JAGDISH PRASAD GUPTA

ITA 711/2011 & batch matters Page 1 of 39

$~ * IN THE HIGH COURT OF DELHI AT NEW DELHI

Reserved on: July 20, 2017

Decision on: August18, 2017

ITA No. 695/2010

JAGDISH PRASAD GUPTA

..... Appellant Through: Mr. C. S. Agarwal, Sr. Advocate with Mr. Rajeev Saxena, Mr. Shashwat Bajpai, Mr. Sharad Agarwal, Advocates.

versus

CIT

..... Respondent Through:- Mr. Ashok K. Manchanda, Sr. Standing Counsel with Mr. Raghvendra Singh, Mr. Anand K. Singh, Advocates.

ITA No. 1535/2010

CIT

..... Appellant

Through: Ms. Vibhooti Malhotra, Advocate

versus

JAGDISH PRASAD GUPTA

..... Respondent Through: Mr. C. S. Agarwal, Sr. Advocate with Mr. Rajeev Saxena, Mr. Shashwat Bajpai, Mr. Sharad Agarwal, Advocates.

ITA No. 711/2011 & C.M. No. 6768/2012

CIT

..... Appellant

Through: Ms. Vibhooti Malhotra, Advocate

versus

JAGDISH PRASAD GUPTA

..... Respondent

ITA 711/2011 & batch matters Page 2 of 39

Through: Mr. C. S. Agarwal, Sr. Advocate with Mr. Rajeev Saxena, Mr. Shashwat Bajpai, Mr. Sharad Agarwal, Advocates.

ITA No. 787/2011 & C.M. No. 6765/2012

CIT

..... Appellant

Through: Ms. Vibhooti Malhotra, Advocate

versus

JAGDISH PRASAD GUPTA

..... Respondent Through: Mr. C. S. Agarwal, Sr. Advocate with Mr. Rajeev Saxena, Mr. Shashwat Bajpai, Mr. Sharad Agarwal, Advocates.

ITA No. 933/2011

CIT

..... Appellant Through:- Mr. Ashok K. Manchanda, Sr. Standing Counsel with Mr. Raghvendra Singh, Mr. Anand K. Singh, Advocates.

versus

JAGDISH PRASAD GUPTA

..... Respondent Through: Mr. C. S. Agarwal, Sr. Advocate with Mr. Rajeev Saxena, Mr. Shashwat Bajpai, Mr. Sharad Agarwal, Advocates.

ITA No. 934/2011 & C.M. No. 6767/2012

CIT

..... Appellant Through: Mr. Ashok K. Manchanda, Sr. Standing Counsel with Mr. Raghvendra Singh, Mr. Anand K. Singh, Advocates.

versus

JAGDISH PRASAD GUPTA

..... Respondent Through: Mr. C. S. Agarwal, Sr. Advocate with

ITA 711/2011 & batch matters Page 3 of 39

Mr. Rajeev Saxena, Mr. Shashwat Bajpai, Mr. Sharad Agarwal, Advocates.

ITA No. 935/2011 & C.M. No. 6764/2012

CIT

..... Appellant Through: Mr. Ashok K. Manchanda, Sr. Standing Counsel with Mr. Raghvendra Singh, Mr. Anand K. Singh, Advocates.

versus

JAGDISH PRASAD GUPTA

..... Respondent Through: Mr. C. S. Agarwal, Sr. Advocate with Mr. Rajeev Saxena, Mr. Shashwat Bajpai, Mr. Sharad Agarwal, Advocates.

ITA No. 936/2011 & C.M. No. 6766/2012

CIT

..... Appellant Through:- Mr. Ashok K. Manchanda, Sr. Standing Counsel with Mr. Raghvendra Singh, Mr. Anand K. Singh, Advocates.

versus

JAGDISH PRASAD GUPTA

..... Respondent Through: Mr. C. S. Agarwal, Sr. Advocate with Mr. Rajeev Saxena, Mr. Shashwat Bajpai, Mr. Sharad Agarwal, Advocates.

ITA No. 424/2016

PR. COMMISSIONER OF INCOME TAX-10 ..... Appellant Through: Mr. Ashok K. Manchanda, Sr. Standing Counsel with Mr. Raghvendra Singh, Mr. Anand K. Singh, Advocates

versus

JAGDISH PRASHAD GUPTA

..... Respondent Through: Mr. C. S. Agarwal, Sr. Advocate with

ITA 711/2011 & batch matters Page 4 of 39

Mr. Rajeev Saxena, Mr. Shashwat Bajpai, Mr. Sharad Agarwal, Advocates.

