1 Section 37(1) – Business expenditure -A. Ys. 1997-98 to 2002-03, 2004-05 and 2009-10 – Year in which deductible (Licence fee) – Assessee, sole proprietor of Oil Corporation, was granted licence by Northern Railway for use of a piece of Railway land against a licence fee – On 20/01/1999, Northern Railway revised licence fee taking revised base rate as on 01/01/1985 – Thereafter, for each of years from A. Y. 2002-03 till A. Y. 2008-09, Northern Railway issued letters demanding enhanced licence fees and damages – Assessee paid actual licence fee and claimed deduction on account of licence fee but had disputed enhanced liability – AO disallowed licence fee on ground that it was a contingent liability and not allowable as a deduction till liability for enhanced licence fee, which had been contested by assessee, actually crystallized

Jagdish Prasad Gupta vs. CIT; [2017] 85
taxmann.com 105 (Delhi):

The assessee the sole proprietor of Oil
Corporation was granted licence by the Northern Railway for use of a piece of
Railway land for constructing and maintaining a depot for storage of petroleum
products etc. By a letter dated 08/02/1980, the Northern Railway revised
the licence fee. On 23/03/1988, the Northern Railway further enhanced the
licence fee. The Northern railway further terminated the licence for use of the
land on the ground that the assessee had failed to deposit the licence fees.
The Northern Railway applied to the Estate Officer (EO) praying for eviction of
the assessee from the land in question. The said application was disposed of by
the EO holding that the enhancements were made by the Northern Railway too
frequently and without legal basis. Further on 20/01/1999, the Northern Railway
revised the licence fee taking the base rate as on 01/01/1985. Thereafter, for
each of the years from assessment year 2002-03 till assessment year 2008-09,
the Northern Railway issued letters demanding enhanced licence fees and
damages. The tax treatment of the claim of the assessee in its income-tax
returns of the enhanced licence fee was deduction. The said claim was allowed
by the Assessing Officer for A. Ys. 1987-88 to 1994-95. For A. Ys. 1996-97 to
1999-2000, the Assessing Officer allowed the licence fee actually paid by the
assessee, holding that it was a contingent liability and not allowable as a
deduction till the liability for the enhanced licence fee, which had been
contested by the assessee, actually crystalised. CIT(A) and the Tribunal
allowed the assessee’s claim.

On appeal by the Revenue, the Delhi High
Court upheld the decision of the Tribunal and held as under:

 “i) The undisputed
fact is that the assessee is following the mercantile system of accounting. It
has to book the liability in the year in which it arises irrespective of
whether it in fact discharges the liability in that year. In that sense, the
liability to pay the enhanced licence fee would arise in the year in which
demand is made or to which it relate irrespective of when the enhanced fee is
actually paid by the assessee.

 ii)   In the present case,
the liability of the assessee to pay the enhanced licence fee has, far from
being excused, sought to be enforced by the Northern Railway by repeated demands
notwithstanding the EO’s order dated 28/03/1990. As noted earlier, the Northern
Railway has preferred claim for arrears of enhanced licence fees and damages to
the tune of over Rs. 45 crores against the assessee before the sole Arbitrator
appointed by it. The demand is therefore very much alive and is subject matter
of adjudication in arbitration proceedings.

 iii)  The order dated
29/03/1990 of the EO no doubt holds the termination notice dated 23/03/1988 and
the claim for enhanced licence fee to be bad in law. However, it does not hold
that there is no liability on the assessee to pay the enhanced licence fees as
and when that is determined in accordance with law. The EO has in fact observed
that the Northern Railway ‘should form a definite policy in revising the
licence fee for a considerable period on uniform basis by incorporating the law
of principles of natural justice to avoid unnecessary litigation thereby not
causing losses of revenue to the railway administration under these
circumstances and ensuring prompt and regular payment of licence fee by
licencees.’ Also the EO ends the order by stating. The applicant is free to
revise the licence fee in accordance with the provisions of law and as per
terms of agreement. The order of the EO read in the correct perspective,
requires the Northern Railway to follow the due process of law by giving a
hearing to those adversely affected by the upward enhancement of liability
before a decision is taken. The Revenue’s characterisation of the said order,
as negating the liability to pay the enhanced licence fee for all times to come
does not flow on the above reading of the said order. On the other hand, it is
more consistent with the plea of the assessee that while he is not denying the
liability to pay the licence fee he is only questioning the procedure involved
in its revision which, according to him, is not in accordance with law.
Consequently, it could not be said that the assessee has sought to mislead this
Court by contending that he is not questioning the liability to pay licence fee
but is only questioning the quantification or the quantum of the licence fee.

 iv)  While the revenue may be
right in pointing out that for assessment years 2002-03 to 2005-06, the
assessee claimed only Rs. 35,37,300 as deduction on the ground of enhanced
licence fee although it could have claimed the further enhancement which had
taken place by then, the fact remains that the enhanced liability claimed by
the Railways by its letter dated 20/01/1999 and later by the letter dated 29/07-1999
subsisted and was /being demanded. The explanation offered by the assessee for
this inconsistency in its claim is a plausible one. It does not deter from the
position that being an accrued liability, the enhanced licence fee can be
claimed by it as a deduction in the year in which such liability arose.

 v)   In the arbitration
proceedings, the claim of the Railways includes the claim for the enhanced
licence fee as well as the arrears. The arbitration proceedings could end
either in favour of the Railways or the assessee. If it goes in favour of the
assessee, it would then have no liability to pay such enhanced licence fee and
in the year in which such final decision is rendered, the corresponding
reversal of entries will have to take place in terms of section 41(3). All of
this, in no way, extinguishes the liability of the assessee to pay the licence
fee. The assessee would be justified in claiming the enhanced licence fee as
deduction in the year in which such enhancement has accrued even though the
assessee has not paid such enhanced licence fee in that year. This legal
proposition is well settled.

 vi) The Railways has already
filed its claim before the Arbitrator for the arrears of licence fees and
‘damages’. As rightly held by the Commissioner (Appeals), and concurred with by
the Tribunal, the mere characterisation by the Northern Railway of the amount
claimed by it from the assessee as ‘damages’ will not, in the context of the
present case, make it any less an accrued liability. It is an expenditure
incurred by the assessee corresponding to the income he derives from using the
land for the purposes of his business.

 vii) The Tribunal did not
make a grievous error, in the order passed by it, regarding the claim for
enhanced licence fee as a deduction being allowable not in assessment year
1995-96 but in assessment year 1996-97. The argument that the Tribunal may have
exceeded its jurisdiction done not hold since the revenue has, apart from not
challenging the said order, implemented it fully by the consequent appeal
effect order.

 viii) For all of the above
reasons, the first issue is decided in favour of the assessee and against the
revenue by holding that the liability of the assessee to pay enhanced licence
fees for the assessment years in question was an accrued liability which arose
in the year in which demand was raised.”