ACIT NON CORPORATE CIRCLE 3, CHENNAI vs. UNITED METAL INDUSTRIES, CHENNAI

आदेश / O R D E R

PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER:

Facts apropos are that assessee a manufacturer of steel 2. structurals had filed its return of income for the impugned assessment year declaring ‘’Nil’’ income. During the course of assessment proceedings, it was noted by the ld. Assessing Officer that assessee had paid a sum of �2,50,00,000/- in a lumpsum to its landlord.

Assessee had rented out a factory from which it was doing its business and was paying �2,500/- per month upto 1990. There was a dispute between landlord and the owner regarding rentals and landlord had filed a suit in the Civil Court. During the previous year relevant to the assessment year, there was an out of court settlement and assessee paid a sum of �2,50,00,000/- to the landlord and claimed such sum as a revenue outgo. However, ld. Assessing Officer was of the opinion that the dispute which resulted in this payment hovered over a period of two decades and could not be allowed as Revenue outgo of one year. Relying on the judgment of Hon’ble Apex Court in the case of Madras Industrial Investment Corporation Limited vs. CIT, 225 ITR 802, ld. Assessing Officer held that expenditure which did not pertain to the relevant year could not be claimed as current year expense, since assessee was following mercantile system of accounting. As per the ld. Assessing Officer, assessee had not made any provision for arrears of rent in the earlier years. Ld. Assessing Officer, held the claim as not allowable and made a disallowance of �2,50,00,000/-.

Aggrieved, assessee moved in appeal before the ld. 3.

Commissioner of Income Tax (Appeals). As per the assessee, rent was paid on its business premise at No.98, Basin Road, Thiruvottiyur, Chennai. Contention of the assessee was that landlord had filed a Civil Suit in District Munsif Court at Thiruvottiyur for fixing the fair rent in the year 2010. As per the assessee in a Lok Adalat held on 17.1.2014, a settlement was reached based on an MOU between the parties. Contention of the assessee was that the MOU dated 23rd December, 2013 was decreed and assessee was compelled to pay arrear rent of �2,50,00,000/- during the relevant previous year. Further, contention of the assessee was that arrears of rent had crystallized during the relevant previous year. In such a situation, as per the assessee disallowance could not be made. Reliance was placed on a judgment of Hon’ble Jurisdictional High Court in the case of CIT vs. Gurunathan, 211 ITR 174.

Ld. Commissioner of Income Tax (Appeals) was appreciative 4. of the above contentions. According to him, bank account of the assessee clearly reflected payment of �2,25,00,000/- after deducting tax of �25,00,000/-, to the lessor by way of Cheque No.26126396.

Ld. Commissioner of Income Tax (Appeals) also noted that TDS amount of �25,00,000/- was deposited to the Government exchequer by the assessee on 07.02.2014. According to him, by virtue of judgment of Hon’ble Jurisdictional High Court in the case of Gurunathan (supra) the claim was allowable. He deleted the disallowance.

We have considered the rival contentions and perused the 7. orders of the authorities below. It is not disputed that assessee was operating from leasehold premises on which it was paying rent @2,500/- per month. It is also not disputed that a Civil Suit was filed by the owner of the property with the District Munsif Court for fixing fair rent, which finally culminated in a settlement between parties in a Lok Adalat held on 17.01.2014, resulting in a lumpsum payment of �2,50,00,000/- as arrear rent. It might be true that assessee was following Mercantile system of accounting. However, assessee could not have visualized a situation where it was constrained to settle the suit through Lok Adalat, whereby it had to pay a higher rent than what it was already paying. As long as the suit was going on, we cannot say that there was any crystallization of the liability.

Crystallization happened only when Lok Adalat decreed the settlement between the parties on 17.01.2014. Pursuant to such decree assessee had made the payment to the land lord after deducting the tax as required under the Act. Crystallization in our opinion happened only when the settlement was agreed. Assessee could not have made any earlier provision. Even if the assessee made any provision it would have been nothing but a provision for unascertained liability.

In the circumstances, the payment of �2,50,00,000/- as lease rent arrears was nothing but Revenue outgo. The claim was an allowable one on basic principles of accrual. In the circumstances, we are of the opinion that ld. Commissioner of Income Tax (Appeals) was justified in deleting the disallowance. We do not find any reason to interfere with the order of the ld. Commissioner of Income Tax (Appeals).

In the result, the appeal of the Revenue stands dismissed. 8.

Order pronounced in the open court at the time of hearing on Wednesday, on 28th day of February, 2018, at Chennai.