FIRST FLIGHT COURIERS LTD,MUMBAI vs. ACIT CIR 4(2), MUMBAI

229 ITR 383 (SC), wherein it has been held that “the power of the Tribunal to entertain the additional ground is not in any way restricted in view of the decision of the Hon’ble Supreme Court and it has jurisdiction to examine the question of law which arises from the facts available before the lower authorities and which has a bearing on the liability of the assessee; even if such question has not been raised before the lower authorities.” Therefore, considering the aforementioned judgment as well as the facts of the present case, we are of the considered view that the additional ground now being raised by the assessee is of legal nature and based on assessment record. Hence, we admit the same for adjudication.

“3.3 I have carefully considered the facts of the case, observation of the Assessing Officer and the arguments and submissions of the appellant. I find that the liability in respect of compensation of damage by U. K. Company has not yet been crystalised as the very execution of decree has been challenged by the appellant in the High Court order. Under the circumstances, I find that the observation of the Assessing Officer is perfectly in order as in the case if the decree is stayed then the liability cannot be recovered from the appellant. Moreover, the appellant has not brought anything in record to show as to whether it has further challenged the decision passed by the Hon’ble High Court of Justice of U. K. and the time lapse for which there still will be time to file the appeal against the order. Since the element of facts is not discussed by the appellant, it cannot say with certainty that the liability will crystalise. It is also a matter of fact that the appellant in the past has not claimed damages as being crystallized despite showing the same in its profit and loss account. Further, the basic question arises “when should we recognize expense/revenue in our books of account”. The accrual concept of accountancy states that expense is accounted for in the books of accounts when there is liability to pay. Following the accrual concept of accounting, in the instant case, the assessee’s liability to pay does not arise in this case and it is basically a contingent liability whose ascertainability will be decided on the future outcome of the case. Contingent liabilities are that may or may not be incurred by an entity depending on the outcome of a future event such as a court case. These liabilities are recorded in a company’s accounts and shown in the balance sheet when both probable and reasonably estimable. A footnote to the balance sheet describes the nature and extent of the contingent liabilities. The likelihood of loss is described as probable, reasonably possible, or remote. The ability to estimate a loss is described as known, reasonably estimable, or not reasonably estimable. Further, the contingent income/loss/expense are never accounted for in the books of accounts. I further find that neither the liability is crystallized during the year nor the assessee has paid the amount till date. In view of the foregoing, the addition made by the Assessing Officer is accordingly confirmed. This ground of appeal is thus dismissed.”

9. After analyzing the order of the learned CIT (A) we are of the considered view that the AO as well as the learned CIT (A) has fallen in certain errors while coming to the conclusion that the appellant assessee could not bring anything on record to show as to whether it has further challenged the decision passed by the High Court of Justice, UK. It was also wrongly held by the learned CIT (A) that since elements of facts have not been discussed by the assessee, it could not be said that with certainty that liability was crystallized. The learned CIT (A) has wrongly upheld the order of the AO wherein the AO held the liability of Rs.20,50,00,000/- as contingent liability. In this respect, we are of the considered view that once assessee’s claim for expenses of Rs.20,50,00,000/- on account of compensation payable by the assessee has been crystallized in view of the order dated 14-5-2010 of the Queen’s Bench Division of the High Court of Justice, UK. Based on the above Court Order, the assessee has provided further a sum of Rs.6,00,00,000/- debited to the profit & loss account as an exception item. Once as per the decision of the Queen’s Bench Division of the High Court of Justice, UK the matter has been finally settled and in this respect the learned AR drew our attention to page 25 and 27 of the paper book it has been pointed out that the entire amount has already been paid by the assessee to the Lessor and in this respect a compromise was entered into between the parties before the Indian Court and the entire decree passed by the UK Court was satisfied. It is important to mention here that it was the decree of the Queen’s Bench Division of the High Court of Justice, UK which was fully satisfied from which it can be gathered that the liability of the assessee was crystallized in view of the order dated 14-05-2010 of the High Court of Justice, UK which was ultimately satisfied by the assessee by making payment to the lessor. Therefore, once the liability for making payment was crystallized by the High Court Order, then question of contingent liability does not arise. Therefore, both the AO and the learned CIT (A) was wrong in treating the liability as contingent liability of the assessee. Our this stand is fortified by the following decisions:-

