IMPORTANT POINTS
Expenditure" is not necessarily confined to the money which has been actually paid out. It covers a liability which has accrued or which has been incurred although it may have to be discharged at a future date. However, a contingent liability which may have to be discharged in future cannot be considered as expenditure. It also covers a liability which the assessee has incurred in praesenti although it is payable in futuro.

JUDGMENT :

R.NARAYANA PISHARADI, J.

1. 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? This is the substantial question of law to be considered in this appeal filed by the revenue.

2. 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 on 06.04.2011, 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.

3. The assessee took up the matter in appeal before the Commissioner of Income Tax (Appeals). The appellate authority allowed the appeal by observing as follows:

“In this case, during the course of assessment proceedings, the construction of Mall was completed and therefore, the appellant could find out the actual cost of construction per sq.ft by dividing the total expenditure on construction by the total saleable area. In a situation where at the time of assessment the building remains incomplete, estimated future expenditure to be incurred is also considered along with the expenditure already incurred and is taken as cost relatable to the total saleable area ie. saleable area already built and the saleable area to be built in future, for arriving at the estimated cost of construction per sq ft. It is not a case of mere sale of commercial space but the appellant was required to provide amenities like escalators, lifts, parking, common toilet etc also. Therefore the contentions of the appellant are accepted and it is held that the AO was not justified in not taking the value of building work in progress during the FY 2009-10 and 2010-11 for working out the cost per square ft. It is therefore, directed that the cost per sq.ft shall be taken as total expenditure incurred in construction divided by total saleable area for the purpose of working out the profit from sale of commercial area.”

4. 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.

5. We have heard learned counsel for the department and also the learned counsel for the respondent.

6. Learned counsel for the department contended 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 only contingent. It is contended that the former is deductible but not the latter.

7. Per contra, learned counsel for the respondent contended that the amount claimed as deduction was expenditure to be incurred to meet an accrued liability and not a contingent liability. Learned counsel 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.

8. At the outset, we may state 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.

9. Section 37 of the Income tax Act, 1961 (hereinafter referred to as “the Act”) is a residuary section for allow ability of business expenditure. Section 37(1)