TaxTMI 
TaxTMI 
2014 (3) TMI 1055
X X X X Extracts X X X X
X X X X Extracts X X X X
....out jurisdiction and is based on wrong facts, thus, all the reassessment proceedings deserve to be declared void ab initio and CIT(A) erred in not declaring the reassessment proceedings illegal, without jurisdiction and bad in law. Asst. yr. 2005-06; Revenue's appeal ITA No. 910/Jp/2013:- (i) Whether on the facts and in the circumstances of the case and in law the learned CIT(A) was justified in deleting the addition of Rs. 1, 07,47,296 holding that the provision made by the assessee for development of land is ascertained liability. Asst. yr. 2007-08; assessee's appeal ITA No. 896/Jp/2013:- (i) That on the facts, in totality of the circumstances and in law, and in view of detailed objections/submissions made before the learned lower authorities, the reassessment proceeding is illegal, bad in law, without jurisdiction and is based on wrong facts, thus all the reassessment proceedings deserve to be declared void ab initio and learned CIT(A) erred in not declaring the reassessment proceedings illegal, without jurisdiction and bad in law. Asst. yr. 2007-08; Revenue's appeal ITA No. 911 /Jp/2013 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ost of these expenses is included in the sale price of the plot and the charges against the development expenses (which are to be incurred by the developer) are not being charged separately from the buyers of the plots in addition to the sale price of the plot taken by the developer. The development work has to be carried out as per the specification of the JDA. The external development work like construction of sector road (approach road from the main road for the colony) is carried out by JDA. 2.1 For the asst. yr. 2005-06, the assessee filed its original return of total income on 31st Oct., 2005 declaring-income of Rs, 55,15,130. Assessment under s. 143(3) of IT Act, 1961 ('the Act' for short) was completed by AO designated as Jt. CIT, Range-2, Jaipur vide his order dt. 28th Dec., 2007 at total income Rs. 2,79,25,370. The additions made were deleted by the learned CIT(A) vide order in IT Appeal No. 645 of 2007-08 dt. 1st Feb., 2008 and the order of first appellate authority was confirmed by the Tribunal vide common order dt. 24th April, 2009 in ITA No. 1097/Jp/2007 and ITA No. 737/Jp/208 for the asst. yrs. 2004-05 and 2005-06 respectively. 2.2 In respect of asst. y....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Jp)(UO) 41- Ed.]. The assessee raised objection to initiation of proceeding under s. 147 of the Act vide letter dt. 21st Aug., 2012 (copy at paper book pp. 119-124 asst. yr. 2005-06, paper book pp. 94-99, asst. yr. 2007-08 and paper book pp. 55-61, asst. yr. 2008-09) and the same was disposed of by the AO vide order dt. 7th Sept., 2012. 2.5 The income for asst. yr. 2005-06 was reassessed vide order dt. 1st March, 2013 under s. 143(3)/147 of the IT Act on total income of Rs. 1,62,62,430 against original return of Rs. 55,15,130 by making addition of Rs. 1,07,47,296 on account of disallowance of provision of development Expenses debited in PandL a/c. In similar way the income of asst. yr. 2007-08 was reassessed vide order dt. 1st March, 2013 under s. 143(3)/147 of the IT Act on total income of Rs. 13,22,95,340 against original return of Rs. 2,01,20.460 by making addition of Rs. 11,21,74,877 on account of disallowance of provision of development expenses debited in PandL a/c. The income of asst. yr. 2008-09 was reassessed vide order dt. 1st March, 2013 under s. 143(3)/147 of the IT Act on total income of Rs. 18,28.35.530 against original return of Rs. 1,73,71,460 by making the addit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n law. A: Proviso to s. 147 is applicable for asst. yr. 2005-06 2.8 The learned Authorised Representative submitted that in view of the proviso to s. 147 of the IT Act, no action can be taken for reopening of an assessment after four years unless the AO has reason to believe that income had escaped assessment by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. The reasons recorded by learned AO do not whisper that the assessee has failed to disclose fully and truly all material facts necessary for the assessment. The learned Authorised Representative submitted that in the present case for asst. yr. 2005-06, the reassessment proceedings under s. 147 was initiated after expiry of four years from the end of the relevant assessment year. The original assessment was completed under s. 143(3) of IT Act after detailed examination and scrutiny of the case. Further, the asst. yr. 2004-05 was also completed under s. 143(3) of IT Act after detailed scrutiny and certain legal issues/principles which were decided in asst. yr. 2004-05 were followed in this year also. The copy of reasons recorded is placed at ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....004-05 and after examining all the details and facts of the case of the assessee the "provisions for development expenses" were duly allowed to the assessee company and the same was not objected by the Department at any stage. On this issue audit objection was also raised in asst. yr. 2004- 05 and after considering our reply at the AO stage, the objection was dropped. The assessment of asst. yr. 2004-05 has reached at finality as no appeal is pending. Therefore following the rule of