2020 (2) TMI 890 - HC - Income Tax

Provision for Site Restoration - Expenses allowable u/s 37(1) - HELD THAT - Assessee is engaged in the business of oil exploration in India and as per the Product Sharing Contract between The Government of India, Oil and Natural Gas Corporation Limited (ONGC), Videocon Petroleum Limited, Command Petroleum (India) Pte Limited, Ravva Oil (Singapore) Pte Ltd, with respect to contract Area identified as Ravva Oil Gas Fields. The Assessee Company undertaking such oil exploration was obligated under the Clause 1.77 and 14.9 of the Contract to restore the site by filling up the pits, after the oil exploration work is over. For the three Assessment Years in question, the provision made by the Assessee for 'Site Restoration cost' under the contractual obligations of the Assessee in the Product Sharing Contract, made on scientific basis was clearly an allowable expenditure under Section 37(1) - The only ingredient required to be complied with for Section 37(1) is that the expenditure in question should be laid out or expended wholly for the purpose of business of the Assessee. There is no dispute that the Provision in question was made wholly and exclusively for the purpose of business. The only dispute was that expenditure not actually incurred in these years and the amount was to be spent in future out of the Provision made during these Assessment years namely A.Y.1996- 1997 to 1998-1999. No prohibition or negation for making a provision for meeting such a future obligation and such a provision being treated as a revenue expenditure under Section 37(1) of the Act. The Hon'ble Supreme Court in the case of Calcutta Company Limited 1959 (5) TMI 3 - SUPREME COURT clearly held that the words Lay (laid out) or Expend includes expendable in future also, which has been quoted by us above. The making of a Provision by an Assessee is a matter of good business or commercial prudence and it is to set apart a fund computed on scientific basis to meet the expenditure to be incurred in future. There is no time frame or limitation prescribed for the said provisions to be actually spent. Merely because in the context like the one involved in this case, the contract period was long viz., 25 years, which too now stands extended by period of ten years or more and therefore the actual work of site restoration may happen after 35 years depending upon the actual exploration of oil reserves and the Site restoration would be undertaken only if there is no longer some oil to be explored or drawn out and, therefore, it cannot be said that the provision made for the three Assessment Years presently at the beginning of the Contract period was irrational or an disallowable expenditure. The question of commercial expediency is a usual business and the economic decision to be taken by the Assesee and not by the Revenue Authorities and therefore the provision made on a reasonable basis, cannot be disallowed under Section 37(1) of the Act, unless it can be said to be have no connection with the business of the Assesee. The words wholly and exclusively for the purpose of business is a sufficient safeguard and check and balance by the Revenue Authorities to test and verify the creation of provisions for meeting a liability by the Assessee in future and its connectivity with the business of the Assessee. Assuming that such set apart provision is not actually spent in future or something less is spent on Site Restoration, nothing prevents Revenue Authorities and Assessee himself to offer it back for taxation in such future year, the unspent Provision to be brought back to tax as per Section 41(1) of the Act. - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the provision for site restoration costs is an allowable deduction under the Income Tax Act.
2. Whether the provision for site restoration costs can be adjusted while computing income under Section 115J of the Act.

Issue-wise Detailed Analysis:

1. Allowability of Provision for Site Restoration Costs:
The primary issue is whether the provision for site restoration costs made by the Assessee for the Assessment Years 1996-1997, 1997-1998, and 1998-1999 is an allowable deduction under Section 37(1) of the Income Tax Act. The Tribunal disallowed the provision, holding that it was a contingent liability and not an expenditure. The Tribunal also noted that Section 33ABA, inserted by Finance Act (No.2) 1998, mandates actual deposits in the Site Restoration Fund for such provisions to be deductible, which was not applicable for the years in question.

The Assessee argued that the provision was made based on a scientific and rational basis, as per the Product Sharing Contract with the Government of India and other entities, which obligated the Assessee to restore the site post-exploration. The Assessee relied on several Supreme Court judgments, including *Calcutta Company Limited vs. CIT*, *Bharat Earth Movers vs. CIT*, and *Metal Box Company of India Ltd. vs. Their Workmen*, to assert that a liability that has accrued, even if to be discharged in the future, is deductible under the mercantile system of accounting.

The Court found that the provision for site restoration costs was made on a scientific basis and was a present obligation arising from past events, satisfying the criteria laid out in *Rotork Controls India (P) Ltd. vs. CIT*. The Court held that the provision was an allowable expenditure under Section 37(1) of the Act, as it was laid out wholly and exclusively for the purpose of business.

2. Adjustment under Section 115J:
The second issue was whether the provision for site restoration costs could be adjusted while computing income under Section 115J of the Act. The Tribunal held that the provision was not an ascertained liability and could be adjusted. However, the Court found that since the provision was made on a scientific and rational basis and was a present obligation, it should not be considered a contingent liability. Therefore, the provision should not be adjusted under Section 115J.

Conclusion:
The Court concluded that the provision for site restoration costs made by the Assessee for the relevant assessment years was an allowable deduction under Section 37(1) of the Income Tax Act. The Court allowed the appeals filed by the Assessee, answering the substantial questions of law in favor of the Assessee and against the Revenue.