AI Drafter 
TaxTMI 
TaxTMI 
2015 (8) TMI 978
X X X X Extracts X X X X
X X X X Extracts X X X X
....ll cutting disposal expenses". The assessing officer computed total income under the normal provisions of the Act and also book profit under section 115JB of the Act. The AO disallowed the claim, cited above, in both the computations. 4. The facts relating 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 companies and processing the same by meeting the standards of PCB. Such processed waste is dumped in the filling site as per the PCB standards. During the year relevant to the AY 2008-09, the assessee-company entered into an agreement with Gujarat State Petroleum Corporation Ltd (GSPC) for waste management of drill cutting of SOBM system and cleaning the same for KG Exploration Block. The scope of the work as per the contract entered into is as fo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....fted 8018.340 tonnes of waste from M/s. Gujarat State Petroleum Corporation Ltd., (GSPC) and received the entire amount prescribed under the Contract and offered the same as its revenue receipt in the Profit and Loss account. However, during the year under consideration, the assessee could process waste to the extent of 946.640 tonnes only and the remaining quantity of 7071.700 tonnes was taken as closing stock. As stated earlier, the assessee had accounted for the entire contract receipt as its income and admittedly, entire gross contract receipt cannot be its net profit, since it has got the responsibility to process the waste as per the norms 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 Rs. 2.70 crores. The Assessing Officer took the view that the provision so made by the assessee was not expenditure allowable under section 37(1) of the Act. In this regard, the Asse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he ld CIT(A) 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. 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 Company Pvt. Ltd (supra). Ld D.R. submitted that the assessee has provided the expenditure by adopting a rate of Rs. 3,850/- per M.T., whereas in the succeeding year, it has actually spent a sum of Rs. 5,628.- per M.T. Accordingly, ld D.R. submitted that the assessee itself was not sure about the quantum of expenditure to be incurred in succeeding year and hence, the provision so made by the assessee cannot be considered as an ascertained liability. He further submitted that following case laws 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)....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in stock. He submitted that the Hon'ble Supreme Court, in the case of CIT vs. Excel Industries Ltd., (2013) (358 ITR 295)(SC) has considered the concept of accrual and has held that there is no need for revenue to continue with litigation when the claim made by the assessee is revenue neutral. The relevant observations made by Hon'ble Supreme Court are extracted below: "Thirdly, the real question concerning us is the year in which the assessee is required to pay tax. There is no dispute 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, therefore, no need for the Revenue to continue with this litigation when it was quite clear that not only was it fruitless (on merits) but also that it may not have added anything much to the public coffers." 1....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d 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 to incur the expenditure is already imposed upon the assessee under the Contract and hence the assessee has estimated the expenditure, which may be at vary at the time of incurring it. He submitted that the accounting principles mandates that all known liabilities and losses have to be provided for in the accounts by estimating the same on reasonable basis, even if the actual amount of expenditure is not known. Accordingly, he submitted that the ld CIT(A) has deleted the additions by correctly 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 Mola....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e last three months the entire revenue is accounted for and the corresponding expenditure needs to be made in the coming financial year. It is in light of this delay in processing the material, assessee had to resort to certain estimated debit of processing charges. It is basically this debit which is the 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 ascertained liability, one has to go through the provisions of section 37(1). The language used in section 37(1) is "any expenditure laid out or expended". The said section prescribes many other conditions like the expenditure not being in the nature of capital expenditure or personal expenditure etc. As there is no dispute on these issues and as the only dispute is whether the said debit is an expendi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....consideration in the case of the assessee. As per the facts of the case once the material is lifted assessee is duty bound to process the same or face the consequences of violation of contract as well as the legal consequences from PCB. Thus there is no doubt that as on date of lifting the waste material assessee is legally and contractually bound by the liability of disposing off the said material. Thus the income earned by the assessee has strings attached to it in the form of the requirement of processing the material. Therefore the assessee cannot be said to have earned the entire revenue without incurring 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 consideration though there can be difference of opinion with regard to the fair estimation as the sa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....en 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 ". 4.11 It is also held by various courts that taxable income is not gross receipts but profits and gains of business and profit should be understood in its natural and proper sense which no commercial man would misunderstand. Based on this principle various courts have time and again held that even warranty expenses which are a future liability are allowable expenditure based on proper estimation. It is further 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 can....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the waste materials. Further the responsibility to process the materials is shifted to the assessee upon lifting of the materials. Hence, it may not be proper to presume that the entire contract receipts represent the income of the assessee, since income represents Receipts less expenditure incurred or required to be incurred in connection with such receipts. In the instant case, the assessee had to incur various expenses 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 liability. 16. The AO has observed that the accounting principles cannot override Income tax provisions. However the said observation was made by the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilisers Ltd (supra) in the context of income earned during ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....way 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 expenditure and the ld CIT(A) also confirmed the same. 21. The ld A.R. of the assessee placed reliance on the decision rendered by Hon'ble Calcutta High Court in the case of Binami Cements Ltd. Vs CIT (2015) 118 DTR (Cal) 61 and submitted that the Hon'ble Calcutta High Court, in the above said case, has held that the expenditure incurred on the project which was abandoned later is revenue in nature, since the assessee did not get any benefit of enduring nature. Ld A.R. submitted that the assessee, 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....