consistency, the provision for development expenses cannot be disallowed in asst. yr. 2005- 06. In the present case, there is no indication that the assessee had failed or omitted to disclose the material or primary facts. These were available on record. In the reasons for initiating proceedings under s. 147 of the Act, it is stated that provision for development expenses was wrongly allowed. Therefore, the allegation of the learned AO is that then AO while passing the original assessment had failed to draw correct legal inferences from the said primary facts. This is not an error or omission on the part of the assessee. It is not alleged that the assessee had suppressed, misrepresented or falsified the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....39;, 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 he 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." Thus as per the above provisions of above section the expenses laid out or expended wholly and exclusively for the purpose of business or profession shall be allowed. The above section does not restrict that the future liability to incurred expenses will not be allowed in the relevant year in which the liability arose. This principle has already been decided by Hon'ble apex Court. Hon'ble apex Court in the case of Rotork Controls India (P) Ltd. us. CIT (2009) 223 CTR (SC) 425: (2009) 23 DTR (SC) 79: (2009) 314 ITR 62 (SC) has laid down the principle that any provision made for the obligation of expenses to be incurred in future against the current year's sale is allowable expenses. Further, Hon'ble apex Court in the case of Bharat Earth Movers us. CIT (2000) 162 CTR (SC) 325: (2000) 245 ITR 428 (SC) has held that i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt on the date of the transactions i.e. on the date on which incomes or expenses accrue, irrespective of the date of a receipt or payment. Thus, before initiating the reopening of proceedings under s. 147 of IT Act, 1961 the learned AO completely ignored the method of accounting regularly employed by the assessee and according to method of accounting the provision for development expenses is directly attributable to sales of the assessee thus duly allowable to the assessee. The learned Authorised Representative submitted that the expenses incurred/liability to be incurred for certain expenses should be looked in equal terms. The "development expenses" are direct cost attributable to the sales as the same is essential part and condition of sales of scheme therefore expenses incurred/to be incurred are business expenses of the assessee and allowable. In the mercantile system accrued but undischarged liability against revenue expenditure must be allowed. In this case, the assessee follow a the mercantile system of the accounting. The assessee's sale consists of two things; first cost of land and second development expenses. Since the development expenses cannot be incurred on plot....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uction must be allowed. The levy of tax is on profits or gains as understood in the commercial sense and determination of profits and gains would be vital area of the computation and determination of income and liability to tax[CIT us. Coimbatore Pictures (P) Ltd. (1973) 90 ITR 452 (Mad). Hon'ble Supreme Court in the case of CIT us. Shoorji Vallabhdas and Co. (1962) 46 ITR 144 (SC)] laid down that the income-tax is a levy on the real income of business or profession. Hon'ble Supreme Court in Poona Electric Supply Co. Ltd. vs. CIT (1965) 57 ITR 521 (SC) has laid down principle that under the IT Act "tax" shall be payable by an assessee under the head "Profits and gains of business" in respect of the profits and gains of any business carried on by him. The said profits and gains are profits of business computed on business principles. Therefore, any provision made for the obligation of expenses to be incurred in future against the current year's sale is allowable expenses. Further, in asst, yr. 2006-07 on the same issue AG audit party raised the audit objection in the case of assessee on the similar issue i.e. "Provision for development charges". The CIT-I, Jaipur, did no....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g the s. 147 by Amending Act, 1989 and the expression "has reason to believe" was reintroduced. "Reasonable belief is the basic sine qua non for initiation of reassessment proceedings.[ITO vs. Ram Narayan Bhojnalarvval (1976) 103 ITR 797 (SC)]. The powers of the AO for assumption of jurisdiction under s. 147 are not plenary powers. The proceedings under s. 147 cannot be initiated on the mere whim or fancy of the AO. The words in statute are 'reason to believe' and not 'reason to suspect' or in the opinion' The words "has reason to believe" are stronger than the words 'is satisfied'. The belief entertained by the AO must not be arbitrary or irrational. Where a reasonable inference cannot be drawn from ' the materials that there was escapement, the reassessment proceedings cannot be sustained.[ITO vs. Dwarka Das Shah Bros (P) Ltd. (1974) 95 ITR 527 (Cal)]. Following decisions are quoted for support. The facts of the case are fully applicable to the facts of the case of the assessee:- (i) ITO and Ors. vs. Lakhmani Mewal Das 1976 CTR (SC) 220: (1976) 103 ITR 437 (SC); (ii) Ganga Saran and Sons (P) Ltd. vs. ITO and Ors. (1981....