CORAM: JUSTICE S. MURALIDHAR JUSTICE PRATHIBA M. SINGH

J U D G M E N T %

18.08.2017 Dr. S. Muralidhar, J.: Introduction 1. These are nine appeals under Section 260A of the Income Tax Act, 1961 (‘Act’), one by the Assessee and the others by the Revenue, directed against orders of the Income Tax Appellate Tribunal (‘ITAT’) which pertain to Assessment Years (‘AY’) 1997-98 to 2002-03, 2004-05, and 2009-10. In the appeals by the Revenue, cross-objections (C.O.) have been filed by the Assessee, i.e. Shri Jagdish Prasad Gupta, the proprietor of Pradeep Oil Corporation.

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tabular form of the relevant AY and the corresponding C.O./appeal by the Assessee and appeal by the Revenue are as under: AY Assessee’s C.O. (CM) and Appeal Revenue’s ITA No. 1997-98 CM 6768/2012 711/2011 1998-99 CM 6765/2012 787/2011 1999-00 CM 6766/2012 936/2011 2000-01 CM 6767/2012 934/2011 2001-02 No appeal 933/2011 2002-03 CM 6764/2012 935/2011 2004-05 ITA 695/2010 1535/2011 2009-10 No appeal 424/2016

Background facts 3. The Assessee is the sole proprietor of M/s Pradip Oil Corporation. The Assessee, by way of an agreement dated 15th March 1975, was granted licence by the Northern Railway for use of a piece of Railway land measuring 41280 sq. ft. at a licence fee of Rs. 20,640/- per annum (p.a.). By another agreement, dated 3rd January 1978, the Assessee was granted licence for use of a further 62,156 sq. ft. of Railway land at a licence fee of Rs. 31,078/- p.a. An additional land of 2329 sq. ft. (equivalent to 216.35 sq. m.) was further granted under a memorandum. Thus the aggregate land measuring 9828.21 sq. m. (1,05,765 sq. ft.) was thus allotted at a licence fee of 50 paise per sq. ft. p.a.

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steel tanks in terms of the specifications of the Northern Railway authorities. The Assessee declared the income from storage and handling of petroleum products as his business income. Apart from this, the Assessee constructed various structures for maintaining the depot such as warehouse, cycle stand, storage room, platform, meter room, pump house, chemical rooms, stores, verandah etc. The warehouses were not optimally put to use by the Assessee. The warehousing facilities were made available for a rent to others and this was disclosed by the Assessee in his returns as income from house property from the AY 1984-85 onwards.

Revisions of licence fees 5. By a letter dated 8th February, 1980 the Northern Railway revised the licence fee for the 41280 sq.ft. plot to Rs. 1/- per sq.ft p.a. with effect from 5th January 1980. Likewise, the licence fee for the plot measuring 62,156 sq.ft. was revised to Rs. 1 per sq.ft. p.a. with effect from 1st January 1981. Subsequently, a letter dated 1st June, 1986 it was revised to Rs. 1. 50 per sq.ft p.a. by letter dated 23rd October 1986 to Rs. 4/- per sq.ft and by letter dated 19th February 1987 to Rs. 7.80 per sq.ft. On this basis the licence fee aggregated to Rs. 7,07,065/- p.a. in respect of the use of land.

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stipulated time, action under the Public Premises (Eviction of Unauthorised Persons) Act, 1971 (‘PP Act’) would be initiated apart from recovering damages at Rs. 14,14,130/- p.a. up to the date of vacation of the land. The letter further noted that the outstanding balance up to 31st March, 1986 stood at Rs. 18,11,036/- whilst Rs. 14,14,130/- was due as licence fee for the period from 1st April, 1986 to 31st March, 1988.

Proceedings before the Estate Officer 7. The Northern Railway applied to the Estate Officer (EO) under the PP Act praying for eviction of the Assessee from the land in question. The said application was disposed of by the EO by an order dated 28th March 1990. The following issues were framed by the EO for consideration:

"(i) Whether the enhancement is due and if so to what extent and on what basis?

(ii) Has the respondent paid the enhanced licence fee and if not, what is the effect on the present proceedings?

