Income Tax Deduction on Lease Rent: Supreme Court Remands Case for Fresh Consideration

The case of Commissioner of Income Tax, Cochin vs. M/s Travancore Cochin Udyoga Mandal involved a dispute over the deduction of lease rent under the Income Tax Act. The Supreme Court was faced with determining the correct assessment year in which the respondent could claim the deduction of the lease rent.

The case began with the State Government acquiring land in 1965 and allotting it to the respondent for setting up a factory. In 1988, the government fixed the lease rent, but the respondent challenged it, arguing it was too high. The dispute continued until 1991, when the State confirmed its decision. The respondent claimed a deduction in the 1992-93 assessment year, but the Assessing Officer disallowed it, stating it should have been claimed in 1989-90.

Arguments Presented

Petitioner’s Arguments

The Commissioner of Income Tax (CIT) argued that:

• The liability for lease rent was statutory and accrued in 1988.
• Since the respondent followed the mercantile system of accounting, the deduction should have been claimed in 1989-90.
• Failure to claim the deduction in the proper year made it inadmissible in later years.

Respondent’s Arguments

M/s Travancore Cochin Udyoga Mandal contended that:

• The lease rent dispute was ongoing, and the liability became final only in 1991.
• The deduction should be allowed in the year when the dispute was resolved.
• The argument that lease rent liability was statutory was raised for the first time before the Supreme Court and should not be entertained.

Supreme Court’s Observations

The Supreme Court, after hearing both parties, held that the issue of whether the lease rent liability was statutory or contractual was a mixed question of law and fact. The court observed:

“In our considered opinion, in order to decide the issue of deduction, the nature of fixation of rent, its payment, recovery etc., and whether it is statutory or contractual, has some bearing over the question.”

The Court further noted:

“The Tribunal being the last adjudicatory authority in hierarchy on facts would be in a better position to decide the issue after taking into account the documents filed by the parties in support of their respective contentions.”

Final Judgment

The Supreme Court set aside the High Court and Tribunal’s decisions and remanded the case to the Income Tax Appellate Tribunal (ITAT), Cochin Bench, for fresh adjudication. The Tribunal was directed to decide the matter on merits, giving both parties an opportunity to present additional documents if necessary.

“The case is remanded to the Tribunal for deciding the appeal filed by the respondent afresh on merits in accordance with law.”

The Tribunal was instructed to complete the process within six months, with the parties directed to appear on September 18, 2017.

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Download Judgment: Commissioner of Inco vs Ms Travancore Cochi Supreme Court of India Judgment Dated 17-08-2017.pdf

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