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Facts
The assessee debited provisions for pit covering expenses (Rs. 3,62,91,274) and post-closure expenses (Rs. 1,59,28,173) to their P&L account. The AO disallowed these provisions on the grounds that they were not ascertained liabilities and were based on estimations, and that the assessee followed the mercantile system of accounting.
Held
The Tribunal held that the provisions for pit covering and post-closure expenses were ascertained liabilities. The Tribunal found that these expenses were incurred for business purposes, were not capital in nature, and were estimated using a systematic and scientific approach, aligning with the matching concept of accounting.
Key Issues
Whether provisions for future expenses like pit covering and post-closure maintenance, based on estimations and contractual obligations, can be allowed as deductions under Section 37(1) of the Income Tax Act, 1961.
Sections Cited
37(1), 30, 36
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Income Tax Appellate Tribunal, “C” BENCH MUMBAI
Before: HON’BLE SHRI SANDEEP GOSAIN & SHRI PRABHASH SHANKAR
Date of Hearing 02.07.2025 Date of Pronouncement 24.07.2025 आदेश / ORDER
PER SANDEEP GOSAIN, JM:
1. The present appeal has been filed by the assessee challenging the impugned order dt. 20.12.2024 passed u/s 250 of the Income Tax Act, 1961 (‘the Act’), by the National Faceless Appeal Centre, Delhi (NFAC) for the assessment year 2018-19.
2. The grounds raised by the revenue are interrelated and interconnected and relates to challenging the deletion of addition on account of “Provision for Pit covering expenses and provision for Post Closing Expenses”. Therefore we have decided to adjudicate these grounds through the present consolidated order.
We have heard the counsels for both the parties, perused the material placed on record, judgments cited before us and also the orders passed by the revenue authorities. From the records we noticed that Ld. CIT(A) has dealt with both these issues i.e “Provision for Pit covering expenses and Provision for Post Closing Expenses” in detail in para 5 (5.1 to 5.3.4) and the same is reproduced herein below:
5 The ground of appeal no. 1 is against the disallowance of Rs. 3,62,91,274/- towards provision for pit covering expenses and disallowance of provision for post closure expenses of Rs. 1,59,28,173/-. 5.1 During the assessment proceedings, the AO observed that in the balance sheet the assessee has made short term and long term provisions in respect of (i) Provision for pit covering- Rs. 3,62,91,274/-and (ii) Provision of Post closure expense Rs. 1,59,28,173/-, which were debited to the P & L account. The AO observed that since the assessee is following mercantile system of accounting and the expenditure debited to the P & L account was neither accrued nor paid during the year and only provisions was made. Therefore, a query was raised why the same should not be disallowed. The assessee filed a reply in response to query raised by the AO. However, the AO was of the view that the assessee had claimed expenditure towards post closure expenditure and pit covering on the ground that it was an expenditure to be incurred in future out of the income received during the year. The assessee did not establish that the provision was an ascertained liability. The assessee gave the detail of method of determination of computation of the provision, however it was found by AO to be based on a number of assumptions and on estimated basis. The ASO noted that even if it is predetermined liability, the event will happen in future. The Assessee is free to create the provision but it should be offered for taxation and then the assessee is free to pay as when required. The Also held that principle of resjudicata is not applicable to income tax proceedings. Accordingly, the AO has disallowed Rs. 3,62,91,274/-towards provision for pit covering expenses and disallowed provision for post closure expenses of Rs. 1,59,28,173/-.
5.2 During the appellate proceedings the appellant has filed a written submission, which is reproduced as under:
4.1 Provision for Pit Covering Expense - Rs.3,62,91,274/- 4.1.1. During the year under consideration, the appellant has debited pit covering expense amounting to Rs.3,62,91,274/-. Pit covering is the expense to be mandatorily incurred by the appellant for covering the pits that are dug for dumping of wastes in it. It includes the expense incurred for capping of landfill, reinstating the land etc. based on the quantity of waste dumped into the landfill.
4.1.2. Pit covering is the expense to be incurred for covering the pits that are dug and in which the waste is being dumped over the years. It is the expense which will be incurred for capping of landfill, based on the quantity of waste dumped into the landfill.
4.1.3. The factors considered while creating the provision are as under: i) The total period of the project project i i) Total sanitary landfill area to be covered and actual sanitary land filled up to the year end. iii) Items to be used for covering the sanitary landfill. iv) Expected waste quantity to be dumped. v) Expected changes in the prices / inflation pertaining to the cost of items to be used for Pit Covering. vi) Expected increase in the Pit Covering expenses as a result of the increase in the quantity of waste dumped in sanitary landfill. vii) The provision for Pit Covering Expenses is reviewed and adjusted at each year end to take cognizance of the regulatory requirements, inflation / deflation, etc.
4.1.4. The appellant has entered into concessionaire agreement ('the Agreement') with Coimbatore City Municipal Corporation for treating of Solid wastes to construct, operate and maintain project facilities, such as waste transfer stations, process units, sanitary landfill site etc, as provided under the said concessionaire agreement for the period of 20 years. It is agreed in the said agreement that the CMC will allot required land on lease to the appellant to construct project facility. Accordingly, the appellant has set up waste transfer stations, a processing facility as well as a sanitary landfill site and is in charge of their construction, operation and maintenance for 20 years.