(iii) Has the respondent made unauthorized construction in the

premises and if so, to what extent, what is the effect on the present

proceedings?

(iv) Are the respondents in unauthorized occupation of Railway

premises and if so are they liable to pay the damages?

(v) What is the amount of damages the respondents are liable to pay?

(vi) Relief"

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(i) The enhancements were made by the Northern Railway too frequently and without legal basis. "In the absence of any definite policy in conformity with principles of natural justice and further with retrospective demands of the applicant contrary to the terms of agreement, no enhancement can be permitted." The Assessee was to continue to pay the licence fee in accordance with the licence agreement and the guidelines in terms of the circular dated 14th December 1985.

(ii) The Assessee had been paying the enhanced licence fee in terms of the document AW-1/3. However, "all subsequent frequent revisions in licence fee are contrary to law and terms of the agreement. The Respondent is not liable to pay the same and the present proceedings are liable to be dropped being neither enhancement is made in accordance with law nor is validly revised."

(iii) The Assessee is not in unauthorised occupation and not liable to pay damages.

(iv) The Railways have failed to prove the liability of the Assessee to pay damages.

(v) "The demand and the termination based thereon are not tenable in law and the licence of the respondent cannot be terminated as stated aforesaid....However, I may point out here that to avoid frivolous litigation, the applicant should form a definite policy in revising the licence fee for a considerable period on uniform basis by incorporating the law of principles

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of natural justice to avoid unnecessary litigation thereby not causing losses of revenue to the railway administration under these circumstances and ensuring prompt and regular payment of licence fee by licencees."

Proceedings in this Court 9. An appeal against the above order was filed by the Northern Railway before the Additional District Judge (ADJ) which ultimately came to be dismissed on 18th December 2007 on the ground of maintainability. The writ petition filed by the Northern Railway in this Court challenging the above order, being W.P. (C) No. 8071 of 2008, was dismissed by a learned Single Judge on 25th November 2010. However, liberty was granted to the Northern Railway to initiate fresh proceedings against the assessee in accordance with law.

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dated 13th January 2015, a copy of the statement of claim dated 2nd September 2014 filed by it before the Sole Arbitrator appointed by it for the sum demanded in the notice dated 5th January 2012 issued to the Assessee. It is stated that the issue concerning the appointment of an independent Arbitrator is pending in the Supreme Court.

Further revisions of licence fees 12. Meanwhile, by a notice dated 25th July, 1995 the aggregate licence fee for the plots was enhanced to Rs. 360 per sq.m. i.e. 35,37,300/- p.a. with effect from 1st April 1986. By the said letter a demand was raised for the ten year period from 1st April 1986 to 31st March 1996 in the sum of Rs. 3,53,85,660 along with arrears for the period up to 31st March 1986 in the sum of Rs. 18,11,036 totalling Rs. 3,71,96, 696. It was stated that the payment would be subject to the decision in the case pending before the ADJ.

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Rs.45,42,20,091.

Tax treatment of claim of licence fee as deduction 14. Now to the tax treatment of the claim of the Assessee in its income tax returns of the enhanced licence fee as a deduction. The said claim was allowed by the Assessing Officer (‘AO’) for AY 1987-88. As and when the licence fee was enhanced, the deduction was claimed by the Assessee on such enhanced amount and was allowed by the AO continuously for AYs 1989-90 to 1994-95. In other words, for these AYs a sum of Rs. 13,32,286/- p.a. was allowed as deduction on account of enhanced licence fee. In three of the AYs i.e. AYs 1989-90, 1990-91 and 1993-94, the deduction was allowed after scrutiny under Section 143 (3) of the Act. For AYs 1995-96 to 1999-2000, the Assessee claimed deduction of Rs. 35,37,300/-p.a. as licence fee. In fact, for AY 1995-96 the Assessee also claimed, as a deduction, arrears of Rs. 1,63,83,337/- for the period from 1st April, 1984 to 31st March, 1994 after reducing the amount already claimed in those years. The AO, however, allowed the claim only the extent of Rs. 20,78,600/-.

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claimed as arrears for AYs 1987-88 to 1995-96 and Rs. 68,22,900 was allowed for AY 1996-97.

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01 and 2002-03 as well as the Revenue's appeal for AY 2001-02 were allowed by the ITAT by a common order dated 22nd July 2008.