X X X X Extracts X X X X
X X X X Extracts X X X X
....09). and letter dt. 30th Nov., 2010 at PB p. 48. Reliance is placed on the following decisions:- (i) Calcutta Discount Co. Ltd. vs. ITO (1961) 41 ITR 191 (SC): mere change of opinion subsequently not enough for reopening the assessment; (ii) Dy. CIT vs. Indian Syntans Investments (P) Ltd. (2007) 106 TTJ (Chennai) 388: (2007) 293 ITR 68 (Chennai)(AT), held that where the AO had called for details of a claim made by the assessee and allowed the same reassessment is not permissible as it would be tantamount to change of opinion. (iii) CIT vs. Feather Foam Enterprises (P) Ltd. (2008) 296 ITR 342 (Del) held that where a matter had been considered and accepted during original assessment, it could not be subject-matter of reassessment. iv) Aventis Pharma Ltd. vs. Asstt. CIT and Ore. (2010) 233 CTR (Bom) 258: (2010) 37 DTR (Bom) 353: (2010) 323 ITR 570 (Bom). Reassessment-Reason to believe-Change of opinion-In the original assessment deduction of consultancy fee and the amount paid by the assessee to the purchaser for meeting the demand of the State Government towards unearned increase in the value of land were allowed....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ne until and unless there was failure on the part of the assessee to make a full and true disclosure of all material facts which were necessary for the assessment. It was contended by the learned counsel for the assessee that in the present case, this pre-condition was not satisfied inasmuch as (a) there is no mention or allegation that there was no full and true disclosure on the part of the assessee in the purported reasons behind the reopening of the assessment in respect of asst. yr. 2005-06; and (b) in fact there was a full and true disclosure on the part of the assessee and even no inference could be drawn from the purported reasons that there was no such full and true disclosure. It was also contended by the learned counsel for the assessee that reopening of the assessment for asst. yr. 2005-06 which had been completed under s. 143(3) of the Act on 28th Dec., 2007, was not supported by law. The reasons recorded by the AO for asst. yr. 2005-06 were as under (copy at paper book p. 118):- "On perusal of assessment records it is revealed that the assessee made and raised a provision for development expenses of Rs. 63,37,614 against development expenses to be incur....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sed again for asst. yr. 2005-06, but the quantum of provision for development expenses was examined with reference to in audit report and books of account. At p. 2 of assessment order passed under s. 147, the AO has mentioned as under:- " ...on perusal of schedule 'M' filed by the assessee in this regard it is found that this amount is inclusive of Rs. 63,37,614 as expenses which were actually not incurred but only a provision to that extent has been made by the assessee company. The provisions for allowing the deduction of expenses are clearly laid clown in the IT Act and as per s. 37(1) the expenditure actually incurred is only allowable..." 2.15 Now, we have to see as to whether there was a failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the relevant assessment year. In the reasons recorded by the AO for issuing notice under s. 148 of the Act, the AO has himself stated that on perusal of assessment records, it is revealed that provision for development expenses was allowed to the assessee. Therefore, from the averments made by him in the reasons recorded, it is clear that the AO has iss....
X X X X Extracts X X X X
X X X X Extracts X X X X
....acts. The term 'primary facts' or 'material facts' are those facts which are material and relevant for the decision of the question before the AO and non-disclosure of which would have a material bearing on the question of escapement of income from assessment. Whether or not primary facts have been disclosed is normally a question of fact and depends upon the facts and circumstances of each case. The requirement of Expln. 1 is that there should be full and true disclosure of the primary or material facts and not beyond that. It is the obligation of the assessee to disclose fully and truly the primary facts. It is not the obligation of the assessee to indicate and state what legal inference can be drawn from the primary facts. While examining the implication of a similar provision in s. 34 of the IT Act, 1922, the Supreme Court in Calcutta Discount Co. Ltd. vs. ITO (supra), had observed:- "From the primary facts in his possession, whether on disclosure by the assessee, or discovered by him on the basis of the facts disclosed, or otherwise, the assessing authority has to draw inferences as regards certain other facts; and ultimately, from the primary fa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....language of the proviso is not sufficient. The basis of the averment/statement should be either stated or should be apparent/lueid/explained from the record. 16. In the present appeal, Expln. 1 to s. 147 also does not help or assist the Revenue. All material facts were available on record and no material facts had to be inferred or discovered by the AO. The AO in spite of being aware of the facts, failed to apply or, at best failed to consider whether s. 2(22)(e) of the Act was attracted. Failure to apply law or a section to admitted facts on record is not covered by Expln. 1. Explanation 1 applies when the AO on the basis of account books or other evidence fails to discover or infer material facts which with due diligence could have been discovered. Expln. 1 deals with failure of the AO to discover or infer all material facts on the basis of books of account or other evidence produced by the assessee. Difference between facts and law is well recognized and understood. Expln. 1 reflects the said difference." 2.18 Hon'ble Gujarat High Court in the case of Kalpataru Sthapatya (P) Ltd. vs. ITO (2013) 215 Taxman 479 (Guj) has held as under:- "5.1 Th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....red and applied his mind to the facts relating to the housing project developed by the petitioner, the shops and the profit earned therefrom. He thereupon qualified the deduction in the assessment order. 6. The Hon'ble apex Court in Calcutta Discount Co. Ltd. vs. ITO (1961) 41 ITR 191 (SC) has laid down as under:- The assessee has responsibility of disclosing all primary facts, but once he has disclosed all the primary facts, his duty ends and it is for the AO to draw the proper conclusions from it. If the wrong conclusion is drawn, then it is no ground for reopening the assessment because the assessing authority previously held another opinion as to the legal effect of certain primary facts and the AO later on took a different view.' 6.1 The phrase 'material facts' contemplated in the proviso to s. 147 connotes 'primary facts' necessary for assessment in relation to the year of assessment. The expression 'material facts' was considered by the Supreme Court in the context of s. 34(1)(a) of the IT Act. 1922 in Associated Stone Industries (Kotah) Ltd. us. CIT (1997) 138 CTR (SC) 260: (1997) 224 ITR 560 (SC),....
