Appeal partially allowed, Collector's liability remanded, disallowance limited, decision date 26/07/2017.

The appeal was allowed in part. The matter concerning the Collector's liability was remanded to the Assessing Officer for reevaluation after direct communication with the Collector of Mumbai. The disallowance under Section 14A was limited to Rs. 3,77,065. The decision was rendered on 26/07/2017.

---

---

Issues Involved:
1. Deduction of Collector's liability Rs. 2,41,15,599.
2. Disallowance under Section 43B of the IT Act, 1961 for Collector's liability.
3. Disallowance under Section 14A of the IT Act, 1961 amounting to Rs. 5,39,175.

Issue-wise Detailed Analysis:

1. Deduction of Collector's liability Rs. 2,41,15,599:
The assessee contested the CIT(A)'s decision to confirm the disallowance of the Collector's liability of Rs. 2,41,15,599. The assessee argued that this liability arose from the development of property and should be considered part of the cost of development. It was claimed that since substantial revenue from the sale of the property was offered for taxation, the corresponding cost should be allowable based on the principle of matching cost and revenue. The assessee further contended that the liability should be deductible under Section 37(1) of the IT Act. However, the Assessing Officer (A.O.) observed that in the absence of a specific demand letter from the Collector, the liability was not provided in the books of accounts. Consequently, the A.O. added Rs. 2,41,15,599 to the assessee's income. The Tribunal noted that the liability would crystallize only when the Collector determined the amount payable by the assessee. Since the liability neither accrued nor crystallized nor was paid or accounted for during the year under consideration, the deduction of expenditure could not be allowed. The matter was restored to the A.O. to directly communicate with the Collector of Mumbai to ascertain any payable liability and decide afresh as per law.

2. Disallowance under Section 43B of the IT Act, 1961 for Collector's liability:
The assessee argued that the Collector's liability was not a sum payable by way of tax, duty, cess, or fee under any law but was a contractual liability arising from the agreement for purchasing rights in the land. The assessee relied on the jurisdictional Tribunal's decision in the case of Mema Engineers & Contractors Pvt. Ltd. v. ACIT, which held that 50% of the unearned increase is a contractual liability and not covered by Section 43B of the Act. The Tribunal considered the facts and found that the liability neither accrued nor crystallized during the year under consideration. Therefore, the addition made by the A.O. under Section 43B was not justified, and the matter was remanded to the A.O. for fresh consideration based on communication with the Collector.

3. Disallowance under Section 14A of the IT Act, 1961 amounting to Rs. 5,39,175:
The assessee contested the CIT(A)'s direction to adopt the disallowance under Section 14A at Rs. 5,39,175, arguing that only direct expenses in the form of PMS charges of Rs. 3,77,605 should be considered. The A.O. had computed the disallowance as per Rule 8D, which was applicable from A.Y. 2008-09 onwards. Since the assessment year under consideration was A.Y. 2007-08, Rule 8D was not applicable. The Tribunal directed the A.O. to restrict the disallowance under Section 14A to Rs. 3,77,065, being the amount of PMS charges paid to Enam Securities P. Ltd.

Conclusion:
The appeal was allowed in part. The matter regarding the Collector's liability was remanded to the A.O. for fresh consideration after direct communication with the Collector of Mumbai. The disallowance under Section 14A was restricted to Rs. 3,77,065. The order was pronounced in the open court on 26/07/2017.

---