TaxTMI 
TaxTMI 
2019 (3) TMI 493
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....ed by the assessee. In the profit and loss account filed along with the said return, a sum of Rs. 2,25,01,129/- was debited by the assessee on account of future development expenses. During the course of assessment proceedings, the assessee was called upon by the AO to explain as to why the future development expenses should not be disallowed as the assessee was following the mercantile system of accounting. In reply, it was submitted by the assessee that the provisions for future development expenses was made in accordance with the AS-29 and similar provisions were also contained in ICDS-X applicable w.e.f. 01.04.2015 u/s 145 of the Act. It was also submitted on behalf of the assessee that the relevant projects were completed in the year under consideration and nonaccounting of such future development expenses would lead to incorrect amount of completion of the phase. It was further submitted that the cost provided as future development was not unascertained liabilities. This contention of the assessee was not found acceptable by the AO. According to him, when the mercantile system of accounting was being followed by the assessee, only crystallized liabilities were allowable and u....
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....anded over during the financial year. It was further submitted that the expenses are not unascertained and ontingent in nature. The cost of such unfinished work is ascertained on the basis of purchase orders placed on vendors and orders placed on service suppliers. The computation of such expenses is supported by sanction plan, project engineers' drawings and requirements of materials & labour etc. Accordingly it was stated that the provision made for future expenses is in accordance with the AS-29 and similar provisions contained in ICDS-X under sec 145 of the Act. It was further submitted that the assessee has consistently been following the same method of accounting for a number of years. The A/R of the appellant placed reliance on the decision in the case of Consulting Engineering Services (India) Limited, 250 ITR 849 (Delhi) for the proposition that "Where a system of accounting (which includes allocation of indirect expenses) is consistently adopted and followed, the same cannot be altered in subsequent years". On going through the submissions of the assessee it has been stated that this method of accounting regularly followed by the assessee has always been accep....
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.... 65,55,973 From the above table it can be seen that only an amount of Rs. 1,59,45,156/- has been debited to the P/L account. The expenses with respect to Village Centre was never charged to the P/L Account as it has been reflected as an investment. Therefore the future development expenses capitalized during the year is Rs. 65,55,973/- which is proportionate to the inventory of unsold flats. Only to the extent the flats have been sold, the revenue realized, there being a contractual liability the proportionate expenses have been charged to the profit and loss account. This has been consistently done on the accounting principle AS- 29 which is now recognized in the ICDS provisions. On these facts it is to be seen whether the expenses are allowable or not. In this regard the assessee has placed reliance on the decision in the case of Mayura Infrastructure Development Company - ITA No.873 & 874/JP/2016 A.Y. 2011-12 & 2013-14, order dated: 25/04/2017, where the issue before the Hon'ble Tribunal was regarding future development expenses. The, Hon'ble Tribunal has considered the issue and has held as under: "Held, (i) that the undertaking to carry out the developm....
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....ure, for which the provision was made, was having direct nexus with the income, as declared by the assessee. Therefore, such provision made by the assessee was allowable during the year under consideration. In the impugned case also it is seen that there is direct nexus with the income booked in the P/L account and the expenditure allocated. Further, the assessee has placed reliance on the decision in the case of Ranka Colonizers Pvt. Ltd. ITA No.787/JP/2016, order dated: 24/03/2017, where the issue before the Hon'ble Tribunal was regarding provision for future development expenses. The Hon'ble Tribunal has considered the issue and has held as under: "It is further submitted that the assessee has shown fulfilment of three elements (i) Reasonableness of the provision (ii) Honesty of Provisioning of expenses (iii) A fair basis/estimation of expenses for making provisions. It is also a fact that the AO has not brought any material to show that the provision made by the assessee is excessive. Further, AO has examined the books of account but books of account were not rejected by him. It is submitted that the assessee has filed complete details of actual expenses ....
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....9/- 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 to the extent of Rs. 29/- ITA 149 & 205/JP/201 5_ M/s Spytech Buildcon Vs ACIT 4 3,06,801 /-. The question is as to whether this action of the ld. CIT(A) is justified. 25. It remains undisputed that the provision was made by the assessee for certain expected expenditure. As such, the provision was made due to the arising of the possibility of the expenditure in future. This was what had prompted the estimation. Now, if the provision does not stand exhausted even four years from the end of the year in which it was made, this does not mean that the provision to that extent was ill conceived. The details of the expenditure intended were duly made available. That such incurrence of expenditure did not come about, cannot put to naught the provision which was made bonafide. The legal position remains that the amount unutilized would be available for being offered to tax in the next assessment year. The basis of the provision made has not been observed by the ld. CIT(A) to be irrational....
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....as rightly held by the AO. 5. The learned counsel for the assessee, on the other hand, strongly relied on the impugned order of the Ld. CIT(A) giving relief to the assessee and submitted that the well discussed and well reasoned order passed by the Ld. CIT(A) while giving relief to the assessee on the issue under consideration deserves to be upheld. He also submitted that similar deduction claimed by the assessee on accounting of provision for future development expenses was allowed by the AO himself in the assessment completed u/s 143(3) for A.Y. 2009-10. He contended that the revenue of its real estate development business was recognised by the assessee as per the project completion method and provision was made for the expenses to be incurred in respect of the projects which were already completed in the year under consideration and revenue of the same was duly recognised. He also contended that such expenses to the extent they were in respect of flat sold were debited to the profit and loss account whereas the expenses to the extent they were in respect of unsold flats were added to the cost of unsold flats shown in the closing stock. He contended that since these expenses w....
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....er words, expenses should be recorded as the corresponding revenues are recorded and the matching principle recognises the expense as the revenue recognition principle recognises income. It is important to match expenses with revenue because net income i.e. the net amount earned in a period is calculated by subtracting expenses from revenue. If expenses are not properly recorded in the correct period, the net income from a particular period may be either understated or overstated and so are the related balance sheet balances. 8. It appears that the AO could not appreciate the claim of the assessee in the light of method of accounting followed by the assessee perspective and disallowed the claim of the assessee on the ground that the provision made by the assessee represented unascertained liability which was not allowable as deduction in the case of the assessee following mercantile system of accounting. He however ignored the fact that the provision was made by the assessee for the expenses in relation to the projects completed of which the revenue was recognised and since such expenses were duly identified by the assessee in respect of each and every projects and details of th....