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Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
PER SANDEEP GOSAIN, JM: The present appeal is filed by the assessee against the order of the learned CIT (A)-8, Mumbai dated 03-02-2014 passed in appeal No.CIT(A)-8/Cir-4/259/2012-13 for assessment year 2010-11 on the following grounds:-
“1.) Disallowance on account of earlier termination of lease. A) The learned Commissioner of Income Tax (Appeals) grossly erred in treating crystallized liability of Rs.20,50,00,000/- as contingent in nature being the outcome of the order passed by the Queen’s Bench Division, in the High Court of U. K. against suit filed for compensation of damage & loss of profit by the U. K. Company. Appellant Company has not gone for appeal to the higher court.
B) The learned Commissioner of Income Tax (Appeals) has totally misconceived it to be contingent liability considering t he fact that the case filed by the U. K. Company for recovery of settled liability in Delhi High Court, is pending
& the Appellant company is contesting the same on recovery issue.” The assessee vide its letter dated 25th April, 2016 has requested for 2. admission of the following additional ground by stating that the same is purely a legal ground and no new evidence or material would be required for adjudication of the same:-
The learned lower authority has grossly erred in making addition in the book profit on account of claim for earlier termination of leases at Rs.6,00,00,000/- on account of Provision for Gratuity at Rs.13,72,96,680/- and on account of provision for Leave encashment at Rs.4,39,51,771/- even though said disallowances are not covered as per Explanation (1) of section 115JB. Due to inadvertence the aforesaid ground has remained to be included in the memorandum of appeal.
The brief facts of the case are that the assessee in the present case is engaged in the business of courier (express) services, surface (cargo) express and tours & travels agency services. Return of income for assessment year 2010-11 was e-filed by the assessee on 13-10-2010 declaring total loss at Rs.11,75,21,174/-. The same was processed u/s 143(1) of the Act and later on the case of the assessee was processed under CASS. Subsequently, notices u/s 143 (2) and 142(1) of the Act were issued and served upon the assessee and after receiving replies of the assessee assessment order u/s 143 (3) of the Act was passed on 08th February, 2013 by the AO thereby making disallowance u/s 2(24) (x) read with Section 36(1) (va) of the Act on account of PF and ESIC for an amount of Rs.32,67,727/- and subsequently the same was added back to the total income of the assessee. In addition, the AO also disallowed a sum of Rs.20,50,00,000/- being expenses as shown in the P & L Account and added back the same to the total income of the assessee. The AO also disallowed Rs.88,206/- from the financial expenses claimed by the assessee for Rs.5,42,693/-. Aggrieved by the order of the AO the assessee carried the matter in appeal before the learned CIT (A) and the learned CIT (A) considering the facts of the case and the submissions of the parties allowed the appeal of the assessee in part by sustaining the disallowance of Rs.20,50,00,000/- made by the AO on account of earlier termination of lease. The assessee is now in appeal before us being aggrieved with the order of the learned CIT (A).
With regard to the additional ground, during the course of hearing the learned AR drew our attention to the aforesaid application moved under Rule 11 of the IT Rules seeking admission of the same for adjudication which has inadvertently remained to be incorporated in the Memorandum of Appeal. The learned AR further submitted that this additional ground relates to making addition in the book profit on account of claim for earlier termination of lease amounting to Rs.6,00,00,000/-, Rs.13,72,96,680/- on account of Provision for Gratuity and Rs.4,39,51,771/- on account of Leave Encashment even though the said disallowances are not covered as per Explanation (1) of Section 115JB of the Act and that this additional ground is of legal nature and no new evidence or materials would be required for adjudication of the same. The learned DR, on the other hand, strongly refuted the claim of the assessee and requested the request for admission of the additional ground be dismissed.
We have both the parties and on perusal of the records we have noted that the ground now being raised as additional ground is purely of legal nature and no new facts or evidences are required for adjudicating the said ground. Therefore, keeping in view the principles laid down in the case of National Thermal Power Corporation Vs CIT reported in (1998)
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.
We have heard the learned the learned Counsels representing both the parties and have also perused the materials placed on record as well as the orders of the Revenue authorities. As per the submission of the learned AR of the assessee with regard to the main ground of the appeal, it is contended that the assessee had taken an aircraft on lease from a foreign Company. However, the operating expenses of the aircraft were very high and therefore, the assessee terminated the lease agreement. It was further argued that the UK based Company from whom the aircraft was taken on lease had filed a suit for compensation of damage and loss in the High Court of Justice, United Kingdom and the claim was allowed for Rs.20,50,00,000/- against the assessee and the order of Queen’s Bench Division in the High Court of Justice UK dated 14-05-2010 was final. The assessee Company has not gone for appeal against the decision of the UK Court to any higher authority. Hence, the compensation payable to the UK based Company was final and settled and thus the liability has been crystallized. It was further argued that the AO has misconceived the fact that the liability was contingent in nature considering the fact that the assessee Company has challenged the decision of the UK Court, though the assessee Company has only challenged the recovery proceedings and winding up of the petition filed by the foreign Company in the Bombay High Court and that it would not affect the settled liability against the assessee Company. It was also argued that the learned CIT (A) has also not considered those facts and erred in treating the crystallized liability of Rs.20,50,00,000/- as contingent in nature being the outcome of the order of the Queen’s Bench Division of the High Court of Justice, UK.
The learned DR on the other hand relied upon the orders of the authorities below.
Before we come to decide the merits of the case, it is necessary to evaluate the findings of the learned CIT (A). The relevant portion of the order of the learned CIT (A) is reproduced herein below which is Para 3.3:-
“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.
By the additional ground, the assessee has challenged the order of the Revenue authorities by submitting that the Revenue authorities erred in making addition in the book profit on account of claim (i) for earlier termination of lease for Rs.6,00,00,000/-, (ii) Provisions for Gratuity for Rs.13,72,96,680/- and (iii) provision for Leave Encashment for Rs.4,39,51,771/-.
In this regard we have heard the learned Counsels for both the parties and also perused the orders of the authorities below. Out of the above three heads before us by way of additional grounds in respect of claim for earlier termination of lease, provisions for Gratuity and Leave Encashment, we are of the considered view that we have already given our findings while adjudicating the main ground of appeal
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.
In the result, assessee’s appeal is partly allowed for statistical purposes. Order pronounced in the open court on 10/08/2016.