Rajasthan High Court - Jaipur
Rajasthan State Mines And Minerals Ltd. vs Commissioner Of Income-Tax on 29 October, 1993
JUDGMENT V.K. Singhal, J.
1. The Income-tax Appellate Tribunal has referred the following question of law arising out of its order dated March 31, 1980, in respect of the assessment year 1975-76 :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that no actual or legal liability was incurred by the assessee to remove overburden of 10 lakh metric tonnes and hence the liability of Rs. 82 lakhs as claimed by the assessee was not allowable?"
2. The brief facts of the case are that the assessee-company derives its income from mining and selling gypsum selenite at Bikaner and mining rock phosphate in Udaipur District on behalf of the Government of Rajasthan as a working contractor. This concern was originally owned by the Government of Rajasthan and other private parties were also having their shares in it. A provision of Rs. 82 lakhs was made for removal of overburden and the same was charged in the profit and loss account for non-removal of overburden. The assessee entered into an agreement on September 24, 1969, with the Government for excavation of rock phosphate from certain blocks in Udaipur District. The work included mining, crushing, transportation, loading and unloading of the ore at various stages including loading of the ore into the wagons at Udaipur City/Udaipur Railway Station. In the agreement, it was provided that the assessee had to pay Rs. 46 per tonne of ore despatched which includes mining, crushing, transportation, loading and unloading. The assessee was also liable for removal of the waste and its dumping at a suitable dumping site to be selected jointly. The amount of Rs. 46 was later on increased to Rs. 70 with effect from January, 1974, and Rs. 96 with effect from April, 1974, and this increase was due to depth of the mines and increase in the ratio of overburden. According to the assessee, the amount of Rs. 82 lakhs was not of the nature of a provision but it was liability for the removal of overburden, the cost of which had been calculated on the basis of the schedule submitted to the Government and, therefore, the said amount was claimed as liable for deduction. Much stress was laid on the clause in the agreement which provides "working contractors shall make arrangements for the removal of waste and its dumping at a suitable dumping site to be selected jointly". According to the assessee, since the overburden has not been removed this amount should have been allowed as deduction as the assessee-company is maintaining the books of account according to the mercantile system. It was observed that the expenditure to be incurred for the removal of overburden may increase or decrease in future depending upon various factors and circumstances and such expenditure actually incurred in future will be considered for allowance in the relevant year.
3. The appeal preferred before the Commissioner of Income-tax (Appeals), Jaipur, was rejected and the matter was challenged before the Income-tax Appellate Tribunal where the Tribunal observed that the expenditure, to be incurred subsequent to the relevant accounting year cannot be allowed as deduction though the necessity for the expenditure may have arisen in the accounting year.
4. The submission of learned counsel for the assessee is that in the mercantile system the net profit or loss has to be calculated after taking into account the income and expenditure relating to the said period irrespective of the fact as to whether the income has been received or not and the expenditure has been incurred or not. Since the legal liability has accrued to the assessee in the year of account the said amount should be allowed as deduction.
5. The submission of learned counsel for the Revenue is that there is no expenditure for which deduction could be allowed nor is there any liability and it is only an estimated liability for which provision is made and provisions are not allowable as deduction.
6. The matter with regard to contingent liability in the present case was considered by the apex court in the case of Indian Molasses Co. (Pvt) Ltd. v. CIT [1959] 37 ITR 66, wherein it was held that the expenditure which is deductible for income-tax purposes, is one which is towards a liability actually existing at the time, but the putting aside of money which may become expenditure on the happening of an event is not expenditure.
