Income-tax---

-----Business expenditure--Year in which expenses are allowable--Compulsory acquisition of tea gardens--Estate owners becoming lessees--Increase of lease rent in 1967 with retrospective effect from 1955--Dispute regarding rent and cess settled and agreement executed between assessee and Government in March 1975--Assessees' previous year commenced on 1-3-1975 and ended on 28-2-1976--Arrears of rent and cess paid under agreement deductible in assessment year 1976-77.

The assessee, a public limited company carried on the business of manufacture and sale of tea. It owned a tea garden in West Bengal. The assessee followed the mercantile system of accounting. By a notification issued by the State Government under section 4 of the West Bengal Estates Acquisition Act, 1953, agricultural lands forming part of different tea gardens situated throughout the State of West Bengal vested in the State Government with effect from April 15, 1955. The lands forming part of the tea garden: were, however, allowed to be retained by the respective tea garden owners who were in possession of such lands on the date of vesting. These persons were allowed to continue their business of cultivation and manufacture of tea a lessees of the Government of West Bengal in respect of the agricultural land; forming part of such tea estates. The Revenue Officers of the Stan Government sought to redetermine the (case rent payable by the owners of tea gardens with retrospective effect from 1955. This attempt was made some time in 1967. The tea industry, however, disputed the right of the Revenue Officer to redetermine the lease rent at an enhanced figure with retrospective effect. There were negotiations and, finally, the State Government drew up a form agreement to be executed by each of the owners of tea gardens. Several to garden owners accepted the formula while some continued the dispute. The assessee executed the agreement in March, 1975. Based upon this agreement the assessee claimed deduction in respect of the aggregate rent and cess amounting to Rs. 4,13,666 which was determined to be payable by it. The deduction was claimed in the assessment year 1976-77, the previous year of the assessee for the said assessment year being March 1, 1975 to February 28, 1976. The Income-tax Officer rejected the claim but the Tribunal directed the Income-tax Officer to allow deduction of the said sum of Rs. 4,13,666 as business expenditure relating to the assessment year 1976-77. On a reference:

Held, that the liability to pay rent and cess was a statutory liability. But, the right of the State Government to enhance the rent with retrospective effect from the date of vesting was all along seriously disputed by everybody including the assessee. The agreement between the assessee-company and the State Government in respect of rent and cess from the date of vesting at the enhanced rate was executed on March 13, 1975, which was during the previous year for the assessment year 1976-77. It was under this agreement that the liability to pay rent and cess at the enhanced rate from the date of vesting was fastened on the assessee and made enforceable for the first time. Therefore, the liability accrued and arose and became real and enforceable in the previous year relevant to the assessment year 1976-77 and was deductible in the assessment year 1976-77.

Belapur Sugar and Allied Industries Ltd. v. State of Maharashtra (1987) 165 ITR 27 (Bom); Commissioner of Agri. I.T.v. Phalton Sugar Works Ltd. (1980) 121 ITR 9?-p (Bom.); CIT v. Jatia Mfg. Investment Co. Pvt. Ltd. (1983) 142 ITR 536 (Cal.); CIT v. Orient Supply Syndicate (1982) 134 ITR 12 (Cal.); CIT v. Phalton Sugar Works Ltd. (1986) 162 ITR 622 (Bom.); CIT v. Robots McLean & Co. Ltd. (1978) 111 ITR 489 (Cal.); CIT v. Swadeshi Cotton and Flour Mills P. Ltd. (1964):53 ITR 134 (SC); Kalinga Tubes Ltd. v. CIT (1988) 169 ITR 374 (Orissa);.National Newsprint and Paper Mills Ltd. v. CIT (1978) 114 ITR 172 (MP); Shalimar Chemical Works Pvt. Ltd. v. CIT (1987) 167 ITR 13 and 17 FJR 67 (Cal.) ref.

A.C. Maitra for the Commissioner.

N.K. Poddar for the Assessee.