4.1.5. In view of the above the appellant submits that, once the contract is undertaken, the liability for pit covering arises immediately along with various other liabilities embedded within the agreement. Further, the appellant submits that the pit covering liability is a definite and ascertained liability since the appellant is under a legal obligation to cover the pits which were dug in the course of its business activity.
Further, the appellant submits that the provision for Pit covering expense is created on a systematic basis. The provision of pit covering is created on the basis of quantity of wastes deposited in the pits made during the subject year.
Copy of the working basis which expense is debited is enclosed herewith as Annexure 2.
Thus from above, Your Honors shall appreciate that Pit covering provision relates to a specific and determined liability the amount of which has been arrived at by a calculated working.
4.1.6. The Hon'ble Apex in the case of Rotork Controls India (p). Ltd. v/s Commissioner of Income Tax, Chennai [2009] 180 Taxman 422 (SC) have held that a provision can be recognized on a cumulative satisfaction of the following three conditions:
(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." MER Relevant extract of the referred decision is reproduced hereunder:
"10. What is a provision? This is the question which needs to be answered. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision 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. If these conditions are not met, no provision can be recognized.
Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.
A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. Where there are a number of obligations (e.g., product warranties or similar contracts) the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole. In this connection, it may be noted that in the case of a manufacture and sale of one single item the provision for warranty could constitute a contingent liability not entitled to deduction under section 37 of the said Act. However, when there is manufacture and sale of an army of items running into thousands of units of sophisticated goods, the past event of defects being detected in some of such items leads to a present obligation which results in an enterprise having no alternative to settling that obligation. In the present case, the assessee has been manufacturing and selling Valve Actuators. They are in the business from assessment years 1983-84 onwards. Valve Actuators are sophisticated goods. Over the years assessee has been manufacturing Valve Actuators in large numbers. The statistical data indicates that every year some of these manufactured Actuators are found to be defective. The statistical data over the years also indicates that being sophisticated item no customer is prepared to buy Valve Actuator without a warranty. Therefore, warranty became integral part of the sale price of the Valve Actuator(s). In other words, warranty stood attached to the sale price of the product. These aspects are important. As stated above, obligations arising from past events have to be recognized as provisions. These past events are known as obligating events. In the present case, therefore, warranty provision needs to be recognized because the assessee is an enterprise having a present obligation as a result of past events resulting in an outflow of resources. Lastly, a reliable estimate can be made of the amount of the obligation. In short, all three conditions for recognition of a provision are satisfied in this case."
4.1.7. Provision for pit covering is a specific and ascertained liability as it satisfies all the conditions laid down by Hon'ble Supreme Court in case of Rotork Controls India (p). Ltd. (discussed supra). The Appellant has claimed the pit covering expense under section 37(1) of the Act. For an expenditure to be allowed under section 37(1) of the Act, the following conditions should be satisfied: a. It should be a specific and ascertained liability i.e. the expenses have accrued. b. The expenditure should not be covered under section 30 to 36 of the Act. c. It should not be capital in nature. d. It should be laid out wholly and exclusively for the purpose of the business.
Each of the element of section 37(1) of the Act is discussed as under: a) Specific and Ascertained Liability i) Once the contract is undertaken, the activities of covering and closure of the sanitary landfill are inevitable and are required to be performed as per the terms of the agreement. Thus, once the agreement is entered into, though the pit covering expense is not incurred immediately but the occurrence of the same is definite and inevitable. Thus, the expense becomes a specific and ascertained liability. The expenditure though not materialized, but crystallized immediately once the agreement was entered into. ii) As per the provisions of Hazardous Wastes (Management and Handling) Rules, 1989 made under the Environment (Protection) Act, 1986 and the authorization granted by CMC the Appellant is under an statutory obligation to maintain the landfills for a period of 30 years after the closure of landfills. iii) Once the waste is disposed in sanitary landfills, it has to be closed. The Appellant is legally bound to cover these landfills and therefore the liability accrues to the Appellant on the same date. iv) The Pit Covering activity entails commitment of large sums at the time land is filled up and unless a suitable reserve is built up in a phased manner to meet the commitment, it may adversely affect the affairs of the Appellant at that time. v) In view of the above, the Appellant submits that the pit covering expenses is an ascertained liability. Pit covering expenses is a definite liability though time of occurrence being uncertain. vi) Charging the expenditure of Pit Covering over the periods is in compliance with the matching concept of accounting and accordingly the pit covering expenses is charged to revenue over the balance life of the project.
For this purpose, the reliance is placed on on the following judicial decisions:
The Hon'ble Supreme Court in in the the case case of of Bharat Bharat Earth Earth Movers Limited vs CIT - [112 Taxman 61], has held that: if a business liability has definitely arisen 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 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 prasenti 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.
[Emphasis Supplied] Hon'ble High Court of Rajasthan in case of Udaipur Mineral Development Syndicate (P.) Ltd. Vs. DCIT [2003] 129 TAXMAN 728 (RAJ.) has held as under:
7. Considering the clause in the agreement, i.e., as far as possible the lessee shall restore the surface land so used to its original condition, the moment assessee dug pits, it was bound under the agreement to fill those pits and liability did accrue on the date when the pits were dug. Therefore, the Tribunal had committed error in disallowing the claim of the assessee in the year under consideration. The moment the assessee dug the pits, liability did arise and it was entitled for deduction of the expenses which it was supposed to incur for filling those pits, as the assessee was following the mercantile system of accounting. It could claim the expenses incurred as soon as it dug the pits.
