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M/s Grace Shelter Versus Asstt. Commissioner of Income Tax

2016 (4) TMI 666 - ITAT MUMBAI

Disallowance of claim of "Provision for Expenses" - Held that:- There appears to be no dispute that a liability is imposed upon the assessee to construct certain premises at free of cost and under normal circumstances, it would form part of the project expenditure and is liable to be deducted against the project revenue. However, the peculiar facts brought on record by the tax authorities show that the liability of the assessee is contingent upon handing over of the relevant portion of land to t .....

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land to the assessee. These facts support of the case of the revenue that there is no clarify as to whether the assessee is required to discharge the said liability or not. In the absence of clarity on this point, coupled with the fact that the assessee has not been handed over the relevant portion of land, we are of the view that the tax authorities are justified in disallowing the claim of provision for expenses made in the accounts of the assessee - Decided against assessee - ITA No. 5599/Mu .....

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e is engaged in the business of building construction. It undertook a project of construction of a property at Morechiwadi, Opposite to Wadala Teephone Exchange, Dadar (East) under Slum Redevelopment Scheme. The project was sanctioned in the year 2004 and was completed in the year 2010 relevant to the assessment year under consideration. The assessee followed "Percentage completion method" for offering income from this project in the earlier years. During the year under consideration, .....

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. As on 31.3.2010, the assessee had not constructed the above said built up area. However, since it is liable to construct the above said area and is required to hand over the same at free of cost to M.C.G.M and since it is part of the condition of sanction of the project approved by the Slum Rehabilitation Authority, the assessee provided for a sum of ₹ 1,22,10,000/- towards construction of the above said built up area and claimed the same as deduction. Even though the project was approve .....

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ted that the Accounting Standard 7 issued by the Institute of Chartered Accountants of India mandates making of such provisions. 4. The AO noticed that the assessee is following mercantile system of accounting and it has offered income in the earlier years under percentage completion method. Further, the assessee appears to have taker different stand before the AO, i.e., at one stage, it has claimed that the project was completed 100% and later it was submitted that the project was completed at .....

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provision made with relevant evidences. Accordingly, the AO did not agree with the claim of "Provision for expenses" and accordingly disallowed the claim of ₹ 1,22,10,000/-. 5. The Ld CIT(A) noticed that the land, where the construction of Municipal staff quarters and Road depot was to be undertaken, was not allotted to the assessee till date. Hence, the Ld CIT(A) took the view that the liability fasted upon the assessee in this regard was contingent upon the allotment of land f .....

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e record. The Ld A.R submitted that the assessee has completed the project during the year under consideration and hence under "Revenue cost matching principle", all the expenses relating to the project have to be provided for. He submitted that the provision made by the assessee represents "provision of expenses towards uncompleted works" and hence the same should have been allowed by the tax authorities. The Ld A.R placed reliance on the terms and conditions of sanction of .....

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he AO. 8. We have heard rival contentions and perused the record. The dispute, as we understand, is whether the provision of ₹ 1.22 crores made by the assessee is towards an ascertained liability or towards a contingent liability. The assessee heavily places reliance on the terms and conditions of sanction of Slum Rehabilitation Scheme to show that it is liable to construct Municipal staff quarters & Road depot and hand over the same at free of cost to M.C.G.M. Since the liability has .....

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diture against the provision so made by it. Further, it was noticed that the liability to construct the buildings would accrue to the assessee only if the relevant portion of land was handed over to the assessee. The Ld CIT(A) has specifically noticed that the land was not handed over to the assessee till date and hence held that the liability claimed by the assessee is contingent upon handing over the land. Accordingly he has taken the view that the liability is only a contingent liability. 10. .....

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