Kerala High Court upholds IT Deduction to Future Expenses in respect of a Liability that accrued during the related Accounting Year [Read Judgment]

A division bench of the Kerala High Court has held that an expenditure to be incurred in future in respect of a liability that accrued during the related accounting year would be eligible for a deduction in the said accounting year under the provisions of the Income Tax Act.

The assessee is a leading mall operator in the State of Kerala. Whilst the Mall was under construction, the assessee had during the financial year 2008-09 sold a portion of the Mall to certain third parties.  The said portion of the Mall was sold on the basis that a fully constructed and operating mall would be provided to the concerned buyers.

According to the assessee, the Mall was fully completed during Financial Year 2011-12.  In arriving at the profit chargeable to tax on the sale of the said portion for FY 2008-09, the assessee claimed a deduction in respect of the proportionate expenditure incurred during the subsequent years, ie, FY 2009-10 and 2010-11, which was challenged by the Tax authorities.  The said deduction of future expenses was upheld by the Income-tax Appellate Tribunal on the basis that there was an obligation on the part of the assessee to provide a fully furnished mall to the various buyers.

The department, then approached the High Court for relief against the Tribunal order.

The bench comprising Justice C K Abdul Rehim and Justice R. Narayana Pisharadi observed that as long as there was an obligation to incur an expenditure, the fact that the said expenditure was paid during the subsequent years would have no relevance.

Accordingly, it was observed that as the liability had accrued during the concerned financial, though discharged in the subsequent year, a deduction was to be granted in the first mentioned year.  The division bench in arriving at its judgment placed reliance on the judgment of the Supreme Court in the cases of Calcutta Company Limited Vs CIT AIR 1959 SC 1165, Madras Industrial Investment Corporation Limited Vs CIT  and Bharat Earth Movers Limited Vs CIT which have upheld the grant of deduction once a liability has accrued.  The bench also held that the fact a payment would need to be effected in the subsequent years (ie, in future) would have no bearing as long as the liability has been incurred in praesenti.

Advocates Sherry Samuel Oommen, Nerish Niranjan Zaveri and Sukumar Nainan Oommen appeared for the assessee.