Ita/163/2016 Of The Commissioner Of Income Tax, Thiruvananthapuram v. M/S.oberon Edifices & Estates (P) Ltd

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE C.K.ABDUL REHIM & THE HONOURABLE MR. JUSTICE R. NARAYANA PISHARADI THURSDAY, THE 05TH DAY OF SEPTEMBER 2019 / 14TH BHADRA, 1941 ITA.No.163 OF 2016 AGAINST THE ORDER IN ITA 351/Coch/2013 DATED 06-06-2016 OFI.T.A.TRIBUNAL,COCHIN BENCH FOR THE AY 2009-10 APPELLANT/RESPONDENT/REVENUE: THE COMMISSIONER OF INCOME TAX, THIRUVANANTHAPURAM BY ADVS.SRI.CHRISTOPHER ABRAHAM, INCOME TAX DEPARTMENTSRI.K.M.V.PANDALAI INCOME TAX DEPARTMENT RESPONDENT/APPELLANT/ASSESSEE: M/S.OBERON EDIFICES & ESTATES (P) LTDTHE ARCADE, KARAMMA, TRIVANDRUM. R1 BY ADV. SRI.NEMISH NIRANJAN ZAVERI R1 BY ADV. SRI.SUKUMAR NAINAN OOMMEN R1 BY ADV. SRI.SHERRY SAMUEL OOMMEN THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON05.09.2019, THE COURT ON 05.09.2019 DELIVERED THE FOLLOWING: “CR” C.K.ABDUL REHIM & R.NARAYANA PISHARADI, JJ. ************************** I.T.A.No.163 of 2016 ---------------------------------------------- Dated this the 5[th] day of September, 2019 J U D G M E N T R.Narayana Pisharadi, J Is expenditure to be incurred in future in respect of aliability that accrued during the accounting year eligible fordeduction in the computation of taxable business income? This isthe substantial question of law to be considered in this appealfiled by the revenue. 2.The respondent/assessee is a company engaged in the business of construction and sale of residential and commercialbuilding complexes. During the assessment year 2009-10, theassessee sold a portion of the mall building constructed by it.The construction of the building was not completed at that time.In the revised return of income filed on 06.04.2011, deduction of the expenses incurred during the financial years 2009-10 and 2010-11 for completing the construction of the building wasclaimed by the assessee. The assessing authority disallowed theaforesaid deduction claimed and completed the assessment. 3.The assessee took up the matter in appeal before theCommissioner of Income Tax (Appeals). The appellate authorityallowed the appeal by observing as follows: “In this case, during the course of assessmentproceedings, the construction of Mall was completedand therefore, the appellant could find out the actualcost of construction per sq.ft by dividing the totalexpenditure on construction by the total saleable area.In a situation where at the time of assessment thebuilding remains incomplete, estimated futureexpenditure to be incurred is also considered alongwith the expenditure already incurred and is taken ascost relatable to the total saleable area ie. saleablearea already built and the saleable area to be built infuture, for arriving at the estimated cost ofconstruction per sq ft. It is not a case of mere sale ofcommercial space but the appellant was required toprovide amenities like escalators, lifts, parking,common toilet etc also. Therefore the contentions ofthe appellant are accepted and it is held that the AO 4. was not justified in not taking the value of buildingwork in progress during the FY 2009-10 and 2010-11for working out the cost per square ft. It is therefore,directed that the cost per sq.ft shall be taken as totalexpenditure incurred in construction divided by totalsaleable area for the purpose of working out the profitfrom sale of commercial area.” The revenue challenged the order of the appellate authority before the Income Tax Appellate Tribunal. The Tribunalagreed with the view taken by the appellate authority anddismissed the appeal. The aforesaid order of the Tribunal is underchallenge in this appeal filed by the revenue. 5.and also the learned counsel for the respondent. We have heard learned counsel for the department 6. Learned counsel for the department contended that the The revenue challenged the order of the appellate authority before the Income Tax Appellate Tribunal. The Tribunalagreed with the view taken by the appellate authority anddismissed the appeal. The aforesaid order of the Tribunal is underchallenge in this appeal filed by the revenue. 5.and also the learned counsel for the respondent. We have heard learned counsel for the department 6. Learned counsel for the department contended that the claim for deduction of future expenses made by the assesseecannot be allowed. Learned counsel contended that there is adistinction between amount spent to pay off an actual liabilityand a liability that would be incurred in future which is onlycontingent. It is contended that the former is deductible but notthe latter. I.T.A.No.163/2016 7. Per contra, learned counsel for the respondent contended that the amount claimed as deduction was expenditure to beincurred to meet an accrued liability and not a contingent liability.Learned counsel also contended that the deduction was claimedin this case after incurring the expenditure since the constructionof the building was completed when the assessment proceedingswere pending. 