Court observed that the

fresh plea of the Department by simply placing reliance on the said Act and Rules

cannot be decided in the absence of factual material and legal issues attached to it.

The Supreme Court while remanding the matter back to the Appellate Tribunal,

observed that the fixation of rent, whether contractual or statutory, its effect on

claiming deduction under the Income Tax Act, and the year of claiming deduction is

a mixed question of law and facts, which can be adjudicated by the Appellate 6

I.T.A. No. 673/Coch/1995

Tribunal after considering the documents filed by the parties in support of the

contentions.

> The fixation of rent and its payment is based on the approved norms of Government (Refer: Orders dated 12.07.1991 and 07.11.1991). The fixation of lease rent on the market value is not under the provisions of Kerala Land Assignment Act, 1960 and the Rules framed thereunder, as borne out from the records.

> The holding of lands is arising out of a lease transaction, which is purely contractual in nature.

> The dispute regarding the retrospective enhancement of rates from the year 1965, was finally decided by the Government in the year 1991.

> Since the matter was pending final orders by the Government, the assessee added back the provision created for enhanced lease rent upto 31.03.1989, for the AY 1990-91. On receiving final order from the Government for paying the amounts to the Government vide order dated 07.11.1991, the assessee claimed deduction of lease rent in the computation of taxable income for the A.Y 1992-93.

8.1 The Ld. AR relied on the following decisions:

1) Kerala State Co-operative Consumers Federation vs. CIT (1996) 222 ITR 492) (Ker.) wherein it was held that liability for payment of the excess collection had arisen only by virtue of the Government order dated August 17, 1979, which admittedly fell outside the accounting period ended on June 30,1979. Therefore, it was clear that the provision made in the accounts after the close of the accounting period was not a permissible deduction.

2) CIT vs. Swadeshi Cotton and Flour Mills (1964) 53 ITR 134 (SC) wherein it was held that it was only in 1949 that the claim to profit bonus was settled by an award of the Industrial Tribunal and the only year to which the liability under the award could be properly attributed was 1949 and that therefore

I.T.A. No. 673/Coch/1995

the sum of Rs.1,08,325-9-3 had to be deducted in the calendar year 1949 relevant to the assessment year 1950-51. An employer who follows the mercantile system of accounting incurs a liability towards profit bonus only when the claim, if made, is settled amicably or by industrial adjudication. The system of re-opening of accounts does not fit in with the scheme of the Income-tax Act. As far as receipts are concerned there can be no re-opening of accounts, and the position is the same in respect of expenses. 3) CIT v. Gurunathan (1995) 211 ITR 174 (Mad.) wherein it was held that the original agreement provided for payment of Rs.5,000 per mensem only in default. Since the assessee had claimed that the lease had been renewed, he had actually provided for the accepted rent of Rs.3,000 in the accounts. The landlord having disputed the claim of the assessee of the renewal of the lease, the matter had gone to the court, and the additional amount had been decreed. The liability to pay the additional amount had thus accrued only when the court had decreed the suit. Therefore, the Tribunal was justified in allowing the arrears of rent as a deduction u/s. 37 in the assessment year 1974-75. That section 30 allows the deduction of rent paid and the word “paid” has been defined in section 43(2) to mean actually paid or incurred according to the method of accounting on the basis of which the profits and gains of business are computed. Since the assessee was following the mercantile system of accounting and the liability to pay the additional amount accrued only on the basis of the order of the court, which was during the previous year relevant to the assessment year 1974-75, the deduction of the amount in computing the income for the assessment year 1974-75 was correct.

4) CIT v. Anna Transport Corporation Ltd (2000) 243 ITR 35 (Mad) wherein it was held that even when an assessee is following the mercantile system of accounting, it cannot possibly make a provision in its accounts, unless the liability had accrued. When the assessee is not in a position to determine the existence of liability, let alone the quantification thereof, the assessee cannot be penalized for not making a provision in the earlier years. The fact that the assessee was liable to pay the sum of Rs.20,20,793/- to the Government, did not imply that it should have provided for an imaginary rate of interest on that sum, even when the assessee had been making efforts to convince the Government to adjust that sum against the value of the shares in the capital of the assessee-company, which shares the assessee was willing to issue to the Government. Had the Government agreed to that proposal, no occasion would have arisen for payment of interest. It was only when the Government, five years later, decided that the amount should be treated only as a loan bearing interest at the rate of 18 per cent, that the assessee was made aware of its liability, and after providing for the same, it had also 8

I.T.A. No. 673/Coch/1995

effected payment. The Tribunal was, in the circumstances, right in holding that the payment so made qualified as a revenue expenditure of that year, namely the assessment year 1980-81.

