By TIOL News Service

NEW DELHI, JAN 27, 2016: THE issue is - Whether during the pendency of the suit against enhancement of licence fee, assessee’s claim of the payment towards licence fee and interest on the arrears of licence fee is an ascertained liability. YES is the answer.

Facts of the case

The Assessee was engaged in the business of running a cinema hall which belonged to the New Delhi Municipal Council (‘NDMC’). In terms of an Agreement entered into with the NDMC, the Assessee obtained a licence for running a cinema hall for a period of ten (10) years against payment of licence fee. The Assessee applied for renewal of the licence. A week prior to the expiry of ten years, a fresh Licence Agreement was entered into between the Assessee and the NDMC. The annual licence fee was increased which was payable in twelve equal monthly instalments. The Assessee is stated to have paid the licence fee from October, 1980 to March, 1981 under protest. Assessee filed its return claiming deduction towards licence fee payable to the NDMC and this was allowed by AO and the assessment order for the said AYs became final. For AY 1984-85 to 1986-87 apart from licence fee claimed by the Assessee in terms of the Agreement, an additional sum was claimed towards payment of interest. All these items of expenditure towards licence fee as well as interest as claimed by the Assessee were allowed by the AO. For three AYs, i.e., 1984-85 to 1986-87 these orders were allowed to be become final. For AY 1987-88, the Assessee claimed deduction of Rs. 13,50,000 towards licence fee payable and a further sum of Rs. 5,13,282.28 towards interest. The amount actually paid to the NDMC towards rent was Rs. 7,16,472 in terms of the interim order passed in the civil suit challenging the enhancement of the licence fee as upheld by the High Court. The AO allowed the licence fee actually paid and thereby disallowed the licence fee to the extent of Rs. 6,63,556. The interest amount claimed in the sum of Rs. 5,13,282, not having been actually paid by the Assessee, was disallowed. CIT(A) deleted the additions made by the AO. The CIT (A) agreed with the Assessee that the amounts payable to NDMC towards liability had already accrued and deleted the addition made by the AO. ITAT reversed the order of the CIT (A) sustaining the additions made by the AO.

AO allowed the amount of licence fee and interest in its entirety as claimed by the Assessee for AYs 1993-94, 1994-95, 1996-97, 2002-03 and 2004-05 to 2008-09. Also, the AO allowed the licence fee as claimed by the Assessee, in the sum of Rs. 13,50,000 for AYs 1993-94, 1994-95, 1996-97 to 2001-02, a sum of Rs. 54,30,450 for AY 2002-03, a sum of Rs. 45,49,548 for AY 2003-04, a sum of Rs. 47,66,196 for AYs 2004-05 to 2007-08 and a sum of Rs. 35,74,647 for AY 2008-09.

Having heard the parties, the Court held that,

++ Whether a liability is ascertained or contingent is dependent on the facts of each case. Merely because a liability may be contractual or non-statutory would not make it incapable of being ascertained. Where an Assessee 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. (para 47)

++ in terms of the interim orders passed by the Court which were conditional upon the Assessee making a certain payment, what was being made clear was that the Assessee’s contention regarding legality of the renewed licence agreement was still to be determined. In other words, the Assessee could not, during the pendency of the suit, claim that it had no liability under the renewed licence agreement. It was granted interim protection on the express understanding that it would abide by the interim order of the Court which was in itself an acknowledgement that the liability under the renewed licence deeds continue as long as the suit is pending. However, the only concession was that the Assessee would pay the reduced licence fee for the renewed period which was 30 per cent over and above the original licence fee. In the circumstances, there was no question of there being no liability on the Assessee whatsoever for the renewal of the licence. Merely because the Assessee had chosen to challenge in Court the enhancement of the licence fee, which was permissible to be raised by it in accordance with law, did not preclude the Assessee, which was following the mercantile system of accounting, from claiming it as a liability during the AYs in question. The Court, therefore, does not, in view of the averments made by the Assessee in the pleadings in the suit filed by it against the NDMC, as a reason to preclude the Assessee from claiming the licence fee, the head office fee and the interest on arrears payable to the NDMC in terms of the renewed licence deed as a liability for the AYs concerned. (para 50)

++ even where a challenge is laid to a liability arising under a contract, by a challenger initiating legal proceedings, such challenger can still for the purposes of its accounts and for the purposes of computation of its income tax liability claim the entire amount under challenge as an accrued liability as long as such amount is ascertainable. Corresponding adjustments would be made in the year in which the suit is finally decided or the disputes settled. That, however, would not preclude the Assessee from claiming it as an ascertained liability. (para 51)

++ while the Assessee consistently claimed liability towards licence fee, the Revenue appears to have accepted it in its entirety some years and not in some others. In AYs 1982-83 to 1986-87, the AO fully allowed the amount as claimed in respect of the licence fee as well as interest by the Assessee in terms of the Agreement dated 23rd September, 1980. Without there being any particular change in the circumstances other than the order of the High Court confirming the interim order passed by the trial court, which position continued even in AY 1982-83, the AO restricted the allowance from AYs 1987-88 to 1992-93 to actual payment of licence fee made and disallowed the difference between the claimed amount and the amount actually paid. Again, without there being any change in the circumstances in AYs 1993-94 and 1994-95, the Assessee’s claim towards payment of licence fee as well as interest is fully allowed by the AO in terms of the Agreement. Again for one AY 1995-96, the AO did not fully allow the claim. In the very next AY, 1996-97, the claim was fully allowed. For AYs 1997-98 to 2001-2002, while the claim towards payment of licence fee was fully allowed in terms of the Agreement, the claim towards interest for arrears of rent was disallowed. Even as pointed out by the Assessee in 1997-98, the actual amount paid by it towards interest was in excess of the amount claimed by it and yet the interest amount actually paid was not allowed. (para 52)

++ for AY 2002-2003, the amount as claimed by the Assessee towards licence fee and interest was fully allowed. In AY 2003-2004, the interest due against arrears of licence fee up to 30th September, 2002 was disallowed. In the last set of years, i.e., AYs 2004-2005 to 2008-2009, the Assessee’s claim towards licence fee and interest was fully allowed. This is indeed an extraordinary case of the Revenue continuously changing its stand during the AYs in question. The Supreme Court in Radhasoami Satsang Saomi Bagh v. CIT (supra) commented upon the approach of the Revenue in changing its stand from one AY to another, as under: "16. We are aware of the fact that strictly speaking res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year." (para 53)

++ ITAT was in error in declining the plea of the Assessee for the AYs in question with regard to the full claim of the payment towards licence fee and interest on the arrears of licence fee. The question framed is answered in the negative, i.e., in favour of the Assessee and against the Revenue. (para 57)

(See 2016-TIOL-152-HC-DEL-IT)