Provision for construction expenses and tax treatment of unsold finished flats: Rs.4 crore provision allowed; deemed-rent rejected; depreciation remitted
On allowability of provision for construction expenses: applying the matching concept and project-completion method where revenue on sales was recognized though completion remained, the tribunal held that a fair-estimate provision debited in P&L (spent subsequently through banking channels and required for completion) is allowable; the provision of Rs. 4 crore was therefore permitted. On deemed rent for unsold flats treated as stock-in-trade: since unsold flats were held as finished stock, annual letting value could not be imposed; the deemed-rent disallowance was rejected. On disallowance of depreciation: given asserted calculation errors and the assessee's offer to produce vouchers, the tribunal restored the issue to the AO for fresh adjudication after affording opportunity to the assessee.
Issues: (i) Whether provision for construction expenses of Rs.4,00,00,000/- debited to Profit & Loss Account is allowable as a deduction under the mercantile system/matching principle; (ii) Whether deemed rent (annual letting value) can be imposed on unsold flats shown as stock-in-trade; (iii) Whether disallowed depreciation (calculation/verification issue) should be restored for adjudication.
Issue (i): Allowability of Rs.4,00,00,000/- provision for construction expenses under mercantile accounting/matching principle.
Analysis: The Tribunal examined facts that revenue from sale of flats was recognized in the impugned year while substantial construction remained; assessee followed project completion method; more than 90% work completed; provision was estimated and subsequently incurred through banking channels; no discrepancies were found by Revenue. The Tribunal relied on authoritative decisions (including Calcutta Co. Ltd. vs. CIT) holding that where a liability has accrued under contractual terms and the mercantile system is followed, estimated expenditure to discharge that accrued liability may be debited and allowed, subject to scrutiny of quantum.
Conclusion: In favour of Assessee. The addition of Rs.4,00,00,000/- is deleted and the Assessing Officer is directed to allow the provision consistent with the mercantile/matching approach.
Issue (ii): Imposition of deemed rent (ALV) on unsold flats held as stock-in-trade.
Analysis: The Tribunal considered earlier decision in assessee's own case for AY 2014-15 and relevant High Court authorities distinguishing income from business/stock-in-trade from deemed rental income; held that unsold flats shown as finished stock should be taxed under business head and are not liable to annual letting value as deemed rent.
Conclusion: In favour of Assessee. The addition of Rs.14,80,398/- on account of deemed rent is deleted.
Issue (iii): Disallowance of depreciation claimed due to calculation/verification defects.
Analysis: The Tribunal found the Assessing Officers addition arose from alleged calculation errors and absence of documentary substantiation. Considering the assessees offer to produce vouchers and the nature of the claim, the Tribunal held it appropriate to remit the matter to the Assessing Officer for verification and decision on facts and law after giving the assessee an opportunity to substantiate.
Conclusion: Partly in favour of Assessee. The issue is restored to the file of the Assessing Officer for verification; the ground is allowed for statistical purposes.
Final Conclusion: The appeal is partly allowed overall: the major additions on account of provision for construction expenses and deemed rent are deleted in favour of the assessee, while the depreciation claim is remitted for factual verification; the Assessing Officer to give opportunity and decide accordingly.
Ratio Decidendi: Where a liability to incur expenditure has accrued under contractual or commercial obligations and the assessee follows the mercantile system (matching principle), an estimated provision debited to profit and loss for that accrued liability is admissible as a deduction subject to assessment of quantum and documentary scrutiny by the assessing authorities.