This Court's order dated 11th December 2008 20. The Assessee then filed ITA Nos. 1349 to 1354 of 2008 pertaining to AYs 1997-98 to 2002-03) in this Court which were allowed by it by a common order dated 11th December 2008 which reads thus: “1. In these appeals the common order dated 22.07.2008 passed by the Income Tax Appellate Tribunal is in question. The issue sought to be raised in these appeals is whether the licence fee payable to the railways for use of land as a depot, could be regarded as an accrued liability or a contingent liability. It was pointed out by the learned counsel for the appellant/ assessee that before the Tribunal he had taken a specific plea that in the assessee’s own case for the assessment year 1995-1996, which had been decided by the Tribunal vide its order dated 25.11.2004, the said licence fee has been construed to be an accrued liability and, therefore, allowable as an expenditure in the year of accrual. Unfortunately, the Tribunal has not returned any finding on this aspect of the matter.

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from the order of the Tribunal pertaining to the assessment year 1995- 1996. In any event, since we are remanding the matters to the Tribunal for a consideration on this aspect of the matter, the Tribunal would examine as to whether the revenue had preferred any appeal therefrom or not and the effect thereof.

The appeals stand disposed of.”

ITAT's order for AYs 1997-98 to 2002-03 21. On remand, the ITAT by the order dated 31st July 2009 confirmed the order of the CIT (A). The ITAT held that since the Revenue had not filed an appeal against its order dated 25th November 2004 for AY 1995-96 whereby it had accepted the plea of the Assessee that the enhanced licence fee was an accrued liability, the said order had to be followed in the subsequent AYs as well. The ITAT rejected the plea of the Revenue that in AY 1995-96 “the Assessee had consciously concealed certain facts” and, therefore, the said decision for AY 1995-96 could not be applied in the subsequent years. It observed that the specific direction of this Court, in its order dated 11th December 2008, was to consider whether any appeal had been preferred by the Revenue for the order in respect of AY 1995-96 and therefore, any further contention that the Assessee consciously concealed certain facts could not be examined by the ITAT. For the aforementioned reasons, the appeals filed by the Revenue and the cross-objections by the Assessee were both dismissed.

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AYs 2003-04 to 2009-10

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Questions of law 26. The central question in all these appeals concerns the allowability of the claim by the Assessee of deduction of the sum representing the payment for use of lands allotted to it by the Northern Railway. The case of the Assessee is that since it follows the mercantile system of accounting, the enhanced licence fee is an accrued liability. The case of the Revenue on the other hand is that it is a contingent liability and not allowable as a deduction till the liability for the enhanced licence fee, which has been contested by the Assessee, actually crystallises.

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"Whether the order dated 31st July, 2009 of the Income Tax Appellate Tribunal is in conformity with and decides all aspects/issues remitted to them vide order dated 11th December, 2008 passed by the High Court and whether the tribunal was right in holding that the licence fee is an accrued liability?"

(i) Whether the order dated 31st July 2009 is in conformity with and decides all aspects/issues remitted to them vide order dated 11th December, 2008 passed by the High Court

(ii) Whether the ITAT was right in treating the licence fee as an

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accrued liability?

(i) Whether the order dated 31st July 2009 of the ITAT is in conformity and decides all the aspects/issues remitted to it by order dated 11th December 2008 passed by this Court?

(ii) If the answer to the above question is in the negative, was the assumption of jurisdiction under Section 147 of the Act for the AYs 1997-98 to 2000-01 and 2002-03, valid?

(iii) Was the ITAT right in holding the licence fee payable to the Railways to be an accrued liability?

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be granted for addressing the re-framed questions.

(i) Whether the order dated 31st July 2009 of the ITAT is in conformity and decides all the aspects/issues remitted to it by order dated 11th December 2008 passed by this Court?

(ii) Was the ITAT right in holding the licence fee payable to the Railways to be an accrued liability"?

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notice of the Northern Railway making that demand was served on the Assessee only on 14th September 2006 the liability had not crystallised during the AY in question i.e. 2004-05.

"Was the ITAT right in upholding the CIT (A) 's order whereby the deduction of Rs. 35,37,300 towards licence fee was allowed?"

"Did the ITAT err in upholding CIT (A)'s order deleting the addition of Rs.2,76,21,682/- made by the AO by treating the licence fee as a contingent and not accrued liability?"

