TaxTMI 
TaxTMI 
2012 (1) TMI 279
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....ility.'' 2.2 The facts of the case are that the assessee is engaged in the business of real estate developer. During the year under reference, the assessee has shown sale of Rs. 2,36,62,503/- and declared loss of Rs. 22,58,693/-. The AO noticed that the assessee debited the expenses on account of development to the tune of Rs. 62,34,041/- in the profit and loss account the AO noticed that the assessee has not actually incurred such expenses but has simply made the provisions and the same was shown as outstanding current liability in the balance sheet. The provisions has been made at Rs. 175/- per. Sq. Yd in respect of the sale carried out during the year. The AO further noticed that the assessee has not incurred any expenses during next assessment year i.e. 2009-10. From such provisions, the assessee has made payment mainly to JDA. According to the AO, it was not ascertainable as to the purpose for which payments have been made to JDA. The AO issued show cause notice vide note sheet entry dated 3rd Dec. 2010 and the same is reproduced as under:- ''The assessee company was asked to justify the expenses debited on account of development amounting to Rs. 62,34,040/- ....
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....lare the income as per sweet will of the assessee. The provisions can be allowed in case the following three conditions are satisfied. 1. Reasonableness of the provisions. 2. Honesty of the provisioning of expenses 3. A fair basis / estimation of expenses for making provisions 2.5 According to the AO, the assessee has failed to fulfill either of the above conditions. The AO has relied on the following decisions in disallowing the provisions for expenses. 1 Rajasthan State Mines and Mineral Ltd. Vs. CIT 208 ITR 1010 (Raj.) 2. TN Small Industries Development Corp. Vs. CIT, 242 ITR 122 (Mad.) 2.6 Accordingly, the AO disallowed a sum of Rs. 62,34,041/-. 2.7 Before the ld. CIT(A), the assessee argued that development expenditure was direct cost attributable to the sales. Therefore, the true profit of the business could be computed by deducting all the direct or indirect expenses from the sales. Since construction of road, laying pipelines, electric lines etc and other development work could not be completed in a particular year, the estimation was required to be made against the expenses to be incurred towards the development cost. T....
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....es. Since the development expenses cannot be incurred on plot to plot basis and but are incurred for whole scheme and sometimes for all the schemes. Therefore, the development expenses have to be incurred against the plot sold in a particular year and it has to be estimated and to that extent the sales are set apart under the nomenclature "provision for development expenses". As per the norms of JDA for Private Township, the developer has to incur several expenses on the development of the scheme such as expenses on internal roads, electrification, water supply and development of public parks and facilities etc. The cost of these expenses is included in the sale price of the plot and the charges against the development expenses (which to be incurred by the developer) is not being charged separately 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. Thus, the sale of the assessee is subject to ascertained liability of development expenses. This liability has arisen in the year of sale of the plot. The said liability ought to have been deducted from the amount of income accrued in order to ....
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.... the expenses by Government Agency. Further, the assessee was bound to carry out these works as per JDA regulations. However, the Private Colonizers had liberty to carry out development work through JDA as against to carry out development work themselves. It was argued that there was direct decision of Hon'ble Apex Court on this issue. In the case of Calcutta Co Ltd Vs Commissioner of Income Tax (37 ITR 1), 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 the same time, it also debited an estimated sum of Rs. 24,809 on account of the expenditure for development, it had undertaken to carry out, even though no part of that amount was actually spent. The department had disallowed such expenditure. Ultimately the matter reached the Supreme Court and it was held that assessee was justified in computing the profit in the manner it did.....
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....ts (total area 6962.04 sq yard). The total area sold was 2488.92 sq yard. The assessee was not absolved from the liability to construct the roads, laying of electric poles, water lines etc merely because the assessee had not constructed the same in AY 2009-2010 or AY 2010-2011. The assessee had to incur these expenses as per JDA regularization. The Hanuman Vatika A-3 scheme was situated on the proposed sector road of 200 ft wide. The construction of sector road was to be made by JDA. The JDA did not start work for sector road, therefore, the connectivity of this scheme by road was not there. The approach road was not given by the other agriculturists from their farms and due to this, the transportation of material not possible. Due to this practical difficulty of site, the development work could not be carried out. The assessee was not absolved from the liability to construct the roads, laying of electric poles, water lines etc. merely because the assessee had constructed the same in assessment year 2009-10 or 2010-2011.The assessee had to incur these expenses otherwise the JDA would not issue patta against the plots sold by the assessee. Any provision made for the obligation of ex....
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....rs. They are in the business from assessment year 1983-84 onwards. Valve actuators are sophisticated goods. Over the years appellant has been manufacturing valve actuators in large numbers. The statistical data indicates that every year some of these manufactured actuators are found to be defective. The statistical data over the years also indicates that being sophisticated item no customer is prepared to buy valve actuator without a warranty. Therefore, warranty became integral part of the sale price of the valve actuator(s). In other words, warranty stood attached to the sale price of the product. These aspects are important. As stated above, obligations arising from past events have to be recognized as provisions. These past events are known as obligating events. In the present case, therefore, warranty provision needs to be recognized because the appellant is an enterprise having a present obligation as a result of past events resulting in an outflow of resources. Lastly, a reliable estimate can be made of the amount of the obligation. In short, all three conditions for recognition of a provision are satisfied in this case. If warranty provisions are based on experience and his....
