National Agricultural Cooperative Marketing Federation of India Ltd vs. JCIT (ITAT Delhi) (Special Bench)

The Special Bench had to consider whether where claim of damages and interest thereon is disputed by the assessee in the court of law, deduction can be allowed for the interest claimed on such damages while computing business income. HELD by the Special Bench:

(i) Under the mercantile system of accounting, an assessee gets deduction when liability to pay an expense arises, notwithstanding its actual quantification and discharge taking place subsequently. The relevant criteria for the grant of a deduction is that the incurring of liability must be certain. If the liability itself is uncertain, it assumes the character of a contingent liability and ceases to be deductible. Thus, a deduction can be allowed only when an assessee incurs liability to pay an amount in the nature of an expense. The aspect of incurring a liability needs to be understood in a correct perspective. It is here that a distinction between a contractual and a statutory liability assumes significance. A statutory liability is incurred on a mere issuance of a demand notice against the assessee and becomes deductible at that point of time. The factum of the assessee raising a dispute against such a demand does not ruin the incurring of liability. On the contrary, a contractual liability is not incurred on a mere raising of demand by a claimant. It arises only when such a claim is either acknowledged or in a case of non-acceptance, when a final obligation to pay is fastened coupled with the claimant acquiring a legal right to receive such an amount. Unless the claimant acquires an enforceable right to receive, it cannot be said that the first person has incurred a liability to pay such an amount. To put it simply, in the case of a contractual dispute between the parties, liability of the assessee to pay arises only when the claimant against the assessee acquires some legal right to receive the amount. In the absence of the vesting of any such right in the claimant, neither he earns any income nor the assessee incurs a corresponding liability to pay, entitling him to claim deduction for the same. Crux of the matter is that except for the assessee accepting a contractual claim, his liability to pay does not arise until some legal obligation to pay is fixed on him. A legal obligation to pay is attached on an assessee when a competent court passes order and a suit is decreed against him and not during the pendency of litigation. This difference between a contractual and a statutory liability has been recognized by the Hon’ble Delhi High Court in assessee’s own case since reported as
National Agricultural Co-operative Marketing Federation of India Ltd. vs. CIT (2011) 338 ITR 36 (Del).

(ii) On facts, the ld. Single Judge of the Hon’ble Delhi High
Court vide his judgment and decree dated 28.1.2000 directed, inter alia, the payment of interest to Alimenta at 11.25% up to the date of award as allowed by FOSFA and at 18% from the date of award till the date of realization. It is undisputed that no payment of the principal amount of damages or interest has so far been finally made, except for furnishing bank guarantees etc. to some extent. The assessee filed a letters patent appeal against the judgment and decree of the ld. Single Judge. The Division Bench, during the pendency of such an appeal, vide its interim
order dated 28.2.2001 stayed the execution of the judgment of ld. Single Judge. Certain interim orders were passed by the Hon’ble Supreme Court and the Hon’ble Delhi High Court, but the stay on the order and decree of the ld. Single Judge was not disturbed, which continued till the ld. third Judge (on a difference of opinion between the two ld. Judges who heard the appeal) finally decided the appeal of the assessee vide its judgment dated 6.9.2010 holding that a letters patent appeal is not maintainable against the judgment dt. 28.1.2000 of the ld. Single Judge. A consequential judgment was passed in September, 2010. Effect of this judgment is that the stay order of the Division Bench passed on 28.2.2001 got vacated and the judgment and decree of ld. Single Judge dt. 28.1.2000 again came to be revived. On 17.1.2012, the Hon’ble Supreme Court rejected the prayer of the assessee for interim relief and gave liberty to Alimenta to enforce decree dated. 28.1.2000 passed by the ld. Single Judge of the Hon’ble Delhi High Court. This sequence of events transpires that the legally enforceable liability against the assessee to pay interest at the rate of 18% to Alimenta, which was created by the decree of the ld. Single Judge dated 28.1.2000, remained suspended from the date of stay granted by the Division bench of the Hon’ble High Court on 28.2.2001. It is only on the passing of the consequential judgment and decree by the Hon’ble Delhi High Court in September, 2010, subject to certain stays etc. granted against the operation of this judgment, that the assessee incurred a legally enforceable liability to pay such interest to Alimenta.

(iii) Now the moot question is whether the assessee is entitled to deduction for interest at the rate of 18% decreed by the ld. Single Judge of the Delhi High Court in the computation of income for the years under consideration. The answer will be in affirmative if the assessee had any legal obligation to pay such interest during the years in question and vice versa. We can do this by ascertaining if any legally enforceable liability existed against the assessee to pay interest in the years under consideration. Per contra, was Alimenta legally entitled to receive such interest income during the years in question? It is patent that the stay order against the judgment and decree of the ld. Single Judge was passed by the Division Bench on 28.2.2001, which is well within the financial year relevant to the assessment year 2001-02 under consideration and remained operative in subsequent years including the immediately succeeding year in appeal. This shows that the assessee did not have any legal obligation to pay interest during these two years. The hitherto obligation which was created by the judgment of the ld. Single judge against the assessee was eclipsed and frustrated by the later judgment of the Division bench and such obligation ceased to exist for the time being.

(iii) Unless there is a specific contrary provision, deduction for an expense can be allowed in the year in which liability to pay finally arises. Once a person has not voluntarily accepted a contractual obligation and further there subsists no legal obligation to pay qua such contractual claim at a particular time, it cannot be said that the person incurred any liability to pay at that point of time so as to make him eligible for deduction on that count. Notwithstanding the fact that obligation relates to an earlier year, the liability to pay arises only in the later year, when a final enforceable obligation to pay is settled against that person. In our considered opinion, there is no qualitative difference between the two situations, viz., first, in which no enforceable liability to pay is created in the first instance, and second, in which though the enforceable liability was initially created but the same stands wiped out by the stay on the operation of such enforceable liability. In both the situations, claimant remains without any legal right to recover the amount and equally the opposite party without any legal obligation to pay the same. Neither any income accrues to the claimant, nor any deduction is earned by the opposite party. We are instantly confronted with the second type of situation in which the obligation created against the assessee by the judgment of the ld. Single Judge on 28.1.2000 was stayed by the judgment of the Division Bench on 28.2.2001, which position continued till the decree on the judgment dt. 6.9.2010 reviving the judgment of the ld. Single Judge, became enforceable. Even though the crystallization of liability of the assessee to pay interest pursuant to the developments after 6.9.2010 also covers earlier years including the years under consideration, but such liability of the assessee became due only on the acquisition of right by Alimenta to enforce the decree issued on the advent of the judgment dated 6.9.2010. Consequently, the assessee can claim deduction for such interest only at such a later stage and not during the years under consideration.

(iv) In view of the foregoing reasons, we answer the question posted before this Special bench in negative by holding that in the facts and circumstances of the case, where claim of damages and interest thereon is disputed by the assessee in the court of law, deduction can’t be allowed for the interest claimed on such damages in the computation of business income.