X X X X Extracts X X X X
X X X X Extracts X X X X
....), if that section was applicable, was an aspect to be examined by the AO. It was a subsidiary fact to be searched out in the assessment process for which the primary facts were available with the AO. An error, a slip, an omission or a mistake on the part of the AO in that regard would not furnish a ground to reopen. For, the reopening proceedings are not rectification proceedings. Nor the concluded assessment can be reviewed under the garb. 8. It was also right on the part of learned senior counsel to rely on the decision of apex Court in Keluinator of India (supra) and on the decision of this Court in Garden Silk Mills Ltd. vs. Dy. CIT (1996) 135 CTR (Guj) 405: (1996) 222 ITR 68 (Guj), to contend and submit that in the facts of the case the exercise of powers to reopen the assessment was based on the same facts and that a change of opinion does not give a ground to reopen the concluded assessment. 9................. 10. The conditions of s. 147 of the Act and in particular the first proviso thereto, which is applicable in the present case, having not been complied with on facts, the reopening of the assessment was not permissible. The ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessment on account of failure or omission on the part of the assessee to disclose truly and fully all material facts necessary for assessment. Therefore, the impugned notice issued after expiry of four years cannot confer any jurisdiction on the AO to continue with the proceedings and same is liable to be quashed. 2.21 The other ground raised for the validity of reassessment proceedings under s. 147 of the IT Act is that the reasons recorded for reopening of assessment are erroneous and bad in law. The AO must have valid "reasons to believe" and the reasons must have the rational and a direct nexus and are intelligible and acceptable in law. The learned Authorised Representative submitted that the AO initiated the reassessment proceedings for asst. yr. 2005-06, asst. yr. 2007-08 and asst. yr. 2008-09 on the opinion that expenses incurred during the previous year are only allowable for deduction from income under s. 37(1) of IT Act, 1961 and no provision is allowable but the same was wrongly allowed during the assessment proceedings. The learned Authorised Representative submitted that the assessment of the assessee for asst. yr. 2004-05 was completed under s. 143(3) of IT Act a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....countant General (Audit) (C and RA) dt. 28th Oct., 2010/4th Nov., 2010 is placed. At p. 2 of the letter, the CIT-I, Jaipur mentioned as under:- "The assessee has made provisions which are comparable with the rates charged by JDA for the said development. The JDA charges Rs. 250 per sq. mts. for each activity of development which includes the expenses for drainage, sewerage and other public utilities. The assessee is not providing drainage, sewerage and other public utilities. Therefore, he has not charged for the same. The cost of development which the assessee had to cany for that JDA charges Rs. 250-(25 + 30 + 20) i.e. 175 per sq. meter against which the assessee has made provision for expenses @ 165 per sq. yard thus the provisioning has been made on scientific basis and not arbitrarily manner. The assessee has made provisions for expenses of development of plot sold to various parties at Rs. 165 per sq. yd. out of which expenses to the tune of Rs. 56.53 per sq. yd. incurred during the year under consideration itself and provision was made for balance @ of Rs. 108.47 per sq. yd. The development expenses had been worked out by the assessee on the basis of guideline....
X X X X Extracts X X X X
X X X X Extracts X X X X
....8 (paper book pp. 41 to 44/APB asst. yr. 2007-08). The relevant explanation is at PB pp. 42-44. In respect to asst, yr. 2008-09 the assessee has also filed detailed explanation for justification of provision for development expenses vide its letter dt. 11th Oct., 2011 (paper book pp. 43 to 46/APB asst. yr. 2008-09) and letter dt. 30th Nov., 2010 copy placed at paper book p. 48/APB asst. yr. 2008-09. In view of there letters on the assessment records of the AO in asst. yr. 2007-08 and asst. yr. 2008-09, the learned CIT(A) was not justified in holding that this issue was not examined at the stage of the original assessment. It is noticed that the return of income was filed by the assessee on 15th Nov.. 2007 and 2nd Oct., 2008 for asst. yr. 2007-08 and asst. yr. 2008-09 respectively, thereafter notice under s. 143(2) was issued and the AO mentioned that the assessee furnished the details called for and after examining the information filed and discussing the case, assessments for asst. yr. 2007-08 and asst. yr. 2008-09 were completed under s. 143(3) of IT Act. So it cannot be said that the AO did not apply his mind while framing the assessment under s. 143(3) of the Act vide orders dt....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... escapement of income. 2.27 In the present case more particularly for asst. yr. 2007-08 and asst. yr. 2008-09, in our opinion, a mere change of opinion is not sufficient to issue notice under s. 148 of the Act for reassessing the income by invoking the provisions of s. 147 of the Act. As regards the initiation of the proceedings for the reassessment under s. 147 of the Act on the basis of change of opinion, the Hon'ble High Court of Delhi (Full Bench) in CIT us. Keluinator of India Ltd. (2002) 174 CTR (Del)(FB) 617: (2002) 256 ITR 1(Del)(FB) held as under:- "In the event it is held that by reason of s. 147 if the ITO exercises his jurisdiction for initiating a proceeding for reassessment only upon mere change of opinion, the same may be held to be unconstitutional. Sec. 147 does not postulate conferment of power upon the AO to initiate reassessment proceeding upon his mere change of opinion." The aforesaid case has been affirmed by the Hon'ble Supreme Court in CIT us. Keluinator of India Ltd. (2010) 228 CTR (SC) 488: (2010) 34 DTR (SC) 49: (2010) 320 ITR 561 (SC) wherein it has been held as under:- "Prior to the Direct Tax Laws (Amendment....