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* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA 324/2005
Date of decision: 12th December, 2017
COMMISSIONER OF INCOME TAX, DELHI ..... Appellant
Through Mr. Ruchir Bhatia, Advocate.
versus
NARINDERJIT SINGH .... Respondent
Through Ms. Bhakti Pasrija Sethi, Advocate.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MS. JUSTICE PRATHIBA M. SINGH
SANJIV KHANNA, J. (ORAL)
The present appeal by the Revenue in the case of Narinderjit Singh
relates to assessment year 1997-98 and arises from the order of the Income
Tax Appellate Tribunal dated 15th September, 2004 in ITA No.
4577/DEL/2000.
2. The appeal was admitted for hearing vide order dated 9 th November,
2006 on the following substantial question of law:-
"Whether the amount of Rs.62,99,100/- being the
provision made by the assessee on account of claim by
the principal contractor due to deficiency in contract
work is a contingent liability or an ascertained liability so
as to entitle the assessee to claim deduction?"
ITA 324/2005 Page 1 of 14
3. The respondent-assessee is a proprietor of M/s. N.J. Design Build,
who were assigned work as sub-contractor by M/s. Bhasin Associates (P)
Limited (BAPL, for short) in November, 1991 to execute unfinished part of
the contract for construction of influent pumping station at Ghatkopar for the
Municipal Corporation of Greater Bombay, Maharashtra (BMC, for short).
As per the agreement between the respondent-assessee and BAPL, the entire
amount receivable by the latter on account of the aforesaid project was to be
transferred to the respondent-assessee as consideration.
4. The respondent-assessee had started the aforesaid construction in the
previous year relevant to the Assessment Year (`AY', for short) 1992-93 and
the contract was completed in the previous year relevant to the AY under
consideration i.e. 1997-98. The respondent-assessee had for the purpose of
taxation opted for ,,completed contract method.
5. Return of income filed by the respondent-assessee on 27th October,
1997, declaring loss of Rs. 4,18,980/-, was taken up for scrutiny assessment.
The assessment order dated 24th March, 2000 records that, pursuant to the
directions issued under Section 144A of the Income Tax Act, 1961 (Act, for
short), the income of the assessee for earlier AYs 1992-93 to 1996-97 was
brought to tax by applying "percentage completion method" @ 12% of gross
receipts. Administrative expenses were allowed therefrom. On this basis,
the Assessing Officer (`AO', for short) computed the net business income of
the assessee for the assessment year 1997-98 at loss of Rs.3,48,842/-.
However, he made an addition of Rs.62,99,100/-, which had been claimed as
business expenditure by the assessee, on the ground that it was a contingent
liability which had not arisen and, therefore, was not ascertained or accrued
ITA 324/2005 Page 2 of 14
liability allowable as an expenditure. The aforesaid amount had been
claimed by BMC from BAPL against rectification and balance work not
completed. BMC has filed an arbitration suit against BAPL for recovery of
Rs.54.10 crores and also put forward a claim of Rs.5,00,000/- on account of
legal expenses. He observed that Rs.62.99 lacs, which had been claimed as
liability by the respondent-assessee constituted a part of the demand of
Rs.54.10 crores raised by BMC against BAPL in the arbitration proceedings.
Accordingly, the respondent-assessee had accepted liability of Rs.62.99 lacs
and, hence, the respondents claim that Rs.62.99 lacs was actual liability was
rejected, observing that it was self-contradictory. Referring to the stand
taken by the respondent-assessee, the assessment order also records that the
assessee was not clear whether he was disputing the demand of Rs.62.99
lacs.
