November 2008
‘Provision for expenses’ on project claimed by estimating liability, substantial part of which incurred within six months from the end of previous year — Balance amount offered for taxation u/s.41(1) — Held, the estimation of liability was reasonable, an
By C. N. Vaze, Shailesh Kamdar, Chartered Accountants
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1 (2008) 114 ITD 1 (Delhi)
Dy. CIT v. Lurgi India Co. Ltd.
A.Ys. : 2000-01 & 2001-02. Dated : 24-8-2007
Assessee debited certain amount to project expenses as
‘provision for expenses’ and claimed the same u/s.37(1) — Assessing Officer
disallowed the said amount on the grounds that provision was made to meet
certain anticipated expenditure which had not accrued till last date of relevant
previous year. It was found that assessee had estimated its liability in respect
of two projects at certain amount, a substantial part of which was incurred
within six months from the end of previous year — Further the assessee submitted
that the balance amount has been offered for taxation u/s.41(1) — Held, based on
the facts, the estimation of liability by the assessee was a reasonable one, and
the liability was an accrued liability.
The assessee had claimed Rs.13,26,724 as ‘provision for
expenses’ in respect of two projects. The Assessing Officer disallowed the
amount, holding that the provision was made to meet certain anticipated
expenditure which had not accrued till the last day of the previous year. Before
the CIT(A), the assessee pointed out that out of the said amount, a sum of
Rs.11,67,210 had actually been utilised or paid before 30-9-2000, and the
balance was offered to tax in the subsequent assessment year. The Commissioner
(Appeals) accepted the above submissions of the assessee, and accordingly
deleted the additions.
On Revenue’s appeal, the Tribunal held that :
1. Any liability which is fastened on the assessee in the
case of a completed project, accrues or arises on the date when the project is
completed.
2. It might be difficult at that point to exactly determine
the amount of liability. However, if such amount of liability can be estimated
on a reasonable basis, then such a liability would be an accrued liability and
not a contingent or expected liability. The assessee had estimated its
liability in respect of the two projects at Rs.13,24,724, against which an
expenditure of Rs.11,67,210 had been incurred within six months from the end
of the previous year. Based on the above facts, the estimation of liability by
the assessee could be termed as reasonable, and therefore subject to
verification of the balance amount being offered for taxation, the liability
was an accrued liability.
3. In case the balance amount had been offered for tax in
the subsequent year, then the expenditure represented deductible expenditure.
However, if it was found that the balance amount had not been offered for tax
in the subsequent year, the allowance would be restricted to the expenditure
actually incurred, i.e., Rs.11,67,210.
Cases referred to :
(i) Handicrafts & Handloom Exports Corporation of India
v. CIT, (1983) 140 ITR 532,
(ii) K. L. Agarwal v. CIT, (1991) 190 ITR 303,
(iii) CIT v. Indian Textile Engineers (P.) Ltd.,
(1983) 141 ITR 69,
(iv) CIT v. Girharram Hariram Bhagat, (1985) 154 ITR
10.