5) Buxa Dooars Tea Co. v. CIT (1991) 188 ITR 375 (Cal.) wherein it was held that the Act of 1954, having been declared void by the Supreme Court by its judgment delivered on September 26, 1960, all the assessments made under the said Act had become void ab initio. No assessment was ever made upon the assessee-company under the new Act of 1961 and, therefore, the order dated January 2, 1975, passed by the Commissioner of Taxes. Assam, upholding the assessments made under the 1954 Act, in view of the retrospective operation given by the 1961 Act, should be considered to be the only order fixing and quantifying the liability of the assessee-company under the said Act and, since that order was passed in the calendar year 1975 relevant to the previous year corresponding to the assessment year 1976-77, the deduction for such liability was clearly admissible in making assessment on the assessee-company for the assessment year 1976-77, notwithstanding that no provision for such liability was made in the books of the assessee-company for the calendar year 1975.

6) CIT v. Jatia Manufacturing Investment Co. Pvt. Ltd. (1983) 142 ITR 536 (Cal.) wherein it was held that under the mercantile system of accounting liability arises when an amount becomes due and not when it is actually paid. But whether in a particular transaction the amount had become due or not would depend upon the nature of the transaction or dealings between the parties. If before the end of a previous year negotiation had been entered into for giving up any amount there would be a stoppage of the accrual of the debt due in the previous year. It was held that the interest of Rs.16,080/- became due during the assessment year 1970-71 and was an allowable deduction for that year.

7) CIT v. Purshotham Gokuldas (1999) 237 ITR 115 (Ker.) wherein it was held that if the assessee follows the mercantile system of accounting and the liability which accrued is disputed then the same could be claimed only when the dispute is settled. However, a statutory liability can be claimed in the year of accrual, notwithstanding the fact that the same is disputed.

I.T.A. No. 673/Coch/1995

accounted for in the respective years and therefore, it cannot be claimed as

deduction for the assessment year under consideration when the assessee is

following mercantile system of book keeping. According to him, the assignment of

land to the assessee was governed by the Kerala Government Land Assignment Act,

1960. As such, lease rent is to be fixed under the rules framed thereunder, i.e., the

Kerala Land Assignment Rules, 1964. Therefore, it cannot be said that the payment

of lease rent is a contractual obligation.

9.1 The Ld. DR relied on the judgment of the Supreme Court in the case of K.C.P.

Limited vs. CIT 245 ITR 421 wherein it was held that if a receipt is a trading receipt

the fact that it is not so shown in the account books of the assessee would not

prevent the assessing authority from creating it as a trading receipt. It is the true

nature and quality of the receipt and not the head under which it is entered in the

account books which is decisive. Eventually, if the amount so collected is passed on

to the State Government or refunded to the purchasers, the assessee would be

entitled to claim deduction of the sum when so paid or refunded.

of Kerala vide their letter dated 25/06/1988 accorded sanction for assignment on

lease of 46.79.250 acres of land in Sy. Nos. 125, 126, 129, 130 and 131 of

Varapuzha village (now Eloor village) from 24-10-1983 to 31-3-1985 at a lease rent

of 6% of the market value of Rs.3000 per cent per annum and again from 1-4-1985 10

I.T.A. No. 673/Coch/1995

to 31-3-1990 at a lease rent of 6% of market value of Rs.3600/- per cent per

annum. The assessee approached the Government to revise the lease rent vide its

letter dated 24.9.1988 which was rejected by the Government vide their letters

dated 12/07/1991 and 07/11/1991. Since the assessee’s request for revision of

lease rent was rejected by the Government vide above two letters, the assessee

claimed entire lease rent of Rs.97,69,077/-.