JUDGMENT

AJIT K. SENGUPTA, J.--In this reference under section 250(1) of the Income Tax Act, 1961 made at the instance of the Revenue, the following question has been referred for the opinion of this Court:

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the liability to pay the arrear rent and cess of Rs. 4,13,066 arose in the accounting year relevant to the assessment year 1976-77 and, therefore, it was an admissible deduction in the aforesaid assessment year?"

The facts which are admitted and/or found by the Tribunal are as under:

The assessee, a public limited company, carries on business in the manufacture and sale of tea. It owns a tea garden which is situated in the State of West Bengal. The assessee follows the mercantile system of accounting. The previous year of the assessee relevant to the assessment year 1976-77, which is now in reference before this Court, commenced on March 1, 1975, and ended on February 28, 1976.

In the course of the assessment proceedings for the said year, the assessee claimed deduction in respect of rent and cess for the earlier years aggregating to Rs. 4,13,666 in all, payable by it to the Government of West Bengal for its Teesta Valley Tea Garden in terms of an agreement entered into by and between the assessee and the State Government on March 13, 1975.

By a notification issued by the State Government under section 4 of the West Bengal Estates Acquisition Act, 1953, agricultural lands forming part of different tea gardens situated throughout the State of West Bengal vested in the State Government with effect from April 15, 1955. The lands forming part of the tea gardens were however, allowed to be retained by the respective tea garden owners who were in possession of such lands on the date of vesting. These persons were allowed to continue their business of cultivation and manufacture of tea as lessees of the Government of West Bengal in respect of the agricultural lands forming part of such tea estates.

Under subsection (2) of section 42 of the West Bengal Estates Acquisition Act, 1953, which was inserted by the Amendment Act, 1964, it was, inter alia, provided that, where an intermediary is entitled to retain possession of any land comprised in a tea garden, the Revenue Officer shall determine the rent payable in respect of such land in the manner as laid down in the said section. The Revenue Officers of the State Government sought to redetermine the lease rent payable by the owners of tea gardens with retrospective effect from 1955. This attempt was made some time in 1967. Doubts were raised as to the powers of the Revenue Officer to enhance the lease rent retrospectively. In view of these doubts, subsections (3) and (4) were inserted in section 42 of the West Bengal Estates Acquisition Act, 1953, by the Amendment Act of 1969. Subsection (4) made it clear that, notwithstanding anything to the contrary contained in any judgment, decree or order of any Court or Tribunal or in any other law, the rent determined under subsection (2) or subsection (3) shall take effect and shall be deemed always to have taken effect from the date of vesting.

The tea industry, however, continued to dispute the right of the Revenue Officers to redetermine the lease rent at an enhanced figure with retrospective effect from the date of vesting in 1955. Various types of disputes were raised by the tea garden owners and no payments were made at the enhanced rate to the State Government. Faced with this situation, the Government initiated a dialogue with the tea industry through the Indian Tea Association for settlement of the matter. Several meetings took place between the representatives of the Government of West Bengal as well as the Consultative Committee .of the Plantation Association. In May, 1971, Mr. Abdus Sattar, the then Minister for Land and Land Revenue, Government of West Bengal, put forward several proposals for settlement of the matter. These proposals were considered by the Consultative Committee of the Plantation Association. The Government of West Bengal, in a letter dated December 23, 1971, advised the Consultative Committee of the Plantation Association that they had accepted the formula suggested by the Minister and intended to implement it without delay. The relevant portion of this letter read as under:

"With reference to your letter No. 12169 dated the 14th December 1971, I am directed to inform you that the question of realisation of revised rents from the tea gardens has been under consideration of the Government for some time. In May, 1971, the representatives of your association had met the then Minister for Land and Land Revenue Department and the Member, Board of Revenue, when the following formula was considered:

(a) The rent as determined under section 42(2) will be realised from the date of vesting, i.e., April 15, 1955.

(b) From now on, every year, a garden owner should pay the current rent plus one year's arrear rent for as many years as it would take the arrears to be wiped out.

(c) As a concession to the tea industry, the Government will not charge any interest on arrears of rent up to April 1, 1971, provided the annual payment is made regularly as at (b) above.

