2019 (3) TMI 64 - HC - Income Tax

Computation of income from the project under the Slum Rehabilitation Scheme - entitled for deduction of the provision of the liability with respect to construction of municipal staff quarters/ road depot and compound wall - Tribunal disallowed assessee s claim of expenditure on the ground that, liability in question had not crystallized - HELD THAT - The view of the Tribunal was that, the liability was a contingent one, depending upon assessee being put in vacant possession of land where construction would be carried out. We do not find that, the Tribunal has committed any error. A liability which is contingent and which has not crystallized, would not be allowed as an expenditure. It is in this context, the Tribunal found that the assessee s liability to carry out construction, free of cost had not yet crystallized since it was contingent upon the authorities being able to give vacant possession of the portion of the plot on which, such construction would be carried out. The record suggests that such portion was occupied by the slum dwellers who were resisting their eviction. Whatever be the reason, the Slum Rehabilitation Authority was unable to put assessee of vacant possession in said area for years together.

Summary

Issues:
- Whether the appellant was entitled to deduction of the provision of the liability for construction of municipal staff quarters, road depot, and compound wall while computing income from the project under the Slum Rehabilitation Scheme?

Analysis:
1. Issue of Contingent Liability: The appellant, a partnership firm, was awarded a contract for a slum redevelopment project by the Slum Rehabilitation Authority. The appellant claimed an expenditure of Rs. 1.22 Crores towards the liability for constructing municipal staff quarters and road depot. However, the Assessing Officer, CIT(A), and the Tribunal held that the liability was contingent and could not be claimed as an expenditure for the Assessment Year 2010-11. The key point of contention was whether the liability had crystallized.

2. Legal Obligation and Cost Estimation: The appellant argued that it was under a legal obligation to provide construction free of costs, which was not disputed by the Revenue Authorities. The appellant had estimated the cost of construction at Rs. 1.22 Crores based on scientific estimation, a figure also not disputed by the Revenue. The appellant contended that since it had offered the entire receipt to tax on an accrual basis, the claim of expenditure was justified in both facts and law.

3. Judicial Precedents: The appellant cited various judicial precedents to support its claim, including the case of Calcutta Co. Ltd. v/s. CIT where the Supreme Court allowed expenditure based on accrual and the case of Bharat Earth Movers v/s. CIT where the deduction was allowed for a liability that had already crystallized. However, the court differentiated the present case from these precedents as the issue here was the crystallization of the liability, not the estimation of the cost of discharging it.

4. Tribunal's Decision: The Tribunal disallowed the appellant's claim of expenditure, emphasizing that the liability was contingent upon the Slum Rehabilitation Authority handing over vacant possession of the land for construction. The Tribunal found that the liability had not crystallized as the possession had not been handed over to the appellant. The court agreed with the Tribunal's decision, stating that a contingent liability that has not crystallized cannot be allowed as an expenditure, even under the mercantile system of accounting.

5. Conclusion: Ultimately, the court dismissed the appeal, upholding the Tribunal's decision that the appellant was not entitled to deduction for the provision of the liability for construction of municipal staff quarters, road depot, and compound wall. The court emphasized the importance of a liability being crystallized and not contingent for it to be allowed as an expenditure, even under the mercantile system of accounting.