6. Against the disallowance of Rs.62.99 lacs as expenditure, the
respondent-assessee preferred an appeal, which was allowed by the
Commissioner of Income Tax (Appeals), who referred to the agreement
between the respondent-assessee and BAPL, copy of the claim made by
BAPL on the respondent-assessee vide letter dated 23rd September, 1996,
copy of the agreement between the respondent-assessee and BAPL on the
defect liability period, imperfections and rectifications. The said order also
refers to several other letters exchanged between the respondent-assessee
and BAPL, and BMC and BAPL. In particular, reference was made to letter
dated 20th November, 1996 along with enclosures written by BAPL
acknowledging confirmation of the claim of Rs.62 crores in their favour by
respondent-assessee vide earlier letter dated 15th October, 1996. He
observed that the respondent-assessee had admitted his liability in these
ITA 324/2005 Page 3 of 14
letters to BAPL, who was the principal contractor. The letters affirmed that
the respondent-assessee had accepted liability having failed to fulfil his
commitment to BAPL. The observations made by the Commissioner of
Income Tax (Appeals) in this regard read as under:-
"I have carefully considered the arguments of
the A.O. and the submission of the appellant.
The A.O. has discussed at length the
inadmissibility of the claim for Rs.54.1 crores.
The issue of the allowance of this claim is not in
appeal expect for an amount of Rs. 62,99,100/-
which was separately claimed by the appellant.
The A.O. made disallowance of Rs.54.1 crores
and Rs.62,99,100/-in the same breath. The
arguments given by her for disallowing the claim
of Rs.54.1 crores was applied in relation to the
claim of Rs.62,99,100/-also. However a
distinction needs to have been made for
appreciating both the claims. The bigger claim
was rightly refused because it had neither been
accepted by the appellant not had been
ascertained or quantified.
But the situation with regard to the claim of
Rs.62,99,100/- is different as there is no dispute
about the pending work. In fact the
quantification by the BMC for this work as per
final claim made by it is yet higher at about
Rs.1.36 crores. The A.O. has given reason for
not accepting the claim of the assessee in Para 29
of the assessment order on the basis of the finding
given in Paras 15-18 of the assessment order by
holding that since the assessee has neither rectified
the pending work not has made the payment so far
to BMC or any other contractor for the liability
admitted by him the same cannot be allowed. In
ITA 324/2005 Page 4 of 14
her opinion the admission of liability should be
supported by an action of actual payment or
rectification of the defective work though it has
been admitted by the A.O. that the BMC has got
pending/ rectification work done through other
parties. She has also stated that since the assessee
is disputing the liability of Rs.54.10 crores and the
amount of Rs.62,99,100/- also forms part of the
same t h e q u a n t i f i c a t i o n o f t h i s l i a b i l i t y h a s
n o t b e e n c o r r e c t l y wo r k e d o ut . I n h e r
o p i n i o n i f t h e a s s e s s e e d e c i d e s t o c o mp l e t e
t h e wo r k h e ma y s p e n d mo r e o r l e s s mo n e y.
Therefore, in her opinion this was a
c o n t i n g e n t l i a bi l i t y a n d wa s n o t a n
a l l o wa b l e d e d u c ti o n . A c o n t i n g e nt l i a b i l i t y
i s c e r t a i n l y n o t a d mi s s i b l e u n d e r t h e
I n c o me - t a x l a w e v e n i f t h e a s s e s s e e i s
f o l l o wi n g me r c a n t i l e s ys t e m o f a c c o u n t i n g .
But the nature of the contingent liability is
t h a t i t i s n o t a c t u a l l y a n e x i s t i ng l i a b i l i t y
o f t h e t i me b u t i s i n t h e n a t u r e o f p u t t i n g
a s i d e o f mo n e y w h i c h ma y b e c o me e x i s t e n t
on the happening of an event. In this case
the liability calculated by the appellant did
n o t d e p e n d u p on a n y f u t u r e e v e n t . Th e
c l a i m w a s ma d e b y t h e B M C f o r d e f i c i e n c y
i n t h e c o n t r a c t wo r k u n d e r t a k e n b y t h e
a p p e l l a n t . Th e ma i n c o n t r a c t o r h a d p a s s e d
o n t h i s l i a b i l i t y t o t h e a p p e l l a n t wh o w a s
c o v e r e d b y s a me t e r ms o f a g r e e me n t a s t h e
ma i n c o n t r a c t o r a n d t h e a p p e l l a n t h a d
a c c e p t e d t h i s l i a b i l i t y. No future event was
involved in this process. The courts have held
that difficulty in ascertaining the quantum of
liability does not prevent the accrual of
liability. If the estimate is wrong the taxing
authority would be competent to substitute
his own estimate ignor ing the estimate of the
ITA 324/2005 Page 5 of 14
assessee but this fact alone would not mean
that the liability had not accrued. This was so
laid down by the Hon'ble Supreme Court in
the case of Calcutta Co. Ltd. Vs. CIT 37 ITR
Page-1. The High Court of Kerala in CIT Vs.