Submissions of learned counsel for the Revenue 32. Mr. Ashok Manchanda, learned Senior Standing Counsel for the Revenue, submitted as under:

(i) The order dated 28th March 1990 of the EO was entirely in favour of the Assessee and absolved it of any liability whatsoever to pay the enhanced licence fee. The pre-conditions for enhancing the licence fee in terms of the Railway circulars and guidelines were not met in the instant case and therefore the liability was only contingent. The right of the Northern

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Railway to increase the licence fee is derived from the agreements dated 15th March, 1975 and 3rd January, 1978. It is "not unconditional or arbitrary and does not apply automatically." Reliance was placed on the decision in Oswal Agro Mills Ltd. v. CIT [2014] 363 ITR 486 (Del). Reference was also made to the affidavit filed by the Assessee before the EO denying the liability to pay the enhanced licence fee as demanded by the Railways.

(ii) There was no stay of the EO's order despite successive challenges by the Northern Railway in the higher forums. Therefore, in terms of the decision dated 19th April 2017 of this Court in ITA No. 161 of 2016 (National Agricultural Marketing Federation of India v. Commissioner of Income Tax, Delhi -IX), there was no subsisting liability on the Assessee as regards enhanced licence fee.

(iii) The Assessee had not deposited a paisa more than Rs. 1,05,570/- with the Northern Railway towards licence fee notwithstanding the demand was in excess of Rs 45 crores. The Northern Railway Railways did not appear to have initiated steps to recover the enhanced licence fees. The only inference that could be drawn from the correspondence is that the amounts “were neither payable by the Assessee nor enforceable by the Railways.”

(iv) The arrears for the period from 1st April, 1986 to 31st March, 1996 calculated by the Railways at Rs. 7.80 crore and all subsequent demands were actually a claim for damages. It was, therefore no better than a contingent liability. Reliance was placed on the decision in CIT v. Goverdhan Ltd. [1968] 69 ITR 675 (SC); Shree Sajjan Mills Ltd. v. Commissioner of Income Tax, M.P. [1985] 156 ITR 585 (SC); CIT v.

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Indian Smelting & Refinery Co. Ltd. [1998] 230 ITR 194 (Bom.) as affirmed in Indian Smelting & Refinery v. CIT [2001] 116 TAXMANN 606 (SC); Indian Molasses Co. (Private) Ltd. v. CIT [1959] 37 ITR 66 (SC); CIT v. Swadeshi Cotton & Flour Mills Pvt. Ltd. [1964] 53 ITR 134 (SC).

(v) The demand for enhanced licence fees was raised on the Assessee by the Northern Railway on 20th January, 1999 which fell in the accounting year relevant to AY 1999-00. Although the Assessee could have claimed this additional amount, as he did in the return for AY 1995-96 after receiving the letter dated 25th July 1995, the Assessee, in fact, did not claim either the enhanced licence fee of Rs. 1,75,12,416/- for AY 1999-00 or further arrears of about Rs.4.25 crore for earlier years. Instead, the Assessee only claimed Rs.35,37,300/- for AY 1999-2000. Thus, the Assessee himself was not following a consistent policy of claiming licence fee. If indeed the claim was based on accrual basis with the Assessee following the mercantile system, the Assessee would hardly forfeit the right to claim the said enhanced licence fee. The Assessee misrepresented before the Court that it was denying only the quantum and not the liability itself.

(vi) The Assessee withheld from the AO the fact of the EO's order dated 28th March, 1990 absolving him of any liability to pay enhanced licence fee and kept fraudulently availing the deduction based thereon. Even the judgment dated 18th December, 2007 of the learned ADJ, dismissing the appeal of the Railways, was not brought to the notice of the AO. Relying on the decisions in CIT v. Sun Engineering Works [1992] 198 ITR 297 (SC), it was contended that Section 148 of the Act was meant to bring escaped

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income to tax and not to provide relief to the Assessee. In relation to the five AYs in respect of which the assessment was reopened under Section 147 of the Act, the Assesse was not, in fact assessed under Section 143 (3) of the Act. The returns were merely processed under Section 143 (1) of the Act. Thus, there was no question of change of opinion by the AO.

