AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2019 (11) TMI 1179
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....t of Rs.4,67,81,771/- disclosed by the assessee and the assessment order u/s 143(3) of the Act was passed by AO on 28.12.2016. Thereafter, the Pr. CIT issued show cause notice (hereinafter 'SCN') u/s 263 of the Act dated 08.02.2019 proposing to interfere with the assessment order passed by the AO wherein he had found fault with the assessment order passed by the AO dated 28.12.2016 as under: "On perusal of the Assessment record, it is observed that the assessee company was engaged in the business of "Real Estate Development". During the relevant FY the assessee was following completion method and booked the revenue for all the flats sold out. The assessee used to sale bare flats. It is further noticed that the assessee company had made a provision of Rs. 5,75,01,370/- for expenses to be incurred to complete the flat in the accounts and included the same in cost of construction and development expenses. On going through the record, it is noticed that the assessee had made the said provision on estimate basis. No documents as such was collected from the buying parties to examine whether the assessee have to incur such expenses on sold out flats. The aforesaid liability of the ass....
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....nd therefore, the said liability of the assessee is an unascertained liability. Therefore, according to the Ld. Pr. CIT as per the provision of Section 115JB of the Act any amount set aside for meeting the unascertained liability needs to have been added back for the purpose of calculating book profit u/s 115JB of the Act, which the AO did not do by disallowing the same which has not been done. Therefore he would like to interfere with the order passed by the AO. When the Ld. Pr. CIT brought to the notice of assessee by issuing SCN (supra), the defaults from the part of AO, the Ld. AR for assessee replied that this precise question as to whether the provision debited in the profit & loss account is an ascertained liability or not has been examined in detail by the AO during the assessment proceedings and for that purpose he took our attention to page 63 of Paper Book wherein we note a query as addressed by the AO dated 06.12.2016 to the assessee therein question no. 2 is reproduced as under: "2. In the aforesaid letter you have claimed that you are developing only one project which started in year 2008 and you have been following completion method for recognizing revenue on sale ....
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....ilding and it was brought to our notice that this fact was also brought to the notice of the AO. It was also brought to our notice that based on the cost estimate prepared by the site engineer the assessee made "provision for expenses" in its books for this relevant assessment year and deduction was claimed in a scientific manner and method. It was also further pointed out that the provision which the company created was in fact lower than the expenses which the company ultimately incurred in the subsequent assessment year for completion of the Flats. For buttressing this fact, the Ld. AR submitted that as against the provision of Rs.5.75 crores created in this assessment year, the assessee actually incurred cost of Rs.3,69,93,931/- in the next financial year (2014-15) and Rs.2,52,29,052/- in the subsequent financial year thereafter (2015-16) totaling Rs.6,22,22,983/-. Thus it was contended by the Ld. AR that this cost was incurred towards fulfilling company's contractual obligations incurred under the agreements with the flat purchasers and according to him the assessee company made the provisions for expenses on fair, equitable and scientific basis and it can be seen that the act....
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....l to be incurred in respect of the said projects as identified and provided by the assessee were claimed as deduction as per the matching principle and the same in our opinion was rightly claimed by the assessee as per the method of accounting consistently followed by it. 7. The matching principle is one of the most fundamental principles in accounting. It is an integral part of the accrual accounting system and requires that a company must record expenses in the period in which the related revenues are earned. The matching principle states that expenses should be recognised and recorded when those expenses can be matched with the revenues those expenses helped to generate. In other 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 b....
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....facts and details submitted by the assessee on the issue whether the provision of Rs.5.42 crores is ascertained liability or not and the AO has accepted the claim of the assessee that the provision is ascertained liability allowed deduction while computing the income as per normal provision and did not disallow u/s 115JB of the Act (which the Ld. Pr. CIT found fault with in his SCN) then changed tact and then in his conclusion was of the opinion that the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the Revenue, in accordance with the Explanation 2(c) below Section 263 of the Act which reads as under: "the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119" 7. According to the Ld. AR, the explanation 2(c) refers to orders, directions, instructions of the CBDT passed u/s 119 of the Act if that is so according to the Ld. AR the Ld. Pr. CIT should have pointed out which order/instruction/direction of the CBDT passed u/s 119 of the Act has not been followed by the AO which he has not spelled out in his impugned order. Therefore, according to Ld. AR, the issue which ha....