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tly, the Hon'ble Delhi High Court in the case of CIT us. Modipon Ltd. in IT Appeal No. 533 of 2011 by following the aforesaid referred to judgment of the Hon'ble Supreme Court in the case of CIT us. Keluinator of India Ltd. (supra) has held vide order dt. 21st March, 2011 as under:- "4. It is not in dispute that the reassessment proceedings were initialed by the AO on the basis of tax audit report filed by the assessee in Form No. 3CD and on the basis of information available in the PandL a/c. There was no reference to any new material by the AO which had come into his possession after the completion of original assessment under s. 143(3) of the Act. It is also a matter of record that before initiating reassessment proceedings by issuing notice under s. 148 of the Act, the AO had initiated proceedings under s. 154 of the Act for the same reasons and proceedings initiated under s. 154 were dropped by him after the issuance of notice under s. 148 and were thus pending on the date of initiation of the reassessment proceedings. In these circumstances, the Tribunal while setting aside the reassessment proceedings relied upon the Full Bench Judgment of this Court i....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the matter, the reassessment framed by the AO for asst. yr. 2007-08 and asst. yr. 2008-09 on the basis of invalid notice is set aside. 2.30 We, thus quashing the same and allow ground No. 1 for asst. yr. 2005-06, asst. yr. 2007-08 and asst. yr. 2008-09 of the appeal filed by the assessee by deciding the same in favour of the assessee. 2.31 Although we have quashed the reassessment framed by the AO for asst. yr. 2005-06, asst. yr. 2007-08 and asst. yr. 2008-09 but in the interest of justice and in order to avoid repetition of the proceedings, we also decide the merit of the case as under. 3.1 Ground No. 2 of assessee's appeal for asst. yr. 2008-09, ITA No. 897/Jp/2013 relates to the addition of Rs. 19,05,000 made under s. 40A(3) by holding that the expenses was not found to be covered under r. 6DD (c) of IT Rules. The brief facts of the case are that the learned AO held that the assessee has incurred expenses exceeding Rs. 20,000 otherwise than by an account payee cheque drawn on a bank or account payee bank draft out of such expenses of Rs. 19,05,000 not found to be covered under r. 6DD(j) of IT Rules. The explanation filed by the Authorised Representative is not foun....
X X X X Extracts X X X X
X X X X Extracts X X X X
....see were of the Rs. 120.52 crores out of which the cash payment is only for Rs. 19.05 lacs. The learned Authorised Representative submitted that the second proviso to s. 40A(3) emphasizes 'having regard to the nature and extent of banking facilities available, consideration of business expediency and other relevant factors. The learned AO failed to appreciate the relaxation provided under second proviso to s. 40A(3) of IT Act. The second proviso to s. 40A(3) is as under:- "Provided further that no disallowance under this sub-section shall be made where any payment in a sum exceeding twenty thousand rupees is made otherwise than by crossed cheque drawn on a bank or by crossed bank draft in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors." 3.3 The words "having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors were added to "under such circumstances as may be prescribed" have some specific meanings. If the legislature intended to restr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the case of CIT vs. K.K.S.K. Leather Processor (P) Ltd. (2007) 292 ITR 669 (Mad) (relates to asst. yr. 2001-02). Exceptional or unavoidable circumstances-Tribunal found that cash payments were made to small time vendors who come from surrounding villages to sell skin to the assessee, a leather producer, and that cash-payments were indispensable-Disallowance rightly deleted-CIT vs. Chrome Leather Co. (P) Ltd. (1999) 235 ITR 708 (Mad) followed. (iv) Madras High Court decision in the case of CIT vs. Chrome Leather Co. (supra): held that payment by crossed cheque was not practicable and that identity of payee and genuineness of payment were established- arnount paid in cash could not be disallowed under s. 40A(3). (v) Gujarat High Court decision in the case of CIT vs. P. Pravin and Co. (2005) 193 CTR (Gaj) 213: (2005) 274 ITR 534 (Guj): held that the requirement under r. 6DD of the IT Rules 1962, regarding practicability of payment otherwise than in cash and consideration of business expediency have to be judged from the point of view of the businessman and not of the Revenue authorities. (vi) In the case of Jt. CIT vs. Swarup Vegetable Prod....
X X X X Extracts X X X X
X X X X Extracts X X X X
....available and they entered into agreement verbally or in writing and some payments were made in cash. Therefore, in our view there was an exceptional circumstance in making cash payments which falls under the exceptional clause of r. 6DD of IT Rules. 14.8 It is also noted that the payments to some villagers have been made after banking hours and in cash voucher itself the time of payment has been mentioned. Some of the examples have been given somewhere above in this order where time of payment has been noted. Therefore, in our view the AO and learned CIT(A) were not correct in observing that no supporting evidence was filed that the payments were made after banking hours. Neither any person was called nor enquiry was made that the payments were made after banking hours or they resided in the villages. 14.9 The provisions of s. 40A(3) are very stringent and, therefore, it was the duty of the AO that before attracting stringent provision he should have made enquiry about the persons whether they live in the villages or not and whether payments have been made after banking hours or not. There is no dispute that payments have been made from disclosed sour....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ch payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town, then no disallowance can be made under s. 40A(3). In fact, the learned CIT(A) has mentioned sub-cl. (h) whereas the correct clause is 6DD(g). The learned counsel of the assessee has made statement at Bar (hat there is no bank branch in village Ballupura at the time of purchase of the land from various sellers. It was also submitted by learned Authorised Representative that normally the villagers were paid in cash at the time of entering into agreement and sale deed is completed at a later stage wherein they have agreed to receive the amount from the assessee either in cash or cheque as the case may be. This contention of the learned counsel of the assessee remained uncontroverted, therefore, we see no reason to interfere with the finding of learned CIT(A) and hold that learned CIT(A) was right in deleting the disallowance made by AO under s. 40A(3).' 15. Facts in the present case for both the years are similar. Therefore, in view of the above facts and circumstances and in view of the consistency as on si....
