2019 (7) TMI 71 - AT - Income Tax

Provision made for future expenses - Allowable revenue expenditure u/s 37(1) - whether contingent in nature and cannot be allowed as a deduction? - HELD THAT - As we have already noticed the projected future expenses was ₹ 58.62 crores and this comprises of a sum of ₹ 29.69 crores which has to be spent for laying roads after completion of the tunnelling work at various points. The other component of the project of future expenses is the cost of providing design to the entire project. As far as the estimation of expenses for laying of roads after completion of the tunnelling work is concerned, the basis of estimate has been given by the assessee to the Assessing Officer in the letter dated November 14, 2013 filed before the Assessing Officer along with all supporting and technical documents. A perusal of the aforesaid documents show that complete technical details was provided by the assessee. Similarly for design work the workings are at page 216 of the paper book . The amounts received from Bangalore Metro Rail Corporation Ltd. of ₹ 17,91,36,000 has also been noticed in this chart. It has been claimed by the assessee before us that the amount received has been included in the total contract receipts and this may be verified by the AO and to the extent the receipt is not offered as income to treat the same as income because the deduction of expenses on account of provision is to be allowed as per order of the CIT (A), with which we are agreement for the reasons to be given in subsequent paragraphs. The agreement with Mott Macdonald Pvt. Ltd., for providing design work and the related cost. The variation contract with Mott Macdonald Pvt. Ltd is at page 251. The CECI Design Consultant and details of their design work are at page 253. The details of design charges payable to Spar Geo infra Pvt. Ltd., at a page 256. In the light of the complete details filed by the assessee to show that the expenditure in question was not contingent liability at a certain liability, it was not proper on the part of the Assessing Officer to have ignored these documents. Though CIT (Appeals) has not made a reference to these documents but has taken note of the fact that the basis of projected future expenses as claimed by the assessee was reasonable and cannot be regarded as contingent expenditure. In our view both the conditions laid down by BHARAT EARTH MOVERS VERSUS COMMISSIONER OF INCOME-TAX 2000 (8) TMI 4 - SUPREME COURT have been satisfied in the present case and therefore the expenditure in question should be allowed as a deduction and was rightly allowed as deduction by the CIT(A). We find no grounds to interfere with the orders of the CIT(A) and accordingly appeal of the Revenue is dismissed.

Summary

Issues Involved:
1. Whether the provision made for future expenses is contingent in nature and cannot be allowed as a deduction under section 37(1) of the Income-tax Act.

Detailed Analysis:

Issue 1: Provision for Future Expenses - Contingent or Allowable Deduction

Background:
The Revenue appealed against the orders of the Commissioner of Income-tax (Appeals) for the assessment years 2011-12 and 2012-13. The core issue was whether the Commissioner was justified in deleting the addition made by the Assessing Officer, who held that the provision made for future expenses was contingent and thus not allowable as a deduction.

Assessee's Explanation:
The assessee, an association of persons formed to participate in a tender by Bangalore Metro Rail Corporation Ltd., claimed a deduction of ?6,66,64,500 as a provision for future expenses. The provision was based on estimated costs for activities like structural design and road refilling, which were necessary but could not be billed immediately due to the ongoing nature of the project. The total projected future expenses were ?58,62,00,000.

Assessing Officer's View:
The Assessing Officer questioned the unbillable amount and held that the provision for future expenses was based on estimates and thus contingent. He referred to section 37 of the Income-tax Act, which allows deductions only for expenses incurred wholly and exclusively for business purposes. The officer concluded that the provision did not meet these criteria.

Assessee's Defense:
The assessee provided a detailed explanation and technical estimates, citing judicial precedents like Calcutta Co. Ltd. v. CIT, Rotork Controls India P. Ltd. v. CIT, and Bharat Earth Movers v. CIT, arguing that the provision was an ascertained liability and should be allowed as a deduction. The provision was consistent with the method of accounting under section 145 of the Act and Accounting Standards 7 of the ICAI.

Commissioner of Income-tax (Appeals) Decision:
The Commissioner found that the provision was based on a reasonable estimate of future expenses necessary for the project, such as road restoration and design costs. The Commissioner concluded that these expenses were certain and not contingent, thus allowing the deduction.

Tribunal's Analysis:
The Tribunal examined the detailed evidence provided by the assessee, including technical documents and cost estimates. It found that the expenses were certain and the estimation method was reasonable. The Tribunal referenced the Supreme Court rulings in Calcutta Co. Ltd. v. CIT and Bharat Earth Movers v. CIT, which support the allowance of provisions for future expenses if the liability is certain and the estimation method is scientific and reasonable.

Conclusion:
The Tribunal upheld the Commissioner of Income-tax (Appeals)'s decision, agreeing that the provision for future expenses was an ascertained liability and thus allowable as a deduction. The appeals for both assessment years 2011-12 and 2012-13 were dismissed.

Final Judgment:
Both appeals by the Revenue were dismissed, confirming that the provision for future expenses was not contingent and should be allowed as a deduction under section 37(1) of the Income-tax Act.

Order Pronounced:
The order was pronounced in the open court on 3rd May, 2019.