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2019 (10) TMI 1229 - AT - Income TaxAddition as the liability for the has not been crystallized in the year under consideration - liability towards the lease rent - AO was of the view that such liability represents the contingent liability as the same has been litigated by the assessee before the Hon ble Bombay High Court - Whether the assessee is eligible for deduction under section 37(1) for the liability on account of rent to Mumbai Port Trust in pursuance to the order of the estate officer of the Mumbai port trust? - HELD THAT - Assessee in pursuance to the order of the estate officer of the Mumbai port trust has provided/accounted its liability in its books of accounts and accordingly claimed the deduction against its profit on the ground that the liability has been crystallized in the year under consideration though the same has been challenged before the competent court of law and pending as on date. Liability raised by the MPT has been disputed by the assessee in the court of law which is pending as on date. We also note that the assessee has not made any payment towards such liability. Therefore in over considered view entire liability is contingent in nature and its outcome depends upon the event in future. However, we further note that in the case of Navjivan Roller Flour Pulse Mills Ltd. Vs. DCIT 2009 (3) TMI 132 - GUJARAT HIGH COURT has allowed deduction for such kind of liability. We hold that the assessee is entitled for the deduction of the liability raised by the MPT despite the fact that the same is pending in the court of law. Hence, the ground of appeal of the assessee is allowed. Additional royalty payment which was treated as prior period expenses - whether the assessee is eligible for deduction under section 37(1) of the Act for the liability pertaining to the year 2003-04 on account of the royalty but paid/ crystallized in the year under consideration to the Department of Geology and Mining? - HELD THAT - Admittedly, the demand was raised by the Department of Geology and Mining of Gujarat upon the assessee vide letter dated 13-11-2006 which was pertaining to the earlier year 2003-04. Thus, it is inferred that the liability was crystallized in the year under consideration. As such, the liability for the royalty was provided by the assessee in the books of accounts in the previous year 2003-04 but some part of it crystallized in the year under consideration. Therefore we are of the view that, the assessee was not in a position to ascertain such liability in that relevant year. Accordingly, it was not possible for the assessee claimed the deduction of such liability in the year 2003-04. There is no ambiguity to the fact that it was not possible for the assessee to claim the deduction for the differential amount of the royalty paid/ crystallized in the year under consideration pertaining to the year 2003- 04. Thus, there was no fault of the assessee to claim the deduction and moreover it was not possible to do so. Therefore, we hold that the deduction pertaining to the earlier year but claimed in the year under consideration cannot be denied in the given facts and circumstance as it was impossible for the assessee to perform its duty. Due to uncontrollable circumstances, the performance of the obligation to record the liability in the year 2003-04 for the royalty expenses was not booked in the that year. The impossibility of performance releases the assessee from its obligation to account for such liability in the year 2003-04. A default occurs only when an obligation is not performed. We also find support from the legal maxim lex non cogit ad impossibilia meaning thereby that the law does not compel a man to do what he cannot possibly perform.See case of Krishna Swamy S. PD. ANR Vs. Union of India ors 2006 (2) TMI 75 - SUPREME COURT Thus in view of above we hold that the assessee would be discharged from such an obligation and hence cannot be regarded a defaulter. We also note that, the law is fairly settled the assessee can claim the deduction for the liabilities in the year in which these were crystallised. Genuineness of the expenses and proximity of such expenses with the business of the assessee has not been doubted by the authorities below. Thus it can be inferred that the impugned expenses were incurred wholly and exclusively by the assessee for the purpose of its business. But the only drawback is that the same was not claimed in the year to which it pertains. However, we also note that there was no change in the rate of tax under the Act. Thus, there cannot be any loss to the revenue even if the assessee claimed such expenses in the year under consideration. Thus assessee is entitled to claim the deduction of the impugned expenses Nature of expenses - expenditure incurred on exploratory/evaluation studies - revenue or capital expenditure - HELD THAT - Study conducted on the existing business in the given facts and circumstances cannot be treated as capital expenditure. The auditor in his report has held that such expenditure is capital in nature. However, in this regard we note that the audit report cannot replace the provisions of law and the principles laid down by the Hon ble Court s. we hold that the assessee is entitled for the deduction of the expenses incurred on the study/feasibility report on the existing business being revenue in nature. Hence the ground of appeal of the assessee is allowed.
Issues Involved:
1. Validity of the assessment order under section 143(3) read with section 147 of the Income Tax Act. 2. Disallowance of liability claim towards Mumbai Port Trust amounting to ?2,02,45,000. 3. Disallowance of additional royalty claims of ?31,29,000 as previous year expenses. 4. Disallowance of expenses of ?16,62,000 incurred on exploratory/evaluation studies, considering them as capital expenditure. Issue-wise Detailed Analysis: 1. Validity of the assessment order under section 143(3) read with section 147 of the Income Tax Act: - This issue was not explicitly discussed in the judgment text provided, so no detailed analysis is available. 2. Disallowance of liability claim towards Mumbai Port Trust amounting to ?2,02,45,000: - The assessee, a limited company engaged in manufacturing and sale of cement, had leased land from Mumbai Port Trust (MPT) but stopped accounting for lease rentals from October 1998 due to financial difficulties and unauthorized occupation by slum dwellers. - MPT raised a demand for outstanding rent and interest totaling ?2,02,45,000 on 28th February 2007, which the assessee contested in civil court and subsequently in the Bombay High Court. - The AO disallowed the claim, considering it a contingent liability since the matter was under litigation. - The CIT(A) upheld the AO's view, stating the liability was not crystallized due to pending litigation. - The Tribunal, however, allowed the deduction, citing that the liability had crystallized when the demand was raised by MPT, despite ongoing litigation. The Tribunal referenced the Gujarat High Court's judgment in Navjivan Roller Flour & Pulse Mills Ltd. Vs. DCIT, which supports recognizing such liabilities when they crystallize. 3. Disallowance of additional royalty claims of ?31,29,000 as previous year expenses: - The AO disallowed the expense, treating it as a prior period expense since it pertained to an earlier assessment year (2003-04). - The CIT(A) upheld the AO's view, noting that the liability was shown in the financial statements for 2003-04. - The Tribunal reversed this decision, stating that the liability was crystallized in the year under consideration (2006-07) when the Department of Geology and Mining of Gujarat raised the demand. The Tribunal emphasized that the liability could not have been claimed earlier as it was not ascertainable then and applied the doctrine of impossibility of performance. 4. Disallowance of expenses of ?16,62,000 incurred on exploratory/evaluation studies, considering them as capital expenditure: - The AO treated the expenses as capital in nature based on the auditor's report, which the assessee could not refute. - The CIT(A) agreed, stating the expenses were for a techno-economic feasibility report, providing long-term benefits. - The Tribunal disagreed, noting that the expenses were for studies on existing projects and did not result in new assets or enduring benefits. The Tribunal cited the Andhra Pradesh High Court's judgment in CIT v/s Coromandel Fertilizers, which held that feasibility study expenses not resulting in new units are revenue expenses. - The Tribunal also emphasized that the auditor's classification in the audit report does not override legal principles and court judgments, referencing the Supreme Court's ruling in Sutlej Cotton Mills Ltd. Vs. CIT. Conclusion: - The Tribunal allowed the appeal, granting deductions for the liability towards MPT, additional royalty claims, and exploratory/evaluation study expenses, recognizing them as revenue expenditures in the year they crystallized.
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