The Government have accepted the formula and intends to implement it without any further delay. On execution of agreements with individual tea estates on the lines of the aforesaid decisions, fresh leases in Form I (appended to Schedule F of the E.A. Rules) will be issued."

The State Government also drew up a form of agreement to be executed by each of the tea garden owners. This decision of the State Government alongwith the format of the agreement was circulated by the Indian Tea Association to its member gardens owners by a letter dated February 25, 1972. In this letter, the Indian Tea Association stated, inter alia, as under:

"Members may use their discretion now to decide whether or not they should execute the agreement and accept the new lease in Form I appended to Schedule F of the West Bengal Estates Acquisition Rules. It is understood that the leases will be given from the date of the order under section 6(3) or from the date of determination of rent under section 42 of the Act, whichever is later."

On receipt of the aforesaid communication from the Indian Tea Association, several tea garden owners accepted the formula and executed necessary agreements. Some, however, continued to dispute the right of the Government to demand enhanced rent and cess with retrospective effect.

The agreement, in the case of the assessee-company, was executed, admittedly, on March 13, 1975. The relevant clauses of the agreement executed between the State Government and the assessee read as under:

"(a) That the lessee shall pay rent to the Government as determined under section 42(2) of the Estates Acquisition Act with effect from the date of vesting, namely, the 15th April, 1955.

(b) That, from the date hereof, the lessee shall pay the current rent and that, alongwith the payment of the rent for the current year, the lessee shall also pay to the Government the rent in arrears by instalments, each instalment being equal to one year's rent until the whole amount of the rent in arrears is paid off in full to the Government.

(c) That if the lessee shall duly and punctually pay the amount of the current rent and the instalment payable in respect of the rent in arrears as provided in clause (b) hereof, the Government will waive its claim for payment of interest on the rent in arrears payable up to April 1, 1971.

(d) That, should the lessee fail and neglect to pay the amounts payable according to the provisions of clause (b) hereof, the whole of the amount of rent in arrears then due and owing with the interest payable thereon at the rate of 6-1/4% per annum from the date when the same became respectively payable up to the date of payment shall forthwith become due and payable and shall be recoverable as arrears of land revenue."

Based upon this agreement, the assessee claimed deduction in respect of the aggregate rent and cess amounting to Rs. 4,13,60, which was determined to be payable by it under section 42(2) of the West Bengal Estates Acquisition Act, 1953; for the period April 15, 1955 to April 1, 1971. Deduction in respect of this amount was earlier claimed by the assessee-company in the assessment years 1974-75 and 1975-76 as well. The Income-tax Authorities, however, did not allow deduction in any of these two years on the plea that the liability did not crystallize in the relevant previous years having regard to the fact that the agreement was executed on March 13, 1975, which fell in the previous year relevant to the assessment year 1976-77, which is now in reference before this Court. The Income-tax Officer, however, did not allow this deduction even in the, assessment year 1976-77 on the ground that the liability to pay rent and cess had arisen in the earlier years and as the assessee was maintaining accounts on the mercantile system, it was not entitled to claim the deduction in the year under reference. The Commissioner of Income-tax (Appeals) allowed the claim of the assessee-Company. On further appeal by the Revenue, the Income-tax Appellate Tribunal, inter alia, held and observed that since the liability for enhanced rent and cess was all along under dispute and was settled only during the previous year under appeal in terms of the agreement executed between the assessee-Company and the State Government on March 13, 1975, the liability to pay the arrear rent and cess became enforceable in the previous year relevant to the assessment year 1976-77. The Tribunal, following the decision of its Special Bench in the case of Bejoy Nagar Tea Company Ltd., dismissed the Department's appeal and directed the Income-tax Officer to allow deduction of the said sum of Rs. 4,13,666 as business expenditure relating to the assessment year 1976-77.

At the hearing before us, learned counsel for the: Revenue, Sri A.C. Maitra, made the following submissions:

(a) The amount in question is undisputedly the liability of the assessee?-company towards rent and cess for the earlier years. Since the assessee?-company follows the mercantile system of accounting, it is not entitled to claim deduction in respect of statutory liability in the year under reference.

