2013 (2) TMI 288 - AT - Income Tax

Appellate Tribunal rules on revenue appeal, stresses clarity in site expenses, validates revised return.

The Appellate Tribunal allowed the appeal of the revenue for statistical purposes, emphasizing the need for the assessee to clarify and substantiate the ... Admissibility of provision for site development as a present obligation - recognition of liability on accrual/mercantile basis under Accounting Standard-1 - requirement of a reliable and reasonable estimate for allowing provisions - reliability of quantification of provisional expenditureAdmissibility of provision for site development as a present obligation - recognition of liability on accrual/mercantile basis under Accounting Standard-1 - requirement of a reliable and reasonable estimate for allowing provisions - Whether the provisional cost of site development debited to profit and loss account is an admissible expenditure being an ascertained liability and not a mere contingent liability - HELD THAT: - The Tribunal accepted the reasoning of the CIT(A) and the assessee's reliance on the decision in Rotork Controls India (supra) to the effect that a provision is recognised where there is a present obligation from a past event, an outflow of resources is probable and a reliable estimate can be made. Applying the mercantile system of accounting in accordance with AS-1 (recognised under section 145), the Tribunal held that where the assessee has contractual and statutory obligations to provide site development and has debited to P&L the proportionate estimated cost relating to plots sold and registered in the year, the expenditure is not merely contingent but a liability in praesenti. The Tribunal, however, emphasised that allowance of such provisions is subject to the requirement that the liability be capable of reasonable estimation; hence quantification must be supported by an explanation of the mode and manner of arriving at the per-unit estimate. On this limited point of quantification the Tribunal found the revenue's objection justified and remanded the matter to the Assessing Officer for verification of the quantification of the provisional site development expenditure. [Paras 6, 8, 10, 11]Provisional site development cost is in principle an admissible expenditure as an ascertained liability under mercantile/AS-1 principles, but the quantum (method of computation) was remitted to the Assessing Officer for verification and justification.Reliability of quantification of provisional expenditure - Whether the revised return filed on 10/03/2008 is valid and the income as per the revised return is to be adopted - HELD THAT: - The Tribunal noted that the revised return filed consequent to the survey was a valid return and that the Assessing Officer had not given reasons for ignoring it. The CIT(A) had accepted the revised return and adopted the income declared therein. The Tribunal recorded that the revised return is valid and that the income for AY 2007-08 is to be adopted as per the revised return subject to the outcome of the remand on quantification of the site development provision. [Paras 6]The revised return filed on 10/03/2008 is valid and the income declared therein is to be adopted, subject to adjustments arising from the verification of the quantification of the provisional site development expenditure.Final Conclusion: The Tribunal held that the provisional site development expenditure debited to the profit and loss account is, in principle, an allowable expenditure as an ascertained liability under mercantile accounting and the principles in Rotork Controls, but remitted the limited issue of quantification (method and justification for the per unit estimate) to the Assessing Officer for verification; the revised return filed on 10/03/2008 was held valid and its declared income adopted subject to the remand. Appeal allowed for statistical purposes. Issues:1. Treatment of provisional cost of site development as an admissible expenditure.2. Validity of the revised return filed by the assessee.3. Recognition of liability on accrual basis.4. Justification of quantification of site development expenses.Issue 1: Treatment of provisional cost of site development as an admissible expenditureThe Appellate Tribunal considered the addition of Rs. 1,48,45,000/- towards provisional cost of site development made by the Assessing Officer. The Tribunal referred to the decision of the Hon'ble Supreme Court in the case of Rotork Controls India Pvt. Ltd. vs. CIT and held that the cost of site development is an ascertained liability, thus deeming the provisional cost as an admissible expenditure under section 37(1) of the Income Tax Act.Issue 2: Validity of the revised return filed by the assesseeThe CIT(A) acknowledged the revised return filed by the assessee on 10/03/2008 as valid. The revised return was based on the surrender of income estimated at 8% of the gross turnover for the assessment year 2007-08. The Tribunal upheld the validity of the revised return, determining the income of the assessee for the relevant year as Rs. 51,69,667/- as per the revised return.Issue 3: Recognition of liability on accrual basisThe Tribunal analyzed whether the expenditure for site development constituted a crystalized or contingent liability. Following the mercantile method of accounting in accordance with AS-I, the Tribunal concluded that the liability to incur site development expenditure was a liability in praesenti, not merely a provision. The Tribunal cited the decision of the Apex Court in the case of Calcutta Co. Ltd., 37 ITR 1 to support this view.Issue 4: Justification of quantification of site development expensesThe Tribunal noted that the expenditure in question was partly a provision and partly an ascertained liability. Referring to judgments such as Bharat Earth Movers Ltd, 245 ITR 428(SC), the Tribunal emphasized the importance of reasonable estimations in allowing such liabilities. While agreeing with the CIT(A) in principle, the Tribunal instructed the assessee to explain and justify the quantification of site development expenses, setting aside the core issue to the file of the Assessing Officer for further examination.In conclusion, the Appellate Tribunal allowed the appeal of the revenue for statistical purposes, emphasizing the need for the assessee to clarify and substantiate the quantification of site development expenses in line with legal requirements and judgments of the Hon'ble Supreme Court.