Contact us   Feedback   Subscription   New User   Login      
Tax Management India .com
TMI - Tax Management India. Com
Extracts
Home List
← Previous Next →

2015 (8) TMI 978 - ITAT VISHAKHAPATNAM

2015 (8) TMI 978 - ITAT VISHAKHAPATNAM - TMI - Expenditure claimed under the head “provision towards SOBM and drill cutting disposal expenses” disallowed - CIT(A) deleted disallowance and held that the provision so made by the assessee is in the nature of ascertained liability and same is deductible both under the normal provisions of the Act and also while computing the book profit under section 115JB of the Act. - Held that:- In the present case, the undisputed fact remains that the contract r .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

i 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.

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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

RI 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 2011-12 and all of them are directed against the orders passed by the ld CIT(A). Since identical issues are involved, all of them were heard together and are being disposed of by this common order, for the sake of convenience. 2. .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ng to the said disallowance are stated in brief. The assessee is in the business of disposal of waste material generated out of offshore oil rigging. As per the norms prescribed by Pollution Control Board (PCB) and Ministry of Environment, oil Exploration Companies have to dispose of the waste generated out of oil drilling process by undertaking certain prescribed methods of process. The assessee possessed necessary equipments and expertise in collecting the said waste from the drilling companie .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

aning and treating offshore drilling waste, Vacuum equipment, tanks, treatment facilities and all other required instruments as per standards applicable for offshore certificate specifications. This facility shall be approved by relevant central/state government authority. b. The contractor shall meet all the requirements prescribed by the regulatory authorities for collection and treatment of offshore drilling waste and other waste/slops collected from Vessel//Tank Cleaning as they apply to the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

uds 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. Th .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the assessee followed the accounting practice of offering the entire amount of contract receipts as its income in the year of receipt, it made a provision in the books of account towards the cost of processing waste lying at the year end, apparently, under revenue-cost matching principle. 6. During the year relevant to AY 2008-09, the assessee lifted 8018.340 tonnes of waste from M/s. Gujarat State Petroleum Corporation Ltd., (GSPC) and received the entire amount prescribed under the Contract a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ms prescribed by the PCB and hence it has to necessarily incur expenditure on such processing in order to discharge the responsibility fixed upon it by the contract. Hence, it made provision for the expenses that is required to be incurred for processing the waste lying as closing stock and claimed the same as deduction. The provision so made during AY 2008-09 was ₹ 2.70 crores. The Assessing Officer took the view that the provision so made by the assessee was not expenditure allowable und .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

on of Hon ble Supreme Court rendered in the case of M/s. Tuticorin Alkali Chemicals and Fertilisers Ltd Vs. CIT (227 ITR 172) (SC), the AO held that the provisions of income tax shall override the accounting practice. Accordingly, the AO held that 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 disallowe .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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, even though it may be incurred in future and hence the amoun .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e assessee is in the nature of ascertained liability and same is deductible both under the normal provisions of the Act and also while computing the book profit under section 115JB of the Act. Aggrieved by the order of the ld CIT(A), the revenue has filed the appeal before us. 8. At the time of hearing before us, ld Departmental Representative strongly supported the order passed by the AO by placing reliance upon the decision rendered by Hon ble Supreme Court in the case of Indian Molasses Compa .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ws relied upon by ld CIT(A) have been rendered on different facts and hence, they cannot be taken support for deciding the issue under consideration: a) MKB Asia Pvt Ltd., 294 ITR 655 (Guj) b) Sify-e-learning Ltd., 124 TTJ 532 (Mum ITAT) c) Madras Industrial Investment Corporation Ltd vs. CIT, 225 ITR 802(Mad) d) J.K. Industries Ltd vs UOI, 297 ITR 176 e) Bharat Earth Movers, 245 ITR 428 f) Taparia Tools Ltd vs JCIT, 260 ITR 102 (Bom) g) CIT vs. Navsari Cotton & Silk Mills, 135 ITR 546 (Guj) .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ned 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 t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

5 ITR 822(AP) Ld D.R. vehemently contended that the ratio laid down in the above said decisions will apply to the facts of the present case and, accordingly, prayed that the decision rendered by the ld CIT(A) should be reversed. 10. The ld A.R, on the contrary, submitted that the provision so made by the assessee is revenue neutral, since the assessee has reversed the same in the succeeding year. At the end of the succeeding year, it has again provided for expenses in respect of the unprocessed .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

te that in the subsequent accounting year, the assessee did make imports and did derive benefits under the advance licence and the duty entitlement pass book and paid tax thereon. Therefore, it is not as if the Revenue has been deprived of any tax. We are told that the rate of tax remained the same in the present assessment year as well as in the subsequent assessment year. Therefore, the dispute raised by the Revenue is entirely academic or at best may have a minor tax effect. There was, theref .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ligation, the entire contract receipts could not considered as net profit of the assessee and hence, in order to arrive at net profit, the assessee was required to estimate the expenses relating to the contract receipts and make provision for expenditure. The said methodology adopted by the assessee is accordance with revenue cost matching principle. He submitted that the Hon ble Supreme Court has considered the concept of revenue cost matching principle in the case of Calcutta Co. Ltd. Vs CIT, .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