(b) Three decisions of the Bombay High Court in Comrnr. of Agrl. I.T. v. Phalton Sugar Works Ltd. (1980) 121 ITR 920; CIT v. Phalton Sugar Works Ltd. (1986) 162 ITR 622 and Bclapur Sugar and Allied Indust ries Ltd. v. Stale of Maharashtra (1987) 165 ITR 27 and the other decision of the Orissa High Court in Kalinga Tubes Ltd. v. CIT (1988) 16,9 ITR 374 support the case of the Revenue.

Mr. N.K. Poddar, learned Advocate appearing on behalf of the assessee-Company, contended to the contrary and submitted that the decisions submitted by the Revenue actually support the case of the assessee. He has also relied on several decisions.

In Commr. of Agrl. I.T. v. Phalton Sugar Works Ltd. (1980) 121 ITR 920, the Bombay High Court was concerned with the determination of income under the Maharashtra Agricultural Income Tax Act, 1962. Under the said Act, agricultural income-tax was levied in respect of the total agricultural income of the previous year. The year of assessment as defined in the Act was a period of 12 months commencing on the first day of April every year. The assessee accounting year was from October 1 to September 30 and it was for this accounting period that the assessee was being assessed to income-tax. The assessee could have exercised its option to select its accounting year as its previous year for agricultural income-tax purposes too. But the assessee preferred to be taxed for agricultural income-tax purposes on the financial year basis. The Court found that, by adopting the method which the assessee had done, it tried to bring into the previous year the income and expenditure for a period prior to the previous year as well as for a period subsequent thereto. The Court held that the assessee was not entitled to do so under the provisions of the Maharashtra Agricultural Income Tax Act, 1902. This case; cited on behalf of the Revenue, has no application to the controversy involved in the

present case before this Court.

In CIT v. Phalton Sugar Works Ltd. (1986) 162 ITR 62 , one of the issues raised for consideration before the Bombay High Court related to the assessee's claim for deduction of Rs. 67,299.90 in regard to the expenses for the extra staff engaged by the Maharashtra State Farming Corporation Ltd. For loading and unloading trucks and tractors with the sugarcane purchased by the assessee from the said corporation. The amount was covered by five bills raised by the corporation. The assessee disputed its liability in regard to the said five bills. The liability was settled only during the previous year relevant to the assessment year 1968-69. The Bombay High Court, following the decision of the Supreme Court in CIT v. Swadeshi Cotton and Flour Mills (P) Ltd. (1964) 53 ITR 134, held that the assessee was entitled to claim deduction in respect of the liability in question in the previous year relevant to the assessment year 1968-69 since it was settled only in that year although it related to the year 1964-65. This case cited on behalf of the Revenue clearly supported the case of the assessee-company. The liability in respect of rent and cess in the case of the assessee got settled and became enforceable only in the previous year under reference. An agreement was entered into by and between the assessee? company and the Government of West Bengal in regard to such rent and cess in the previous year under reference.

In Belapur Sugar and Allied Industries Ltd. v. State 'of Maharashtra (1987) 165 ITR 27, the Bombay High Court found that the assessee-company owned certain lands on which it used to raise sugarcane crop and manufacture sugar. In February, 1963, the State of Maharashtra sought to acquire the surplus lands held by the assessee. There was litigation between the assessee and the State Government, but ultimately there was an agreement whereby the assessee agreed to pay certain sums by way of share of profits, licence fees, etc., in respect of the assessment years 196-1-fi5, 1965-00 and 1966-67. In respect of the assessment year 1964-65, the assessee claimed deduction in respect of the amount paid under the agreement between May 10, 1965, and September, 1965. The Court held that there was no diversion of income at source. The concept of real. income was not material and since the amounts of expenditure were paid after the end of the relevant previous year, the assessee company was not entitled to claim any deduction in respect of the payments made. This case cited by the Revenue again has no application and does nor?? touch the controversy involved in the present case.