Kerala Transportation Co. has also held that
for considering the question of legal liability
in a mercantile system of accounting only
concern can be that of legal liability arising in
relevant assessment year and fact that
liability has not been quantified for pay ment
which law enjoins upon assessee to cannot
be relevant (2000) 111 Taxman 612). An
enforceable liability against the assessee was
created in the year through the principal
contractor by the BMC. This liability was not
only quantified in the year but was also
accepted by the assessee in the year. Assessee
has been following mercantile system of
accounting and the project in which the liability
was created came to an end in this year.
Therefore the claim could only have been
ascertained and made in this year. Under the
circumstance and in view of decisions mentioned
supra, the deduction of Rs.62,99,100/- is
allowable. If subsequently there is a remission of
liability, such remission would attract provisions
of Section 41(1) of the Act. The A.O. is directed
to allow the same."
7. Aggrieved, the Revenue preferred further appeal which has been
dismissed by the impugned order dated 15th September, 2004, passed by the
Income Tax Appellate Tribunal. The impugned order after referring to the
order passed by the AO and the first appellate authority held that the
assessee had accepted the liability and, therefore, the same was not
contingent. There being no dispute between the assessee and BAPL, the
ITA 324/2005 Page 6 of 14
liability or expenditure was to be allowed as a deduction under the year in
consideration.
8. We had asked and called upon the counsel for the appellant-Revenue
to ascertain the fate of the arbitration proceedings and whether the amount
of Rs. 62.99 lacs was brought to tax in any year. Counsel for the Revenue
has ascertained and stated that the amount of Rs. 62.99 was brought to tax in
the assessment year 2002-03 pursuant to the return filed by the assessee
himself including this amount in the taxable income for the said year and
under the head "other income".
9. We would have examined and gone into the question whether the
aforesaid amount of Rs.62.99 lacs was contingent or actual liability in some
detail, but find ourselves handicapped as the appellant-Revenue has not
placed on record a copy of the agreement between the respondent-assessee
and BAPL as also correspondence extensively referred to by the
Commissioner of Income Tax (Appeals). We may, in this connection,
produce the relevant portions of the order of the first appellate authority
regarding and dealing with the said aspect:-
"Before me learned counsel for the appellant
appeared and filed written submission
alongwith paper book. It is stated that the
A.O. has given a finding by not properly
appreciating the facts in entrity (sic). He
stated that it is not the appellant wh o has
contested the clai m of the BMC but it is the
principal contractor Bhasin Associ ates (P)
Ltd. In support of the facts , the appellant
filed the following documents and stated
that the same were filed before the A.O.
also.
ITA 324/2005 Page 7 of 14
A. Copy of the agreement of th e appellant
with Bhasin Associates (P) Ltd or BAPL
B. Copy of the claim made by BMC on BAPL
C . Cop y o f th e c lai m lodg ed b y B AP L on
th e appell ant vide l ette r dat ed 23.9 .96 .
D. Copy of the clauses for defect liability
period and liability for defects and imperfections and
rectification thereof.
E. A photo cop y of th e lett er dat ed
28 .02 .2000 alongwith its en clos es.
F. Photocopies of the letters dated 03.08.1995,
29.09.1995 and 29.08.1996 written by BMC about
pending work.
G. A copy of justification note filed before
the A.O. with the letter dated 27.01.2000
H. Copies of the Notification u/s 154(2) of the
Act bearing No. S069 (E) and the notification
No. 994 (F. No. 132/7/95-TPL) both dated
25.01.1996 about method of accounting and
estimated provision of expens es to be incurred
against the work already completed.