7. In the present matter, no money has been expended/disbursed and even on the basis of accounting principles no fixed amount could be arrived at to find out the liability. The liability may be in praesenti or future but it should be the actual liability. The liability which is in praesenti is allowable as deduction while future liability will be considered as a contingent liability and would be allowable only at the time when the expenditure is actually incurred or ascertained. The claim which has been set up before the authorities below was that the overburden has to be removed in the ratio of 1 : 5. Even in fixing this ratio one cannot be definite in respect of a particular area or particular period or for a particular field the extent of the quantity of overburden which is to be removed which depends on a number of facts as to how the overburden is to be removed. The exact liability in respect of this very year has not been calculated on any factual basis. It was only on the basis of the formula which has not been considered by the Income-tax Appellate Tribunal as a foolproof formula, the deduction was claimed. Even the Expert Committee was of the view that no exact formula could be arrived at. Out of the overburden of 16 lakh metric tonnes for the extraction of 4 lakh metric tonnes, according to the formula, the assessee had not incurred actual liability for extraction of 10 lakh metric tonnes of overburden. There may be an obligation to remove the overburden but it could not be ascertained so as to bring it within the purview of a legal enforceable liability and as such there was no actual liability on the basis of which the expenditure could be allowed. A liability which is not accurately estimated could be a contingent liability and is not an expenditure. The apex court in Indian Molasses Co. (Private) Ltd. v. CIT [1959] 37 ITR 66 referred to above, has held that the "expenditure" is what is paid out or away and is something which has gone irretrievably. Expenditure, which is deductible for income-tax purposes, is one which is towards a liability actually existing at the time, but the putting aside of money which may become expenditure on the happening of an event is n,ot expenditure. The income-tax law makes a distinction between an actual liability in praesenti and a liability de futuro which, for the time being, is only contingent. The former is deductible but not the latter.
8. In Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1, it was held by the apex court that if a liability has definitely been incurred in the accounting year, e.g., an unconditional accrued liability, it cannot be regarded as a contingent liability merely because it is to be discharged at a future date and the cost of discharging it is not definite but has to be estimated.
9. Similarly, in British South Africa Co. v. CIT [1946] 14 ITR 17 (Suppl.) (PC), it has been held by the Privy Council that where a liability clearly exists then quantification of the sum should not come in the way of the assessee in debiting the sum and claiming the deduction thereof. In order to estimate the true profits a liability has to be determined.
10. It was observed by the Supreme Court in the case of CIT v. Gemini Cashew Sales Corporation [1967] 65 ITR 643 (headnote) : "Broadly stated, the present value on commercial valuation of money to become due in future, under a definite obligation, will be a permissible outgoing or deduction in computing the taxable profits of a trader, even if in certain conditions the obligation may cease to exist because of forfeiture of the right. Where, however, the obligation of the trader is purely contingent, no question of estimating its present value may arise, for to be a permissible outgoing or allowance, there must in the year of account be a present obligation capable of commercial valuation". It was further observed that "where accounts are maintained on the mercantile system, if liability to make the payment has arisen during the time the business is carried on, it may appropriately be regarded as expenditure. But where the liability is, during the whole of the period that the business is carried on, wholly contingent and does not raise any definite obligation during the time that the business is carried on, it cannot fall within the expression 'expenditure laid out or expended wholly and exclusively' for the purpose of the business".
11. A liability which is dependent on fulfilment of a condition which may result in reduction or in extinction of the liability is a contingent liability. It is only the actual liability which is existing in the relevant assessment year which is allowable to be considered as an expenditure. If the liability is contingent then it would amount to allowing the apprehended losses in future from the profits which is not accepted on any principle of law or accountancy. The question of estimation in a contingent liability also does not arise in order to allow the deduction under Section 37 of the Act.