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....owing circumstances, the order of the AO can be held to be erroneous i.e. (i) if the Assessing Officer's order was passed on assumption of incorrect facts; or assumption of incorrect law; (ii) Assessing Officer's order is in violation of the principles of natural justice; (iii) if the AO's order is passed by the without application of mind; or (iv) if the AO has not investigated the issue before him. In the circumstances enumerated above only the order passed by the Assessing Officer can be termed as erroneous for the purpose of S.263 of the Act. Coming next to the second limb, the AO's erroneous order can be revised by the Ld. CIT only when it is shown that the said order is prejudicial to the interest of Revenue. When this aspect is examined one has to understand what is prejudicial to the interest of the revenue. The Hon'ble Supreme Court in the case of Malabar Industries (supra) held that this phrase i.e. "prejudicial to the interest of the revenue'' has to be read in conjunction with an "erroneous" order passed by the Assessing Officer. The Hon'ble Supreme Court, held that for invoking powers conferred by S.263; the CIT should not only show that the....
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....interfere with the assessment order was that since the assessee is engaged in the business of "Real Estate Development" and is following the completion method has booked the revenue for all the flats sold (shell of the flats) however has made a provision of Rs.5.75 crores for expenses to be incurred to complete the flat and included the same in cost of constructions and development expenses. According to the Pr. CIT this provision of Rs.5.75 crores is based on estimation and no documents were collected from the buying parties to examine whether the assessee had to incur such expenses on sold out flats and therefore this liability is an unascertained liability, which should have been disallowed also while computing the book profit u/s 115JB of the Act. However, after going through the reply of the assessee that the issue whether the provision of Rs.5.75 crores which the assessee claimed is an ascertained liability was in fact raised by the AO during the assessment proceedings which had been duly replied by the assessee to AO wherein it was brought to the notice of AO the architects certificate, Site Engineer/architect's estimation, and that the actual expenditure was more than the a....
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....ng the assessment, or cancelling the assessment and directing a fresh assessment. [Explanation 1.]-For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,- (a) an order passed [on or before or after the 1st day of June, 1988] by the Assessing Officer shall include- (i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner] or the Income-tax Officer on the basis of the directions issued by the [Joint] Commissioner under section 144A; (ii) an order made by the [Joint] Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the [Principal Chief Commissioner or] Chief Commissioner or [Principal Director General or] Director General or [Principal Commissioner or] Commissioner authorised by the Board in this behalf under section 120; (b) "record" [shall include and shall be deemed always to have included] all records relating to any proceeding under this Act available at the time of examination by the [Principal Commissioner or] Commissioner; (c) where any order referred to in t....
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....hed beyond the purpose for which they were enacted and should not extend that legitimate field (Raymond Vs. State of Chattisgarh AIR 20-07 SC 2854) and it should be kept in mind that deeming provision should be in respect of facts, from which legal consequences will follow. However, a legal consequence cannot be deemed[DCM Vs. State of Rajasthan (1996) 2 SCC 449. AIR 1996 SC 2930 (3 judges of Hon'ble Supreme Court) and same view reiterated in State of Karnataka Vs. State of Tamil Nadu (2017) 3 SCC 362. So when we look at Explanation-2, we note that deeming fiction of law that the order of the Assessing Officer is deemed to be erroneous insofar as it is prejudicial to the interest of the Revenue only if in the opinion of the ld. CIT, which necessarily has to be a finding of fact in the following four events. Then legal consequence follows, if not it does not. So, the CIT has to make a finding of fact in the following: (a) the assessment order passed by the Assessing Officer is without inquiry or verification, (b) the Assessing Officer allowed a claim without enquiry, (c) the Assessing Officer passed the order not in accordance with any order, directions or instructions issue b....
