Ms. Sonia Gokani, J. - As substantial question of law raised in both the Tax Appeals is common in respect of different assessment years, both the appeals are decided by a common judgment.
2. The appellant has preferred the present Tax Appeals challenging the orders of the Income Tax Appellate Tribunal dated 09/11/2012 and 21/12/2012 respectively in Tax Appeal No. 502/2013 and Tax Appeal No. 503/2013 under section 260A of the Income-tax Act, 1961 (hereinafter referred to as 'the Act') raising the following identical substantial question of law in each, for determination of this Court;
TAX APPEAL No. 503/2013
"Whether the Hon'ble Tribunal has justified in allowing interest expenses which was not become payable on the last day of financial year 2005-06 on unspent grant by the assessee under section 37(1) of the Income Tax Act, 1961 amount to Rs.1,87,61,273/-?"
TAX APPEAL No. 502/2013
"Whether the Hon'ble Tribunal has justified in allowing interest expenses which was not become payable on the last day of financial year 2008-09 on unspent grant by the assessee under section 37(1) of the Income-tax Act, 1961 amounting to Rs.2,39,64,697/?"
3. The brief facts necessary for the purpose of adjudicating these appeals are as follows;
3.1 The assessee-respondent-Company was incorporated as a Company, which is a nodal agency for development of Information Technology in the State of Gujarat. Essentially even for purchase of hardware and software of computers for the departments of government of Gujarat, it acts as a nodal agency. Money for such project is ordinarily received from the Department of Science and Technology and in such centralized purchase, respondent charges 3% commission. When certain indents remains incomplete and money is unspent, the same is used by the respondent for the purpose of investment including parking such funds with the Gujarat State Financial Services Ltd. It also further appears that two government resolutions, being dated 21/03/2004 and 14/03/2006 , were issued by the Department of Science and Technology, which required the respondent to pay the interest at the rate of 6% on the unspent amount and also asked the individual department to park the unspent amount with the respondent-assessee. In the profit and loss account for respective assessment years, sum of Rs.1,87,61,273/- and Rs.2,39,64,697/- by way of expenditure had been debited by the respondent-Company as it had made provisions on unspent amount of grant at the rate of 6% to be paid to the Department of Science and Technology. The Assessing Officer did not allow such deduction on the ground that the assessee was not under obligation to repay the amount granted and, therefore, it was not borrowed capital nor would the same fall under the definition of expenditure as defined under section 37(1) of the Act.
4. When the matter was challenged before the CIT(A) it considered elaborately the government resolutions and considering the very issue held in favour of the assessee so far as section 37 is concerned. The CIT(A) of course was of the belief that section 36(1)(iii) was not applicable as there was no borrowing. It was further noted that the funds in question are part of the business, which has been utilized by the assessee, including parking by the M/s. Gujarat State Financial Services Ltd. with huge amount of interest.
5. Both the sides challenged this order before the Income Tax Appellate Tribunal (hereinafter referred to as 'the Tribunal') and the Tribunal held that the amount cannot be considered under section 36(1)(iii) of the Act for not being loan. However, on having found the assessee eligible to avail the benefit under section 37(1), it held in favour of the assessee in the following manner:
"7. We have heard both the sides. We have perused the orders of the authorities below in the light of voluminous compilation filed and case laws cited. The admitted factual position is that the assessee-company is a government undertaking incorporated for the implementation of IT Policies in the State of Gujarat and to provide consultation services to various government departments towards software development. Certain grants were given to the assessee. There was a clause as per certain Government Resolutions that if an amount remains unspent out of the grant, then the unspent amount shall bear interest @ 6% per annum. In the light of the said instructions, the assessee has made the provision in its books of account. In this regard few G.Rs are placed on record. However, the main question before us is that the action of the assessee of providing 6% interest on the unspent amount of grant is allowable whether under Section 36(1)(iii) of the IT Act or under section 37(1) of the IT Act. We are of the view that since the amount in question was not in the nature of borrowings or loans, therefore, the provisions of section 36(1)(iii) do not apply on these facts. We are in agreement with learned CIT(A) that this pleas of the assessee is not acceptable. Once we have held so and that this view has already been expressed by the learned CIT(A), therefore the objection of the Revenue Department that the learned CIT(A) was not justified in allowing the expenditure under Section 36(1)(iii) is unwarranted. Because of this reason, we hereby also hold that the case laws cited by the ld. DR of Pepsu Road Transportation (Supra) do not apply on the present facts of this appeal because of the reason that the Hon'ble P&H High Court in that cited decision has settled the issue which revolve around the provisions of Section 36(1)(iii) of the IT Act. Now the question left before us is that whether the provisions so made by the assessee is eligible for deduction under Section 37(1) of the IT Act. In this connection, few decisions were cited before learned CIT(A) and considering all those decisions as cited supra, we are of the considered view that on one hand the assessee has earned interest income on investment of the surplus fund and on the other hand made the provisions of interest, hence such a claim does fall under the provisions of Section 37(1) of the IT Act. We have been informed that the unspent surplus funds have been invested as per the guidelines and thereupon interest was earned by the assessee. On the other hand, the assessee has to pay interest that too as per the directions of the Government. Hence, the provisions made by the assessee is, therefore, meant for the purpose of the business, hence qualify for claim under Section 37(1) of the IT Act. In the result the view taken by the ld. CIT(A) is hereby confirmed and this ground of the Revenue is dismissed."