12. In the light of the principles enunciated by the apex court, it has to be seen as to what finding has been given by the Income-tax Appellate Tribunal in respect of the facts of the assessee. It is an admitted position that the assessee has extracted and removed 6 lakh metric tonnes of overburden and there was a shortfall of 10 lakh metric tonnes in removing the overburden. A ratio under contract was agreed upon which was the liability of the assessee to remove and the assessee failed to remove that overburden in the ratio agreed in accordance with the agreement. The ratio of removal of the overburden was initially 1 : 4 but later on it was changed to 1 : 5. It was contemplated that in case the overburden is not removed in the ratio then corresponding deduction at the rate of Rs. 11 per tonne of rock shall be deducted from the remuneration payable as per revised rates. The Tribunal came to the conclusion that there could not be any foolproof formula in respect of any extraction of one tonne of ore and removal of overburden and the formula which was agreed upon was only on estimation/expectation and, therefore, will not fall within the definition of expenditure under Section 37 of the Income-tax Act, 1961. Alternatively, a point was also raised before the Income-tax Appellate Tribunal that even if the cost of the removal of overburden of 10 lakh metric tonnes of ore is not allowed then alternatively it should be considered that the payment at the rate of Rs. 11 per tonne of rock should be treated as an advance payment of remuneration and is not assessable. On this point, the matter was sent back to the Commissioner of Income-tax (Appeals) for hearing afresh since this point was raised for the first time before the Tribunal. It has not been submitted before us as to what has happened to this alternative argument and what relief has been given to the assessee. So far as the provisions of Section 37 are concerned, it is only expenditure which is laid out or expended wholly or exclusively for the purpose of business which is to be allowed. In order to consider a particular item as expenditure the observations of the apex court in the case of CIT v. Nainital Bank Ltd. [1966] 62 ITR 638 are relevant wherein it has been held that (headnote):
"In its normal meaning, the expression 'expenditure' denotes 'spending' or 'paying out or away', i.e., something that goes out of the coffers of the assessee. A mere liability to satisfy the obligation by an assessee is undoubtedly not 'expenditure' : it is only when he satisfies the obligation by delivery of cash or property or by the settlement of accounts that there is expenditure. But expenditure does not necessarily involve actual delivery of or parting with money or property. If there are cross-claims--one by the assessee against a stranger and the other by the stranger against the assessee--and as a result of the accounting the balance due only is paid, the amount which is debited against the assessee in the settlement of the accounts may appropriately be termed as expenditure."
13. Even the actual liability which is in praesenti is also an expenditure. The only thing which is required is that it must be the actual liability and not contingent or unascertained. The finding which has been recorded by the Tribunal elaborately discussing the matter is that the formula could not be considered as a definite one because even initially it was in the ratio of 1 : 4 which has subsequently been changed to 1 : 5 and, therefore, it could not be said as to what is the fixed liability. The liability which has been calculated by the assessee on the basis of removal of the overburden of 10 lakh tonnes of ore, therefore, cannot be said to be an actual liability. Another factor which has been taken into consideration by the authorities below is that it was possible for the assessee to extract 4 lakh tonnes of ore by removing 6 lakh tonnes of overburden and that expenditure in respect of 6 lakh tonnes has already been allowed and on that basis the removal of ore could be possible even if the ratio is 1 : 1. Since a finding has been recorded that the formula is not based on the actual liability and has been changed from time to time and there was a possibility of extraction of ore by removing lesser quantity of overburden it cannot be said that the assessee was having legal liability of removing the overburden to 10 lakh metric tonnes. In the contract, in order to remove any uncertainty with regard to the quantity of removal of overburden, it has already been provided to reduce the payment by Rs. 11 per tonne and on that point the matter has already been sent back by the Income-tax Appellate Tribunal to the Commissioner of Income-tax (Appeals).
14. The fixation of amount of Rs. 11 also shows that the formula which was adopted for removal of overburden was not a foolproof formula and, therefore, it was contemplated that the rate shall stand reduced by Rs. 11 per metric ton, even if the overburden has not been removed according to the agreed ratio.
15. The Income-tax Appellate Tribunal, therefore, was justified in coming to the conclusion that there was no actual liability existing for removal of the overburden to the extent of 10 lakh metric tonnes and, therefore, the liability of Rs. 82 lakhs as claimed by the assessee was not allowable.
16. Accordingly, the reference is answered in favour of the Revenue and against the assessee.