;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 dut .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

t or not. The profit of a trade or business is the surplus by which the receipts from the trade or business exceed the expenditure necessary for the purpose o earning those receipts. That seems to me to be the meaning of the word 'profits' in relation to any trade or business. Unless and until you have ascertained that there is such a balance. nothing exists to which the name 'profits' can properly be applied." 12. The Ld counsel for the assessee submitted that the liability .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

appreciating the facts of the present case and also by applying correct principles of accounting by holding the provision so made by the assessee as ascertained liability. Accordingly, he prayed that the order of the ld CIT(A) should be upheld. 13. With regard to the decision rendered in the case of Indian Molasses Company Pvt.Ltd (supra), ld A.R. submitted that the assessee therein set apart certain amount towards some expenditure and the Hon ble Supreme Court noticed that there was a chance of .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

dia 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 a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

lling 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 because the responsibility shifts to the assessee the entire amount is billed to the oil drilling company as soon as the waste is lifted from the drilling company's premises. Thus assessee receives entire payment as soon as the waste material is lifted. Such receipt cannot be deferred by the assessee to a future date as .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

he eye of the controversy of the present appeal. As per the assessee's argument the said expenditure debited is an ascertained liability as it is the responsibility of the assessee to dispose off the waste material as per the norms of PCB. However as per AO the said provision is only a contingent liability to meet a future expenditure and hence cannot be allowed in the year under consideration. To answer this question as to whether the said provision is a contingent liability or an ascertain .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

' or 'expended', meaning thereby that the expenditure should either be spent or laid out the meaning of word expenditure is analyzed by the Hon'ble Apex Court in the case of Indian Molasses Company (P) Ltd as under: "Expenditure" is equal to "expense" and "expense" is money laid out by calculation and intention though in many uses of the word this element may not be present, as when we speak of a joke at another's expense. But the idea of "s .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

f payment' it is held by the court that the expenditure which is deductible for income-tax purpose is towards a liability actually existing at that time but setting apart money which may become expenditure on happening of an event is not an expenditure. 4.10 In the light of above judgement it needs to be examined whether there is any liability actually existing during the year under consideration in the case of the assessee. As per the facts of the case once the material is lifted assessee i .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

curring the expenditure on processing the same. In view of the above, the provision made by the assessee on estimated basis cannot be said to be a contingent liability though the said expenditure cannot be fully quantified as on the given date. Incurring of expenditure is contingent upon lifting of the waste material. As the said contingency of lifting of waste material has happened during the year, reasonable expenditure relatable to the same needs to be allowed during the year under considerat .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

, one has to examine whether such laying out is in the nature of contingent liability. Contingent liability does not constitute expenditure and cannot be the subject matter of deduction even under mercantile system of accounting. Expenditure which is deductible for income-tax 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 Lt .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

n 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 against the assessee all the ci .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

unting 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 th .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

held by various courts that where liability clearly exists, the difficulty in estimation or quantification should not stand in the way of the assessee debiting it or else true profits cannot be ascertained. Before a deduction claimed can be allowed as expenditure, it must have been valued or quantified atleast provisionally. Hon'ble Allahabad High Court in the case of CIT vs Swarup Vegetable Products, 210 ITR 716 went to the extent observing that the liability for additional purchase price .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 expenditu .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the AO that the said estimation is disproportionate or on higher side. In view of the above discussion, I am of the considered opinion that given the peculiar facts and circumstances of the case the provision debited by assessee is in the nature of ascertained liability and hence is deductible. AO is thus directed to allow the said provision debited. 15. We notice that the order passed by Ld CIT(A) is well reasoned one and based on proper appreciation of facts and legal position. The Ld CIT(A) .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

xpenses for processing the materials lifted by it and hence those expenses should be considered as the expenditure relating to the contract receipts received by the assessee. Under the accounting principles, all the known expenses, liabilities and losses have to be provided for, in order to arrive at the Net Profit. Hence we are of the view that the provision for expenses made by the assessee cannot be considered to be a contingent liability and it can only be considered to be an ascertained lia .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

y of income that has already accrued. Hence the reliance placed by the AO on the above said decision is misplaced. The Ld D.R also placed reliance on a number of decisions. We have considered the same and we are of the view that the ratio laid down in those cases is not applicable to the facts of the present case. In the present case, the undisputed fact remains that the contract receipts cannot be considered to be free money available with the assessee, since there is obligation to discharge th .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ct 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

debited a sum of ₹ 30,04,154/- to its profit and loss account towards custom duty. It was noticed that the assessee had imported a drier machinery from Norway for processing the waste. As the said drier did not meet the operational requirement of the assessee, it was returned back to the supplier. Since the assessee did not get refund of custom duty paid on import of the drier, it treated the same as revenue expenditure. The assessing officer disallowed the same by treating it as capital e .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

, in the instant case, imported the machinery and paid custom duty at that point of time and since the machinery was not found suitable, it was returned back. Hence, the assessee did not get any benefit of enduring nature out of the custom duty paid. Further, the expenditure was incurred during the course of business, the Ld A.R submitted that it has to be allowed as revenue expenditure. 22. On the contrary, the ld D.R. submitted that the custom duty paid by the assessee was in respect of machin .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

are of the view that there is merit 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

s 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 of deduction of TDS against tax payable. We restore this issue to the file of the AO and direct him to consider this issue after affording necessary opportunity to the assessee. 25. Now, we shall take up the appeal filed by the revenue as well as assessee for assessment .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

 

 

 

 

 



|| Home || Acts and Rules || Notifications || Circulars || Schedules || Tariff || Forms || Case Laws || Manuals ||

|| About us || Contact us || Disclaimer || Terms of Use || Privacy Policy || TMI Database || Members || Site Map ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.

Go to Mobile Version