TaxTMI 
TaxTMI 
2016 (10) TMI 966
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....ng the said disallowance of Rs. 43,06,801/-. 2. In the facts and circumstances of the case and in law the Id. CIT (A) has erred in confirming the disallowance of Rs. 43,752/- of depreciation on Cars out of total disallowance of Rs. 87,504/- made by Id. AO. The action of the Id. CIT(A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by quashing the said disallowance of Rs. 43,752/-. Ground of revenue's appeal:- "(i) Whether on the facts and circumstances of the case and in law, the Id. CIT(A) was justified in deleting the addition of Rs. 4,68,43,199/- made by the AO by disallowing provision of direct expenses inspite of the fact that the assessee has followed mercantile system of accounting and followed 'concept of accrual of liability." 2. At the outset, the ld counsel for the assessee have stated at the bar that they do not wish to press ground No. 2 of the appeal. Rejected as not pressed. 3. As per record, the assessee firm is engaged in the business of real estate and construction of residential, industrial and commercial properties, farm houses, etc. It has constructed residential flats in the name of "Pearl Gree....
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....ave been prepared on mere estimation, without proper justification and a reasoned base. It seems that the assessee has prepared the above mentioned details so as to suit its own requirements. 8. As for as allowability of such provision is concerned, it is pertinent to mention here that under the Income Tax Act, 1961, a deduction is generally allowed in respect of revenue expenditure incurred for the purpose of business, in the year in which such expenditure is incurred. However, estimated cost of meeting the warranty obligations is also allowable as deduction in the year in which such provision is made subject to:- (a) If the provision is based on a scientific method that is consistently followed. CIT Vs Vinitec Corporation 196 CTR 369 (Delhi HC), Voltas Ltd. Vs DCIT 64 ITD 232 (ITAT, Mumbai) ITO Vs Wanson (India) Ltd. 5 ITD 102 (ITAT, Pune) Kevin Enterprises Vs JCIT 79 ITD 196 (ITAT, Ahmedabad)]. (b) If the provision is made on basis of a reasonable estimation. CIT Vs Indian Transformers Ltd. 270 ITR 259 (Kerala HC) (c) If the an undertaking to carry out the development work is provided in the Sale Deed/Agreement. Udaipur Mineral Development Syndicate....
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....resaid contention the assessee has placed reliance over the case of Rotork Controls India Pvt. Ltd. Vs CIT (2009) 223 CTR 425 (SC). 12. The above-mentioned contention of the assessee has been duly examined. Surprisingly, the above-mentioned contention does not match to what the assessee has said earlier on this issue. As per the Chart submitted by the assessee on earlier occasion showing the Details of the provision made for the expenses to be incurred' in respect of the provision of Rs. 5,11,50,000/-, there was no provision of repair works of ganda naala. The issue of ganda naala has suddenly arisen during the later stage of assessment proceedings just to quantify the provision made by the assessee. It is pertinent to mention here that while approving the said residential project in the year 2006 the JDA vide letter dated 19.01.2006 required the assessee to construct 'Retaining Wall ' on the said Ganda Naala. Any outflow from the said naala may damage the construction work of the aforesaid project. Hence, any prudent builder will certainly take care of the safety measures of its project before investing in the project. In the present case the assessee has first constructed the ....
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....s no actual expenditure and likewise the income is reflected even where there is no actual receipt of money. Moreover, the accounting standards issued by the ICAI require that accounting policies must be governed by the principle of 'prudence '. 16. Further, under the mercantile system of accounting in order to determine the net income of an accounting year, the revenue and other incomes are matched with the cost of resources consumed (expenses). Under the mercantile system of accounting, the matching is required to be done on accrual basis. Under the matching concept, revenue and income earned during an accounting period, irrespective of actual cash in-flow is required to be compared with expenses incurred during the same period, irrespective of actual outflow of cash. The Matching concept is quite relevant to compute taxable income particularly in cases involving deferred revenue expenditure. In the instant case, the assessee is following mercantile system of accounting. The assessee has taken into consideration the amount of expected expenditure; however, the assessee has ignored the amount of relevant revenue. As such, the assessee has failed to fulfill the requirements of m....
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....sales) of the year under consideration. The assessee was well aware of the fact that the sale consideration of 108 flats sold during the year under consideration is subject to certain liability. Even then the assessee booked the whole revenue in the year under consideration and made provisions for expected expenditure against the above mentioned revenue despite of the fact that part of said expected expenditure is chargeable against the revenue likely to be arise in future. The above act of the assessee is not within the abidance of Accounting Standard (AS 9) issued by the ICAI as well as the 'Matching Concept', as discussed above. It is worthwhile to mention here that for all practical purposes and for the recognition of revenue; all the conditions specified in Para 10 & Para 11 of AS-9 have to be fulfilled [Prestige Estate Projects Ltd. Vs DCIT (ITAT, Bang.) 129 ITD 342]. 20. Further, there are two main accounting methods that the assessees engaged in the field of construction activities use to record revenue and expenses. The first is 'Completed Contract Method' and the other is 'Percentage of completion Method'. In the Completed Contract Method, only completed projects are r....
