TaxTMI 
TaxTMI 
2024 (6) TMI 1539
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....the Income Tax Act, 1961 (hereinafter referred to as „the Act‟) were issued to the assessee, in response to which the assessee filed its submissions from time to time. During the course of assessment proceedings, the Assessing Officer observed from the Profit and Loss Account that the assessee has debited Rs. 4 crores on account of provision for construction expenses. On being questioned by the Assessing Officer to justify the same, it was submitted that the amount of Rs. 4 crores has been arrived at by making the fair estimation of amount required to be incurred for the purpose of completion of entire remaining work of the project. However, the Assessing Officer was not satisfied with the arguments advanced by the assessee and made addition of Rs. 4 crores by recording as under: "5.3. When the mercantile system of accounting being followed by the assessee, only crystallized liabilities are allowable and unascertained liabilities cannot be allowed. The future development expenses were claimed by the assessee on estimated basis and such estimated expenditure which had not been incurred cannot lead to crystallization of liability in the year under consideration. ....
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.... Act being the difference in the agreement cost and the stamp valuation Rs. 28,601/- being wrong claim of depreciation and denial of deduction u/s 80IB(10) of the Act to the extent of Rs. 1,25,64,630/-. The Assessing Officer, accordingly, determined the total income of the assessee at Rs. 11,09,37,440/-. 5. In appeal, the Ld. CIT(A) / NFAC partly allowed the appeal filed by the assessee wherein he sustained the addition of Rs. 4 crores made by the Assessing Officer on account of provision made for construction expenses, restored the issue to the file of Assessing Officer in respect of deemed rent, deleted the addition of Rs. 1,69,414/- made by the Assessing Officer u/s 43CA, sustained the addition on account of disallowance of depreciation and partly allowed the claim of deduction u/s 80IB(10) of the Act. 6. Aggrieved with such order of CIT(A) / NFAC, the assessee is in appeal before the Tribunal by raising the following grounds: 1. On facts and circumstances prevailing in the case and as per the provisions of law and scheme of the Act it be held that, the disallowance of Rs. 4,00,00,000/- made by the Learned Assessing Officer ("Ld.AO") and further upheld by the Firs....
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..../ NFAC in allowing proportionate deduction u/s 80IB(10) of the Act. However, the Ld. Counsel for the assessee did not press the additional ground. Accordingly, the same is dismissed as not pressed. 9. So far as the grounds No.1 and 2 are concerned, the same relate to the order of CIT(A) / NFAC in sustaining the addition of Rs. 4 crore made by the Assessing Officer on account of provision for construction expenses debited to the Profit and Loss Account. 10. The Ld. Counsel for the assessee referring to pages 1 to 14 of the paper book drew the attention of the Bench to the copy of signed financials for assessment year 2016-17. Referring to pages 15 to 22 of the paper book, he drew the attention of the Bench to the construction work in progress account as on 31.03.2018. Referring to pages 23 to 36 of the paper book, the Ld. Counsel for the assessee drew the attention of the Bench to the submissions filed before the CIT(A) / NFAC wherein it was stated that for the purpose of computing the income on matching principle when the entire revenue from the sale of units was being recognized, the total cost which included cost incurred till date and future costs to be incurred for the co....
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....rounds of appeal, statement of facts and the submissions made by the appellant during the appeal proceedings. Generally the provisions and reserves recorded in business financial statements are not tax deductible until the expenses are actually incurred. An expense will be incurred where there is a commitment or obligation to pay the actual expense. A provision is an estimate of expenditure which is expected to be incurred in a trade in respect of a particular item. Provisions are not allowable why because there would be a danger that a deduction could be claimed for expenses that had not actually been incurred or were never going to be incurred, thereby reducing taxable profits without justification. 'Provision for outstanding expenses' is an allowable expenditure as per the mercantile system of accounting. During the course of assessment proceedings, the appellant was failed to furnish the details such as to when the expenses was made and not identified as to where the expense was supposed to be incurred. The assessee has given scant details and has not provided any documentary evidence for the same. The estimate for provisions thus made by the assessee are arbitrary and with....
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....hrough proper banking channel and no discrepancies were noticed by the Revenue. Under these circumstances, we have to decide as to whether such provision for expenses is an allowable expenditure during the year or not. 16. We find the Hon'ble Supreme Court in the case of Calcutta Co. Ltd. vs. CIT (supra) on an identical issue has held as under: "The question which really arises for our determination in this appeal is whether having regard to the fact that the appellant's method of accounting, viz., the Mercantile method was accepted by the Income Tax Officer and the receipts appearing in the books of account included the unpaid balance of the sale price of the plots in question, the amount of liability undertaken by the appellant to earn those receipts was to be deducted even if there had not been actual disbursement made by it during the accounting year. Put in other words, the question was whether in view of the fact that the sum of Rs. 43,692-11-9 had been entered on the credit side in the books of account even though it was not money actually received but only money treated as received on the basis that it. was due and receivable, the sum of Rs. 24,809 which....
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....t in any manner whatever from carrying out the undertaking and the purchasers were in a position to enforce the undertaking by taking appropriate proceedings in that behalf. Reliance was placed on behalf of the Revenue on the case of Peter Merchant Ltd. v. Stedeford (Inspector of Taxes) (1) in which a distinction was drawn between an actual i.e., legal liability, which is deductible, and a liability which is future or contingent and for which no deduction can be made. The facts of that case were that the Company which carried on the business of managing factory canteens, had contracted with a factory owner to maintain the crockery, cutlery and utensils used in the canteen otherwise known as the light equipment in its original quantity and quality. The cost of replacement was admittedly a proper deduction in computing profits, as was also any sum paid to a factory owner in settlement of the value of shortages on termination of the contract. Owing to war and. other circumstances it was impossible or impracticable for the Company to obtain replacements in some cases, and the obligations under the contracts with the factory owners in those cases still remained to be performed ....