6. We have heard Shri Sudhir Mehta, learned advocate appearing on behalf of the appellant, who has vehemently argued before us that neither section 36(1)(iii) nor Section 37(1) would be applicable to the case of the assessee. He has relied upon the decision rendered in the case of CIT v. Micro Land Ltd. [2012] 347 ITR 613/204 Taxman 174 (Mag.)/18 taxmann.com 80 (Kar.). He emphasized that the amount of interest, which has been specified to be deductible is not actually expended by the assessee and section 37 gives the benefit of the amount only under the circumstances when the amount is actually expended. He reiterated that the Tribunal has erroneously granted the benefit to the respondent under section 37 as what the respondent has done is only to make a provision for payment of interest in the future.
7. In view of the glaring facts, on having heard the learned advocate appearing on behalf of the appellant and considering the material on record with his assistance, we are of the firm opinion that the tribunal has committed no error, for the reasons to follow hereinafter.
8. Section 37 of the Income-tax Act requires to be reproduced at this stage—
"37. General — (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession ".
Explanation.—For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.
(2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.
8.1 While computing the income under the head of profit and gains business uncalled any expenditure expended for the purpose of business or profession exclusively is allowed. The entire thrust of this provision is of allowing the expenditure, which is in fact determined and used completely for the purpose of business or profession at the time of computing the chargeable income under the head of profit and gains of business or profession.
9. The Karnataka High Court was dealing with the similar issue where the deduction was sought under section 37 of the Income Tax Act. Such judgment is sought to be relied upon by the learned advocate appearing on behalf of the appellant rendered in the case of Micro Land Ltd. (supra). The Karnataka High Court dealt with the provisions of warranty made by the assessee and it held that it was not permissible and further said that in order to be deductible under section 37 of the Income Tax Act, 1961, expenditure must be actually incurred or laid out in the year under consideration and it should not be contingent expenditure. The Court also held that in the matter before it, the liability had not been determined on scientific basis and in such eventuality when there was an impossibility of inference to be drawn, such amount cannot be permitted to be deducted as business expenditure. Thus, essentially as the amount of expenditure was not determined scientifically, the Court did not permit such deduction under section 37(1).
10. We also note that the Supreme Court while dealing with the similar question in the case of Rotork Controls India (P.) Ltd. v. CIT [2009] 314 ITR 62/180 Taxman 422 has observed that the principle of estimation of the contingent liability is not the normal rule. However, the same would depend on the nature of the business, sales, product manufactured and old and the scientific method of accounting adopted by the assessee. It also depends upon the historical trend and upon the number of articles produced. In the said matter, the Court permitted deduction under section 37 by holding that the principle is that if the historical trend indicates that a large number of sophisticated goods were being manufactured in the past and the facts show that defects existed in some of the items manufactured and sold, then provision made for warranty in respect of such sophisticated goods would be entitled to deduction from the gross receipts under section 37.
11. In the facts and circumstances of the case as can be noted from the record, the assessee needed to pay the specified amount of expenditure, being the interest amount, at the rate of 6%, to be paid to the Department of the science and Technology. The liability was necessarily ascertained for having come in a package, given to the assessee while disbursing the amount/grant as also by way of both government resolutions as discussed elaborately by both the CIT(A) and the Tribunal and, therefore, by no stretch of imagination it can be said that there was uncertain or undetermined liability. The assessee-Company is a Government undertaking incorporated for implementation of Information Technology (IT) policies in the State of Gujarat. It also provides its services to various department on commission basis for providing hardware and software. As the government resolutions as mentioned hereinabove specify that the unspent amount of the grant shall bear the interest at the rate of 6% per annum and when appropriate provision had been made by the assessee making a request thereafter to treat the said amount as expenditure under section 37(1) of the Income Tax Act, both the authorities have rightly held that such provisions since was meant for the purpose of business, the Assessing Officer could not have held that the percentage (%) specified in the government resolution by way of interest on unspent amount was a contingent expenditure. These authorities have rightly granted the direction of deduction of such amount under section 37(1) of the Income Tax Act to the assessee.
12. Cumulatively it can be thus held with regard to the amount of interest permitted to be deducted under Section 37(1) that both the revenue authorities have correctly appreciated the facts and applied the law flawlessly.
13. No question of law, much less substantial question of law arises in the present appeals. Hence, the same deserves to be dismissed and are accordingly dismissed.