10.1 As far as the applicability of The Kerala Government Land Assignment Act,

1960 is concerned, the first aspect that was brought to our notice by the learned

counsel for the Assessee and which we have also noticed is that the said Act in

Sec.2(1) Explanation-1 lays down that the said Act applies to all Government lands

i.e., even to lands acquired under the Land Acquisition Act for the time being in

force are Government lands. Sec.2(a) of the said Act defines Assignment to include

transfer of land by way of lease. Sec.3 of the said Act lays down that Government

land may be assigned by the Government or by any prescribed authority either

absolutely or subject to such restrictions, limitations and conditions as may be

prescribed. There is no prohibition in Sec.3 that Government lands cannot be

assigned otherwise than under the provisions of the said Act. Sec.4 of the said Act

lays down procedure before Assignment of Government lands but the said section

does not apply to assignment by way of lease. Sec.7 of the said Act lays down the

power of the Government to make rules and the power also includes in Sec.7(1)(h)

the power to prescribe the rates at which land may be assigned and tree growths

may be valued, and the mode of recovery of the amounts due. The Kerala Land 11

I.T.A. No. 673/Coch/1995

Assignment rules, 1964 has been framed in exercise of powers conferred u/s.7 of

the Kerala Government Land Assignment Act, 1960. Rule 13 of the said rules refer

to lease or licensing of Government land and the condition for grant of lease is that

the land which are likely to be required in future for Government or Public

Purposes, but not immediately may be leased or licensed for purposes listed in the

said rule. A query was raised by the Bench as to what is the purpose for which the

lands were leased to the Assessee. The letter by which the lease of the lands were

granted to the Assessee is silent on the purpose. The learned counsel for the

Assessee made a statement across the bar that it was for providing housing to

employees of the Assessee which is a public sector undertaking. A perusal of rule

13 of the The Kerala Land Assignment rules, 1964 shows that such a purpose is not

covered by the provisions of the said rules. Rule 13A of the The Kerala Land

Assignment rules, 1964 is applicable only to lands within port limits. Rule 15 of The

Kerala Land Assignment rules, 1964 talks about conditions of lease and the said

rule is applicable only for lease for agricultural purpose and non agricultural

purpose. Appendix VII to the said rules is the form of lease for non-agricultural

purpose. A perusal of the same shows that the same is applicable to lease of land

for temporary occupation and that is not the condition when the Government

granted lease of the lands to the Assessee. In any event, we are not examining the

validity of the lease in favour of the Assessee. Our examination is limited to the

question whether the rent fixed for the lease of land in question is covered by the

provisions of The Kerala Land Assignment Act, 1960 and therefore the liability of

the Assessee can be said to be Statutory liability. The discussion of the various 12

I.T.A. No. 673/Coch/1995

provisions of the The Kerala Land Assignment Act, 1960 and The Kerala Land

Assignment rules, 1964, shows that the lease in question is not governed by the

provisions of the said Act and therefore the argument of the learned DR that the

liability of the Assessee in so far as it relates to payment of rent to the Government

is a statutory liability is without any basis. No evidence has been brought on record

in this regard by the Revenue. Therefore the plea of the Revenue in this regard

deserves to be rejected.

10.2 Thus, the liability of lease rent was crystallized only on final order of the

Government of Kerala dated 07/11/1991 which is relating to the assessment year

1992-93. In our opinion, the claim of the assessee is justified as the contractual

obligation was crystallized on receipt of the final Government order dated

07/11/1991. In our opinion, when the assessee follows the mercantile system of

accounting and the liability towards payment of lease rent was finally settled by the

State Government vide their letters dated 12/07/1991 and 07/11/1991 by rejecting

the request letter made by the assessee, it should be allowed as deduction in the

assessment year under consideration when it was finally settled. Therefore, there

is no question of re-opening of the accounts so as to allow expenditure in the

earlier assessment years. As such, the assessee’s claim relating to the lease rent

as an expenditure is to be allowed in the assessment year under consideration.

Thus, we do not find any merit in the argument of the Ld. DR and the case law

relied on by him is not applicable to the facts of the case. Hence, this ground of

appeal of the assessee is allowed.

I.T.A. No. 673/Coch/1995

Order pronounced in the open court on 22nd January, 2020.

Sd/- Sd/- (N.V. VASUDEVAN) (CHANDRA POOJARI) VICE-PRESIDENT ACCOUNTANT MEMBER

Place: Kochi Dated: 22nd January, 2020 GJ Copy to: 1. The Travancore Cochin Chemicals Limited, Udyogmandal P.O., Kochi. 2. The Deputy Commissioner of Income-tax, Special Range-2, Ernakulam, Kochi. 3. The Commissioner of Income-tax(Appeals)-II, Kochi. 4. The Pr. Commissioner of Income-tax, Kochi-2. 5. D.R., I.T.A.T., Cochin Bench, Cochin. 6. Guard File. By Order

(ASSISTANT REGISTRAR) I.T.A.T., Cochin