[Emphasis Supplied] Thus, from above Your Honor will appreciate that provision for pit covering expense is a specific, definite and ascertained liability, allowable as expenses u/s 37(1) of the Act. b) Expenditure not covered under sections 30 to 36 of the Act Section 30 to 36 of the Act provides for specific expenditure that can be claimed as business expenses for earning the income offered to tax. Expenses that are incurred for the purposes of business and are not covered above mentioned sections can be claimed as expenses under section 37 of the Act. Your Honour will appreciate that provision for pit covering expenses is not covered by section 30 to 36 of the act hence, the same is allowable under section 37 of the Act. c) Expenditure being capital in nature The Appellant further submits that the provision for pit covering expense does not bring into existence any capital asset and is neither bringing any benefit of enduring nature and hence the same is not capital in nature and resultantly claimed under section 37 of the Act. d) Expenditure wholly and exclusively for the purpose of business Further, the pit covering expense have been laid out wholly and exclusively for the purpose of the business. To substantiate the aforesaid fact, Appellant submits as under: i) The expression "Wholly and exclusively" covers within its ambit expenditure that may be incurred for the purpose of the business although it may not be incurred for the purpose of earning the profits for the business. It includes expenses that are necessarily incurred for the purposes of business of the Appellant, but may not have direct linkage to the revenue generated from the business. In this regards, the Appellant places reliance on the following judicial precedents:
Hon'ble Madhyapradesh High Court in case of Binodiram Balchand v. CIT [1963] 48 ITR 548 (MP) held as under:
" ...It is not necessary that the expenditure should be incurred for the direct purpose of earning profits or that there should be any direct corelation in point of time between expenditure and earning of any profits. An expenditure may not help the assessee to earn or increase the income; but it may be necessary for the business from the point of view of commercial expediency. The "commercial expediency" has to be determined from the point of view of the businessman and not from the point of view of the outsiders including the taxing authorities. Judged by this test the expenditure of Rs. 14,000 incurred by the assessee in the instant case could legitimately be regarded as justified on grounds of commercial expediency for facilitating the carrying on of the assessee' s business."
[Emphasis supplied] Hon'ble Patna High Court in case of Indian Copper Corporation Ltd. v. Commissioner of Income-tax [1960] 38 ITR 544 (Patna) held that:
"...In section 10(2)(xv) the expression used is "any expenditure laid out or expended wholly and exclusively for the purpose of such business". This expression was introduced by the Amendment Act of 1939, and before the amendment the expression used was "incurred solely for the purpose of earning such profits". The formula now used in section 10(2) (xv) is wider than the formula used before the 1939 amendment. It is not necessary that there should be any direct correlation in point of time between the expenditure and the earning of any profits. A sum of money may by spent not because of necessity or with a view to direct and immediate benefit to business, but if the expenditure is made on the ground of commercial expediency and indirectly to facilitate the carrying on the business, it may still be expenditure made wholly and exclusively for the purpose of the business and so fall within the ambit of section 10(2)(xv). The payment made by the assessee to the foreign directors was made to put an end to an expensive method of carrying on business and so it was a payment made for commercial expediency and could be properly deducted under the provisions of section 10(2)(xv) of 1922 Act."
In view of the above judicial pronouncements, your honour will appreciate that for the allow ability of expenses under section 37 of the Act, it should be incurred for the purpose of business, though it is not necessary that it should be incurred for earning profits.
4.1.8. In the present case under consideration, the contract price for executing the entire project has been estimated on the basis of pre-determined rates on a yearly basis. The activities to be performed for executing the project include transportation of waste, processing of waste, land filling activities, pit covering, post closure activities, closure maintenance, etc. There is no separate income which is receivable by the Appellant in relation to the Pit Covering services provided. The income in relation to activities of Pit Covering services are already embodied in the contract price which is reviewed on a yearly basis. The Pit Covering Expenses are a part of the income generated every year and are estimated on a scientific basis.
4.1.9. It would be further pertinent to mention here that the Pit Covering expenditure is identified by adopting a scientific and reasonable approach. The total cost of covering is towards sanitary landfill. The quantity for each item is arrived after taking into consideration the thickness of the related item and area to be consumed by that item. Charging the expenditure of Pit Covering over the periods is in compliance with the matching concept of accounting and accordingly the definite and ascertained liability is proposed to charge to revenue over the balance life of the project. The claiming of pit covering expense is in accordance to matching concept since the revenue offered to tax includes charges towards the pit covering expenses 4.1.10. From above your Honor's, would appreciate the fact that provision for Pit Covering has been made by adopting a systematic and scientific approach. The provision is not an adhoc estimation rather the same is based on an absolutely realistic and rational calculation.
4.1.11. Matter decided on same issue in favour of Appellant own case and its 'sister concern':
The Appellant has followed consistent approach / basis for creating provision for Pit covering expenses year on year. The claim of the Appellant regarding allow ability of pit covering expense has been allowed by erstwhile Id. CIT (A), 54 Mumbai for AY 2012-13, AY 2013-14, AY 2014-15 and AY 2015-16. Copy of CIT(A) order for AY 2012-13 is enclosed herewith as Annexure 3 for ready reference.
