TMI Blog2011 (12) TMI 346X X X X Extracts X X X X X X X X Extracts X X X X ..... t the estimation of profit but the estimation of expenses. The liability was not even an ascertained liability but only estimation. - AO rejected the books of accounts - held that:- in respect of providing alternate accommodation, it is for the Assessee to choose the manner in which it gives the old occupants of the land, alternate accommodation. The AO cannot sit in judgment over the business decision of the Assessee and say that the Assessee should have given alternate accommodation to the old occupants of the land only from his share of built up area received from the subdeveloper. - The AO will examine the expenses and on the Assessee showing correlation of the actual expenses with the expenses actually claimed by way of provision during the previous year, the AO will allowe them as deduction. - Matter remanded back to AO. - ITA No. 4421/Mum/2008; ITA. No. 4921/Mum/2008; - - - Dated:- 30-12-2011 - N.V. Vasudevan, Pramod Kumar, JJ. Pravin Varma for the Appellant Satish R. Mody for the Respondent ORDER N.V. Vasudevan, Judicial Member 1. ITA.No.4421/Mum/08 is an appeal by the Assessee, while ITA No.4921/Mum/2008 is an appeal by the Revenue. Both t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to enforce any recovery of taxes on protectively assessed income in the year under consideration. 2. On the facts and in the circumstances of the case, and in law, the learned CIT (A) erred in directing the Assessing Officer to tax the income on protective basis. 3. The appellant prays that the Order of the CIT (A) on the above grounds to be set aside and that of the A.O. be restored." 2. The Assessee is a partnership firm engaged in the business of builders and real estate developers. The assessee was the owner of the plot of land bearing CST No.2640, 2641 and 2641/1 to 6 of Village Eksar adm. 7175 sq. mts. The land was situated in Borivli (East). The land was encroached upon by various illegal structures in which various tenants were residing. The assessee had acquired this land number of years back. The Assessee wanted to develop a residential complex over the land owned by it, involving the construction of building No.I and II which was named as "Shree Krishna Complex". The Assessee had spent upto 31-3-2004, totalling Rs.1,30,68,930/- for development of the land and getting the approval of building plans, etc. The said amount was capitalised in its books of account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement. c) As per Clause 7 of the Agreement, the Developer also, agreed to demolish the existing old toilet structure of MHADA standing on the said Property and to construct the new toilet structure on other location, as per the MCGM approval, at their own costs and expenses, in order to facilitate the development of the said Property. d) Clause 8 of the Agreement, the Developers have already obtained approval of layout, under File No. CHE/18521/LOR dated 27th August, 2002in respect of the said property from the concerned authorities and also got I.O.D., Commencement Certificates upto plinth level issued by MCGM at their own costs and expenses, for commencing the construction work of the proposed buildings i.e., Building No.1 under I.O.D. No. CHE/A- 2719/BP(WS)/AR dated 29th March, 2001 and revised on 27th February, 2002 and the Commencement Certificate dated 13th June, 2002 upto plinth level and Building No.2 under I.O.D.No.CHE/A-2720/BP(WS)/AR dated 29th March, 2001 and revised on 27th February, 2002 and the Commencement Certificate dated 20th June, 2002 upto plinth level granted by MCGM on the said property, which will always be known as "SHREE KRISHNA COMPLEX". It w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ete as far as the assessee is concerned. The construction in building No.2 which was to go to the share of the sub-developer was however going on. The assessee declared profit from the project Shri Krishna Complex in the ROI filed for assessment year 2005-2006. The assessee had shown income of Rs.8,59,530/-which had been determined by the assessee as follows: Total Area available for sale (Carpet area) 21475.00 sq.ft. Cost of Land and Expenses 16847808 46855365 Estimated future Cost of Tenant Compensation etc., 30007557 Total Area Sold as on 31-3-05 (carpet area) 21475.00 sq.ft. Sale proceeds of Area Sold as on 31-3-05 47316125 Less: Total Estimate cost of construction and Land 7316125 Estimated Profit of Entire project 46855365 460760 %Estimate profit on Actual Sales 100.00% Total Estimated profit in respect of sales effected upto31-3-05 i.e., 460760 460760*100.00% 460760 Misc. Charges 215000 Interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Development Agreement, the assessee was required to make the payment of the following fees: RCC Consultant Architect Licence plumber The assessee has provided Rs.25 lakhs as Consultancy charges which will be payable. The assessee has also provided Ps. 10,45,186/- in respect of Salaries, Miscellaneous Site Expenses, charges, etc. The total liability