DCIT 4(1), MUMBAI vs. DOUBLE DON FINANACE LTD, MUMBAI

The appeal filed by the revenue is directed against the order dated 12-02-2009 passed by Ld CIT(A)-IV, Mumbai and it relates to the assessment year 2004-05. The revenue is aggrieved by the decision of Ld CIT(A) in respect of the following issues:- (a) Allowing deduction of “Provision for loss on account of renewal/transfer of lease and Provision for workers liability” amounting to Rs.5.02 crores while computing book profit u/s 115JB of the Act. (b) Deleting the disallowance of Rs.96.79 lakhs pertaining to arrears of rent, LC, LCS paid to the Tamilnadu Government while computing income under normal provisions of the Act.

We heard the parties and perused the record. The facts in brief are that the assessee was earlier known as “DCW Home Products Ltd”. One of the group companies named M/s DCW Ltd acquired leasehold right of the land owned by Tamilnadu Government through an agreement dated 03.05.1991 for a period of 12 years, i.e., upto 31.3.2003. The land was intended to be used by DCW Ltd for manufacture of “Salt”. The assessee herein and DCW Ltd entered into an agreement on 22.11.1991, whereby the salt manufacturing rights was given to the assessee herein. Thereafter, the assessee herein, DCW Ltd and another company named M/s GHCL entered into a tripartite agreement on 17-02-1999, as per which the salt manufacturing right was transferred to M/s GHCL. In the said agreement, it was also agreed that the leasehold right over the land shall also be transferred to M/s GHCL after getting necessary approval from the Taminadu Government. In consideration of transfer of the leasing rights over the land M/s GHCL paid a sum of Rs.4.50 crores to the assessee with the condition that the assessee herein should provide a Bank Guarantee of equal amount to M/s GHCL. In case of failure of the assessee / DCW Ltd to get the leasehold right transferred to M/s GHCL, it can encash the bank guarantee. However, the assessee could not get the leasehold right transferred to M/s GHCL till 31.3.2003, i.e., till the date of expiry of original lease agreement entered by DCW Ltd.

It is pertinent to note that the assessee herein has stated that it has offered the amount of Rs.4.50 crores received by it from M/s GHCL as its income in AY 1999-2000. After the expiry of lease period on 31.3.2003, both DCW Ltd and the assessee herein have claimed to have pursued the matter of renewal of lease agreement as well as the transfer of leasehold rights to M/s GHCL. It is stated legal courses by filing writs in the Madras High Court and thereafter to the Supreme Court were also pursued. The Bank guarantee obtained by the assessee in favour of M/s GHCL expired by 31.3.2002 and the same was renewed initially upto 31.3.2003 and again upto 31.3.2004. During the pendency of court proceedings, it appears that the Tamilnadu government asked M/s DCW Ltd to pay arrear rent and charges and accordingly, the assessee paid a sum of Rs.95.79 lakhs towards the same during the financial year 2003-04, i.e., the year under consideration and claimed the same as deduction.

While finalizing the accounts of the financial year 2003-04 in the month of August 2004, i.e., the year under consideration, the assessee reviewed the matter and came to the conclusion that despite the payment of arrear rent, there was no positive indication about the renewal of the lease. Accordingly, it came to the conclusion that the liability to repay the amount of Rs.450 lakhs to M/s GHCL has arisen. Accordingly, the assessee provided for the same in the accounts of the financial year 2003- 04 relevant to the AY 2004-05, i.e., the year under consideration. It was stated that the Bank Guarantee was finally encashed by M/s GHCL in the financial year 2004-05 relevant to the assessment year 2005-06. In addition to the above, the assessee also provided for a sum of Rs.62.06 lakhs towards workers liability. Thus, the total provision made by the assessee amounted to Rs.512 lakhs.

In the computation of income under normal provisions of the Act, the assessee added back the provision so made. However, it did not add back the provision to the Net profit for the purpose of arriving at the „Book Profit‟ u/s 115JB of the Act. The assessee took the stand that the provision so created is an “ascertained liability” and hence the same was not required to be added to the Net Profit under the provisions of sec. 115JB of the Act. However, the assessing officer took the view that (a) if at all the provision is to be made, the same should have been made on 31.3.2003 and not on 31.3.2004, since the lease period had expired on 31.3.2003. (b) M/s DCW Ltd can transfer its right over the leased land only with the approval of the Tamilnadu Government. Hence the transfer of right to manufacture of salt by DCW Ltd to the assessee herein/ GHCL is void-ab-initio. (c) Since the DCW Ltd leasehold right expired on 31.3.2003 and till that date M/s GHCL has also carried on its activities without getting transfer of leasehold right, M/s GHCL was in no way affected in not transferring the leasehold right.

In support of the claim relating to the payment of arrears of lease rent etc, which was claimed by the assessee as deduction, the assessee produced a copy of order of Hon‟ble Madras High Court. However the AO noticed that the said order was in the name of DCW Ltd. Further, it was noticed that the receipt issued by the Tahsilder also carried the name of DCW Ltd. The AO further observed that the Tamilnadu Government has not recognized the agreement entered between the assessee and DCW Ltd and the assessee has accepted the liability of DCW Ltd without such an approval. Accordingly the AO held that the assessee cannot claim an expenditure pertaining to DCW Ltd. Accordingly he disallowed the claim of Rs.95.79 lakhs pertaining to arrear rent etc.