Further it may be noted that the Hon'ble Ahmedabad ITAT in case 733, 1424, 4389 & 4408/AHD/2007 in case of M/s Bharuch Enviro Infrastructure Limited, which is a 'sister concern' of the Appellant, has allowed provision for pit covering expense as an allowable expense. Relevant extract of the order is reproduced hereunder:
".......The A.O. found that the assessee has debited expenses of Rs. 84,72,597/under the head "Pit Covering Expenses". On further verification, the A.O. noticed that the assessee has incurred actual expenditure for pit covering at Rs. 66,92,900/as against the provision of Rs. 84,72,597/. The assessee was asked to explain why the expenses of Rs. 17,79,697/should not be disallowed. The assessee explained that the liability to incur expenditure on pit covering arises as soon as the pits were dug and the pits are required to be covered after each pit is completely filled as per guidelines issued by GPCB. The A.O. denied the contention of the assessee on the ground that the pit is closed immediately and, therefore, the difference between the provision and the amount actually spent could not be explained properly. The A.O. further added the excess provision to the book profit treating the same as unascertained liability for the computation, A.Y. 2002-03 to 2006-07of book profit u/s. 115JB of the Act. The Hon'ble Rajasthan High Court in the case of Udaipur Mineral Development Syndicate Pvt. Ltd. 261 ITR 706 had held that "as soon as the assessee dig the pits its liability to refill them arose and it was entitled to deduction of the expenses incurred for filling those pits, as the assessee was following mercantile system of accounting". Similar view was taken by the Coordinate Bench of Hyderabad in the case of NMDC Ltd. 56 taxmann.com 396. The Coordinate Bench at Ahmedabad in the case of Enviro Technology Ltd. in 734 to 736/Ahd/2007 following the order of the Hon'ble Rajasthan High Court (supra) allowed the claim of the assessee... " [Emphasis Supplied] The appellant basis above stated verdict passed by Hon'ble ITAT in case of sister concern on same grounds submits that provision for pit covering should be allowed expense under section 37(1) of the Act.
In view of the above, the Appellant submits that provision for Pit covering expenses of Rs. 3,62,91,274/- should be allowed under section 37(1) of the Act for the following summarized reasons: a) Provision for Pit covering is ascertained liability calculated adopting systematic approach; b) Provision has been created following accounting principle of matching concept; c) The provision for expense is wholly and exclusively for business purpose of Appellant; d) The Appellant has followed consistent approach / basis for creating provision for Pit covering expenses year on year. The claim of Appellant is accepted by appellate authorities in its own case for AY 2012-13 to AY 2015-16; e) Similar matter has been allowed in sister concern of Appellant by Hon'ble Ahmedabad Tribunal.
4.2. Provision for Post closure expense - Rs. 1,59,28,173/- 4.2.1. During the subject year the appellant has debited Rs. 1,59,28,173 towards post closure expenditure to Profit & Loss Account for the year ended 31.03.2018. The post closure expense relates to expenditure to be incurred for post closure of the pits dug and in which wastes are deposited.
4.2.2. The Post closure expenses is for proper upkeep and safe and secure maintenance of the closed cells in the landfill, which includes: (i) Maintenance of the landscape and vegetation on the surface of the landfill (ii) Monitoring of ground water contamination if any by monitoring of the water quality of borewells installed at specific locations around the landfill. (iii) Monitoring of ambient air contamination by monitoring the quality of ambient air at specified locations around the landfill. (iv) Undertaking corrective measure in case of any damage or failure in the landfill. 4.2.3. As mentioned above, Appellant had entered into an agreement with CMC. As per the agreement with CMC, the Appellant is bound to perform the post closure activities and therefore the liability accrues to the Appellant on the same date on which the Appellant entered into agreement with CMC. Charging the expenditure of Post Closure over the periods is in compliance with the matching concept of accounting and accordingly the estimated liability is proposed to charge to revenue over the balance life of the project.
From above, the assesee is legally bound to incur the post closure expenses and it is a certain business liability and accordingly the expenses to be incurred have been spread over the years of the execution of project by adopting a scientific and rational approach.
The appellant is obliged under the provisions of Hazardous Wastes (Management and Handling) Rules, 1989 made under the Environment (Protection) Act, 1986 to maintain the landfills after the closure of landfills. Details of amount set aside for post closure expense for the subject year is enclosed supra as Annexure 2.
4.2.4. The appellant had claimed the provision for post closure expense under section 37(1) of the Act. For an expenditure to be allowed under section 37(1) of the Act, the following conditions should be satisfied: a. It should be a specific and ascertained liability i.e., the expense has accrued. b. The expenditure should not be covered under section 30 to 36 of the Act. c. It should not be capital in nature. d. It should be laid out wholly and exclusively for the purpose of the business.
All the above four conditions are discussed in detail above in para 4.1.7 in respect of provision for Pit Covering expenses and the same are not reiterated here for repetitive value.
4.2.5. By applying the same reasons and arguments provided as for in Pit Covering expenses, the appellant states that the provision for Post Closure expenses is an allowable expenditure under section 37(1) of the Act.