In Kafinga Tubes Ltd. v. CIT (1988) 169 ITR 374 (Orissa), the assessee claimed deduction in respect of additional demand of Sales tax raised by the Sales Tax Officer. The deduction was claimed in respect of the final additional demand which arose as a result of the appellate order passed by the Sales Tax Tribunal. The deduction was claimed in the previous year relevant to the assessment year 1971-72, when the Tribunal passed the appellate order although the original additional demand of sales tax was raised by the Sales Tax Officer in March, 1966. The Orissa High Court held that where the assessee follows the mercantile system of accounting, it can clam deduction in the year when the liability to sales tax was finally determined by the Sales Tax Tribunal in the second appeal. This case, again, far from supporting the case of the Revenue; actually supports the case of the assessee inasmuch as the liability to additional rent and cess was

fastened upon the assessee before us in terms of the agreement executed during the previous year under reference between the assessee-Company and the Government of West Bengal.

We shall now refer to the cases cited on behalf of the assessee. In CIT v. Orient Supply Syndicate (1982) 134 ITR 12, this Court was concerned with a statutory liability under the Employees' Provident Funds Act, 1952. Such liability related to the years 1957 to 1960. On June 19, 1962, the Regional Provident Fund Commissioner wrote a letter to the assessee-Company to comply with the provisions of the Act and the scheme framed thereunder with effect from January 1. 1961. Pending a decision for compliance for the period November 1, 1957 to December 31, 1960. The assessee-Company, for the first time, claimed deduction in respect of Rs. 29.008 towards its liability to pay provident fund contribution relating to the earlier years. Such deduction was claimed for the first time in the assessment for the previous year ending May 31, 1963, corresponding to the assessment year 1964-65. The Income-tax Officer and the Appellate Assistant Commissioner disallowed the claim on the ground that the contribution related to earlier years. On further appeal, the Tribunal found that though this was a statutory liability under the Employees' Provident Funds Act to make contributions, it was never enforced under the Act in the earlier years, and it was only in the year under appeal that the Regional Provident Fund Commissioner called upon the assessee to make the statutory contributions for the entire period from November, 1957, and that since the demand for the statutory contribution was made by the authorities for the first time during the year under appeal, the entire amount paid in that year was an allowable deduction. A letter addressed to the assessee by the Regional Provident Fund Commissioner indicated that a decision was pending for compliance with the statute for the period November 1, 1957 to December 31, 1960. This Court held that the statutory liability admittedly accrued in the year in question as it became real and enforceable in this year. The Court, therefore, allowed deduction in respect of the entire sum of Rs. 29,008, although it was a statutory liability relating to the earlier years. This case clearly supports the submissions made on behalf of the assessee.

In Shalimar Chemical Works (P.) Ltd. v. CIT (1987) 167 ITR 13, this Court was again concerned with the statutory liability of an employer to make contribution under the Employees' State Insurance Act, 1948. In view of certain amendments carried out in the said Act, the assessee-Company became liable to make contributions. The assessee-Company, however, did not make any contribution nor did it initiate any proceedings challenging the amendment in any Court. After the decisions of several High Courts in other cases, the authorities under the said Act issued a letter to the assessee informing it about the decisions of other Courts and demanded contributions from the assessee-?Company from 1968 onwards. The assessee-Company initially objected to the demands but finally agreed to pay the contributions as demanded. The assessee-Company claimed deduction of Rs.45,191 as expenditure incurred on account of contribution under the said Act for the period January, 1968 to June, 1973. This deduction was claimed for the first time in the assessment year 1975-76. This Court held that though the statutory liability was created by the Amendment Act of 1966, the liability became real and enforceable in 1974, although the demand was referable to the years 1968-1973. The position was clarified by the High Court upholding the validity of the extension of the statute in several other cases. It, therefore, held that, from a commercial point of view, the assessee was entitled to claim deduction in respect of the liability in question when it became final and enforceable. This case also supports the contention of the assessee inasmuch as the liability to pay rent and cess became enforceable in terms of the contract executed during the relevant previous year between the assessee-Company and the Government of West Bengal.

