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TMI Blog2015 (8) TMI 978X X X X Extracts X X X X X X X X Extracts X X X X ..... net profit. In respect of liability already accrued, the actual date of incurring of expenses is irrelevant and hence the payment could be postponed in subsequent years. Even otherwise, it is submitted that the assessee has reversed the provision in the immediately succeeding year, i.e., the said provision is offered as income in the succeeding year in the form of reduction of corresponding expenditure. As observed by Hon’ble Supreme Court in the case of Excel Industries Ltd. (2013 (10) TMI 324 - SUPREME COURT ), accounting policy adopted by the assessee is tax neutral in nature, No infirmity in the order of the ld CIT(A) on this issue and, accordingly, we uphold the same. - Dcided against revenue. - I.T.A. No.286/Viz/2012, I.T.A. No.120/Viz/2015, I.T.A. No.333/Viz/2013, I.T.A. No.285/Viz/2012, I.T.A. No.267/Viz/2013, C.O.No.20/Viz/2015 - - - Dated:- 10-8-2015 - SHRI D.MANMOHAN AND SHRI B.R.BASKARAN, JJ. For The Assessee : Shri G.V.N. Hari, Adv For The Revenue : Shri Th.Lucas Petia, CIT DR ORDER Per Bench: The appeals and cross objection filed by the assessee and the appeals filed by the revenue are related to assessment years 2008-09, 2009-2010 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Port GSPC Shorebase mud plant tanks. Collection, transportation and treatment of waste / sludge recovered from tank cleaning of OSV GSPC Shorebase mud plant tanks. Collection, transportation and treatment of waste/sludge recovered from mud plant at GSPC Shorebase. Treatment of Drill fluids, mud for recovery of valuable muds and base oil and recovered base oil valuable mud shall be provided to GSPC at no cost. Drill cuttings treatment disposal at SAR Chandra's facility. Collection, transportation and disposal of drill cuttings from GSPC warehouse. Skips shall be provided by GSPC for carrying out above mentioned work. If required GSPC would hire the skips from contractor. d. All the applicable IS/API/ASTM/ Pollution control (concern authority ) for carrying out above mentioned activity/process. The assessee-company raised bills on its client viz., M/s GSPC for entire contract amount upon lifting of drilling waste. The wastes so lifted were transported to the assessee's facility, which is processed later. 5. The processing of waste takes its own time depending upon the type of waste. As there is a time lag between collection and final ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the provision so made by the assessee was relating to the future expenses, which is neither crystalised nor accrued. Accordingly, he held that the assessee has adopted a colourable device in order to understate its income. Accordingly, the AO disallowed the claim while computing total income under the normal provisions of the Act and also while computing the book profit under section 115 JB of the Act. 7. In the appellate proceedings, the ld CIT(A) agreed with the submissions of the assessee and, accordingly, held that the assessee, under the Contract entered with GSPC, has undertaken a legal and contractual liability to process the material lifted from GSPC. Hence the gross contract amount received by the assessee is attached with the legal and contractual liability to process the materials. Accordingly, the ld CIT(A) held that the assessee is obliged to provide for expenditure relating to the contract receipts, since the entire contract receipts was offered as its income. With regard to the contention of the AO that it was a provision made towards future expenses, the ld CIT(A) held that the provision made for a liability which has already accrued is a present liability, ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure and further not sure of the quantum of expenditure, has made provision on estimated basis and hence, the provision so made by the assessee should be considered as unascertained liability. He further submitted that though the assessee has received the entire contract amount for shifting waste materials from the site, the same should be treated as advance since the assessee is obliged to comply with various standards prescribed by the Pollution Control Board. Hence, the provision so made by the assessee in respect of expenditure, which could not be predicted by the assessee cannot be allowed as deduction u/s.37(1) of the Act, as the various conditions prescribed in that section were not complied with. Ld D.R. placed reliance on the following case laws in support of his propositions: 1) Brooke Bond India Ltd. Vs JCIT,337 ITR 482(Cal) 2) CIT v. Forbes Campbell Finance Ltd (2013) 352 ITR 602 (Mad ) 3) CIT vs. Tamil Nadu Small Ind. Dev. Corpn Ltd., 370 ITR 449(Mad) 4) CIT vs Cable Corporation of India Ltd [2011] 336 ITR 56 (Bom) 5) Commissioner of Income-Tax. Vs. Denso India Limited.,292 ITR 502(Del) 6) Hyderabad Asbestos Cement vs Commissioner Of Income-Tax, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme Court has considered the concept of revenue cost matching principle in the case of Calcutta Co. Ltd. Vs CIT, 37 ITR 1 and held as under: Apart, however, from the question whether s, 10(2)(xv) of the IT Act would apply to the facts of the present case, the case is, in our opinion, well within the purview of s. 10(1) of the Act. The appellant here is being assessed in respect of the profits and gains of its business and the profits and gains of the business cannot be determined unless and until the expenses or the obligations which have been incurred are set off against the receipts. The expression profits and gains has to be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure which is necessary for the purpose of earning the receipts is deducted therefrom-whether the expenditure is actually incurred or the liability in respect thereof has accrued even though it may have to be discharged at some future date. As was observed by Lord Herschell in Russlt vs. Town Country Bank Ltd. (1888) 13 App Cas 418 : The duty is to be charged upon a sum not less than the full amount of the balance of the profits or ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. IBM India Ltd., (2013) 357 ITR 0088 (Karn) 2) CIT vs. Hewlett Packard India (P) Ltd., (2009) 314 ITR 0055 3) Hindustan Shipyard Ltd vs DCIT (2010) 6 ITR 0407. 