I. A copy of the letter dated 29.09.1995 of
BMC to BAPL alongwith enclosures.
J. A copy of the letter dated 20.11.1996 alongwith
enclosures written by BAPL acknowledgement of
confirmation of claim of Rs. 62 lakhs in their favour by
the appellant vide letter dated 15.10.1996.
K. A specific confirmation from Bhasin Associates
Ltd. Certifying admitted claim of Rs. 62,99,100/- by
ITA 324/2005 Page 8 of 14
the appellant in its favour in respect of BMC,
Ghatkoper, Mumbai Project.
L. A letter from the appellant to the said effect giving
categorical confirmation vide letter dated 15.10.1006.
It was submitted that there was no dispute
between the appellant and BAPL the principal
contractor. The appellant admitted his liability
to that extent as he failed to fulfil (sic) his
commitment to complete the work and as
happens in every government contract the
governments is empowered to get the
uncompleted work finished from other sources
at the risk and cost of the earlier contractor.
Such amount can be recovered thereafter by the
Govt. from the contractor as land revenue. It is
pointed out by the learned counsel that as per
Para 48 and 49 of the claim filed by BMC
against the main contractor BAPL had failed to
execute the said work and the said work
resulted into additional liability of Rs.20.91
lakhs the calculation of which has been given in
exhibits EE-1 and EE-2 attached thereto.
Similarly in exhibit 33 forming part of Para 57 of
the claim it has been shown that benching
concrete work was got done by BMC as the main
contractor failed resulting into an additional cost
of Rs.116 lakhs. Para 60 of the claim document
also shows in exhibit LL the additional cost of
RS. 9.18 lakhs paid by BMC because of failure of
BAPL Para 73 of the claim filed by BMC shows
that it had incurred an expenditure of Rs.1 crore
for the repairs and servicing of machines and
equipment at the site due to failure of the
contractor. The working of this amount is given
on page 82 of the claim. All these factors go to
prove that the contention of the assessing officer
that the appellant failed to substantiate that the
ITA 324/2005 Page 9 of 14
work had already been completed by alternate
contractors is incorrect. Can it be stated that
the BMC (a government body) made false
claims. It is stated that in v iew of the said
facts the other contention of the A.O. that the
liability was contingent also becomes
baseless.
Further it was stated that in terms of clause
No. 3 of the agreement dated 1.11.91
between the appellant and the main
contractor all future liab ilities were to be
borne by the appellant to the entire
exclusion of the main contractor and
therefore the same was accordingly provided
in the books of account. My attention was
also drawn to clause No. 76 of the
Arbitration claim of the BMC which clearly
stipulates the working of claim of Rs.54.1
crores against the main contractor. This
included not only erection of new work but
also expenses of Rs.1 crore incurred on
repairs and servicing of the machinery
equipment at site. This is specifically
mentioned in Para 73 of the claim. The total
computation of claim is given in exhibit YY of
the claim as per enclosed photocopy of the
same. The amount determined as payable by the
appellant to the main contractor includes the
cost of rectification as well as balan ce work. It
is stated that the claim of Rs. 54.1 crores
contains interest claimed at Rs.52.18 crores
besides Rs.56.4 lakhs for illegal occupation of
land. It these two figures are excluded from the
total claim, then the actual claim of the BMC
remains Rs. 1.36 crores only against which the
appellant has admitted a liability of Rs.62.99
lakhs. A reconciliation of the pending work
ITA 324/2005 Page 10 of 14
claimed by the BMC and quantified by the
appellant at Rs.62.99 lakhs has also been filed.
In respect of the issue alleged by the A.O. that
certain amounts included in the claim of RS.54.1
crores made by the BMC are also included in the
admitted liability of Rs.62.99 lakhs of the
assessee, it was stated that the same is
correct.
A copy of the letter dated 29.08.96 issued by
BMC attaching therewith the list of pending
balance and rectification work has been filed.