4.2.6. Provision of Post Closure Expense linkage with revenue The Ld. AO contended that an expense can be claimed only when it has been expended for earning income accrued, received or deemed to have been accrued or received.
In this respect, the appellant submits that it is very much in agreement with the above contention of the Ld. AO. All expenses incurred with an intention of revenue generation can be claimed as an expense, irrespective of whether the income was actually earned or not.
In the present case under consideration, we would like to bring to your Honors attention that the post closure expenses are to be incurred under a legal business obligation. The obligation is imposed by contract between the appellant and CMC discussed above. The incurrence of post closure expenses is sine quo non for the business of the appellant. The business activity of the appellant is bringing revenue to the appellant and the post closure expenses are thus incurred in connection with revenue generation. Once the contract is undertaken, the activities of covering and closure of the sanitary landfill are inevitable and are required to be performed as per the terms of the agreement.
The appellant further states that the revenue is collected in the form of user charges at pre-determined tariff rates. The tariff rates is agreed upon in the contract between the appellant and CMC. The appellant submits that the tariff rates are arrived at after covering various costs and reasonable profits on the costs.
There is no separate income which is receivable by the Appellant in relation to the Post Closure services provided. The income in relation to activities of Post Closure services are already embodied in the contract price which is received on a yearly basis.
4.2.7. Charging the expenditure of Post Closure over the periods is in compliance with the matching concept of accounting and accordingly the estimated liability is proposed to charge to revenue over the balance life of the revenue generation period of the project.
The Post Closure Activity entails commitment of large sums at the time land is filled up and unless a suitable reserve is built up in a phased manner to meet the commitment, it may adversely affect the affairs of the appellant at that time.
In view of above, Your goodself will appreciate that maintenance expense includes post closure expenses and the same has been included in the tariff rates arrived at. Thus, the appellant submits that the revenue corresponding to the post closure expense incurred have been offered to tax. As the post closure expenses is part of the income generated each year, the provision for post closure expenses is to be considered as an expense of the year in which the income is earned. Otherwise, there won't be the income and expenditure matching concept in accounting.
4.2.8. Matter decided on same issue in favour of Appellant and its 'sister concern':
As discussed supra for pit covering, Hon'ble CIT(A) passed order in Appellant's own case for AY 2012-13, AY 2013-14, AY 2014-15 and AY 2015-16 adjudicating Post Closure Expenses as an allowable expense of the Appellant. The appellant basis above stated verdict passed by Hon'ble ITAT in case of sister concern on same grounds submits that provision for post closure should be allowed as an expense. In view of the above, the Appellant submits that provision for Post closure expenses of Rs. 1,59,28,173/- should be allowed under section 37(1) of the Act for the following summarized reasons: a) Provision for Post closure is ascertained liability calculated adopting systematic approach; b) Provision has been created following accounting principle of matching concept; provision for expense is wholly and exclusively for business purpose of Appellant; d) The Appellant has followed consistent approach / basis for creating provision for Post closure expense year on year. The claim of Appellant is accepted by appellate authorities in its own case for AY 2012-13 to AY 2015-16; e) Similar matter has been allowed in one of sister concern of Appellant by Hon'ble Ahmedabad Tribunal. Based upon the above stated facts and circumstances of the case and the case laws relied upon by the Appellant, your honour is requested to allow the appeal of the Appellant and delete the addition of Rs. 1,59,28,173/- for provision for Post closure expenses made by ld. AO.
5.3 The facts of the case and findings of the AO recorded in the Assessment Order and the written submissions of the appellant have been considered.
5.3.1 The facts of the case of the appellant are that during the year, the appellant made provisions in respect of (i) Provision for pit covering- Rs. 3,62,91,274/-and (ii) Provision of Post closure expense Rs.1,59,28,173/- and claimed it as an expenditure in the P & L account. The AO disllowee the same for the reasons that the assessee is following mercantile system of accounting and theexpenditure debited to the P & L account was neither accrued nor paid during theyear and only provisions was made. Therefore, it was not an ascertained liability. Themethod of determination of computation of theprovision was based on a number of assumptions andon estimated basis. Accordingly, the AO has disallowedRs. 3,62,91,274/-towards provision for pit covering expenses and disallowed provision for post closure expenses of Rs. 1,59,28,173/-.
5.3.2 During the appellate proceedings, the appellant submitted that pit covering or sanitary landfill covering means the activity of filling the waste in the pit created by digging the land. The provision for pit covering expenses is the estimation of expenses for capping of land fill based on the quantity of waste dumped into landfill, Similarly, once the pit is covered, the appellant is required to maintain the secured landfill for 20 years after post closure of the pits. The amount of Rs.39,77,053/- debited as post closure expenses, is for proper upkeep and safe and secure maintenance of the closed cells in the sanitary landfill. The assessee had given working of these expenses. The expenditure in relation to Pit covering and land fill expenses has to be incurred in the future years but its corresponding income is earned during the relevant year. Therefore, this being an ascertained liability and following the principle of matching concept, the provision has to be allowed during the relevant year. Thee appellant also submitted that the expenditure is not capital in nature and also the expenditure is incurred wholly and exclusively for business purpose. The appellant also submitted that on identical facts in its own case the CIT(A) has allowed relief for A.Υ. 2012-13 to A.Υ. 2015-16. Further, in the case of sister concern, BharuchEnviro Infrastructure Ltd., the Hon'ble ITAT, Ahmedabad (ITA Nos. 733, 1424, 4389 & 4408/AHD/2007) has allowed pit covering expenses and post closure expenses.