(vii) The order of the ITAT for AY 1995-96 was vitiated in law as the ITAT went beyond its jurisdiction to comment on the allowability of the arrears claimed for the subsequent AY 1996-97. This was a perverse conclusion reached by the ITAT ignoring the fraudulent acts and omissions of the Assessee. The said order dated 22nd November, 2004 was dishonestly procured by the Assessee and should well be ignored. Reliance was placed on the decision in A.V. Papayya Sastry v. Government of A.P. (2007) 4 SCC 221. In the same breath it was contended that the said order and the orders dated 22nd July 2008 and 22nd January 2010 of the ITAT for multiple AYs and AY 2004-05 were in fact in favour of the Revenue inasmuch as they held that the liability to pay enhanced licence fee was only a contingent and not an accrued liability. Therefore, there was no need for the Revenue to challenge the order dated 22nd November 2004 of the ITAT for AY 1995-96.

(viii) In its order dated 31st July 2009 i paras 4, 7 and 8, the ITAT did discuss the reopening of the assessments under Section 148 of the Act and was within its rights to refuse to adjudicate the issue. Moreover even this Court by its order dated 11th December 2008 did not require the ITAT to examine this issue.

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Submissions of learned Senior counsel for the Assessee 33. Mr. C.S. Agarwal, learned Senior Advocate appearing for the Assessee, pointed out that the order of the ITAT for AY 1995-96 disallowed the claim for that AY but directed it to be allowed to the year to which it pertained. This order became final with the Revenue not preferring an appeal against it. Even in the past, similar claims of deduction as an accrued and ascertained liability had been allowed in AYs 1990-91 to 1994-95. The claim of Rs. 13,32,286/-, representing ascertained liability for AYs 1991-92 and 1993-94 had been allowed under Section 143(3) of the Act by orders dated 31st August, 1992 and 29th November, 1995 respectively. He submitted that, on the rule of consistency as explained in several decisions, the Revenue could not possibly deny the claim by terming it as a contingent liability.

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Sassoon & Company Ltd. and Ors. v. CIT, Bombay City [1954] 26 ITR 27 (SC).

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contention that the said order absolved the Assessee wholly from liability to pay the licence fee. Mr Aggarwal submitted that the essential requirement of Section 147 of the Act for reopening the assessment was not fulfilled in the present case. Reliance was placed on the decisions in Mohan Gupta (HUF) v. CIT (2014) 366 ITR 115 (Del) and ACIT v. Rajesh Jhaveri Stock Brokers P Ltd. (2007) 291 ITR 500 (SC). Mr. Aggarwal maintained that the impugned order dated 31st July 2009, of the ITAT, does not decide all the aspects remitted to it by the Court by the order dated 11th December, 2008. In particular, the validity of the reopening of the assessments under Section 147 of the Act was not examined.

Accrued or contingent liability? 39. The Court proposes to first examine the central issue that arises in the present appeal viz., is the liability of the Assessee to pay enhanced licence fee an accrued or a contingent liability?

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1955-56. The Assessee had in the calendar year 1954, i.e., the 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 Tax Act, 1922. It was held “whether the Assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the Assessee might take of his rights; nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter.”

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accounts. Likewise it debited the estimated sum of expenditure towards development although “no part of that amount represented any expenditure actually made during that year.” Explaining the mercantile system of accounting, the Court referred to an earlier decision in Keshav Mills Ltd. v. Commissioner of Income Tax, Bombay (1953) 23 ITR 230 (SC) in which it was described as under:

“That system brings into credit what is due, immediately it becomes legally due and before it is actually received and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed.”

“Inasmuch as the liability which had thus accrued during the accounting year was to be discharged at a future date the amount to be expended in the discharge of that liability would have to be estimated in order that under the mercantile system of accounting the amount could be debited before it was actually disbursed.

The difficulty in the estimation thereof again would not convert an accrued liability into a conditional one, because it is always open to the Income-tax authorities concerned to arrive at a proper estimate thereof having regard to all the circumstances of the case.”

“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

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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 language implies that for the purpose of arriving at the balance of profits all that expenditure which is necessary for the purposes of earning the receipts must be deducted, otherwise you do not arrive at the balance of profits, indeed, otherwise you do not ascertain, and' cannot ascertain, whether there is such a thing as profit or not. The profit of a trade or business is the surplus by which the receipts from the trade or business exceed the expenditure necessary for the purpose of earning those receipts. That seems to me to be the meaning of the word "profits" in relation to any trade or business. Unless and until you have ascertained that there is such a balance, nothing exists to which the name ‘profits’ can properly be applied.”