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....ed liability or was one which was contingent on the happening of a certain event in the future. There is no doubt that the undertaking to carry out the developments within six months from the dates of the deeds of sale was incorporated therein and that undertaking was unconditional, the appellant binding itself absolutely to carry out the same. It was not dependent on any condition being fulfilled or the happening of any event, the only condition being that it was to be carried out within six months which in view of the fact that the time was not of the essence of the contract meant a reasonable time. Whatever may be considered a reasonable time under the circumstances of the case, the setting up of that time limit did not prescribe any condition for the carrying out of that undertaking and the undertaking was absolute in terms. If that undertaking imported any liability on the appellant the liability had already 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 very well be deducted from the profits and ....
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....y not have to be discharged till a later date. It will be always open to the Income-tax authorities to fix an appropriate money value of that liability as at the end of the accounting period by taking all the circumstances into consideration and the estimate of expenses given by the assessee would be liable to scrutiny at their hands having regard to all the facts and circumstances of the case. The High Court was, therefore, clearly in error when it stated:- "In view of all the circumstances of the case it must in my opinion, be held that the amounts of sale-price, not received in cash, were also received and for the purpose of earning the receipts the assessee spent, besides giving the lands, nothing more than a promise. Since the whole amount was actually received in the year of account before and without making the promised expenditure, no question of allowing a deduction of any expenditure from such receipts of the year arises." If then the estimated expenses which would have to be incurred in duly discharging that liability which was undertaken by the appellant and was incorporated in the deeds of sale could be deducted in accordance with the mercant....
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....rged upon I a sum not less than the full amount of the balance of the profits or gains of the trade, manufacture, adventure, or concern'; and it appears to me that that language implies that for the purpose of arriving at the balance of profits all that expenditure which is necessary for the purposes of earning the receipts must be deducted, otherwise you do not arrive at the balance of profits, indeed, otherwise you do not ascertain, and' cannot ascertain, whether there is such a thing as profit or not. The profit of a trade or business is the surplus by which the receipts from the trade or business exceed the expenditure necessary for the purpose of earning those receipts. That seems to me to be the meaning of the word "profits" in relation to any trade or business. Unless and until you have ascertained that there is such a balance, nothing exists to which the name " profits can properly be applied." A similar opinion was expressed in the Gresham Life Assurance Society V. Styles: "When we speak of the profits or gains of a trader we mean that which he had made by his trading. Whether there be such a thing as profit or gain can only be ascertained by sett....
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....rought under one or the other of the deductions mentioned in s. 10(2) and that there was no scope for any preliminary deduction under general principles. It was, however, held by this Court in Badridas Daga v. The Commissioner of Income-tax(1) "It is to be noted that while s. 10(1) imposes a charge on the profits or gains of a trade, it does not provide how those profits are to be computed. Section 10(2) enumerates various items which are admissible as deductions, but it is well settled that they are not exhaustive of all allowances which could be made in ascertaining profits taxable under S. 10(1)." Venkatarama Aiyar, J., who delivered the Judgment of this Court then proceeded to discuss the cases of Commissioner of Income-tax v. Chitnavis(2), Gresham Life Assurance Society v. Styles (3) and Pondicherry Railway Co. v. -Income-tax Commissioner(4), and observed:" "The result is that when a claim is made for a deduction for which there is no specific provision in s. 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the busines....
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....eceipts of Rs. 43,692-11-9 in their totality even though a sum of Rs. 29,392-11-9 only was actually received by the appellant in cash, thus making the' appellant liable for income-tax on a sum of Rs. 14,300 which had not been received by it during the accounting year, it was hardly open to the Revenue to urge that the sum of Rs. 24,809 should not have been allowed as a permissible deduction before arriving at the profits or gains-of the appellant which were liable to tax. Consistently enough with this attitude, the Revenue ought to have expressed its willingness to treat only a sum of Rs. 29,392-11-9 as the actual receipt of the appellant during the accounting year and made up the computation of the profits and gains of the appellant's business on that basis. The Revenue, however, did nothing of the sort and insisted upon having its pound of flesh, asking us to delete the whole of the item of Rs. 24,809 from the debit side of the account which it was certainly not entitled to do. We accordingly allow the appeal, set aside the judgment of the High Court and answer the referred question in the affirmative. The respondent will of course pay the appellant's costs t....
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.... dated 12-09-2018 in the case of M/s. Cosmopolis Construction (supra) by this Tribunal, we find the Tribunal considered the decisions of Hon'ble High Court of Delhi in the case of Ansal Housing Finance & Leasing Co. Ltd. (supra) and in the case of Neha Builders (P.) Ltd. (supra) of Hon'ble High Court of Gujarat in detail. The Tribunal held the decision of Hon'ble High Court of Delhi in the case of Ansal Housing Finance & Leasing Co. Ltd. (supra) is against the assessee therein and followed the decision of Hon'ble High Court of Gujarat in the case of Neha Builders (P.) Ltd. (supra) which is in favour of the assessee. We find the Tribunal by discussing the issue in detail and also by referring to various decisions which were relied on by the rival parties therein, but however, following the decision of Hon'ble High Court of Gujarat in the case of Neha Builders (P.) Ltd. (supra) which is in favour to the assessee held no annual rental value could be levied on unsold flats which were shown as finished stock (stock-in-trade). The ld. DR did not bring on record any view contrary to the view taken by the Tribunal in the case of M/s. Cosmopolis Construction (supra). Therefore, as discussed....