5.3.3 The facts recorded and finding of the AO in the assessment order and the submission made by the appellant has been considered.
During the year the appellant carried activity of filling the waste in the pit created by digging the land. The provision for pit covering expenses was created on the basis the estimation of expenses for capping of land fill based on the quantity of waste dumped into landfill. Safter the pit was covered, the appellant was required to maintain the secured landfill for 20 years after post closure of the pits. The appellant provided working of these expenses. The expenditure in relation to Pit covering and land fill expenses has to be incurred in the future years but its corresponding income is earned during the relevant year. Therefore, this being an ascertained liability and following the principle of matching concept. further, the expenditure was not capital in nature and also the expenditure was incurred wholly and exclusively for business purpose.
On identical facts in appellant's own case the CIT(A) has allowed relief for A.Y. 2012-13 to Α.Υ. 2015-16.
Further, in the case of sister concern, BharuchEnviro Infrastructure Ltd., the Hon'ble ITAT, Ahmedabad (ITA Nos. 733, 1424, 4389 & 4408/AHD/2007) has allowed pit covering expenses and post closure expenses.
The relevant paras of the decision of the ITAT are reproduced as under:
"21.Common grievance no. 3 - Disallowance of provision for Pit CoveringExpenses.
22. The AO found that the assessee has debited expenses ofRs.84.72.497/- under the head "Pit Covering Expenses". On furtherverification, the AO noticed that the assessee has incurred actualexpenditure for pit covering at Rs.66,92,900/- as against the provision ofRs.84,72,597/-. The assessee was asked to explain why the expense of Rs. 17,79,697/- should not be disallowed. The assessee explained that the liability to incur expenditure on pit covering arises as soon as the pits were dug and the pits are required to be covered after each pit is completely filled as per guidelines issued by GPCB. The AO denied the contention of the assessee on the ground that the pit is closed immediately and, therefore, the difference between the provision and the amount actually spent could not be explained properly.. The AO further added the excess provision to the book profit treating the same as unascertained liability for the computation AY2002-03 to 2006-07 of book profit u/s. 115JB of the Act. The Hon'ble Rajasthan High Court in the case of Udaipur Mineral Development Sundicate Pvt. Ltd. 261 ITR 706 had held that "as soon as the assessee dig the pits its liability to refill them arose and it was entitled to deduction of the expenses incurred for filling those pits, as the assessee was following Mercantile System of accounting". Similar view was taken by the Co-ordinate Bench of Hyderabad in the case of NMDC Ltd. 56 taxman.com 396. The co-ordinate Bench at Ahmadabad in the case of Enviro Technology Ltd. in to 436/Ahd/2007 following the order of the Hon'ble Rajasthan High Court(supra) allowed the claim of the assessee.
OME TAX DEPART 23. In the light of the aforementioned judicial decisions, we direct theAO to allow the provision for pit covering expenses in totality.
25. Common grievance no. 3 - Disallowance of Post ClosureExpenses.
26. The assessee has made a provision for post-closure expenditurefor the following major expenses:
1. Air (gas) Monitoring expenses;
2. Leachate treatment expenses;
3. Insurance expenses in respect of Public Health Liability; 4.Repairs and Maintenance expenses in respect of electric water pumps installedin the bore wells;
5. Security expenses;
6. Gardening expenses;
7. Laboratory expenses;
8. Electricity expenses;
9. Office and administration expenses.
27. It is worth to mention here that the charges collected from the members towards treatment of solid water includes charges towards post closure case expenses and the same have been offered to tax as per the directions of the Gujarat Pollution Control Board. After closure AY 2002-03 to 2006-07 of landfill at least for 30 years the assessee has to take measure for collection ofleachate and gas emission generated if any. Therefore, the provision made inthe books of accounts towards post closure care expenditure is anascertained liability to meet at future date against which income earned during the year is offered to tax. We find that the Gujarat Pollution Control Board in its amendment of authorization dated 17.04.2001, interalia, stated "itshall prepare detailed financial estimate for the cost to conduct post closure care for 30 years, after closure of the portion/full part of the land fill".
Pursuant to this stipulation, the assessee had scientifically computed theprovision as under- Working showing computation of Provision for post closure care expensesmade during the year.
Total sludge Received during the year (Qty. in MT) 61,484,737/- post closurecare fund @ Rs.50/- per MT. 3,074,237 (working as per last year Notesenclosed herewith at annexure A) Opening Balance 7,700,000 interest @7.15% on Opening Balance required to be recovered 550,550 3,624,787 sayRs.3,625,000.
28. Considering the totality of the facts, in the light of the stipulation ofGujarat Pollution Control Board (supra) and the Scientific Working AY 2002-03 to 2006-07, we direct the AO to allow the post closure expenses.
Common grievance no. 4 is allowed."