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....rused the facts of the case, the assessment order and the submissions of the appellant. The appellant is a real estate developer. It follows the mercantile system of accounting. During the year, the appellant has sold 108 flats whereas 130 flats and 8 studio apartments remain in closing stock at the end of the year. Out of a total built up area of 4,37,761 sq. ft., the assessee has sold 2,03,506 sq. ft. during the year. In this year, the assessee has booked sales pertaining to the 108 flats sold during the year. The assessee follows the project completion method of accounting. The appellant has made a provision for direct expenses amounting to Rs. 5,11,50,000/- on account of pending work relating to common facilities like lift, club house, electric substation, borewell, internal roads, repairs to the ganda nalla etc. This provision has been made both with respect to the flats which have been sold as well as those residential units which have not been sold and appear in the closing stock. 2.3.2 The Assessing Officer has disallowed this provision on the ground that it is based on mere estimate, without proper justification or a reasonable basis. He has stated that there is no cond....
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....ll the circumstances of the case. "(Calcutta Co. Ltd. vs. CIT (SC) 37 ITR 1). 2.4.2 It has been held in the case Rotork Controls India (P) Ltd. vs. CIT (SC) 180 Taxman 422 that - "Whether for a provision to qualify for recognition, there must be a present obligation arising from past events, settlement of which is expected to result in an outflow of resources and in respect of which a reliable estimate of amount of obligation is possible - Held, yes A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when: fa) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized. [Para 10]. Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources from the enterprise embodying economic benefits. [Para 11]". 2.4.3 In the instant case, the appellant has an obligation toward....
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....e there is no corresponding revenue in this year. It has been stated by the Assessing Officer that the corresponding revenue will arise only in subsequent years. The Assessing Officer has not understood the method of accounting followed by the assessee. The assessee has made a provision for pending work for both the flats sold (of Rs. 2,37,77,024/-) as well as the unsold flats (of Rs. 2,73,72,976/-). After including this provision (for both the flats sold as well as the unsold flats), the assessee has computed value of closing stock. Therefore, the provision for unsold flats has been included in the valuation of closing stock. The provision on unsold flats has therefore, a matching entry in the valuation of closing stock. In other words if the provision on unsold flats is to be disallowed, then the value of closing stock will also correspondingly decrease. Therefore, this provision on unsold flats of Rs. 2,73,72,976/- is revenue neutral and cannot be added to the total income by disallowing it. This contention of the Assessing Officer, is therefore, without any basis. 2.4.3 It has been stated by the Assessing Officer, in para 10 of the order u/s 143(3) that out of the provision ....
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....bility having not been discharged till the end of the year, it remained to be discharged later on, and it was, therefore, that it had to be estimated, so as to enable it to be debited before actual disbursement thereof, as per the mercantile system of accounting, which was the method of accounting of the assessee. Rather, as per actual facts on record, the project undertaken by the assessee was development/repair of Ganda Nala. Clearance from JDA was awaited by the assessee for discharge of the obligation. The JDA was undertaking examination of environmental and other issues on account of development in the course of the Nala. The Assessing Officer refused to believe this contention of the assessee. The assessee had, however, submitted the details with regard to the development of Ganda Nala. A letter received from JDA was also filed. The details and the letter, however, were not taken into consideration by the Assessing Officer. 12. The Assessing Officer observed that the provision had been made partially on verbal commitments and such provision was not acceptable. However, the Assessing Officer did not take into consideration the contractual obligation of the assessee, as cast....
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.... Ltd. Vs. CIT (1997) 227 ITR 172 (SC)', if the accounting practice cannot be justified, it has no merit in the argument based thereon. Per contra, herein, the accountancy practice of allowability of provision made is in issue, rendering 'Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs. CIT', to be to nowhere detrimental to the case of the assessee and the Assessing Officer erred in misapplying the same. 14. The case of 'Sutlej Cotton Mills Ltd. Vs. CIT', 116 ITR 1 (SC) was also taken by the Assessing Officer to go against the assessee. That decision, however, has no bearing on the question as to whether or not, under the mercantile system of accounting, provision of expenses, calls for being allowed. 15. The Assessing Officer further observed that the decision in the case of 'CIT Vs U.P. State Industrial Development Corporation', 225 ITR 703 (SC), do not aid the assessee. However, where the assessee firm has regularly been following the project completion method for recognizing its revenue, as to how it is so, has not been shown by the Assessing Officer. The project completion method is, undoubtedly, a well recognize method of accounting, based on principles of commercial ac....
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....s excessive to the extent of Rs. 32,06,801/-, which has not been spent even till 31/9/2014, i.e., four years from the end of the year in which the provision was made. 22. The contention of the assessee is that if the provision is based on a fair estimate of the expenditure to be incurred, which fact has been accepted by the ld. CIT(A) himself, the provision deserves to be allowed in full. It has been contended that if any amount remains unspent, it will be taxed U/s 41(1) of the Act in the subsequent year, as and when the liability to incur the expenditure ceases to exist. 23. On the other hand, the ld CIT DR has contended that the ld. CIT(A) ought to have sustained the disallowance in full. 24. Here, it is seen that in spite of the assessee following the mercantile system of accounting, the ld. CIT(A) held the provision made by the assessee to be justified. The ld. CIT(A) has held that since till 31/3/2014, there was incurrence of expenditure to the tune of Rs. 4,68,43,199/- and that the sum of Rs. 43,06,801/- remained unspent even four years from the end of the year in which the provision was made. It was on this basis, that the provision made was taken to be excessive t....