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Actual Payment of Business Expenditure in the relevant Accounting Year not mandatory for claiming Deduction: Kerala HC [Read Judgment]

AAR - jurisdiction - Rules - Kerala High Court - Taxscan

The Kerala High Court has ruled that, Actual Payment of Business Expenditure in the relevant Accounting Year not mandatory for claiming Deduction.

The appeal is filed by the revenue before the Kerala High Court and the question in consideration is expenditure to be incurred in future in respect of a liability that accrued during the accounting year eligible for deduction in the computation of taxable business income? The court held that in order to claim deduction of business expenditure, it is not necessary that the amount has been actually paid or expended during the relevant accounting year itself.

The fact of the case are the respondent/assessee is a company engaged in the business of construction and sale of residential and commercial building complexes. During the assessment year 2009-10, the assessee sold a portion of the mall building constructed by it. The construction of the building was not completed at that time. In the revised return of income filed, deduction of the expenses incurred during the financial years 2009-10 and 2010-11 for completing the construction of the building was claimed by the assessee. The assessing authority disallowed the aforesaid deduction claimed and completed the assessment. The assessee filed an appeal before the Commissioner of Income Tax (Appeals). The appellate authority allowed the appeal. The revenue challenged the order of the appellate authority before the Income Tax Appellate Tribunal. The Tribunal agreed with the view taken by the appellate authority and dismissed the appeal. The aforesaid order of the Tribunal is under challenge in this appeal filed by the revenue.

The department submitted that the claim for deduction of future expenses made by the assessee cannot be allowed. Learned counsel contended that there is a distinction between amount spent to pay off an actual liability and a liability that would be incurred in future which is the only contingent. It is contended that the former is deductible but not the latter.

The respondent contended that the amount claimed as deduction was expenditure to be incurred to meet an accrued liability and not a contingent liability. Respondent also contended that the deduction was claimed in this case after incurring the expenditure since the construction of the building was completed when the assessment proceedings were pending.

While dismissing the appeal, the division bench comprising of Justice C.K.Abdul Rehim and Justice R.Narayana Pisharadi, stated in the light of judgments in cases Calcutta Company Limited v. Commissioner of Income Tax, West Bengal : AIR 1959 SC 1165), Madras Industrial Investment Corporation Limited v. Commissioner of Income Tax : AIR 1997 SC 2063), In Bharat Earth Movers v. Commissioner of Income Tax : AIR 2000 SC 2636, that the dispute raised by the revenue is only with regard to the deduction claimed by the assessee in respect of the expenses incurred in future, that is, after the sale of the building, during the subsequent financial years, and not in respect of the expenses incurred by it during the relevant financial year. In order to claim the deduction of business expenditure, it is not necessary that the amount has been actually paid or expended during the relevant accounting year itself. It is sufficient that the liability for payment had incurred or accrued during the relevant accounting year. The actual payment of amount or discharge of liability may occur in future. What is crucial is the accrual of liability for payment or expenditure during the relevant accounting year. But, a contingent liability that may arise in future cannot be treated as expenditure. The Tribunal was right in confirming the finding of the appellate authority that, the expenditure incurred by the assessee company during the financial years subsequent to the sale of the building, is eligible for deduction in the computation of taxable income.

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