8. At the outset, we may state that the dispute raised bythe revenue is only with regard to the deduction claimed by theassessee in respect of the expenses incurred in future, that is,after the sale of the building, during the subsequent financialyears, and not in respect of the expenses incurred by it duringthe relevant financial year. 9. Section 37 of the Income tax Act, 1961 (hereinafter referred to as “the Act”) is a residuary section for allowability ofbusiness expenditure. Section 37(1) of the Act reads as follows: “37 (1).-- Any expenditure (not beingexpenditure of the nature described in sections30 to 36 and not being in the nature of capitalexpenditure or personal expenses of the assessee), laid out or expended wholly andexclusively for the purposes of the business orprofession shall be allowed in computing theincome chargeable under the head “Profits andgains of business or profession”. 10. The expression "profits and gains" has to be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure which is necessary for thepurpose of earning the receipts is deducted therefrom - whetherthe expenditure is actually incurred or the liability in respectthereof has accrued even though it may have to be discharged atsome future date. The profit of a trade or business is the surplusby which the receipts from the trade or business exceed theexpenditure necessary for the purpose of earning those receipts.It is the meaning of the word "profits" in relation to any trade orbusiness. Whether there be such a thing as profit or gain canonly be ascertained by setting against the receipts theexpenditure or obligations to which they have given rise (SeeCalcutta Company Limited v. Commissioner of Income Tax,West Bengal : AIR 1959 SC 1165) profits and gains until the expenditure which is necessary for thepurpose of earning the receipts is deducted therefrom - whetherthe expenditure is actually incurred or the liability in respectthereof has accrued even though it may have to be discharged atsome future date. The profit of a trade or business is the surplusby which the receipts from the trade or business exceed theexpenditure necessary for the purpose of earning those receipts.It is the meaning of the word "profits" in relation to any trade orbusiness. Whether there be such a thing as profit or gain canonly be ascertained by setting against the receipts theexpenditure or obligations to which they have given rise (SeeCalcutta Company Limited v. Commissioner of Income Tax,West Bengal : AIR 1959 SC 1165) 11. In Calcutta Company Limited (supra), the assesseewas a company conducting the business of developing land fit forbuilding purposes and selling it in plots at a profit. The procedurefollowed was that when a plot was sold, the purchaser would payabout 25 per cent of the purchase price in cash and wouldundertake to pay the balance with interest at a certain rate ininstalments which he secures by creating a charge on the landpurchased. The assessee, in its turn, would undertake to carryout the developments within six months from the date of thesale. The assessee claimed deduction of the amount to be spentfor development in the computation of the profits and gains of itsbusiness. The Income Tax Officer disallowed that claim on theground that the expenses had not been actually incurred in theyear of account and also on the ground that the estimate had notbeen proved to be based on a consideration of the real expenseswhich the company would have to incur for the purpose. Whenthe matter ultimately reached the Apex Court, after dealing withthe provisions contained in Sections 10(1) and 10(2) of theIncome Tax Act, 1922, it was held as follows: ”The question which really arises for ourdetermination in this appeal is whether havingregard to the fact that the appellant's methodof accounting, viz., the mercantile method wasaccepted by the Income Tax Officer and thereceipts appearing in the books of accountincluded the unpaid balance of the sale price ofthe plots in question, the amount of liabilityundertaken by the appellant to earn thosereceipts was to be deducted even if there hadnot been actual disbursement made by itduring the accounting year. ..... Inasmuch asthe