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....ntile system of accounting. The accounting standards issued by the Institute of Chartered Accountant of India also mentions that such expenses are to be debited on the basis of accrual of such liability. 5. Under the matching concept, the cost is to be claimed in the year in which revenue is received. The cost includes the future liability relating to the item included in the revenue receipts. 2.9 The ld. CIT(A) has referred to the decision of Hon'ble Apex Court in the case of Bharat Earthmovers Vs. CIT, 245 ITR 428 in which it has been held that deduction should be allowed although the liability may have to be quantified and discharged at future date. During the year, the a has two schemes namely Hanuman Vatika A-2 and Hanuman Vatika A-3. In Hanuman Vatika A-2 scheme, the assessee could not make the approach road. The land was surrounded by the land of other agriculturists. The construction of road etc. could not be completed before final approval of scheme plan by JDA. In respect of Hanuman Vatika A-3, the assessee stated that the construction of sector road was to be made by JDA and JDA did not start work. Therefore, the approach road could not be made, The ld. C....
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....st. The provision for development expenses is not setting apart the profits but it is an estimation of expenses to be incurred on the project in future. The sale proceed received by the assessee is subject to the liability of development work to be done by the assessee. The liability to incur the development expenses has arisen in the year of the sale of the plot. The said liability ought to have been deducted from the amount of income accrued in order to calculate true profit. Hon'ble Rajasthan High Court in the case of CIT Vs Govind Grah Nirman Sahakari Samiti Ltd 258 ITR 208 (Raj) has held that the expenditure in developing the land, laying down pipe line dividing the land into small plots were expenses required to be incurred for the purpose of carrying on the business of selling the land and these expenses are allowable expenses. In the case of Badridas Daga Vs CIT 34 ITR 10 (SC), Hon'ble Apex Court has observed that while section 10(1) of the 1922 Act [analogous to section 28(i) of the Act] imposed a charge on the profit or gains of trade. Whether a claim for deduction admissible or not will depend on whether having regard to the accepted commercial practice and trading princ....
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....d from the amount of income accrued in order to arrive the true and fair profits of a business or profession, therefore the estimation of future cost of development nomenclatured in books of account as "Provision against development expenses" are allowable expenses u/s 37 of Income Tax Act read with section 28 of Income Tax Act. 2.3.5 Consistent Accounting Policy It is prevailing accounting policy of assessee and other assessees of similar trade to make provision of development expenses to be incurred on area sold in order to arrive the true and correct profit and the assessee is consistently following this accounting practice. 2.3.6. Basis of estimation for provision made for development expenses. The development work has to be carried out as per the specification of the JDA. We are enclosing herewith the copy of the order of JDA in respect of the development work and estimate amount of expenses on each activity of development wherein the expenses on the each activity were estimated by JDA.. The total cost estimated by JDA is 250 per SQ Mt against which the made provision for expenses @ Rs. 175/- per SQ Yd. The break up of estimation of the assessee was as under:- R....
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....see. It is true that the assessee could not incur the development expenses in the AY 2009-2010. The assessee had two schemes one Hanuman Vatika A-2 and second is Hanuman Vatika A-3. There were genuine difficulties in carrying out the development expenses; explained as under:- a) Hanuman Vatika A-2 (i) This scheme is scattered in three parts and also surrounded by the lands of other agriculturists. The approach road was not there to transport the material from main road to the site of the scheme. The other agriculturists were not allowing transportation of material by trucks from their lands. (ii) The JDA passed the scheme for part of the land. The 90B proceedings were completed only in respect of Khasara No 217, 220 whereas the assessee's scheme consists Khasara No 217, 220, 345 346 235 and 236. Therefore, on final approval of scheme, the scheme plan was subject to change by JDA, therefore, the construction of road etc cannot be completed before final approval of scheme by JDA in respect of other unapproved Khasaras. (iii) There was court case by some party over this land. The coparcener and other parties filed court case against the assessee ....
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....ng. 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 note 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 be discharged at a future date. It was thus an accrued liability and the estimated expenditure which would be incurred in discharging the same could be deducted from the profits and gains of the business, and the amount to be expended could be debited in accounts maintained in the mercantile system of accounting before it was actually disbursed. The difficulty in the estimation thereof did not convert the accrued liability into a conditional one, because it was always open to the Income-tax authorities concerned to arrive at a proper estimate thereof having regard to all the circumstances of ....
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....Hon'ble Gujarat High Court in the case of welding Rods Manufacturing Co. V/s CIT 225 ITR 525 had on 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. 34. The Hon'ble Raj. High Court in the case of Udaipur Mineral Development Syndicate PVt. Ltd. V/s DCIT 261 ITR 706 had on occasion to consider the accrual of liability. In this case the assessee as per agreement was required to restore the surface land in the original condition and hence the liability to refill pits accrued as soon as pits were dug. In the instant case, the assessee as per agreement was to provide insurance policy to members having attained S-I category and hence liability accruals as and when such members got category of S-I. ....
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....the time being, is only contingent. The former is deductible but not the latter. In Calcutta Co. Ltd. V/s CIT (1959) 37 ITR, I, it was held by the apex court that if a liability has definitely been incurred in the accounting year, eg., 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. V/s CIT (1946) 14 ITR 17 (Suppl)(PC) it has been held by the Privy Council that where a liability clearly exists then quantification of the sum should not come in the way of the assessee in debiting the sum and claiming the deduction thereof. In order to estimate the true profits a liability has to be determined. It was observed by the Supreme Court in the case of CIT V/s Gemini Cashew Sales Corporation (1967) 65 ITR 643 (headnote) : "Broadly stated, the present value on commercial valuation of money to become due in future, under a definite obligation, will be a permissible outgoing or deduction in computing the taxable profits of a trader, even if in certain conditions the obl....