The Ld CIT(A) noticed that the assessee has duly provided for the liabilities in its books of account. He also noticed that the assessee had offered the sum of Rs.450 lakhs as its income in AY 1999-2000 and the liability towards GHCL was settled in the year succeeding to the year under consideration. The Ld CIT(A) noticed that the provision made for workers liability pertained to the period prior to February, 1999. The Ld CIT(A) did not agree with the view of the AO with regard to the nature of liability and accordingly concluded that the provision created by the assessee was towards an “ascertained liability”. Accordingly, he held that the addition of the provision of Rs.502 lakhs made by the assessing officer under clause (b) or (c) of Explanation below sec. 115JB(2) is not warranted.

With regard to the disallowance of Rs.95.79 lakhs relating to payment of arrear rent, the Ld CIT(A) held that the payment was made by the assessee out of commercial expediency and the receipt issued by the Tahsildar was in the name of DCW Ltd, since the lease was granted to DCW Ltd only by the Tamilnadu Government. Accordingly, the Ld CIT(A) deleted the addition made by the AO.

The Ld D.R placed strong reliance on the order passed by the assessing officer. However, the Ld A.R strongly supported the order passed by Ld CIT(A).

We have heard the rival contentions and perused the record. The first issue is whether the provision of Rs.502 lakhs is an ascertained liability or not. We have noticed earlier that only M/s DCW Ltd has taken the land on lease from the Government of Tamilnadu and it has given the manufacturing right of salt to the assessee initially. Thereafter both the assessee and DCW Ltd has given the same to M/s GHCL. Before us, the agreement entered between the assessee and M/s DCW Ltd was not produced. It is stated that the assessee got a sum of Rs.450 lakhs from M/s GHCL and offered the same in AY 1999-2000. We have noticed earlier that the assessee has got only the right to manufacture salt and the leasehold right was held by M/s DCW Ltd. Under these set of facts, it is not understandable as to how the assessee could get a compensation of Rs.450 lakhs for transferring the leasehold rights, when the assessee itself is not a lease holder of the land. Secondly, if it is presumed that the assessee has got the above said sum of Rs.450 lakhs for transferring its “Salt manufacturing right”, then the point is that the right has already been transferred by way of third party agreement and M/s GHCL has started manufacturing of salt from Feb., 1999 onwards. In this situation, why the assessee should repay the amount of Rs.450 lakhs? Hence, in our view, the assessee should clarify as to how it got the right to get Rs.450 lakhs and should also clarify the commercial expediency in agreeing to provide a Bank guarantee for repaying the amount of Rs.450 lakhs. The existence of commercial expediency and consequently the liability on the part of the assessee, if any, could be ascertained only if the terms of agreement entered between M/s DCW Ltd (lease right holder) and the assessee are examined. As noticed earlier, the assessee herein has not explained as to how the liability on this account came to be fasted upon it. The confusion prevailing in this matter is further fortified by the fact that the assessee has disallowed this provision while computing the Act. Had it been a clear case of ascertained liability, then there is no question of disallowing the same while computing the total income under normal provisions of the Act.

With regard to the provision of workers liability, we notice that the Ld CIT(A) has recorded a finding that the same pertains to the period prior to Feb., 1999. However, he has not brought any material on record to support his finding. It appears that the assessee has provided a Bank guarantee towards workers‟ liability in addition to the bank guarantee given for Rs.450 lakhs. Though the tax authorities discuss about the bank guarantee given for an amount of Rs.450 lakhs relating to transfer of leasehold rights, no facts relating to the bank guarantee given for workers‟ liability was given. It is also not clear as to how the assessee could keep the workers‟ liability pertaining to 1998-99 pending till 2004, since the same appears to be against trade practice. Hence, we are of the view that the facts relating to the same should be brought on record and then only a proper decision could be arrived at.

In view of the above, we are of the view that the entire matter relating to provision created by the assessee for transfer of lease and workers‟ liability requires fresh examination. Accordingly, we set aside the order of Ld CIT(A) on this issue and restore the same to the file of the assessing officer with the direction to examine the same afresh by considering all the relevant details. The assessee is also directed to furnish all the details in support of its claim and that may be called for by the AO. 13. The next issue relates to the claim of Rs.95.79 lakhs relating to arrear rent paid. We have noticed that the assessing officer has disallowed the same on the reasoning that the order of Hon‟ble High Court of Madras has placed the burden on M/s DCW Ltd and the receipt issued

With regard to the issue relating to the liability of the assessee to pay the arrear rent etc. amounting to Rs.95.79 lakhs, in our view, one has to examine the agreement entered into between the assessee and DCW Ltd. From the orders passed by the tax authorities, it is not clear as to the period for which the above said arrears was paid. We have earlier noticed that the assessee‟s right to manufacture salt was available upto Feb., 1999 and thereafter, the same was transferred to M/s GHCL. Hence, it is required to be ascertained first, as to who shall be liable to pay the lease rent and arrear rent for specific periods. Admittedly, the tax authorities have not brought the facts relating to the same on record. Secondly, we notice that the assessee has stopped the salt manufacturing business from Feb., 1999 onwards, in which case, the question that arises is whether the assessee could claim an expenditure pertaining to a discontinued business. In our view, the question of application of commercial expediency shall arise only if the above said questions are answered. In view of the above discussions, we are of the view that this issue also requires proper examination at the end of the assessing officer. Accordingly, we set aside the order of Ld CIT(A) on this issue and restore the same to the file of the AO with the direction to examine this issue afresh.