(i) R. C. Gupta Vs CIT, Delhi-VIII, 298 ITR 161 (2008) wherein the Hon’ble Delhi High Court in Para 9 of the order has held as under:-

“The liability in the instant case was capable on being estimated with reasonable certainty when a recovery suit was filed by Hindustan Steel Limited against the assessee on 18-8-1978. Merely because the liability was not a statutory one it could not be said that the liability that was not an ascertained one but a contingent one.

In view of the settled law and in the facts of the present case, we are of the view that the claim of the assessee for deduction of RS.50,761 towards disputed liability should be allowed in the assessment year 1979-80.

Accordingly, the question referred for our opinion is answered in the negative that is favour of the assessee and against the revenue. Reference stands disposed of.

(ii) Rampur Engg. Co. Ltd. Vs CIT 203 Taxman 177 (Delhi) wherein the Hon’ble Delhi High Court has held as under:-

“Merely because proceedings could not be initiated by the PSEB against assessee for enforcing the decree by way of execution for want of consent of the BIFR as required under section 22 of SICA, it would not mean that the liability had not accrued when assessee was following mercantile system of accounting”.

(iii) Bharat Earth Movers Vs CIT 162 CTR 325 (2000) 112:-

The appellant company has created a fund by making a provision for meeting its liability arising on account of the accumulated earned/vacation leave – In the assessment year 1978-79 an amount of Rs.62,25,483 was set apart in a separate account as provision for encashment of accrued leave and it was claimed as a deduction – In the opinion of the Tribunal the assessee was entitled to such deduction but the High Court has formed a different opinion and held that the provision for accrued leave salary was a contingent liability and, therefore, was not a permissible deduction – Not justified –Provision made by the appellant company for meeting the liability incurred by it under the leave encashment scheme proportionate with the entitlement earned by the employees of the company, inclusive of the officers and the staff, subject to the ceiling on accumulation as applicable on the relevant date is entitled to deduction out of the gross receipts for the accounting year during which the provision is made for the liability, the liability is not a contingent liability”.

Keeping in view the facts and circumstances of the case as well as the aforementioned legal propositions we set aside the order of the learned CIT (A) and direct the AO to allow the claim of expenses for Rs.20,50,00,000/- by treating the same as crystallized in the year under consideration.

of the assessee herein above. Therefore, our findings on the main ground are applicable on the additional ground qua earlier termination of lease for Rs.6.0 Crores and therefore in view of the said decision the addition is deleted. So far as the addition on account of provisions for Gratuity and Leave Encashment are concerned, the said issues were never raised before the learned CIT (A). Therefore, the said issues raised before us by the assessee need verification. The learned CIT (A) has already dealt with the grounds of PF contribution and ESIC as income u/s 2. (24) (x) read with section 36(1)

(va) of the Act and it has been held by the learned CIT (A) as per the decision of the Hon’ble Rajasthan High Court rendered in the case of CIT Vs. Jaipur Vidyut Vitran Nigam Ltd. dated 17-01-2014 wherein it has been held that employees contribution towards PF, CPF and ESIC is allowable deduction u/s 36(1 (va) is paid on or before the due date i.e. before the date of filing of return of income. We following the aforesaid decision direct the AO to delete these additions. Since, the ground of Gratuity and Leave Encashment were not raised before t he learned CIT (A), therefore, in principle we agree with the decision of the Hon’ble Rajasthan High Court dated 17-01-2014 and in our considered opinion, in view of the legal position as well as the facts of the case, we remit these issues back to the file of the AO to verify the claim of the assessee in this regard in view of the above decisions of the Hon’ble Rajasthan High Court. Needless to mention that before deciding the said issue, the AO would provide adequate opportunity of hearing to the assessee. Resultantly, the additional ground raised by the assessee is partly allowed for statistical purposes.