ACIT, BANGALORE vs. M/S CEC SOMA CICI JV, BANGALORE

The common issue involved in both these appeals is as to whether the CIT(A) was justified in deleting the addition made by the AO by holding that the provision made for future expenses are contingent in nature and cannot be allowed as a deduction.

The grounds raised by the assesee are identical in both the appeals. For the sake of ready reference we give below the grounds of appeal raised for asst. year 2012-13 which reads as follows:-

“1. The order of the Learned CIT (Appeals), in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case.

The assessee is an association of persons of 3 entities formed with specific purpose of participating in the tender floated by Bangalore Metro, Rail Corporation Ltd., (BMRCL) for laying metro line along with infrastructure facilities between Cricket Stadium and Kempe Gowda Bus Station (Majestic) in Bangalore. For asst. year 2011-12, the assessee filed a return of income on 29/9/2011 declaring a total income of Rs.76,77,270/-.

The AO on perusal of the aforesaid explanations given by the assessee asked the assessee to explain what is unbillable amount of Rs.58,62,00,000/- (of which the sum of Rs.6,66,64,500 claimed as deduction under the provision by the Assessee is forming part) as claimed by the assesssee as above which was to be spread over for the period for which the contract was to be executed for BMRCL. According to the AO, the assessee was not in a position to explain what was unbillable amount. The AO, examined the Commercial Manager of the AOP and in his sworn statement he had explained that the unbillable amount are monies which need to be spent for construction of roads after completion of the project. The AO thereafter made a reference of provision of sec. 37 of the Income- tax Act (the Act) and was of the view that under the aforesaid provision, the only expenditure which is incurred by the assessee which is wholly and exclusively for the purpose of business of the assessee that can be allowed as deduction an expenditure claimed by the way of provision to meet a liability in a future date cannot be allowed as a deduction u/s 37 of the Act.

The assessee in a letter dated 14/11/2013 explained the basis on which the deduction was claimed. The basis on which provision was made along with a letter the assessee had given a technical estimate based on which provision for unbillable future expenses of Rs.58.62 crores was made. The assessee also submitted that provision for liability in future expenses are allowable expenditure by relying on the following judicial pronouncements:-

The AO however held that the claim for deduction made by the assessee was only on the basis of estimate and that incurring of expenditure by the assessee was purely contingent and therefore the deduction claimed cannot be allowed. For the aforesaid reasons the AO did not allow the claim of the assessee for deduction.

On appeal by the assessee, the CIT(A) directed the AO to allow the claim for deduction made by the assessee. The CIT(A) found that the assessee AOP was required to execute the entire work starting from the design to the execution of the work and thereafter it was also required to undertake restoration work with a view to restoring roads, foot paths and other amenities that were disturbed or diverted at the time of execution of the project. The AOP commenced operation during the financial year 2009-10 and the first balance sheet was drawn for the year ended 31/3/2010. No income was offered during the aforesaid asst. year since the extent of work had not progressed for recognizing the revenue. The AOP first recognized revenue only during the financial year 2010-11 relevant to asst. year 2011-12. The assessee followed percentage completion method of recognizing revenue. The CIT(A) found that the following was the basis of making provisions by the assessee. A sum of Rs.29,69,40,875/- was expenses for finishing work in the form of laying roads after completion of the construction. The CIT(A) also found that a sum of Rs.28,91,13,042/- was towards cost of designing on the entire contract which was paid to different parties over the period of execution of the work. The sum total of the aforesaid 2 expenses was sum of Rs.58.62 crores (figures rounded off). The cost of design work was fixed at 3% of project value which was 995.2 crores. The total future expenses anticipated for completing of the project for Rs.58.62 crores was claimed on the basis of the running bills raised (turnover till the year end) to the total project cost multiplied by the projected future expense. The CIT(A) on the basis of the above details held that the incurring of the expenses in question was a certainty and that the basis on which the liability was estimated was reasonable and therefore the expenditure in question was not a contingent expenditure and had to be allowed as deduction.

