By TIOL News Service

CHENNAI, APR 05, 2019: THE ISSUE IS - Whether once the tariff authority settles the dispute of storage charges, the assessee cannot take shelter of pendency of dispute to forego its liability to pay tax upon cessation of trading liability u/s 41(1). YES IS THE VERDICT.

Facts of the case

The assessee company is a shipping agent. For the relevant AY 2003-2004, the assessee had shown income in its books of account, accrued from rent payments. These payments were collected during the period of 1994-95 towards ground rent payable to the Chennai Port Trust as storage charges for the containers of the customers. These payments were not paid by the assessee to the Chennai Port Trust on the ground that the issue of ground rent charges levied by the port trust was pending before the Madras High Court. The assessee submitted that since the liability was in dispute, it cannot be qualified as an income of the assessee but only as liability in its books. However, the AO rejected such contentions and held that since the assessee had collected the amounts from its customers, they are to be taxed as income.

This order of the AO was carried to the CIT(A) which accepted the contentions of the assessee. It was held that once a claim is pending determination before judicial authorities, it cannot be added to the income of the Assessee till the dispute is finally settled. The Tribunal also accepted the findings of the CIT(A).

On hearing the appeal, the High Court held that,

++ the issue was the whether the rents received cannot be taxed u/s 41(1) because these represented the subject of disputed rent payable to Chennai Port Trust. The significant phrase in section 41(1) is 'remission or cessation' of trading liability. If such liability is paid back by the creditor or had ceased to exist, then in that year of payment or cessation, such trading liability can be brought to tax as profit chargeable to tax. The cessation of liability should cease to exist in the eye of law. The Explanation provided that an unilateral act on the part of assessee to write back or write off such liability also amounted to cessation of liability attracting tax on it. In the present case, the amounts have been received by the assessee in the course of carrying on their business. By efflux of time, it had become the assessee's own money;

++ the Tarriff Authority for Major Ports had passed final orders on January 15, 2016 revising the container storage charges at Chennai Port Trust for the period from July 06, 1994 to August 2001. Consequently, since TAMP had finally fixed the storage charges, the claim of the assessee that the tax liability had not ceased finally cannot be accepted. The assessee had taken shelter on the ground that the storage charges had not been finally quantified, but the liability to pay the same to Chennai Port Trust was not disputed and therefore the liability of assessee to pay back to customers had ceased and had infact become the income in the hands of the assessee. Consequently, the reasoning given by the Tribunal that the assessee is not liable since there was a dispute pending, no longer survived. The obligation by the assessee to pay back the amounts to Chennai Port Trust had arisen immediately when TAMP had passed final orders fixing the storage charges. The Assessee had enjoyed the rent amounts as its income collected but without paying it to the Chennai Port Trust. They were under obligation to be taxed on the such amount, as per Section 41(1). Since they have not paid the same, the amount in their hands has to be treated as 'income' taxable u/s 41(1).

(See 2019-TIOL-752-HC-MAD-IT)