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TMI Blog2020 (2) TMI 890X X X X Extracts X X X X X X X X Extracts X X X X ..... ess 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost was not an allowable deduction under the Act.? T.C.(A)No.2118 of 2008 1. Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal was justified in law in holding that the amount of ₹ 48,03,344/- debited in the profit and loss account towards provision for site restoration cost was not an allowable deduction under the Act.? T.C.(A)No.2119 of 2008 1. Whether in the absence of any specific ground of appeal, could it be held that, the Tribunal had impliedly held that, provision for site restoration cost is not an ascertained liability and, therefore adjustment could be made while computing the income under Section 115J of the Act ? 2. The learned Tribunal disallowed the provisions made by the Assessee for site restoration cost for the Assessment years in question by holding that an expenditure which is deducted for income-tax purpose is one which is towards a liability actually existing at the time, but putting aside some money which may become an expenditure on the happening of an event is not an expenditure. In other words, the Tribunal held that since the provision made under site restoration fund is a contingent li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cordance with, and for the purposes specified in, a scheme (hereafter in this section referred to as the scheme) approved in this behalf by the Government of India in the Ministry of Petroleum and Natural Gas; or (b) deposited any amount in an account (hereafter in this section referred to as the Site Restoration Account) opened by the assessee in accordance with, and for the purposes specified in, a scheme framed by the Ministry referred to in clause (a) (hereafter in this section referred to as the deposit scheme), the assessee shall, subject to the provisions of this section, be allowed a deduction (such deduction being allowed before the loss, if any, brought forward from earlier years is set off under section 72) of- (i) a sum equal to the amount or the aggregate of the amounts so deposited; or (ii) a sum equal to twenty per cent of the profits of such business (computed under the head Profits and gains of business or profession before making any deduction under this section), whichever is less : Provided that where such assessee is a firm, or any association of persons or any body of individuals, the deduction under this section shall not be allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be installed in an industrial undertaking for the purposes of business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule. (5) Where any amount standing to the credit of the assessee in the special account or in the Site Restoration Account is withdrawn on closure of the account during any previous year by the assessee, the amount so withdrawn from the account, as reduced by the amount, if any, payable to the Central Government by way of profit or production share as provided in the agreement referred to in section 42, shall be deemed to be the profits and gains of business or profession of that previous year and shall accordingly be chargeable to income-tax as the income of that previous year. Explanation.-Where any amount is withdrawn on closure of the account in a previous year in which the business carried on by the assessee is no longer in existence, the provisions of this sub-section shall apply as if the business is in existence in that previous year. (6) Where any amount standing to the credit of the assessee in the special account or in the Site Restoration Account is utilised by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness or profession immediately before the succession become the properties of the company; (ii) all the liabilities of the firm relating to the business or profession immediately before the succession become the liabilities of the company; and (iii) all the shareholders of the company were partners of the firm immediately before the succession. (9) The Central Government may, if it considers necessary or expedient so to do, by notification in the Official Gazette, direct that the deduction allowable under this section shall not be allowed after such date as may be specified therein. Explanation.-For the purposes of this section,- (a) State Bank of India means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955); (b) the expression amount standing to the credit of the assessee in the special account or the Site Restoration Account includes interest accrued to such accounts.] Section 37 Section 37(1) says that any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsferred in accordance with the agreement referred to in subsection (1), subject to the provisions of the said agreement and where the proceeds of the transfer (so far as they consist of capital sums) (a) are less than the expenditure incurred remaining unallowed, a deduction equal to such expenditure remaining unallowed, as reduced by the proceeds of transfer, shall be allowed in respect of the previous year in which such business or interest, as the case may be, is transferred; (b) exceed the amount of the expenditure incurred remaining unallowed, so much of the excess as does not exceed the difference between the expenditure incurred in connection with the business or to obtain interest therein and the amount of such expenditure remaining unallowed, shall be chargeable to income-tax as profits and gains of the business in the previous year in which the business or interest therein, whether wholly or partly, had been transferred : Provided that in a case where the provisions of this clause do not apply, the deduction to be allowed for expenditure incurred remaining unallowed shall be arrived at by subtracting the proceeds of transfer (so far as they consist of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -1998 and 1998-1999 was laid out or expended wholly and exclusively for the purpose of business or not. 8. The 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. The said relevant clauses are also quoted below for ready reference: 1.77. Site Restoration shall mean all activities required to return a site to its natural state or to render a site compatible with its intended after use (to the extent reasonable, having regard to its former use, if any, and state), after cessation of Petroleum Operations in relation thereto and shall include, where appropriate, proper abandonment of wells or other facilities, removal of equipment, structures and debris, establishment of compatible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4/97 213,070,779.00 F Abandonment Cost Per Barrell (D/E) 0.09 G Production During 1997-98 12,857,377.00 H Provision to be made USD ( FXG) 1,146,549.20 I CEIPL Share @ 22.5% (HX22.5%) 257,973.57 J CEIPL Share in INR (1X39.397) 10,163,384.69 10. The learned counsel further urged that the Hon'ble Supreme Court in the case of Calcutta Company Limited Vs. CIT reported in (1959) 37 ITR 1 (SC) , has laid down that inasmuch as the liability which had accrued during the accounting year, was to be discharged at a future date, the amount to be expended in the discharge of that liability would have to be estimated in order that under the mercantile system of accounting, the amount could be debited before it was actually disbursed. The relevant portion of the said Judgement are quoted below for ready reference: Turning now to the facts of the present case, we find that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Their Workmen, which is quoted below for ready reference: 4.The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability . It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain . 5. In Metal Box Company of India Ltd. Vs. Their Workmen (1969) 73 ITR 53 the appellant company estimated its liability under two gratuity schemes framed by the company and the amount of liability was deducted from the gross receipts in the P L account. The company had worked out on an actuarial valuation its estimated liability and made provision for such liability not all at once but spread over a number of years. The practice followed by the company was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. If these conditions are not met, no provision can be recognized. Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. Where there are a number of obligations (e.g. product warranties or similar contracts ) the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole. 13. Thus, the three criteria of the provision is recognized when: (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iii) and it would, therefore, be convenient to refer to that section, but before we do so, we may point out that section 57(iii)occurs in a fasciculus of sections under the heading 'F- Income From Other Sources' . Section 56 which is the first in this group of sections enacts in sub-section (1) that income of every kind which is not chargeable to tax under any of the heads specified in section 14, Items A to E shall be chargeable to tax under the head 'Income From Other Sources' and sub-section (2) includes in such income various items one of which is 'dividends'. Dividend on shares is thus income chargeable under the head 'Income From Other Sources'. Section 57 provides for certain deductions to be made in computing the income chargeable under the head Income From Other Sources and one of such deductions is that set out in clause (iii) which reads as follows: Any other expenditure (not being in the nature of capital expenditure) laid down or expended wholly and exclusively for the purpose of making or earning such income . The expenditure to be deductible under section 57(iii) must be laid out or expended wholly and exclusively for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt had discussed the view of Lord Thankerton in Hughes (supra) in the following terms:- This view which we are taking is clearly supported by the observations of Lord Thankerton in Hughes v. Bank of New Zealand where the learned Law Lord said: Expenditure in the course of the trade which is unremunerative is none the less a proper deduction, if wholly and exclusively made for the purposes of the trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense. We find that the same view has been taken by the Madras High Court in Appa Rao v. Commissioner of Income tax , and Mohamed Ghouse v. Commissioner of Incometax, the Bombay High Court in Ormerods (India) Private Ltd. v. Commissioner of Income-tax, the Allahabad High Court in Chhail Beharilal v. Commissioner of Income-tax, the Madhya Pradesh High Court in Commissioner of Income-tax v. Dr. Fida Hussain G. Abhasi, the Kerala High Court in M. N. Ramaswamy Iyer v. Commissioner of Incometax and the Orissa High Court in Commissioner of Income-tax v. Gopal Chand Patnaik. This view is eminently correct as it is not only justified by the language of section 57(iii) but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 23. However at this stage itself we make it clear that Section 33ABA is not applicable to the three Assessment years viz., 1996-1997, 1997-1998 and 1998-1999 and the learned counsel for the Assessee himself has stated before us that from 01.04.1999 viz. Assessment Year 1999-2000, the Assessee has not claimed any Provision as deduction and the controversy involved is restricted only for these three Assessment years. 24. Secondly the learned counsel for the Revenue relied upon the Judgment of the Hon'ble Supreme Court in the case of New India Mining Corporation Ltd Vs. Commissioner of Income Tax reported in (2000) 243 ITR 640 (SC) in which case the learned Tribunal has held that the expenditure incurred by the appellant for the purpose of restoring the lease land to the original condition was permissible under Section 37(1) of the Income Tax Act. Further, the Tribunal has found that since no expenditure was incurred by the Assessee therein and therefore, in the Hon'ble Supreme Court has held that once it is held that since no expense was incurred by the appellant, the question of any allowable expense being deducted in computing the income from the profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax purposes is towards a liability actually existing at the time but setting apart money which might become expenditure on the happening of an event is not expenditure. (See in this connection the observations of this Court in Indian molasses Co. (P) Ltd., v. Commissioner of Income-tax, West Bengal), 37 I.T.R. 66 at pages 76 80. A distinction is often made between an actual liability in praesenti and a liability de futuro, which for the time being is only contingent. The former is deductible but not the latter. 25. Amounts set apart by way of provision or by way of a reserve or fund to meet the liability of gratuity as and when it becomes payable will not be deductible allowance or expenditure. Where, however, an approved gratuity fund is created for the exclusive benefit of the employees under an irrevocable trust, contribution made to the fund during the year of account will be allowed to be deducted under section 36(1)(v). 26. The said observation was made by the Hon'ble Supreme Court that the contingent liabilities do not constitute expenditure and cannot be the subject matter of deduction even under the mercantile system of accounting was made in the conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Renowned Auto Products Mfrs. Ltd Vs. Income Tax Officer reported in (2013) 354 ITR 127 (Mad) where the Co-ordinate Bench of this Court held that where the provisions of warranty costs was not created on scientific basis and such provision seemed just an ascertained contingent liability, the same was not deductible under Section 37 (1) of the Act. The said aspect was already discussed in the Judgment of Rotork Controls India (P) Ltd., Vs. Commissioner of Income Tax reported in ( 2009) 314 ITR 0062 (SC), and therefore the Judgment of Renowed Auto Products Mfrs. Ltd. (supra) is not applicable to the facts of the present case, as we find that the Provisions for 'Site Restoration' in the present case was made by the Assessee on a Scientific, Rational and reasonable computing basis, and it was not on ad-hoc basis. 29. Thus on the conspectus of the legal precedents discussed above, we are of the clear opinion that 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 ex ..... X X X X Extracts X X X X X X X X Extracts X X X X
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