Aggrieved by the aforesaid order of the CIT(A) Revenue has preferred present appeal before the Tribunal.

The ld DR placed reliance on the order of the AO and submitted that the CIT(A) had not given the basis on which he has come to the conclusion that expenditure in question was not a contingent and was certain liability.

The ld AR on the other hand brought to our notice various evidence filed to explain as to how the expenditure in question was not contingent in nature.

We have given a very careful consideration to the rival submission. As we have already noticed the projected future expenses was 58.62 cores and this comprises of a sum of Rs.29.69 crores which has to be spent for laying roads after completion of the tunneling work at various points. The other component of the project of future expenses is the cost of providing design to the entire project. As far as the estimation of expenses for laying of roads after completion of the tunneling work is concerned, the basis of estimate has been given by the assesee to AO in the letter dated 14/11/2013 filed before the AO along with all supporting and technical documents. A perusal of the aforesaid documents show that complete technical details was provided by the assessee. The breakup of the expenses on laying of roads given by the assessee to the AO is as follows:-

The Detailed workings for laying of roads on East ramp is at pages 84 to 90. The description like quantity of work to be done in terms of measurement and rates were also given in this working. Similarly for Cricket Stadium such detailed workings is at page 100 to 107. For Vidhana Soudha station the workings are at 112-199. For National College workings is at page 124 to 131. For City Railway station workings are at 135 to 140. For Pocket Track workings are at page 144 to 149 and for West Ramp the workings at page 191 to 197.

For escalation of cost at 25.86% the workings are at page 154 and 155 of the assessee’s paper book. Similarly for design work the workings are at page 216 of the paper book and the same is as follows:-

Perusal of the above shows that the amounts received from BMRCL of Rs. 17,91,36,000 has also been noticed in this chart. It has been claimed by the assessee before us that the amount received has been included in the total contract receipts and this may be verified by the AO and to the extent the receipt is not offered as income to treat the same as income, because the deduction of expenses on account of provision is to be allowed as per order of CIT(A), with which we are agreement for the reasons to be given in subsequent paragraphs.

The agreement with Mott Macdonald Pvt. Ltd., for providing design work is at page 221 and the related cost are at page 249. The variation contract with Mott Macdonald Pvt. Ltd is at page 251. The CECI Design Consultant and details of their design work are at page 253. The details of design charges payable to Spar Geo infra Pvt. Ltd., at a page 256.

As far as law with regard to allowing deduction on account of a provision the same is well settled. The Hon’ble Supreme Court in the cse of Calcutta Company Ltd., Vs. CIT 37 ITR page 1 has laid down that under the mercantile system of accounting an estimate of accrued liability to be discharged at a future date is an allowable expenditure. In that case the assessee bought lands and sold them in plots for constructing buildings. The assessee undertook development by laying roads, providing drainage system and installing lines. The sale was completed without the development work being completed but assessee clamed expenses to be incurred in future for carrying out development as an expenditure. The Hon’ble Supreme Court held that the liability of the assessee was unconditional and was therefore an accrued liability. The estimated expenditure to be incurred in future was to be allowed as a deduction. The Hon’ble Supreme Court in the case of BEML Ltd., 245 ITR 428 taken a view that provision can be allowed as a deduction provided 2 conditions are satisfied namely.

In our view both the conditions laid down by the Hon’ble Supreme Court have been satisfied in the present case and therefore the expenditure in question should be allowed as a deduction and was rightly allowed as deduction by the CIT(A). We find no grounds to interfere with the orders of the CIT(A) and accordingly appeal of the Revenue is dismissed.

As far as asst. year 2012-13 is concerned, the facts are identical to asst. year 2011-12 and the orders passed for asst. year 2011-12 have been followed by the AO and the CIT(A). In view of our conclusions on this issue for the asst. year 2011-12, we are of the view that there is no merit in the appeal of the Revenue for asst. year 2012-13. Accordingly the same is liable to be dismissed.

In the result, both the appeals are dismissed.