Since the said work was factually incomplete
and pending the appellant conceded the same
and valued its cost at Rs.62.99 lakhs. The items
mentioned in the said list to BMC tally item by
item in the Valuation made by the appellant and
the main contractor as per details given on pages
52 & 53 of the paper book filed earlier. Further,
it is stated that from exhibits RR and YY which
form part of the claim of the BMC, it would be
seen that for the rectification items claim was
for Rs.14.10 lakhs as against which the assessee
admitted a liability of Rs.8,79,600/-as per details
given on page 52 of the paper book. Similarly
the first item in the exhibit YY claimed at Rs.
20.94 lakhs has been admitted by the asses-see
at Rs.20 lakhs as item 9a as per details given on
page 53 of the paper book. The second item in
the exhibit YY claimed at Rs.1.15 lacs has
been admitted at Rs.1 lakh by the assessee in
the said list. For the balance item th e BMC
made a claim of Rs.1 crore in lump sum as per
item 5 of the exhibit YY and in which SI. No
4 is the claim for Rs.14.10 lakhs. The item
No.3 of the exhibit YY is for miscellaneous
work got done as per exhibit LL which are also
ITA 324/2005 Page 11 of 14
part of balance work as per page 53 of the paper
book.
The learned counsel also stated that since the
claim was made by the BMC for pending/
rectification work, the appellant conceded the
same as per its own cost whereas the cost
estimated and claim made for the same by BMC
was of much higher amount. Thus the same items
have to form part of both the figures. He fairly
conceded that factually inadvertent error occurred
when the claim was made for Rs.54.1 crores
whereas the same should have been for an
amount lower by Rs.62.99 lakhs and at Rs.53.47
crores. The A.O. has discussed the same in
context of the claim for Rs.54.1 crores, an issue
which is not pending in this appeal as no ground
for the same has been taken in this appeal.
Finally it was stated that claim of BMC is for a
bigger amount yet the assessee has admitted his
liability unconditionally to the extent of
Rs.62.99 lakhs only vide letter dated 15.10.99
and the said confirmation was accepted by the
main contractor on 20.11.96 as per its letter of
the said date. Thus the liability arose during the
period under consideration only. The appellant is
not liable to make any payment to BMC. His
liability is limited to the main contractor only
for whom he was working and if the main
contractor is raising disputes with the contractor
party then it does not mean that the liability of
the appellant as sub-contractor is also disputed.
In case the main contractor gets some concessions
from the contractee then it may be the income of the
main contractor of if the same is passed on the sub-
contractor then it shall become income of the
sub-contractor u/s 41 (1) of the Act for the year,
when it will be remitted by way of concession.
ITA 324/2005 Page 12 of 14
For such eventualities only, this section has been
introduced in the Statute. Any subsequent
probable remission cannot influence the result of
an earlier year if as on the closing date of the
earlier year, the nature of subsequent event was
not know. Further the counsel for the appellant
has place reliance on certain decisions. On the
basis of the above arguments the learned counsel
prayed that the action of the A.O. in rejecting the
deduction of Rs.62,99,100/-should be reversed. "
10. In the absence of the said documents and papers, it would be
hazardous and difficult for us to answer the question framed above without
examining the contents of the agreement and correspondence exchanged
between the parties. Noticeably, the exchange of correspondence itself
between the respondent-assessee and BAPL, and BAPL and BMC remained
undisputed and was not under challenge.
11. In view of the aforesaid position, we decline and do not answer the
question of law as the appellant-Revenue has not placed on record the said
letters including the agreements mentioned above. Without the said
documents, it will not be possible to answer the question. The case of the
respondent-assessee as accepted by the first appellate authority and the
Tribunal is that they had accepted and admitted their liability to pay
Rs. 62.99 lacs to BAPL. That facet cannot, in absence of documents, be
rejected and upset by us without the said documents on record.
Accordingly, we decline to answer the question of law raised by the
appellant-Revenue in the absence of documents and papers on record. There
ITA 324/2005 Page 13 of 14
would be no order as to costs.
SANJIV KHANNA, J.
PRATHIBA M. SINGH, J.
DECEMBER 12, 2017
NA
ITA 324/2005 Page 14 of 14
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