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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 ..... ther on the facts and circumstances of the case, the Income Tax Appellate Tribunal was justified in law in holding that the amount of Rs. 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 liability incurred by the Assessee, the same is not an allowable expenditure. In paragraph 16 of the Impugne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in the computation of the income of any partner or, as the case may be, any member of such firm, association of persons or body of individual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edule. (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 for the purposes of any expenditure in connection with such business in accordance with the scheme or the deposit scheme, such expenditure shall not be allowed in computing the income chargea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lities 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 wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head, "Profits and Gains of Business or Profession". Section 42 Special provision for deductions in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 capital sums) from the expenditure remaining unallowed. Explanation.-Where the business or interest in such business is transferred in a previous year in which such business carried on by the assessee is no longer in existence, the provisions of this clause shall apply as if the busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted, 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 contours and drainage, replacement of top soil, revegetation, slope stabilisation, infilling of excavations or any other appropriate actions in the circumstances." "14.9Contractor's Abandonment Obligations On expiry or termination of this Contract or relinquishment of part of the Contract Area, the Contractor shall: ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 sum of Rs. 24,809 represented the estimated expenditure which had to be incurred by the appellant in discharging a liability which it had already undertaken under the terms of the deeds of sale of the lands in question and was an accrued liability which according to the mercantile system of accounting the appellant was entitled to debit in its books of account for the accounting year as against the receipts of Rs. 43,692-11-9 which represented the sale proceeds of the said lands. Even under s. 10(2) of the Income-tax Act, it might possibly be urged that the word " expended was capable of being interpreted as " expendable "or to be expended " at least in a case where a liability to incur the said expenses had been actually incurred by the assessee who adopted the mercantile system of accounting and the debit of Rs. 24,809 was thus a proper debit in the present case. We need not however base our decision on any such considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that every year the company worked out the additional liability incurred by it on the employees putting in every additional year of service. The gratuity was payable on the termination of an employees service either due to retirement, death or termination of service - the exact time of occurrence of the latter two events being not determinable with exactitude before hand. A few principles were laid down by this court, the relevant of which for our purpose are extracted and reproduced as under:- "(i) For an assessee maintaining his accounts on mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is paid; permissible only in case of amounts actually expended or (ii) Just as receipts, though not actual receipts but accrued due are brought in for income-tax ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. 14. The learned counsel for the Appellant urged that all the three criteria are satisfied by the Assessee in the present cases and there is no dispute from the side of the Revenue that the Assessee has incurred an obligation under the contract known as 'Product Sharing Agreement' vide clause 1.77 r/w. Clause 14.9 thereof,quoted above. The question of restoring the site of exploration after the work is over for which the said provision is made is based on a scientific method and relevant materials. He submitted that initial period of the said contract of the Assessee entered into in the year 1994 was 25 years and the same has been recently further extended for the period of ten years on 24.10.2019. Thus, after October 2029, it can be expected that oil exploration work would be over and the Assessee will have to restore the site to its original as nearly as possible, and that expenditure is covered by the provisions made i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The expenditure to be deductible under section 57(iii) must be laid out or expended wholly and exclusively for the purpose of making or earning such income. The argument of the Revenue was that unless the expenditure sought to be deducted resulted in the making or earning of income, it could not be said to be laid out or expended for the purpose of making or earning such income. The making or earning of income, said the Revenue, was a sine qua non to the admissibility of the expenditure under section 57(iii) and, therefore, if in a particular assessment year there was no income, the expenditure would not be deductible under that section. The Revenue relied strongly on the language of section 37(1) and contrasting the phraseology employed in section 57(iii)with that in section 37(1), pointed out that the Legislature had deliberately used words of narrower import in granting the deduction under section 57(iii). Section 37(1) provided for deduction of expenditure laid out or expended wholly and exclusively for the purpose of the business or profession in computing the income chargeable under the head 'Profits or gains of business or profession'. The language used in section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect as it is not only justified by the language of section 57(iii) but it also accords with the principles of commercial accounting. The contrary view taken by the Patna High Court in Maharajadhiraj Sir Kameshwar Singh v. Commissioner of Income-tax and the Calcutta High Court in Madanlal Sohanlal v. Commissioner of Income-tax must in the circumstances be held to be incorrect." 19. Relying upon the aforesaid Judgments, the learned counsel appearing for the Assessee submitted that the Tribunal has erred in disallowing the said expenditure even under Section 37 (1) of the Act without assigning any proper or detailed reason in the impugned order. 20. The words "Lay (Laid out)" or "Expend (Expended)", as employed in Section 37 (1) of the Act, are defined in the following manner,in the Second Edition of the Oxford English Dictionary published by Clarendon Press-Oxford, in the following manner. "Expend- To pay out, spend. It differs from spend in being less colloquial, and (in mod.use) in implying some determinate direction or object of outlay. (a) To put away, lay out, spend (money). To spend, make away with, consume in outlay. (b)To lay out (money) for determinate objects. Const ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he income from the profits and gains of the appellant does not arise. Further, the question of allowability of Provision of such expenditure was not even involved in the said Judgment. Therefore the said Judgment relied upon by the learned counsel for the Assessee is clearly distinguishable and does not advance the case of the Revenue. 25. The learned counsel for the Revenue Mr.T.Ravi Kumar further relied upon the Judgment of Shri Sajjan Mills Ltd. Vs. Commissioner of Income Tax and another reported in (1985) 156 ITR 585 (SC) in which the Hon'ble Supreme Court held that contingent liabilities do not constitute expenditure and cannot be the subject matter of deduction even under the mercantile system of accounting. Paragraph 24, 25 of the said Judgment is quoted below for ready reference. "24.The right to receive the payment accrued to the employees on their retirement or termination of their services and the liability to pay gratuity became the accrued liability of the assessee when the employees retired or their services, were terminated. Until then the right to receive gratuity is a contingent right and the liability to pay gratuity continues to be a contingent ability qua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ext of Section 40(A)(7) of the Act which was inserted by Finance Act 1975 with effect from 01.04.1973 and which provides that no deduction shall be allowed in respect of the provisions made by the Assessee for the payment of gratuity to the employees on their retirement or on their termination of employment for any reason. This provision was apparently brought in to undo the Judgment of Metal Box Company of India Ltd supra whereby the Hon'ble Supreme Court allowed the Provision for payment of gratuity. Thus, the said Judgment relied upon by the learned counsel for the Revenue also dealt with the different context in which provisions was made for payment of gratuity to the employees being contingent liability which was not allowable due to specific provisions under Section 40A(7) of the Act. This analogy is akin to the 'Site Restoration Fund' under the provisions brought in the statute book under Section 33ABA. Thus if the Provisions of Act require specific deposit or actual payment of that liability, the Provision made for that may not be allowed, but such is not the position in the case before us. Thus if the Provision of the Act require specific deposit or actual paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act. The only ingredient required to be complied with for Section 37(1) of the Act 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. 30.We find 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 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 sp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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