In this regard, the decision of the Hon'ble Supreme Court in the case of BharatEarth Movers Ltd. vs. CIT [112 taxman 61] is relevant. In this case, the Hon'bleSupreme Court has held as under:
"If a business liability has definitely arisen 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 liability. It should also be capable of being estimated with reasonable certainly though the actual quantification may not be possible. If these requirements are satisfied, the liability is not a contingent one. The liability is in prasenti 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."
Further, the Hon'ble Rajasthan High Court in the case of Udaipur Mineral Development Syndicate (P.) Ltd. vs. DCIT 129 taxman 728(Raj) has held as under:
7. Considering the clause in the agreement, i.e., as far as possible the lessee shall restore the surface land so used to its original condition, the moment assessee dug pits, it was bound under the agreement to fill those pits and liability did accrue on the date when the pits were dug. Therefore, the Tribunal had committed error in disallowing the claim of the assessee in the year under consideration. The moment the assessee dug the pits, liability did arise and it was entitled for deduction of the expenses which it was supposed to incur for filling those pits, as the assessee was following the mercantile system of accounting. It could claim the expenses incurred as soon as it dug the pits.
5.3.4 In the case of the appellant, the appellant has to dig a pit and maintain it for 20years as per GPCB guidelines. In the case of M/s. Bharuch Enviro Infrastructure Ltd, the ITAT found the working of provision for pit closure expenses as scientific. Further, the liability of these expenses is the ascertained liability. In view of the above discussion, the disallowances made by AO on account of provision for pit covering expenses to the tune of Rs. 3,62,91,274/- and provision for Post closure expenses to the tune of Rs. 1,59,28,447/- are deleted. Accordingly, the ground no. 1of appeal is allowed.
After having gone through the facts of the present case and also hearing the counsels for both the parties at length, we found that AO had disallowed both the provisions on the premise that assessee had claimed expenditure on the ground that it was an expenditure to be incurred in future out of the income received during the year and the assessee could not establish that the provision on both the above issues were ascertained liability. It was also held by the AO that since the assessee is following Mercantile System of Accounting and therefore the expenditure debited to the profit and loss account was neither accrued nor paid during the year and only provision was made. It was also noticed that method of determination of computation of the provision was based on the number of assumptions and on estimation basis, accordingly the AO disallowed the same.
However, after considering the entire facts and documents placed on record we are of the view that the provision credited by assessee is an ascertained liability on the premise that the Pit covering or sanitary landfill covering means the activity of filling the waste in the Pit created by digging the land. Hence the provision for Pit covering expenses is the estimation of expenses for capping of land fill based on the quantity of waste dumped into landfill. Hence once the pit is covered, the assessee is required to maintain the secured landfill for 20 years after post closure of the pits. The assessee has categorically submitted that the amount debited as post closure expenses, is for proper upkeep and safe and secure maintenance of the closure cells in the sanitary landfill, in this regard the assessee had given detailed working of these expenses. Wherein, expenditure in relation to pit covering and land fill during the relevant year. Therefore this being an ascertained liability and while following the principles of matching concept, he provision has been credited by the assessee. It is important to mentioned here that the expenditure in question is not capital in nature and also the expenditure is incurred wholly and exclusively for the purpose of business.
6. We have also noticed that on identical facts in the case of assessee itself, Ld. CIT(A) had allowed relief for A.Y 2012-13 to 2015-16 and even in the case of sister concern i.e Bharuch Enviro Infrastructue Ltd. (ITA Nos. 733, 1424, 4389 & 4389 & 4408/Ahd/007), the Hon’ble ITAT has allowed pit covering expanses and post closure expenses, the relevant portion of the decision of the Coordinate Bench is reproduced herein below:
"21.Common grievance no. 3 - Disallowance of provision for Pit CoveringExpenses.
The AO found that the assessee has debited expenses ofRs.84.72.497/- under the head "Pit Covering Expenses". On furtherverification, the AO noticed that the assessee has incurred actualexpenditure for pit covering at Rs.66,92,900/- as against the provision ofRs.84,72,597/-. The assessee was asked to explain why the expense of Rs. 17,79,697/- should not be disallowed. The assessee explained that the liability to incur expenditure on pit covering arises as soon as the pits were dug and the pits are required to be covered after each pit is completely filled as per guidelines issued by GPCB. The AO denied the contention of the assessee on the ground that the pit is closed immediately and, therefore, the difference between the provision and the amount actually spent could not be explained properly.. The AO further added the excess provision to the book profit treating the same as unascertained liability for the computation AY2002-03 to 2006-07 of book profit u/s. 115JB of the Act. The Hon'ble Rajasthan High Court in the case of Udaipur Mineral Development Sundicate Pvt. Ltd. 261 ITR 706 had held that "as soon as the assessee dig the pits its liability to refill them arose and it was entitled to deduction of the expenses incurred for filling those pits, as the assessee was following Mercantile System of accounting". Similar view was taken by the Co-ordinate Bench of Hyderabad in the case of NMDC Ltd. 56 taxman.com 396. The co-ordinate Bench at Ahmadabad in the case of Enviro Technology Ltd. in to 436/Ahd/2007 following the order of the Hon'ble Rajasthan High Court(supra) allowed the claim of the assessee.
OME TAX DEPART 23. In the light of the aforementioned judicial decisions, we direct theAO to allow the provision for pit covering expenses in totality.