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....uties in a fair, just and reasonable, manner and the principle of due process of law was recognized by the Hon'ble Supreme Court. Therefore the opinion of the Ld. CIT has to be in consonance with that of the well settled judicial principles and cannot be arbitrarily made discarding the judicial precedent on the subject. The opinion of the Ld. Pr. CIT has to be reasonable and that of a prudent person instructed in law. Moreover, it has to be kept in mind that an Explanation to substantive section should be read as to harmonize with and clear up any ambiguity in the main section and should not be so construed as to widen the ambit of the section as held by the Hon'ble Supreme Court in Bihta Cooperative Development Cane Marketing Union Ltd. Vs. Bank of Bihar, AIR 1967 SC 389 and M/s. Oblum Electrical Industries Pvt. Ltd., Hyderabad vs. Collector of Customs, Bombay - AIR 1997 SC 3467 at page 3471 and also see Justice G. P. Singh, Principal of Statutory Interpretation 234 Lexus 2016. It has to be kept in mind that while the Commissioner is exercising his revisional jurisdiction over the assessment order, he has to exercise his power in an objective manner and not arbitrarily or subject....
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....of PB). The assessee had furnished detailed reply by letter dated 21.12.2016 which is found placed at page 65-88 (relevant reply at page 79-88) wherein the assessee replied as under: "In the circumstances, even though the entire sale consideration due from the flat purchasers was not fully received in terms of the Agreement for Sale yet the Company in its books recognized the full revenue due from the flat purchasers in accordance with terms contained and evidenced in the Agreements for Sale. Since the Company had recognized the full revenue receivable in the form of sale proceeds of the entire saleable area in F.Y. 2013-14, in arriving at taxable income of the Company; it was also necessary to make appropriate provision for expenses which the Company had not incurred till 31.03.2014, but the Company had obligation to incur such expenses in discharging its contractual obligations under the Agreements executed with the flat purchasers. As submitted in the foregoing the construction of the building was substantially completed in F.Y.2013-14 when the building had reached a stage where the residential units were certified by the project architect to be in habitable condition though....
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....oks for F.Y. 2013-14 it had recognized the gross revenue. From the company's Balance-Sheet you will note that the Sundry Debtors in respect of this project was Rs. 18.67 crores approx whereas the gross revenue recognized in respect of the Elgin Road project was Rs. 65.94 crores. You will therefore appreciate that just as the Company did not actually pay the construction cost to the tune of Rs. 5.75 crores; in the same manner the flat purchasers had also not fully paid for the sale consideration even though the company had recognized the gross revenue from sale of constructed spaces in its accounts for the year ended 31.03.2014. In the month of March 2014 the Company was granted a Certificate by M/s. M/s. Saha & Associates represented by its proprietor Mr. Bichitresh Saha who were the present Architect supervising the Elgin Road Project. The Certificate was given after they carried out physical inspection of the project Site. In the said Certificate the Architect had declared that the construction of the building was substantially complete and the building was fit for human habitation. The Architect had also certified that since the construction of the building was substantially c....
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....ed towards fulfilling Company's contractual obligations incurred under the Agreements with the Flat purchasers. You will thus appreciate that not only the Company made the provision for expenses on fair, equitable & scientific basis, but the actual expenditure which the Company actually incurred in the subsequent years towards fulfilling its contractual obligation was higher than the provision created on conservative basis. We therefore submit that no adverse inference in this regard is called for. We further submit that merely because the company did not actually defray the expenses of Rs. 5.75 crores in F.Y. 2013-14; such fact by itself cannot negate the fact that the liability for such expenditure was not incurred by the Company in connection with earning of the income which the Company derived from the Elgin Road Project. We submit that since the gross revenue from the said Elgin Road Project was credited to the Company's Profit 8s Loss A/c for the year ended 31.03.2014 in arriving at true and correct income in respect of such project it was necessary that the deduction was granted to all such expenses, outgoings& costs for which the Company had incurred obligation under the ....
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.... of disallowing the same on the score of Sec 37 even if it was shown as accrued liability payable in future and it has not been paid. An accrued liability and the estimated expenditure incurred in discharging the same is deductible from the profits & gains and the amount to be expended could be debited in the accounts maintained under Mercantile System of Accounting before it was actually disbursed. The difficulty in the estimation thereof did not convert the accrued liability into contingent one since it is always open to tax authority to arrive at a proper estimate having regard to all the circumstances of the case. Under the Mercantile System, it is an accepted commercial practice and trading principle that the estimated amount which would have been expended in arrying on business and incidental to its business, would be a allowable deduction in arriving at profit & gain of the business. The liability in present though to be discharged in future is not a contingent one. If it is shown to be a business liability and if it arises in the accounting year, the liability is eligible for deduction. If the provision is made for meeting the liability incurred then it would be allowed as ....