liability which had thus accrued during theaccounting year was to be discharged at afuture date the amount to be expended in thedischarge of that liability would have to beestimated in order that under the mercantilesystem of accounting the amount could bedebited before it was actually disbursed. .....The appellant here is being assessed in respectof the profits and gains of its business and theprofits and gains of the business cannot bedetermined unless and until the expenses orthe obligations which have been incurred areset off against the receipts. .... We aredefinitely of opinion that the sum of Rs. 24,809represented the estimated amount which would have to be expended by the appellant inthe course of carrying on its business and wasincidental to the same and having regard tothe accepted commercial practice and tradingprinciples was a deduction which, if there wasno specific provision for it under Section 10(2)of the Act was certainly allowable deduction, inarriving at the profits and gains of the businessof the appellant under Section 10(1) of theAct, there being no prohibition against it,express or implied in the Act”. 12. "Expenditure" is not necessarily confined to the money would have to be expended by the appellant inthe course of carrying on its business and wasincidental to the same and having regard tothe accepted commercial practice and tradingprinciples was a deduction which, if there wasno specific provision for it under Section 10(2)of the Act was certainly allowable deduction, inarriving at the profits and gains of the businessof the appellant under Section 10(1) of theAct, there being no prohibition against it,express or implied in the Act”. 12. "Expenditure" is not necessarily confined to the money which has been actually paid out. It covers a liability which hasaccrued or which has been incurred although it may have to bedischarged at a future date. However, a contingent liability whichmay have to be discharged in future cannot be considered asexpenditure. It also covers a liability which the assessee hasincurred in praesenti although it is payable in futuro (SeeMadras Industrial Investment Corporation Limited v.Commissioner of Income Tax : AIR 1997 SC 2063). 13. In Bharat Earth Movers v. Commissioner ofIncome Tax : AIR 2000 SC 2636, the Supreme Court has held as follows: “The law is settled: if a business liability hasdefinitely arisen in the accounting year, thededuction should be allowed although theliability may have to be quantified anddischarged at a future date. What should becertain is the incurring of the liability. It shouldalso be capable of being estimated withreasonable certainty though the actualquantification may not be possible. If theserequirements are satisfied the liability is not acontingent one. The liability is in praesentithough it will be discharged at a future date. Itdoes not make any difference if the future dateon which the liability shall have to bedischarged is not certain”. 14.It is discernible from the decisions referred to abovethat, in order to claim deduction of business expenditure, it is notnecessary that the amount has been actually paid or expendedduring the relevant accounting year itself. It is sufficient that theliability for payment had incurred or accrued during the relevantaccounting year. The actual payment of amount or discharge ofliability may occur in future. What is crucial is the accrual ofliability for payment or expenditure during the relevant I.T.A.No.163/2016 accounting year. But, a contingent liability that may arise infuture, cannot be treated as expenditure. Thus, the substantialquestion of law is answered in favour of the assessee and againstthe revenue. 15.In the instant case, the revenue has no case that thesale deed executed in respect of the building did not provide thatthe assessee was liable to complete the construction of thebuilding. The Tribunal was right in confirming the finding of theappellate authority that, the expenditure incurred by theassessee company during the financial years subsequent to thesale of the building, is eligible for deduction in computation oftaxable income. Consequently, the appeal is dismissed. No costs. (sd/-) C.K.ABDUL REHIM, JUDGE (sd/-) jsr/14/08/2019 R.NARAYANA PISHARADI, JUDGE True Copy PS to Judge APPENDIX PETITIONER'S EXHIBITS: ANNEXURE ATRUE COPY OF THE ASSESSMENT ORDER DATED29.12.2011 ANNEXURE BTRUE COPY OF THE APPELLATE ORDER DATED 27.03.2013 PASSED BY THE COMMISSIONER OF INCOME-TAX, TRIVANDRUM ANNEXURE CCERTIFIED COPY OF THE COMMON ORDER PASSED BY THE INCOME-TAX APPELLATE TRIBUNAL ON 06.06.2016 True Copy PS to Judge