Common grievance no. 3 - Disallowance of Post ClosureExpenses.
The assessee has made a provision for post-closure expenditurefor the following major expenses:
1. Air (gas) Monitoring expenses;
Leachate treatment expenses;
3. Insurance expenses in respect of Public Health Liability; 4.Repairs and Maintenance expenses in respect of electric water pumps installedin the bore wells;
5. Security expenses;
Gardening expenses;
Laboratory expenses;
Electricity expenses;
9. Office and administration expenses.
It is worth to mention here that the charges collected from the members towards treatment of solid water includes charges towards post closure case expenses and the same have been offered to tax as per the directions of the Gujarat Pollution Control Board. After closure AY 2002-03 to 2006-07 of landfill at least for 30 years the assessee has to take measure for collection ofleachate and gas emission generated if any. Therefore, the provision made inthe books of accounts towards post closure care expenditure is anascertained liability to meet at future date against which income earned during the year is offered to tax. We find that the Gujarat Pollution Control Board in its amendment of authorization dated 17.04.2001, interalia, stated "itshall prepare detailed financial estimate for the cost to conduct post closure care for 30 years, after closure of the portion/full part of the land fill".
Pursuant to this stipulation, the assessee had scientifically computed theprovision as under- Working showing computation of Provision for post closure care expensesmade during the year.
Total sludge Received during the year (Qty. in MT) 61,484,737/- post closurecare fund @ Rs.50/- per MT. 3,074,237 (working as per last year Notesenclosed herewith at annexure A) Opening Balance 7,700,000 interest @7.15% on Opening Balance required to be recovered 550,550 3,624,787 sayRs.3,625,000.
Considering the totality of the facts, in the light of the stipulation ofGujarat Pollution Control Board (supra) and the Scientific Working AY 2002-03 to 2006-07, we direct the AO to allow the post closure expenses.
Common grievance no. 4 is allowed."
In this regard, the decision of the Hon'ble Supreme Court in the case of BharatEarth Movers Ltd. vs. CIT [112 taxman 61] is relevant. In this case, the Hon'bleSupreme Court has held as under:
"If a business liability has definitely arisen 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 liability. It should also be capable of being estimated with reasonable certainly though the actual quantification may not be possible. If these requirements are satisfied, the liability is not a contingent one. The liability is in prasenti 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."
Further, the Hon'ble Rajasthan High Court in the case of Udaipur Mineral Development Syndicate (P.) Ltd. vs. DCIT 129 taxman 728(Raj) has held as under:
7. Considering the clause in the agreement, i.e., as far as possible the lessee shall restore the surface land so used to its original condition, the moment assessee dug pits, it was bound under the agreement to fill those pits and liability did accrue on the date when the pits were dug. Therefore, the Tribunal had committed error in disallowing the claim of the assessee in the year under consideration. The moment the assessee dug the pits, liability did arise and it was entitled for deduction of the expenses which it was supposed to incur for filling those pits, as the assessee was following the mercantile system of accounting. It could claim the expenses incurred as soon as it dug the pits.
5.3.4 In the case of the appellant, the appellant has to dig a pit and maintain it for 20years as per GPCB guidelines. In the case of M/s. Bharuch Enviro Infrastructure Ltd, the ITAT found the working of provision for pit closure expenses as scientific. Further, the liability of these expenses is the ascertained liability. In view of the above discussion, the disallowances made by AO on account of provision for pit covering expenses to the tune of Rs. 3,62,91,274/- and provision for Post closure expenses to the tune of Rs. 1,59,28,447/- are deleted. Accordingly, the ground no. 1of appeal is allowed.
7. Therefore, taking into consideration our above discussion and also keeping in view the decision of the revenue in assessee’s own case of A.Ys 2012-13 to 2015-16 and also the decision of its sister concern i.e Bharuch Enviro Infrastructue Ltd (supra) of ITAT Ahmadabad Bench, we are of the view that the “provision for pit closure expenses and provision for pit covering expenses” were rightly allowed by the Ld. CIT(A).
8. No new facts or circumstances have been brought before us during the course of arguments in order to controvert or rebut the findings so recorded by Ld.CIT(A). Therefore we have no reasons to deviate from the lawful findings so recorded by Ld. CIT(A). Hence, while dismissing the grounds raised by the revenue, we uphold the decision of Ld. CIT(A) and accordingly grounds raised by the revenue stands dismissed.
In the result, the appeal filed by the revenue stands dismissed.
Order pronounced in the open court on 24.07.2025 Sd/- Sd/- (PRABHASH SHANKAR) (SANDEEP GOSAIN) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated 24/07/2025 KRK, PS आदेश की �ितिलिप अ�ेिषत/Copy of the Order forwarded to : अपीलाथ� / The Appellant 1. ��थ� / The Respondent. 2. संबंिधत आयकर आयु� / The CIT(A) 3. आयकर आयु�(अपील) / Concerned CIT 4. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण,मु�बई/ DR, ITAT, Mumbai 5. गाड� फाईल / Guard file. 6. आदेशानुसार/BY ORDER, स�ािपत �ित //True Copy//
उप/सहायक पंजीकार ( Asst. Registrar) आयकर अपीलीय अिधकरण, मु�बई मु�बई / ITAT, Mumbai मु�बई मु�बई