THE COMMISSIONER OF INCOME TAX, THIRUVANANTHAPURAM vs. M/S.OBERON EDIFICES & ESTATES (P) LTD

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ITA/163/2016HC KeralaKLHC01026962201605 September 2019Author: HONOURABLE MR.JUSTICE C.K.ABDUL REHIM,HONOURABLE MR. JUSTICE R. NARAYANA PISHARADI12 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that expenditure to be incurred in the future in respect of a liability that accrued during the accounting year is eligible for deduction in the computation of taxable business income. The Court reasoned that under the mercantile system of accounting, profits and gains cannot be computed until the expenditure necessary for earning receipts is deducted. This includes liabilities that have accrued even if they are to be discharged at a future date. The Court relied on Supreme Court decisions in Calcutta Company Limited v. Commissioner of Income Tax, West Bengal, and Bharat Earth Movers v. Commissioner of Income Tax, which established that if a business liability has definitely arisen in the accounting year, the deduction should be allowed even if it needs to be quantified and discharged at a future date. The Court found that the sale deed provided for the assessee's liability to complete the construction. Therefore, the expenditure incurred in subsequent financial years for completing the construction was eligible for deduction. The substantial question of law was answered in favour of the assessee.

What were the facts?

The assessee, M/s. Oberon Edifices & Estates (P) Ltd., a construction company, sold a portion of a mall building during assessment year 2009-10, though construction was incomplete. In its revised return, the assessee claimed deduction for expenses incurred in financial years 2009-10 and 2010-11 to complete the construction. The Assessing Officer disallowed this deduction. The CIT(A) allowed the appeal, holding that the cost per square foot should be calculated based on total expenditure incurred divided by total saleable area, including future construction. The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s order. The Revenue has appealed this order to the High Court.

What were the issues?

1. Whether expenditure to be incurred in the future in respect of a liability that accrued during the accounting year is eligible for deduction in the computation of taxable business income, under Section 37(1) of the Income Tax Act, 1961? Assessee's Contention: The amount claimed as deduction was expenditure to be incurred to meet an accrued liability, not a contingent liability. The deduction was claimed after incurring the expenditure as construction was completed during assessment proceedings. Revenue's Contention: The claim for deduction of future expenses cannot be allowed. There is a distinction between an amount spent to pay off an actual liability and a liability that would be incurred in the future, which is only contingent. The former is deductible, but not the latter.

Which sections of the Income-tax Act were involved?

Section 37(1)

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