14. We have heard rival submissions and perused the record. We have also carefully gone through the order passed by the ld CIT(A). A careful perusal of the impugned appellate order clearly reveals that the Ld. CIT(A) has considered and adjudicated the issue, in question, after appreciation of the facts of the case, material available on record and various judicial precedents. For the sake of convenience, we extract the relevant observations made by the ld CIT(A) at paras 4.8 to 4.12 as under: 4.8 From the above, it can be seen that it is the responsibility of the assessee to collect the waste and dispose it off after treatment at the facility of the assessee. The responsibility of the oil drilling company with regards to pollution control norms is discharged once the waste is removed by the assessee company from the premises of oil drilling company. Subsequently, it becomes the responsibility of the assessee company to treat the said waste and dispose it off as per the Pollution Control Board norms. It is be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncerned. Expenditure is thus what is paid out or away and is something which is gone irretrievably. 4.9 The Hon'ble Court held that there is a distinction between the contingent liability and a payment depending upon a contingency . Further distinction is made between an actual liability in praesenti and a liability de future which, for the time being, is only contingent. The court held that the former is deductible but not the latter. The recurring liability of pension which is compressed into a lump payment should itself be a legal obligation, and that, if contingent, the present value of the future payments should be fairly estimable. If the pension itself be not payable as an obligation, and if there be a possibility that no such payment may be necessary in the future, the whole of the amount cannot be deducted but only the present value of the future liability, if it can be estimated. From the above observations, it can be seen that the Hon'ble court examined two issues. With regard to paying out it is held by Hon'ble court that even if the amount is paid out the requirement of such payment as per law needs to be examined and every payment as per the ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax purpose is towards a liability actually existing at the time. For determining whether there is an expenditure, it is necessary to see whether there is an existing liability to pay out monies irretrievably. In Calcutta Co Ltd case (37 ITR 1,) the Hon'ble Apex Court pointed that a distinction should be made between a contingent liability which may or may not arise in future and a present liability which has to be performed in future. In the later case the liability having accrued in the year of account, the amount to be expended in discharge of that liability would have to be estimated in order that under mercantile system of accounting the amount so estimated should be debited before it is actually disbursed. In the case of CIT Vs. Gemini Cashew Sales Corpn.(65 ITR 643), the Hon'ble Supreme Court observed that, broadly stated, the present value on commercial valuation of money to become due in future, under a definite obligation, will be a permissible outgoing or deduction in computing the taxable profits, even if in certain conditions the obligation may cease to exist because of forfeiture of the right. In deciding the question whether present liability has accrued again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic basis. 4.12 In the light of the above judicial pronouncements it would be pertinent to examine the facts of the case again. In the case of the assessee there is a definite liability to process and disposed off the drilling waste. As long as the waste material is lying in the compound of the assessee there is a legal/contractual liability of the assessee to process such material. If only the receipt of the assessee is considered without considering the corresponding expenditure related to the same it would lead to absurd results in the profits of the company. Therefore the assessee is obliged to provide for expenditure on the income which is already accounted for. Assessee in the present case has done so. From the estimation of expenditure made by the assessee it can be seen that it has reasonably estimated the expenditure taking into account the average expenditure over a period of time. Thus the expenditure debited is less than the actual per ton expenditure incurred during the year under consideration. Further there is no dispute regarding the basis of estimation by the AO. It is also not the argument of the AO that the said estimation is disproportionate or on higher side. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e there is obligation to discharge the responsibility to process the waste materials. Hence the gross contract receipts cannot considered to be the net income of the assessee, i.e., the income arising from the said contract alone can be brought to tax, in which the corresponding expenditure is required to be allowed as deduction. Hence the liability to process the materials constitute ascertained liability in praesenti and hence the assessee is justified in providing for those expenses in order to arrive at the net profit. In respect of liability already accrued, the actual date of incurring of expenses is irrelevant and hence the payment could be postponed in subsequent years. 17. Even otherwise, it is submitted that the assessee has reversed the provision in the immediately succeeding year, i.e., the said provision is offered as income in the succeeding year in the form of reduction of corresponding expenditure. As observed by Hon ble Supreme Court in the case of Excel Industries Ltd. (supra), accounting policy adopted by the assessee is tax neutral in nature. 18. In view of above, we do not find any infirmity in the order of the ld CIT(A) on this issue and, accordingly, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rit in the contentions of the assessee. Though the assessee imported the drier machinery from Norway by paying custom duty, it was constrained to return it back since the said drier did not meet the requirements of the assessee. Normally, the customs duty paid on import of machinery is required to be capitalized along with the cost of machinery. However, in the instant case, the machinery was not ultimately purchased and hence the question of capitalizing the same along with the cost of machinery does not arise at all. Once the machinery is returned back, in our view, the custom duty loses its character as relating to machinery purchased, Hence, in our view, the custom duty paid by the assessee is in the nature of expenditure incurred on surveying about suitability of machinery and it was incurred in the course of carrying on business. Accordingly, we are of the view that there is merit in the contentions of the assessee that the same has to be treated as revenue expenditure. Accordingly, we set aside the order of the ld CIT(A) on this issue and direct the Assessing Officer to allow custom duty paid by the assessee as revenue expenditure. 24. The next issue relates to non-giving ..... X X X X Extracts X X X X X X X X Extracts X X X X
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