provided Rs.3,00, 07,556/- was explained thus by the Assessee as liability to be taken into account for the purpose of profit for this year. 7. The Assessee pointed out that the Method of Accounting as per note on item NO.11 on Form No. 3CD annexed to the tax audit report was as under: "The assessee has followed Accounting Method whereby to ascertain the profit as follows: a) The total cost of construction including Cost of Land, etc. is estimated. b) The total amount received on account of the sale of the area is taken into account. c) Estimated profit of the entire 1broject is ascertained. d) Misc, charges and interest received by the assessee is added to such estimated profits in respect of building activities to arrive at total estimated profit for the year. (e) As the construction work of the enti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .13,33,003/- on account of provisional estimation which is not furnished by the assesse. 9. The AO was of the view that what the assessee is doing not the estimation of profit but the estimation of expenses. The liability was not even an ascertained liability but only estimation. The Assessee's negotiations with the tenants were going on with the tenants even before the MOU was signed. What assessee is debiting from the P and L A/c. is only estimation of expenditure and 'not accrued expenditure. As per the principle of accountancy only the accrued liability which has crystallized during the year, can be debited from the P and L A/c., if the assessee is following mercantile system of accounting. The assessee has not proved that this expenditure has actually accrued and crystallized during the year. In fact, the manner of accounting in the books of accounts of the assessee is not determinative of the factor, what constitutes income and what constitutes expenditure, The AO therefore held that he is not satisfied with the correctness or completeness of the accounts of the assessee. Therefore, the provisions of section 145(3) become applicable. 10. The AO further held that even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4500/- is not backed by facts. In view of the above, the AO held that even if compensation to tenants is to be provided in the books of the assessee, then it has to be at the rate Rs.4 lacs which was paid to the tenant Shri R. Bose or maximum at the rate prevailing on the date of First NIOU i.e. 21-03-2001. There can be third alternative also which is to determine the rate of alternate accommodation at the same rate at which the flats of this building No.1 were sold. As per the details furnished by the assessee the lowest rate of booking of flat is Rs.1,000/-per sq.ft. This rate has been taken for the flat No. C-201 and C-604, which were booked on 11- 07-2004 and 21-01-2004 respectively. Therefore on this count al he value of alternate accommodation of flat of 420 sq.ft. should be Rs.4,20,000/-. 11. Regarding the payment to MCGM assessee the AO held that the assessee has not furnished the breakup of expenses which were to be borne by the assessee and which were to be borne by Ni/s. Audumber Construction Co. As per Clause- 10 if expenses are to be divided proportionately, then assessee has only one flat to sell in Bldg.- 2. In fact, such type estimated expenditure cannot be allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect vacated and also taxes cess and dues payable to MCGM. He has also to pay fee to Architect and consultancy relating to both the buildings. In the case of the appellant receipts relating to booking of 43 flats and expenses related to building No.1 are ascertained but expenses related to building No.2 are not ascertained. As per provisions of Act real income would be taxable. Real income can be calculated after allowing all the expenses related to earning of income. 3.24. There is no doubt that the appellant has to bear certain expense! related to project but A.O. taxed gross receipts of the project and did not allow expenses which appellant has to incur for completion of project. According to the A.O. calculation of expenses done by it is based on expenses incurred on building No.1. 3.25. The Honourable Supreme Court in the case of Bharat Earth Movers vs. CIT 245 ITR 428 held as under: "If a business liability has definitely arisen in the accounting year, the deduction should be allows although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed till 31.3.2005. Appellant has entered into separate agreement with each of 8 tenants and they have been allotted flats in building No.2 as under:- Mr. Gopinath pal 103A Mr. Ramurt D. Yadav 103A Mr. Shyam R. Moriya 230A Mr. Rammuti J. Yadav 203A Mr. Jayram Gupta 205A Shri Amardeo Yadav 205B Shri Ashok S. Gole 301A Shri Pushparani R. Bose 303A Appellant paid Rs.50 lakhs to MIs. Audumber Construction Co. against booking of flats for tenants. Appellant also paid Rs.17,69 lakhs to MCGM till date of passing of this order against dues for construction of building No.2. All these show that the appellant is discharging its liability as and when the project is in progress. The