X X X X Extracts X X X X
X X X X Extracts X X X X
....xternal development work such as providing sector roads for the colony etc. It is option for the colonizer either to carry out the development work by itself or through JDA. In case the colonizer opts to carry out internal development work in the colony through the JDA, it has to pay the amount to JDA at predetermined per square meter rate. If the colonizer opts to carry out internal development of the colony by itself then the work has be carried out under the supervision of JDA and JDA monitors the quality control of the work. Further, if the colonizer opts to carry out internal development of the colony itself then the JDA keeps 12.5 per cent of total plots as security with it against the internal development work of the colony to be carried out by the colonizer. The JDA releases these 12.5 per cent plots only after the completion of entire internal development by the colonizer in accordance with the quality controls specified by JDA. The scheme is that in case a private colonizer does not do the work of internal development, the JDA would sell these 12.5 per cent plots in open market and do the work of internal development of the colony from the sale proceeds of these plots. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... by mentioning that the learned CIT(A) was not justified in deleting the addition made by the AO. The learned Departmental Representative submitted that the assessee is not bound to carry out development work as no such agreement has been made by it from the buyers of the plots. Further, the actual expenses incurred by the assessee in development work were very meager and the funds of development provisions made for the development of land are being used for expansion of the business rather than the development of land. Therefore, the order of AO deserves to be restored in this regard. 4.4 On the other hand learned Authorised Representative submitted as under:- 1. The issue is covered by the decisions of Hon'ble Tribunal, Jaipur Bench in following cases:- (a) Assessees' own case by Hon'ble Tribunal Jaipur Shree Salasar Overseas (P) Ltd. vs. CIT ITA No. 433/Jp/2011 (supra) with reference to order under s. 263 passed by CIT (copy of order at paper book pp. 77-84). (b) Tribunal Jaipur in ITO vs. Fintech Real Estate Developers (P) Ltd., ITA No 30/Jp/2009 (copy of order at paper book pp. 160-162). (c) Tribunal Ja....
X X X X Extracts X X X X
X X X X Extracts X X X X
....supply and development of public parks and facilities etc. The cost of these expenses is included in the sale price of the plot and separate charges against the development expenses to be incurred by the developer is not being charged in addition to the sale price of the plot taken by the developer. Thus the development work has to be carried out as per the norms and specifications of the JDA and there is no need for separate agreement/contract with the individual purchasers of the plots. The learned AO completely ignored these facts before arriving at this finding. In private Khatedar scheme the assessee is only selling plots to plots holders and the contract between assessee and plot holders is only for sales of plots. The development expenses are part of cost of assessee and the same are required to be incurred as per regulation of JDA and its not according to agreement of sale of plot with parties. The development expenses incurred by the assessee are not on individual plot of plot holder but the same are incurred on entire scheme. If suppose a particular plot holder does not want road or water line or other development work even than the assessee has to carry ou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....not be charged from customers. Thus, the sales of the assessee represent to two things, first cost of land and second cost of development expenses of scheme. Since the cost of the development expenses is to be incurred in the next years, therefore, the sales to the extent of the cost of development expenses is carried forwarded for next years under the nomenclature "Provision against the development expenses". It is relevant to mention here that the development expenses are estimated only in respect of the plots sold during the year, not on whole land and such amount is carried forwarded. (d) At S. No. 4 the learned AO rejected the submission of assessee on the ground that the assessee is not having sales agreement regarding development expenses with plot holders, therefore the assessee is not convent for such development expenses against sale of the plots of land. In absence of any agreement of sale with the purchasers of the plots no such bifurcation of cost comes to light. The findings of the learned AO in para 3 contradicts the findings of AO in para 4. The learned AO himself in para Nos. 3 at p. 4 cited the JDA Order No. D-1694 dt. 1st Dec., 2005,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e stock-in-trade i.e., land and is revenue expenditure. The ratio laid down in this case is applicable to the assessee's case because the assessee has made the provisions against the liability to carry out development work on land sold by it, which is to be discharged in future. Badridas Daga vs. CIT (1958) 34 ITR 10 (SC) and CIT vs. Coimb'atore Pictures (P) Ltd. (1973) 90 ITR 452 (Mad): The learned AO distinguished this case law on the ground that in this case issue was whether any misappropriation done by an authorized agent was an allowable business loss/ allowability of irrevocable part of advance an advance as business loss. The learned AO failed to understand the ratio or principles laid down by Hon'ble Court in this case. In this case the finding given by the Court that "whether a claim for deduction admissible or not will depend on whether having regard to the accepted commercial practice and trading principles it can be said to arise out of carrying on of the business and incidental to it and if that is established, then the deduction must be allowed. The levy of tax is on profits or gains as understood in the commercial sense and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....under:- (i) Calcutta Co. Ltd. vs. CIT (supra): The learned AO distinguished this case law on the ground that in this case the sales was made in instalments and company undertakes to carry out developments as per terms and condition of sales within six month. The learned AO held that in the case of the assessee's sales are not credited in this manner and the presence of terms and condition of development is not there. The above case is directly identical to facts of the case of assessee and applicable in the case of the assessee. In the case the Court decided that how the profits should be computed in cases like present assessee. 