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whereupon the staff or the officer concerned would be paid salary for the period of leave earned but not availed. A fund was created by the Assessee for meeting this liability and during the AY 1978-79, a sum of Rs.62,25,483/- was set apart for the purpose of encashment of the leave. Although the ITAT held the Assessee to be entitled to claim the said sum as deduction, the High Court was of the view that it was not. The Supreme Court explained as under:

“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 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.”

“(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 result

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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.”

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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.”

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liability on the Assessee to pay the enhanced licence fees as and when that is determined in accordance with law. The EO has in fact observed that the Northern Railway "should form a definite policy in revising the licence fee for a considerable period on uniform basis by incorporating the law of principles of natural justice to avoid unnecessary litigation thereby not causing losses of revenue to the railway administration under these circumstances and ensuring prompt and regular payment of licence fee by licencees." Also the EO ends the order by stating: "The applicant is free to revise the licence fee in accordance with the provisions of law and as per terms of agreement."

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Aggarwal and Modi Enterprises (Cinema Project) Co. Pvt. Ltd. v. CIT (supra) where it was held that the fact that there may have been a stay of the enhanced demand by a judicial order as an interim measure pending the final decision in the proceedings challenging the revision. That, however, would not amount to wiping out the liability itself.

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which such enhancement has accrued even though the Assessee has not paid such enhanced licence fee in that year. This legal proposition is well settled.

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careful reading of the said order in fact indicates to the contrary. The order dated 22nd July 2008 of the ITAT also does not help the Revenue any more since it has been set aside by this Court by the order dated 11th December 2008. The reason for the remand of the matters to the ITAT by the said order was that, according to this Court, the ITAT had not returned any finding on the issue whether the licence fee payable by the Assessee to the Railways for the use of the land could be regarded as an accrued liability or a contingent liability. This Court noted the specific plea of the Assessee that, for AY 1995-96, the ITAT had decided this issue in favour of the Assessee, by an order dated 25th November, 2004, construing the licence fee to be an accrued liability and, therefore, allowable as expenditure in the year of accrual.

Reopening of assessments 52. The Court examines next the question of the validity of the assumption of jurisdiction under Section 147 of the Act by the notice dated 21st March, 1994 for AY 1997-98 and by the notice dated 20th May, 2004, for AY 1997-98 to 2000-01 and AY 2002-03.

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the Court does not propose to remand the matters once again to the ITAT for this purpose.

Conclusions 56.1 The questions framed by the Court by its order dated 27th November, 2015 in ITA Nos. ITA Nos. 711/2011, 787/2011, 936/2011, 934/2011, and 935/2011 for AYs 1997-98 to 2000-01 and 2002-03 are answered thus:

56.2 Question (i) is answered in the negative by holding that the order dated

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31st July 2009 of the ITAT is in not conformity with and does not and decide all the aspects/issues remitted to it by order dated 11th December 2008 passed by this Court.

56.3 Question (ii) is answered in the negative i.e. in favour of the Assessee and against the Revenue by holding that the assumption of jurisdiction under Section 147 of the Act for the AYs 1997-98 to 2000-01 and 2002-03 was not valid.

56.4 Question (iii) is answered in the affirmative i.e. in favour of the Assessee and against the Revenue by holding that the ITAT was right in holding the enhanced licence fee payable to the Northern Railway was an accrued liability.

56.5. The Revenue’s appeals ITA Nos. ITA Nos. 711/2011, 787/2011, 936/2011, 934/2011, and 935/2011 are dismissed and the corresponding C.Os/CMs of the Assessee are disposed of in the above terms.

57.1 The questions framed in Revenue's appeal for AY 2001-02, ITA 933 of 2011 are answered thus:

57.2 Question (i) is answered in the affirmative by holding that the order dated 31st July 2009 of the ITAT is in conformity with the order dated 11th December 2008 passed by this Court inasmuch as it does examine the circumstances under which the Revenue failed to challenge the order dated 22nd November 2008 of the ITAT for AY 1995-96 and the effect thereof.

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57.3 Question (ii) is answered in the affirmative i.e. in favour of the Assessee and against the Revenue by holding that the ITAT is right in holding the licence fee payable to the Railways was an accrued liability. Resultantly the impugned order dated 31st July 2009 of the ITAT is affirmed and ITA 933 of 2011 is dismissed.

S. MURALIDHAR, J.

PRATHIBA M. SINGH, J. AUGUST 18, 2017 dn/b’nesh