counsel of the appellant has given in wring that the project would be completed by March 2009 and all the liabilities of the share of appellant related to receipts would be discharged by that time. Looking to the above facts, I am of the opinion that income offers by the appellant in A.Y. 2005-06 is premature and its correct quantification is not possible. The version of the ITO in remand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur attention was also drawn to the fact that in the subsequent assessment years, the expenses which were claimed by way of provision in the previous years, were actually incurred and were much more than what was claimed by the Assessee by way of provision. The following details were provided by him in this regard. "The assessee spent various amounts to complete the building project upto 31-03-2005, towards the discharge of liability by making following payments as under: A/cing year A/sment Year Amount Rs. Remarks 31-03-2006 2006-2007 Rs.1,001,161 The assessment has been completed u/s. 143(3) of Income Tax Act, 1961. 31-03-2007 2007-2008 Rs.7,.16,452/- Return filed 30/11/2007 31-3-2008 2008-2009 Rs.1,599,270/- Return filed 29/09/2008 31-03-2009 2009-2010 Rs.16,277,299/- Return filed 02/09/2009 Upto 30-09-2009 2010-2011 Rs.92,60,600/- Return filed 02/09/2009 Total Rs.3,32,54,782/- In fact in October, 2009 and November, 2009 additional amounts have been spent towards discha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these expenses represent liability which the Assessee has to incur and is borne out by the various terms of the Agreement. There were eight tenants who were to be given alternative accommodation consisting of 420 sq. ft. of super built-up constructing saleable residential area to each one of them. In support of this liability, the following documents are on record: 1. Registered Development Agreement clearly indicating that the assessee had undertaken the liability to rehabilitate the existing tenants by giving alternate accommodation to each one of them. 2. Supplementary Agreement with the above mentioned subdevelopers, M/s. Audumber Construction Co. 3. Eight registered agreements with eight tenants. Each of the agreement very clearly shows that the assessee had undertaken the liability to rehabilitate each tenant by offering them alternative residential accommodation at the same place. 4. The certificate of the Architects estimating the cost of each sq.ft of alternative accommodation to be given to the existing tenants at Rs4500/- per sq.ft. 5. Letter from M/s. Audember Construction Co. who indicated the price at Rs.4,260/- per sq. ft. of alternate accommodati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt tax Rs.12,00,000 3. Development Charges Rs.16,29,292 4. Balcony premium Rs.10,86,000 5. Open space deficiency premium Rs.13,10,400 6. Amount already paid after 31/3/05 Rs.17,69,5 7. Deposits and payments for opening water connection, sewerage connection, road digging charges, debris removal chgs. Etc., Rs. 5,34,081 24. Along with this detailed working, the assessee also submitted the certificate of the Architects M/s. Tee Arch Architects and Consultants Pvt. Ltd. and the booklet published by Tee Engineers, Architects and Town Planners Association. This booklet gives complete details of the various charges payable to the municipal corporation, the basis and the working of such charges is also given in the booklet. The assessee had made provision for consultancy charges mainly Architects' fees of Rs.25,00,000/-. A copy of the Articles of Agreement for engagement of architects executed on 22-12- 2000, was placed on record. The said note gives the details about the scope of working of architects/surveyors and also gives the details of the professional fees to be pai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sold and income therefrom offered to tax by the Assessee. The law with regard to the question whether the Assessee can expenditure by way of provision is well settled and is to the effect that the incurring of the liability should be certain and the quantification of the same should be on a scientific basis. In this regard, we now have the benefit of the actual figures of expenditure and we feel that it would be just and proper to direct the AO to examine the actual expenditure claimed to have been incurred by the Assessee, which were claimed by way of provision in this Assessment year. The AO will examine the expenses and on the Assessee showing correlation of the actual expenses with the expenses actually claimed by way of provision during the previous year, the AO will them as deduction. As already stated the claim for deduction cannot exceed the amount claimed as deduction by way of provision by the Assessee. With these observations, the issue is restored to the AO for the limited purpose as directed above. Thus Ground No.5 raised by the Assessee and the Ground of appeal of the Revenue are allowed. Ground No.1 to 4 raised by the Assessee are allowed for statistical purpose. ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