'The answer to this question is given by Hon'ble Supreme Court in the case of Calcutta Co. Ltd. (supra). In that case the Supreme Court was considering a case of a land developer, who had undertaken to develop the land by laying out roads, providing of drainage system and installation of lights etc. Some of the plots were sold by the assessee against a consideration of Rs. 29,392. Following mercantile system of accounting, the assessee credited the entire sum of Rs. 43,692 being the full sale price of the land. At t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... failed to appreciate the ratio and principles laid down by Hon'ble apex Court in this case. The principle laid down by Hon'ble Court was that "any provision made for the obligation of expenses to be incurred in future against the current year's sale is allowable expenses. 'The learned AO was wrong in holding that in the case of the assessee it is at the option of the assessee as to how much expenses are to be incurred against the sales consideration and when it is to be incurred. The learned AO cited the JDA order No. D-1694, dt. 1st Dec., 2005. It is not understandable how the assessee be free from the obligation of development expenses in view of this circular particularly when the liability has been fixed to take "Adhivas Praman Patra" from JDA on completion of development work and development work is subject to supervision of Government authorities and in case the uncompleted work is to be carried out by the developer himself, then he has to deposit the 12.5 per cent of the plots in the scheme with JDA as security. This exercise is done before the announcing of camp by JDA for issuance of Patta by JDA in favour of the plot holders. For development work, the dev....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is. The Supreme Court in the case in (2009) 223 CTR (SC) 425: (2009) 23 DTR (SC) 79: (2009) 314 ITR 62 (SC) (supra) has held that if the Revenue recognized, the cost incurred to earn the Revenue has to be fully provided. It is also noticed that the Supreme Court in (1959) 37 ITR 1 (SC) has also opined the accrued expenses which are necessarily required to be incurred by the assessee in respect of sales effected during the year would be admissible deduction while computing PandL a/c of the assessment." Further against the order passed under s. 263 of IT Act, 1961 the assessee filed appeal before Tribunal, Jaipur Bench, Jaipur and the Tribunal vide its order dt. 22nd Nov., 2013 held the provision is allowable in the case of the assessee. Therefore the learned AO was wrong in holding that CIT passed the order under s. 263 holding that allowing of the assessee's claim of provision was erroneous and prejudicial to the interest of the Revenue. 3. The allegation that the assessee was not covenant to the development work:- This issue has been explained in detail in above paras. Further, the learned AO (has not) brought any pos....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ting treatment given by the assessee is as under:- (a) Estimation of total development expenses. Provision is made for the plots sold during the year. Provision is made for the amount which is required to be incurred in future on the plots sold by it, i.e., total cost of development expenses less development expenses already incurred. (b) Actual expenses incurred: The actual expenses incurred are proportioned in between the plots sold upto last year and plots in stock. The actual expenses on the plots sold upto last year are debited to provision by reversing it and actual expenses on the plots-in-stock is taken into value of inventory i.e. value of inventory is increased. Liability towards development expenses to be incurred in future on the plots sold did not extinguish merely because the assessee has incurred small part of expenses in next few years. Liability towards development expenses to be incurred in future on the plots sold did not extinguish merely the assessee has not incurred expenses in next year or for next few years. This liability extinguishes only when the assessee is absolved from the liability to constru....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s allowed as deduction. In the business of colonizer, the development expenses cannot be incurred on plot-to-plot basis. Suppose an assessee has 100 plots in a scheme and sold only 10 plots in particular year, the roads, electric pole etc. cannot be laid down for 10 plots. The expenses have to be incurred on for whole scheme irrespective to the plots sold. The assessee is following a better system of accounting i.e. "mercantile system" as against "completed cost method" or "cash method". Books of account have not been rejected The assessee maintains proper books of account. The accounts of the assessee were audited by chartered accountant. The learned AO has examined the books of account maintained by the assessee and method of accounting followed by it. The learned AO has neither rejected the books of account nor the method of accounting applied by it. It is laid down in s. 145(1) of IT Act, 1961, that the income chargeable under the head "Profits and gains of business or profession" shall be computed in accordance with the method of accounting regularly employed by the assessee. Therefore, addition by disallowing the provision made aga....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... charges claimed by the appellant are an allowable liability or not. The appellant is admittedly involved in the business of real estate and follows mercantile system of accounting. It acquires land from agriculturists which is converted into non-' agriculture land after getting approval from JDA. This land is developed and sold after carving out plots and basic infrastructural work such as road, sewer etc. is developed. The expenditure on this development was to be incurred in future and was, therefore, treated as ascertained liability by the appellant. The liability was incurred in the year the plots were sold. 6.3 In order to determine the nature of the liability for which provision has been created it would be useful to consider the JDA Order No. D-1694 dt. 1st Dec., 2005 which throws some light on the nature of this liability. This order modified the earlier order dt. 18th June, 2003 vide which directions were issued to the developers regarding development of residential schemes. These orders provide that the developer has to carry out internal development of a scheme and the rates for various activities have been prescribed. The developmental work has to. b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....for the asst. yr. "2006-07, albeit with reference to the order passed under s. 263, the Hon'ble Tribunal allowed the appellant's appeal in ITA No. 433/Jp/2011. In his order passed under s. 263, the CIT had set aside the assessment order for the asst. yr. 2006-07 on the limited issue of proper examination of allowability of provisions for development expenses. In appeal, the Hon'ble Tribunal held that the order of the CIT was not justified and it, accordingly, cancelled the order. While allowing the appellant's appeal (ITA No. 433/Jp/2011) the Hon'ble Tribunal followed its own decision in the case of Swapan Sakar Insurance (ITA No. 117/Jp/2010) and the decision of the apex Court in the case of Bharat Earth Movers (supra). On the same issue, the Hon'ble Tribunal had also allowed appeals of Shri Ram Kripa Buildcon (ITA No. 1076/Jp/2011) and Shri Ram Chandra Agarwal (ITA No. 1078/Jp/2011). following its order in the appellant's own case (ITA No. 433/Jp/2011). Thus, it is clear that the Hon'ble Tribunal has also consistently held that the provision as claimed by the appellant was in the nature of ascertained and allowable liability. In view....