2019 (9) TMI 317 - HC - Income Tax

Deduction of future expenses - accrued liability towards construction of building which was sold as incomplete during construction - distinction between amount spent to pay off an actual liability and a liability that would be incurred in future which is only contingent - HELD THAT - Expenditure is not necessarily confined to the money which has been actually paid out. It covers a liability which has accrued or which has been incurred although it may have to be discharged at a future date. However, a contingent liability which may have to be discharged in future cannot be considered as expenditure. It also covers a liability which the assessee has incurred in praesenti although it is payable in futuro (See Madras Industrial Investment Corporation Limited v. Commissioner of Income Tax 1997 (4) TMI 5 - SUPREME COURT In order to claim deduction of business expenditure, it is not necessary that the amount has been actually paid or expended during the relevant accounting year itself. It is sufficient that the liability for payment had incurred or accrued during the relevant accounting year. The actual payment of amount or discharge of liability may occur in future. What is crucial is the accrual of liability for payment or expenditure during the relevant accounting year. But, a contingent liability that may arise in future, cannot be treated as expenditure. Thus, the substantial question of law is answered in favour of the assessee and against the revenue. In the instant case, the revenue has no case that the sale deed executed in respect of the building did not provide that the assessee was liable to complete the construction of the building. The Tribunal was right in confirming the finding of the appellate authority that, the expenditure incurred by the assessee company during the financial years subsequent to the sale of the building, is eligible for deduction in computation of taxable income.

Summary

Issues:
- Deductibility of future expenses incurred for a liability accrued during the accounting year in the computation of taxable business income.

Analysis:
1. The case involved a company engaged in construction and sale of building complexes. The company sold a portion of a building under construction during the assessment year 2009-10. The company later claimed deduction for expenses incurred in completing the construction in the financial years 2009-10 and 2010-11.

2. The appellate authority allowed the deduction, considering the estimated future expenditure to be incurred along with expenses already incurred for arriving at the cost of construction per sq ft. The authority held that the assessing officer was not justified in disallowing the deduction, as the company was required to provide additional amenities beyond the mere sale of commercial space.

3. The revenue challenged the appellate authority's decision before the Income Tax Appellate Tribunal, which upheld the decision. The revenue contended that future expenses for a contingent liability cannot be deducted, while the company argued that the claimed deduction was for an accrued liability to be met after the completion of construction.

4. The High Court analyzed Section 37(1) of the Income Tax Act, which allows deduction for business expenditure laid out wholly and exclusively for business purposes. Referring to the Calcutta Company Limited case, the Court emphasized that expenditure necessary for earning receipts must be deducted, whether actually incurred or accrued as a liability to be discharged in the future.

5. The Court cited the Madras Industrial Investment Corporation and Bharat Earth Movers cases, establishing that if a business liability has arisen in the accounting year, the deduction should be allowed even if the liability is to be quantified and discharged in the future. The key is the certainty of incurring the liability during the relevant accounting year.

6. The Court concluded that as the company had incurred expenses for completing the building as per the sale deed, the future expenses were eligible for deduction in the computation of taxable income. Therefore, the appeal by the revenue was dismissed, affirming that the expenditure incurred for future liabilities accrued during the accounting year is deductible in computing taxable business income.