By Ajay R. Singh
Advocate
5. M/s Vedanta Limited vs.
The Jt. CIT, Special Range-I [Tax
Case Appeal Nos. 2117 to 2119 of 2008; Date of order: 23rd January,
2020] (Madras High Court)
[Income
Tax Appellate Tribunal, Chennai ‘A’ Bench; dated 24th July, 2006,
passed in I.T.A. Nos. 490/MDS/2000, 352/MDS/2000 and 353/MDS/2002 for A.Ys.
1996-1997, 1997-1998 and 1998-1999]
Business
expenditure – Provision made for site restoration – Contingent liability –
Commercial expediency – Allowable expenditure u/s 37
The
assessee is engaged in the business of oil exploration in India and as per the
Product Sharing Contract between the Government of India, Oil and Natural Gas
Corporation Limited (ONGC), Videocon Petroleum Limited, Command Petroleum
(India) Pte. Limited, Ravva Oil (Singapore) Pte. Ltd. with respect to the
contract area identified as Ravva Oil & Gas Fields. The assessee company
undertaking the oil exploration is obligated under Clauses 1.77 and 14.9 of the
contract to restore the site by filling up the pits after the oil exploration
work is over.
The provision for such expenditure to be incurred in future for site
restoration work was made on a scientific and rational basis depending upon the
quantum of oil expected to be explored, based on production of the oil which
was worked out depending upon the share of the oil of various companies of
which the assessee had 22.5% of the total oil explored, and over the expected
production of the oil in barrels and abandonment costs computed by the company.
The assessee company computed the said expected liability of site restoration
charges and accordingly made provisions for the three A.Ys. in question.
The
Tribunal disallowed the provisions made by the assessee for site restoration
cost for the A.Ys. in question by holding that ‘an expenditure which is
deducted for income-tax purpose is one which is towards a liability actually
existing at the time, but putting aside some money which may become an
expenditure on the happening of an event is not an expenditure.’ In other
words, the Tribunal held that since the provision made under site restoration
fund is a contingent liability incurred by the assessee, the same is not an
allowable expenditure. The Tribunal held that the provision for site
restoration fund cannot be allowed even u/s 37(1) of the Act.
The
Tribunal also referred to the provisions of section 33ABA inserted by the
Finance (No. 2) Act, 1998 with effect from 1st April, 1999 from
which date such a provision for site restoration made by the assessee cannot be
allowed unless an actual deposit is made in the Site Restoration Fund u/s
33ABA. But the A.Ys. in question before the Court are prior to this amendment
of law.
Before the
Hon’ble High Court the only question left for deciding the controversy on hand
was whether such deduction of ‘Provision made for Site Restoration’ by the
assessee can be allowed as a business expenditure u/s
37(1).
Section
37(1) of the Act is a residual provision and apart from various deductions for
business expenditure prescribed under sections 32 to 36 which are specific in
nature, section 37(1) provides that any expenditure (not being expenditure of
the nature described in sections 30 to 36 and not being in the nature of
capital expenditure or personal expenses of the assessee), ‘laid out or expended’ ‘wholly and exclusively’
for the purposes of the business or profession shall be allowed in computing
the income chargeable under the head ‘Profits and gains of business or
profession’. Thus, the expenditure incurred by the assessee or a provision made
for the same are both allowable u/s 37(1), provided such expenditure is
incurred wholly and exclusively for the purpose of business and is laid out or
expended for the purpose of business.
The
assessee urged that the Supreme Court in the case of Calcutta Company Limited vs. CIT (1959) 37 ITR 1 (SC)
has laid down that inasmuch as the liability which had accrued during the
accounting year was to be discharged at a future date, the amount to be
expended in the discharge of that liability would have to be estimated in order
that under the mercantile system of accounting the amount could be debited
before it was actually disbursed.
Further,
relying upon another judgment of the Supreme Court in the case of Bharat Earth Movers vs. CIT (2000) 245 ITR 428 (SC),
it was submitted that the law is settled – 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.
It was
further submitted that the three yardsticks, criteria or parameters for
allowing the ‘Provisions made for future expenditure’ were discussed by the
Supreme Court in the case of Rotork Controls India
(P) Ltd. vs. Commissioner of Income-tax reported
in 2009 314 ITR 0062. Thus,
the three criteria of the provision are recognised 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.
It was
urged that all the three criteria are satisfied by the assessee in the present
cases and there is no dispute from the side of the Revenue that the assessee
has incurred an obligation under the contract. The question of restoring the
site of exploration after the work is over for which the said provision is made
is based on a scientific method and relevant materials.
The High
Court observed that for the three assessment years in question the provision
made by the assessee was clearly an allowable expenditure u/s 37(1). The only
ingredient required to be complied with for section 37(1) is that the
expenditure in question should be laid out or expended wholly for the purpose
of the business of the assessee. There is no dispute that the provision in
question was made wholly and exclusively for the purpose of business. The only
dispute was that the expenditure was not actually incurred in these years and
the amount was to be spent in future out of the provisions made during those
assessment years, viz., 1996-1997 to 1998-1999.
The Court
observed that there was no prohibition or negation for making a provision for
meeting such a future obligation and such a provision being treated as a
revenue expenditure u/s 37(1). The Supreme Court in the case of Calcutta Company Limited (Supra) had
clearly held that the words ‘Lay’ (laid out) or ‘Expend’ include expendable in
future, too. The making of a provision by an assessee is a matter of good
business or commercial prudence and it is to set apart a fund computed on
scientific basis to meet the expenditure to be incurred in future. There is no
time frame or limitation prescribed for the said provisions to be actually
spent. Merely because in the context like the one involved in this case the
contract period is long, viz., 25 years, which, too, now stands extended by a
period of ten years or more, and therefore the actual work of site restoration
may happen after 35 years depending upon the actual exploration of oil reserves
and the site restoration would be undertaken only if there is no longer some
oil to be explored or drawn out, therefore, it cannot be said that the
provision made for the three assessment years at the beginning of the contract
period was irrational or a disallowable expenditure.
The
question of commercial expediency is a usual business and economic decision to
be taken by the assessee and not by the Revenue authorities, therefore the
provision made on a reasonable basis cannot be disallowed u/s 37(1) unless it
can be said to have no connection with the business of the assessee. The words
‘wholly and exclusively for the purpose of business’ is a sufficient safeguard
and check and balance by the Revenue authorities to test and verify the
creation of provisions for meeting a liability by the assessee in future and its
connectivity with the business of the assessee. Assuming that such set-apart
provision is not actually spent in future or something less is spent on site
restoration, nothing prevents the Revenue authorities and the assessee himself
from offering it back for taxation in such future year, the unspent provision
to be thus brought back to tax as per section 41(1).
In view of the aforesaid facts, the appeals
filed by the assessee were allowed.
