IN HIGH COURT OF KERALA AT ERNAKULAM PRESENT HONOURABLE MR.JUSTICE C.K.ABDUL REHIM & HONOURABLE MR. JUSTICE R. NARAYANA PISHARADI THURSDAY, 05TH DAY OF SEPTEMBER 2019 / 14TH BHADRA, 1941 ITA.No.163 OF 2016 AGAINST ORDER IN ITA 351/Coch/2013 DATED 06-06-2016 OF I.T.A.TRIBUNAL,COCHIN BENCH FOR AY 2009-10 APPELLANT/RESPONDENT/REVENUE: COMMISSIONER OF INCOME TAX, THIRUVANANTHAPURAM BY ADVS. SRI.CHRISTOPHER ABRAHAM, INCOME TAX DEPARTMENT SRI.K.M.V.PANDALAI INCOME TAX DEPARTMENT RESPONDENT/APPELLANT/ASSESSEE: M/S.OBERON EDIFICES & ESTATES (P) LTD ARCADE, KARAMMA, TRIVANDRUM. R1 BY ADV. SRI.NEMISH NIRANJAN ZAVERI R1 BY ADV. SRI.SUKUMAR NAINAN OOMMEN R1 BY ADV. SRI.SHERRY SAMUEL OOMMEN THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 05.09.2019, COURT ON 05.09.2019 DELIVERED FOLLOWING: I.T.A.No.163/2016 2 CR C.K.ABDUL REHIM & R.NARAYANA PISHARADI, JJ. ************************** I.T.A.No.163 of 2016 ---------------------------------------------- Dated this 5th day of September, 2019 JUDGMENT R.Narayana Pisharadi, J Is expenditure to be incurred in future in respect of liability that accrued during accounting year eligible for deduction in computation of taxable business income? This is substantial question of law to be considered in this appeal filed by revenue. 2. respondent/assessee is company engaged in business of construction and sale of residential and commercial building complexes. During assessment year 2009-10, assessee sold portion of mall building constructed by it. construction of building was not completed at that time. In revised return of income filed on 06.04.2011, deduction of I.T.A.No.163/2016 3 expenses incurred during financial years 2009-10 and 2010-11 for completing construction of building was claimed by assessee. assessing authority disallowed aforesaid deduction claimed and completed assessment. 3. assessee took up matter in appeal before Commissioner of Income Tax (Appeals). appellate authority allowed appeal by observing as follows: In this case, during course of assessment proceedings, construction of Mall was completed and therefore, appellant could find out actual cost of construction per sq.ft by dividing total expenditure on construction by total saleable area. In situation where at time of assessment building remains incomplete, estimated future expenditure to be incurred is also considered along with expenditure already incurred and is taken as cost relatable to total saleable area ie. saleable area already built and saleable area to be built in future, for arriving at estimated cost of construction per sq ft. It is not case of mere sale of commercial space but appellant was required to provide amenities like escalators, lifts, parking, common toilet etc also. Therefore contentions of appellant are accepted and it is held that AO I.T.A.No.163/2016 4 was not justified in not taking value of building work in progress during FY 2009-10 and 2010-11 for working out cost per square ft. It is therefore, directed that cost per sq.ft shall be taken as total expenditure incurred in construction divided by total saleable area for purpose of working out profit from sale of commercial area. 4. revenue challenged order of appellate authority before Income Tax Appellate Tribunal. Tribunal agreed with view taken by appellate authority and dismissed appeal. aforesaid order of Tribunal is under challenge in this appeal filed by revenue. 5. We have heard learned counsel for department and also learned counsel for respondent. 6. Learned counsel for department contended that claim for deduction of future expenses made by assessee cannot be allowed. Learned counsel contended that there is distinction between amount spent to pay off actual liability and liability that would be incurred in future which is only contingent. It is contended that former is deductible but not latter. I.T.A.No.163/2016 5 7. Per contra, learned counsel for respondent contended that amount claimed as deduction was expenditure to be incurred to meet accrued liability and not contingent liability. Learned counsel also contended that deduction was claimed in this case after incurring expenditure since construction of building was completed when assessment proceedings were pending. 8. At outset, we may state that dispute raised by revenue is only with regard to deduction claimed by assessee in respect of expenses incurred in future, that is, after sale of building, during subsequent financial years, and not in respect of expenses incurred by it during relevant financial year. 9. Section 37 of Income tax Act, 1961 (hereinafter referred to as Act ) is residuary section for allowability of business expenditure. Section 37(1) of Act reads as follows: 37 (1).-- Any expenditure (not being expenditure of nature described in sections 30 to 36 and not being in nature of capital expenditure or personal expenses of I.T.A.No.163/2016 6 assessee), laid out or expended wholly and exclusively for purposes of business or profession shall be allowed in computing income chargeable under head Profits and gains of business or profession . 