In CIT v. Roberts McLean and Co. Ltd. (1978) 111 1TR 489, this Court was considering the case of an assessee which dealt in machinery and was maintaining its books on the mercantile system of accounting. Certain differences arising between the assessee-Company and its sole selling agent were referred to arbitration. The arbitrators delivered the award in March, 1960, and directed payment of interest from 1959 to the date of the award. The Court held that though the liability for interest had been fixed by the award for the earlier years, it could not be said that it was an existing liability for the earlier years. The Court further held that the mere fact that a part of the interest was also provided by the assessee-Company in the earlier years was not relevant or conclusive for the purpose of income-tax. Since the award was delivered in the accounting year, the liability in terms of the said award was allowable in the corresponding assessment year. This case also supports the contention of the assessee.

In National Newsprint and Paper Mills Ltd. v. C.I.T. (1978) 114 ITR 172, the Madhya Pradesh High Court was considering the assessee's claim for deduction of arrear interest payable by it to the (3overnmcnt in respect of the accounting years 1949-50 to 1956-57. The deduction was claimed in the financial year 1956-57. The, Government had granted in 19.19-50 substantial loans to the assessee-Company without specifying any rate of interest. In 1952, the Government intimated to the assessee-Company that interest on such loans would be charged at certain rates. Correspondence followed between the Company and the Government as the assessee pressed the Government for waiver of interest or, in the alternative, to reduce the rate to a minimum. Finally, by an agreement arrived at in 1957, the interest was not waived but the f amount was converted into equity shares. The assessee-Company maintained its accounts on the mercantile system but it claimed the entire interest for the year 1949-50 to 1956-57 as a deductible business expenditure in the financial year 1956-57. This claim was upheld by the Madhya Pradesh High Court.

In CIT v. Jatia Manufacturing Investment Co. P. Ltd. (1983) 142 ITR 536, this Court was similarly considering the assessee's claim for deduction of interest for the accounting year 1967-68, the claim whereof was made in the assessment for the assessment year 1970-71. The Court found that the assessee had approached the creditor for waiver of interest in 1967 and by letter, dated 29th March, 1968, the creditor had intimated to the assessee-Company that such request for waiver was under consideration. Finally; in December, 1968, the creditor rejected the request for waiver and submitted the interest bill. The Court upheld the assessee's claim for deduction in the assessment year 1970-71 on the ground that the interest, though -relating to the earlier year, actually accrued in this accounting year.

?It is true that the liability to pay rent and cess was a statutory liability. But, the right of the State Government to enhance the rent with retrospective effect from the date of vesting was all along seriously disputed by everybody including the assessee. Even the State Government felt doubts about its right to revise the rent with retrospective effect from the date of vesting. For this purpose, the Amendment Act was introduced and passed by the State Legislature in 1969 and subsection (4) was introduced in section 42 of the West Bengal Estates Acquisition Act, 1953. Notwithstanding the introduction of subsection (4), the disputes continued. The Government of West Bengal, thereafter, decided to negotiate with the Tea Plantation Association and several meetings were held between the representatives of the Consultative Committee of the Plantation Association and the Government of West Bengal. In such meetings, several formulas were suggested by both sides and, A ultimately, a consensus was sought to be evolved on the proposal put forward by the then Minister for Land and Land Revenue. The decision of the Government was communicated in the letter of December 23, 1971, to the Consultative Committee of the Plantation Association. The said decision in turn was communicated to the member gardens on February 25, 1972. Even at this stage, the Indian Tea Association advised their members to use their discretion and to decide independently whether or not they were prepared to execute the agreement with the Government of West Bengal in respect of rent and cess from the date of vesting and accept the new lease. In this particular case, the agreement between the assessee-Company and the Government of West Bengal in respect of rent and cess from the date of vesting at the enhanced rate was executed on March 13, 1975, that is during the previous year under reference. It was under this agreement that the liability to pay rent and cess at the enhanced rate from the date of vesting was fastened on the assessee and made enforceable for the First time. Therefore, the liability accrued and arose and became real and enforceable in the previous year under reference when the agreement was executed.

For the foregoing reasons, the question raised in this reference is answered in the affirmative and in favour of the assessee.

There will be no order as to costs.

BHAGABATI PRASAD BANERJEE, J.--I agree.

M.B.A./1594/T??????????????????????????????????????????????????????????????????????? Reference answered.