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TMI Blog2019 (10) TMI 1229X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. X X X X Extracts X X X X X X X X Extracts X X X X ..... bsequently it was declared as the sick company by the BIFR vide order dated 6th September, 2000. In view of the above the assessee claimed that it has not provided the lease rental in its books of accounts from October 1998. 3.3 However, the Estate Office of MPT raised a demand towards the outstanding amounting to ₹ 2,02,45,000.00 along with the interest vide order dated 28th February, 2007. The assessee against such order of MPT carried the matter to the civil court but no success. Accordingly the assessee carried the matter before the Hon'ble Bombay High Court which is pending therein. However the assessee was of the view that such liability has arisen in the year under consideration and accordingly it recognized the same in the books of accounts. 4. However, the 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. 4.1 Similarly, the AO was also of the view that such liability towards the lease rent along with interest pertains to the earlier years. Therefore the same cannot be allowed as deduction in the year under consideration. In view of the above the AO disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n'ble Bombay High Court which is pending as on date. 8.3 However the 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. 8.4 The contractual liability may arise under two situations 1- From Statutory Order and 2- From Contract. The liability arising in situation 1 is covered by the provision of section 43B of the Act meaning thereby, it will be allowed as deduction in the year in which it is paid. However the liability arising under situation 2 is difficult to ascertain in view of the contradictory stand taken by the parties involved in the dispute. As such the contractual liability is in the nature of contingent liability which cannot be allowed as deduction under the provisions of the Act. Such liability may arise on the happening of an event in future. In this connection, we draw support and guidance from the orders of Delhi High Court in the case Oswal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ending in the court of law. Hence, the ground of appeal of the assessee is allowed. 9. The 2nd issue raised by the assessee is that the Ld. CIT (A) erred in upholding the addition made by the AO for ₹ 31,29,000.00 on account of additional royalty payment which was treated as prior period expenses. 10. The AO during the assessment proceedings observed that the assessee has claimed an expense for the additional royalty of ₹ 31,29,280.00 pertaining to the earlier assessment year. As per the AO such liability represents the prior period expenses and accordingly the same cannot be allowed as deduction in the year under consideration. Thus the AO disallowed the same and added to the total income of the assessee. Aggrieved assessee preferred an appeal to the Ld. CIT (A). 11. The assessee before the Ld. CIT (A) submitted that the liability towards the additional royalty was crystallized in the year under consideration and therefore the same was claimed as per mercantile system of accounting. 12. However, the Ld. CIT (A) disagreed with the submission of the assessee by observing that the assessee has shown such liability in its audited financial statements as pertaining to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the given facts and circumstance as it was impossible for the assessee to perform its duty. 15.2 It is well-settled law that an obligation gets discharged due to impossibility of performance. The law of impossibility of performance does not necessarily require absolute impossibility, but also encompass the concept of severe impracticability. In our humble opinion, the doctrine of impossibility of performance applies in this case. 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. In holding so we find support & guidance from the judgment of Hon'ble Supreme Court in the case of Krishna Swamy S. PD. & ANR Vs. Union of India & ors reported in 281 ITR 305 wherein it was held that : "The other relevant maxim is, lex n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard we find support and guidance from the judgment of Hon'ble Bombay High Court in the case of CIT v. Nagri Mills Co. Ltd.[1958] 33 ITR 681 has held as under: "3. We have often wondered why the Income-tax authorities, in a matter such as this where the deduction is obviously a permissible deduction under the Income-tax Act, raise disputes as to the year in which the deduction should be allowed. The question as to the year in which a deduction is allowable may be material when the rate of tax chargeable on the assessee in two different years is different; but in the case of income of a company, tax is attracted at a uniform rate, and whether the deduction in respect of bonus was granted in the assessment year 1952-53 or in the assessment year corresponding to the accounting year 1952, that is in the assessment year 1953-54, should be a matter of no consequence to the Department; and one should have thought that the Department would not fritter away its energies in fighting matters of this kind. But, obviously, judging from the references that come up to us every now and then, the Department appears to delight in raising points of this character which do not affect the taxabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21. We have heard the rival contentions of both the parties and perused the materials available on record. The issue in the instant case relates whether the assessee has rightly claim the expenditure incurred on exploratory/evaluation studies as revenue expenditure while the auditor in the audit report mentions the same as capital expenditure. From the preceding discussion we note that there is no doubt about the genuineness of the expenses. 21.1 Before, we proceed to adjudicate the issue of allowability of such expenses, it is pertinent to note that the study was conducted on the existing project and there was no fixed asset came into existence out of such expenditure. This fact has not been doubted by any of the authorities below. Similarly, the learned CIT (A) has assumed that such study will result in the enduring benefit to the assessee without referring to any material on record. 22. The learned DR has also not brought anything on record suggesting that there was some enduring benefit to the assessee out of such expenses. We also draw the support and guidance from the judgment of Hon'ble Andhra Pradesh High Court in the case of CIT v/s Coromandel Fertilzers reported in 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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