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... year. It will be useful to reproduce the following paras from the judgment dt. 6th Jan., 2011:- '30. The Hon'ble apex Court in the case of Calcutta Co. Ltd. vs. CIT (1959) 37 ITR 1 (SC) had an occasion to consider the allowability of expenditure which was to be incurred for development of plot. The assessee received Rs. 29,392 towards sale price of lands but credited the entire full price of land in accounts on the basis of mercantile system of accounting. A sum of Rs. 24,809 was debited as estimated expenditure for development, though no such sum was spent. The headnotes of this decision are reproduced:- 'Held, (i) that the undertaking to carry out the developments within six months from the dates of the deeds of sale (which, in view of the fact that time was not of the essence of the contract, meant a reasonable time) was unconditional, the appellant binding itself absolutely to carry out the same. That undertaking imported a liability on the appellant which accrued on the dates of the deeds of sale, though that liability was to he discharged at a future date. It was thus an accrued liability and the estimated expenditure which would be ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... whether the expenditure is actually incurred or the liability in respect thereof has accrued even though it may have to be discharged at some future date. Thus, 'expenditure' is not necessarily confined to the money which has been actually paid out. It covers a liability which has accrued or which has been incurred although it may have to be discharged at a future date. However, a contingent liability which may have to be discharged in future cannot be considered as expenditure. 33. The Hon 'hie Gujarat High Court in the case of Welding Rods Mfg. Co. vs. CIT (1997) 137 CTR (Guj) 569: (1997) 225 ITR 525 (Guj) had an occasion to consider the allowability of provision made though amount not actually spent. The assessee borrowed welding rods and were to be returned on demand. The assessee made a provision of liability on account of the rise in prices. The Hon'ble High Court observed that in mercantile system of accounting, the businessman has to take into consideration his liabilities which might be even contingent in order to arrive at what is real business profit in that year. The assessee has to take into consideration his legal liabilities. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....994) 208 ITR 1010 (Raj) has observed at p. 1014: 'A liability which is not accurately estimated could be a contingent liability and is not an expenditure. The apex Court in Indian Molasses Co. (P) Ltd. vs. CIT (supra) referred to above, has held that the 'expenditure' is what is paid out or away and is something which has gone irretrievably. Expenditure, which is deductible for income-tax purposes, is one which is towards a liability actually existing at the time, but the putting aside of money which may become expenditure on the happening of an event is not expenditure. The income-tax law makes a distinction between an actual liability in praesenti and a liability de futur which, for the time being is only contingent. The former is deductible but not the latter. In Calcutta Co. Ltd. vs. CTT (1959) 37 ITR 1 (SC), it was held by the apex Court that if a liability has definitely been incurred in the accounting year, e.g., on unconditional accrued liability, it cannot be regarded as a contingent liability merely because it is to be discharged at a future date and the cost of discharging it is not definite but has to be estimated. Similarly, in British South Africa Co. vs. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....C) 79 held that such provision is allowable as it relates to present obligation and involves flow of resources. In the case of Bharat Earth Movers vs. CIT (2000) 162 CTR (SC) 325: (2000) 245 ITR 428 (SC), the Hon'ble apex Court held that the liability is allowable if it has arisen in the year though it may be quantified and discharged at a future date.' 2.9 Looking to the above facts, we feel that the learned CIT was not justified in setting aside the order under s. 263 of the Act. The order of the learned CIT is cancelled and the appeal of the assessee is allowed. 3. In the result, the appeal of the assessee is allowed." The similar addition was also made in the case of Shree Ram Kripa Buildcon (P) Ltd. ITA No 1076/Jp/2011 and in the case of Shri Ram Chandra Agarwal ITA No. 1078/Jp/2011. In these cases provisions for development expenses were added back by the AO in assessment proceedings. The learned CIT(A) deleted the addition. The Revenue filed appeals before the Tribunal in these cases. The Tribunal upheld the findings of learned CIT(A) following the ratio laid down in the case of present assessee in ITA No. 433/Jp/2011, ord....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ders. In most of the colonies, the JDA has not developed approach roads/sector roads. There were several reasons for not carrying development work at full swing such as problem in possession of land due to disputes with Khatedars, problem of way (Rasta) by adjoining farmers, non-construction of sector roads by JDA, Takashna problem in case of joint ownership of land, etc. The main problem which the assessee is facing that most of the lands were in joint names. Some of the original Khatedar sold the land to the assessee but some of them have not sold to the assessee. Since the Khasaras are in joint names therefore without Takasana it was not possible to carry out development work on the land, which the assessee sold. This is also a reason that the assessee invested huge amount in gold bullion to keep the money in reserve separately for the purpose of development work. However, liability towards development expenses to be incurred in future on the plots sold did not extinguish merely because the assessee has incurred small part of expenses in next few years. The AO held that the funds of provision made for development of land are being used for expansion of the business. The assessee....