10. expression "profits and gains" has to be understood in its commercial sense and there can be no computation of such profits and gains until expenditure which is necessary for purpose of earning receipts is deducted therefrom - whether expenditure is actually incurred or liability in respect thereof has accrued even though it may have to be discharged at some future date. profit of trade or business is surplus by which receipts from trade or business exceed expenditure necessary for purpose of earning those receipts. It is meaning of word "profits" in relation to any trade or business. Whether there be such thing as profit or gain can only be ascertained by setting against receipts expenditure or obligations to which they have given rise (See Calcutta Company Limited v. Commissioner of Income Tax, West Bengal : AIR 1959 SC 1165) I.T.A.No.163/2016 7 11. In Calcutta Company Limited (supra), assessee was company conducting business of developing land fit for building purposes and selling it in plots at profit. procedure followed was that when plot was sold, purchaser would pay about 25 per cent of purchase price in cash and would undertake to pay balance with interest at certain rate in instalments which he secures by creating charge on land purchased. assessee, in its turn, would undertake to carry out developments within six months from date of sale. assessee claimed deduction of amount to be spent for development in computation of profits and gains of its business. Income Tax Officer disallowed that claim on ground that expenses had not been actually incurred in year of account and also on ground that estimate had not been proved to be based on consideration of real expenses which company would have to incur for purpose. When matter ultimately reached Apex Court, after dealing with provisions contained in Sections 10(1) and 10(2) of Income Tax Act, 1922, it was held as follows: I.T.A.No.163/2016 8 question which really arises for our determination in this appeal is whether having regard to fact that appellant's method of accounting, viz., mercantile method was accepted by Income Tax Officer and receipts appearing in books of account included unpaid balance of sale price of plots in question, amount of liability undertaken by appellant to earn those receipts was to be deducted even if there had not been actual disbursement made by it during accounting year. ..... Inasmuch as liability which had thus accrued during accounting year was to be discharged at future date amount to be expended in discharge of that liability would have to be estimated in order that under mercantile system of accounting amount could be debited before it was actually disbursed. ..... appellant here is being assessed in respect of profits and gains of its business and profits and gains of business cannot be determined unless and until expenses or obligations which have been incurred are set off against receipts. .... We are definitely of opinion that sum of Rs. 24,809 represented estimated amount which I.T.A.No.163/2016 9 would have to be expended by appellant in course of carrying on its business and was incidental to same and having regard to accepted commercial practice and trading principles was deduction which, if there was no specific provision for it under Section 10(2) of Act was certainly allowable deduction, in arriving at profits and gains of business of appellant under Section 10(1) of Act, there being no prohibition against it, express or implied in Act . 12. "Expenditure" is not necessarily confined to money which has been actually paid out. It covers liability which has accrued or which has been incurred although it may have to be discharged at future date. However, contingent liability which may have to be discharged in future cannot be considered as expenditure. It also covers liability which assessee has incurred in praesenti although it is payable in futuro (See Madras Industrial Investment Corporation Limited v. Commissioner of Income Tax : AIR 1997 SC 2063). 13. In Bharat Earth Movers v. Commissioner of Income Tax : AIR 2000 SC 2636, Supreme Court has held I.T.A.No.163/2016 10 as follows: law is settled: if business liability has definitely arisen in accounting year, deduction should be allowed although liability may have to be quantified and discharged at future date. What should be certain is incurring of liability. It should also be capable of being estimated with reasonable certainty though actual quantification may not be possible. If these requirements are satisfied liability is not contingent one. liability is in praesenti though it will be discharged at future date. It does not make any difference if future date on which liability shall have to be discharged is not certain . 14. It is discernible from decisions referred to above that, in order to claim deduction of business expenditure, it is not necessary that amount has been actually paid or expended during relevant accounting year itself. It is sufficient that liability for payment had incurred or accrued during relevant accounting year. actual payment of amount or discharge of liability may occur in future. What is crucial is accrual of liability for payment or expenditure during relevant I.T.A.No.163/2016 11 accounting year. But, contingent liability that may arise in future, cannot be treated as expenditure. Thus, substantial question of law is answered in favour of assessee and against revenue. 15. In instant case, revenue has no case that sale deed executed in respect of building did not provide that assessee was liable to complete construction of building. Tribunal was right in confirming finding of appellate authority that, expenditure incurred by assessee company during financial years subsequent to sale of building, is eligible for deduction in computation of taxable income. Consequently, appeal is dismissed. No costs. (sd/-) C.K.ABDUL REHIM, JUDGE (sd/-) R.NARAYANA PISHARADI, JUDGE jsr/14/08/2019 True Copy PS to Judge I.T.A.No.163/2016 12 APPENDIX PETITIONER'S EXHIBITS: ANNEXURE TRUE COPY OF ASSESSMENT ORDER DATED 29.12.2011 ANNEXURE B TRUE COPY OF APPELLATE ORDER DATED 27.03.2013 PASSED BY COMMISSIONER OF INCOME-TAX, TRIVANDRUM ANNEXURE C CERTIFIED COPY OF COMMON ORDER PASSED BY INCOME-TAX APPELLATE TRIBUNAL ON 06.06.2016 True Copy PS to Judge Commissioner of Income-tax, Thiruvananthapuram v. Oberon Edifices & Estates (P) Ltd