TMI Blog2011 (11) TMI 686X X X X Extracts X X X X X X X X Extracts X X X X ..... tting aside the order passed by the AO u/s 143(3) of Income Tax Act and directing the AO to verify the claim of provision for development expenses without arriving on any conclusion. 4) That the directions of the learned CIT are contrary to the decision of Supreme Court in the case of Calcutta Co Ltd Vs Commissioner of Income Tax (1959) 37 ITR 1 (SC) and Rotork Controls India (P) Ltd Vs CIT (2009) 314 ITR 62 (SC) 5) That the order passed by the CIT is inconsistent with the past practice followed by the appellant of estimating the obligation of development expenses on roads etc. to be incurred in future against the current year s sale and claiming the same as allowable expenses against the current s years income more so when the estimation of development expenses was made on the same basis of past practice and complete details of such working was filed and examined by the AO during the course of assessment proceedings u/s 143(3) of Income Tax Act. It is contended that the assessments of the assessee for AY 2004-2005 and 2005-2006 were completed u/s 143(3) wherein the same practice was followed and expenses on development charges were claimed on same basis were allowed. 6) T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which it was held that profit should be determined by spreading over the estimated cost in carrying out the development of land over the saleable area of the plots. 4. The cost of development if carried out through JDA comes to ₹ 175/- per. Sq. Yds whereas the assessee has made provision by estimating the cost of development expenses at ₹ 165/- per. Sq. Yds . 5. The assessee is following the same system of accounting since the commencement of the business. 2.3 The ld. CIT accepted the contention of the assessee that the expenditure which have been accrued during the year although not incurred is also required to be allowed in addition to the expenditure incurred during the year. The objection of the ld. CIT was that the assessee can claim the provision if the same has been made on scientific basis. Reliance placed on the decision of Hon'ble Apex Court in the case of Calcutta Company Ltd. (supra) was held as correct. The ld. CIT in his order u/s 263 of the Act has recorded the following findings. 1. It is not clear from the record as to whether the provisions made is in respect of sales effected and is made on scientific basis having relation to the accr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t works to be done and to be charged from the owners of the plot. Hence, from this letter, the ld. AR submitted that the AO has made enquiry and it is not the case where expenditure has been allowed without making enquiry. In the written submission it was further submitted that the audit party has raised the audit objection on the issue of allowing provisions for development expenses. On the basis of the audit objection, ld. CIT-1, Jaipur issued notice u/s 263 of the Act. The assessee replied the notice vide letter dated 20-09-2010 and 14-10-10. The ld. CIT was satisfied with the explanation of the assessee and wrote a letter to the Accountant General to drop the audit objection. The assessee again filed the detailed reply on the issue of allowance of provisions for development expenses. Before the ld. CIT, the assessee filed the chart showing actual development expenses for different assessment years. 2.6 The ld. AR drew our attention that ld. CIT has admitted that the expenses accrued during the year but not incurred during the year are to be allowed. If the expenditure is allowable then the order cannot be termed as erroneous. The assessee has made the provisions on scientifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich was to be incurred for development of plot. The assessee received ₹ 29,392 towards sale price of lands but credited the entire full price of land in accounts on the basis of mercantile system of accounting. A sum of ₹ 24,809/- was debited as estimated expenditure for development, though no such sum was spent. The headnotes of this decision are reproduced. Held, (i) that the undertaking to carry out the developments within six months from the dates of the deeds of sale (which, in view of the fact that time was note of the essence of the contract, meant a reasonable time) was unconditional, the appellant binding itself absolutely to carry out the same. That undertaking imported a liability on the appellant which 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 be deducted from the profits and gains of the business, and the amount to be expended could be debited in accounts maintained in the mercantile system of accounting before it was actually disbursed. The difficulty in the estimation thereof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed although it may have to be discharged at a future date. However, a contingent liability which may have to be discharged in future cannot be considered as expenditure. 33. The Hon ble Gujarat High Court in the case of welding Rods Manufacturing Co. V/s CIT 225 ITR 525 had on occasion to consider the allowability of provision made though amount not actually spent. The assessee borrowed welding rods and were to be returned on demand. The assessee made a provision of liability on account of the rise in prices. The Hon ble High Court observed that in mercantile system of accounting, the businessman has to take into consideration his liabilities which might be even contingent in order to arrive at what is real business profit in that year. The assessee has to take into consideration his legal liabilities. 34. The Hon ble Raj. High Court in the case of Udaipur Mineral Development Syndicate PVt. Ltd. V/s DCIT 261 ITR 706 had on occasion to consider the accrual of liability. In this case the assessee as per agreement was required to restore the surface land in the original condition and hence the liability to refill pits accrued as soon as pits were dug. In the instant case, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... event is not expenditure. The incometax law makes a distinction between an actual liability in present and a liability de future which, for the time being, is only contingent. The former is deductible but not the latter. In Calcutta Co. Ltd. V/s CIT (1959) 37 ITR, I, it was held by the apex court that if a liability has definitely been incurred in the accounting year, eg., on unconditional accrued liability, it cannot be regarded as a contingent liability merely because it is to be discharged at a future date and the cost of discharging it is not definite but has to be estimated. Similarly, in British South Africa Co. V/s CIT (1946) 14 ITR 17 (Suppl)(PC) it has been held by the Privy Council that where a liability clearly exists then quantification of the sum should not come in the way of the assessee in debiting the sum and claiming the deduction thereof. In order to estimate the true profits a liability has to be determined. It was observed by the Supreme Court in the case of CIT V/s Gemini Cashew Sales Corporation (1967) 65 ITR 643 (headnote) : Broadly stated, the present value on commercial valuation of money to become due in future, under a definite obligation, will be ..... 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