Rambagh Palace Hotel P. Ltd. vs Commissioner of Income Tax

The Income Tax Appellate Tribunal has referred the following question of law arising out of its order dated December 31, 1983, in respect of the assessment year 1979-80 u/s 256(1) of the Income Tax Act, 1961 :

"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the demand of Rs. 2,64,113 raised on the assessee in the accounting period as a consequence of the completion of assessment by the land and building tax authority pertaining to the earlier years is not allowable as a deduction in computing the income for the assessment year 1979-80 as the assessee followed the mercantile system of accounting ? "

The facts relevant for the purpose of disposal of the above question are that the assessments of the assessee under the Rajasthan Land and Building Tax Act for the assessment years 1973-74 to 1977-78 were completed on February 28, 1978. During the assessment proceedings for the year ending on June 30, 1978, i.e., 1979-80, deduction of Rs. 5,05,758 was claimed which included the liability of house tax paid under the Rajasthan Municipalities Act for a sum of Rs. 34,023. The balance amount was in respect of liability of land and building tax. The Income Tax Officer found that the additional liability of Rs. 66,028 per year counted from 1973-74 to 1976-77, i.e., Rs. 2,64,113, has not been accepted by the assessee and an appeal has been filed against the said order. The matter was challenged in the High Court and stay was also granted on March 22, 1988. Since the liability pertains to the years 1973-74 to 1976-77, it could not have been claimed in the year 1979-80, hence, it could not be allowed in the assessment year 1979-80. The matter was challenged before the Commissioner of Income Tax (Appeals) and the claim of the assessee was allowed. It was found that since the matter pertains to the extra liability for the earlier years and demand was created by the assessing authority during this year, the liability has been quantified during the year of account and the assessee could not have anticipated the higher liability. In appeal before the Income Tax Appellate Tribunal, the order of the Commissioner of Income Tax (Appeals) was reversed on the ground that the assessee was maintaining the mercantile system of accounting and the assessee was under obligation to determine the market value and pay the tax thereon. The assessing authority has merely quantified the real tax payable that the assessee was required to pay. In these circumstances, the deduction was disallowed.

The submission of Mr. Gupta on behalf of the assessee-petitioner is that the decision of The Kedarnath Jute Mfg. Co. Ltd. Vs. The Commissioner of Income Tax, (Central), Calcutta, has wrongly been interpreted and since the admitted amount of tax as per the assessee has already been paid, the additional liability created could not have been anticipated.

We have considered over the matter. This court had an occasion to examine the above dispute in the case of CIT v. Shah Engineering Put Ltd. [1994] 208 ITR 985 in which the following observations were made (at page 988) :

"In the present case, the matter pertains to the land and building tax liability for financial years 1973-74 to 1977-78. The assessee had paid a sum of Rs. 190 in respect of each of the financial years 1973-74 to 1976-77 and no amount was paid for 1977-78. The assessment was made by the Assistant Director, Land and Building Tax, wherein out of the liability of Rs. 14,562, Rs. 2,662 were considered as pertaining to the relevant assessment year and the balance amount of Rs. 11,900 was disallowed because the assessee was maintaining the books on the mercantile basis. The assessee has a statutory liability which was discharged in part, i.e., a sum of Rs. 190 for each year was paid. It appears that when the assessment was finalised, the tax liability was created at the rate of Rs. 4,917.50 in each of the years. It was not the ascertained liability which could be said to be known to the assessee at the time when the payment of tax was made during the preceding years and the additional liability which has been created in the assessment year was crystallised by issuance of a notice of demand in respect of each of the years. Under the Land and Building Tax Act, it is no doubt true that the tax is to be paid in each of the years and the assessee has paid the tax which was due according to him. The order which had been passed on May 23, 1978, created the additional liability which cannot be compared with those cases where the tax liability has accrued in a year and has not been claimed in that year. The assessee had paid the tax that was due according to him. The tax which was admitted by the assessee had already been paid and it is only the excess additional tax liability which has been created by the assessment order and the demand notices issued. Before such assessment order, there was no quantification and it could not be said that the additional liability which has been created by virtue of the assessment order was ascertained even before the finalisation of the assessment. We are, therefore, of the view that the additional liability which has been created in the present case in the assessment order was not an ascertained one before the date of assessment and, therefore, the Income Tax Appellate Tribunal was justified in holding that the liability of Rs. 11,900 pertaining to the earlier years and demanded by the assessing authority under the Rajasthan Land and Building Tax Act, on May 23, 1978, being a statutory liability is allowable for computing the total income of the assessee in the year under consideration."

Following the above decision, we are of the opinion that the Income Tax Appellate Tribunal was not justified in holding that the payment of Rs. 2,64,113 by the assessee in the accounting period as a consequence of completion of assessment by the land and building tax authority pertaining to the earlier years and is not allowable as deduction in computing the income for the assessment year 1979-80 as the assessee followed the mercantile system of accounting.

Accordingly, the reference is answered in favour of the assessee and against the Revenue. No order as to costs.