TMI Blog2014 (3) TMI 1055X X X X Extracts X X X X X X X X Extracts X X X X ..... payment under s. 40A(3) of IT Act. Accordingly, the addition of ₹ 19,05,000 is deleted.- Decided in favour of assessee Disallowance of provision for development expenses - provision claimed by the assessee as future liability of development expenses against the sales of the plot booked by it in these years - assessee is a colonizer who purchases agricultural land from the farmers and get it converted from JDA - Held that:- The main problem which the assessee is facing that most of the lands were in joint names. Some of the original Khatedar sold the land to the assessee but some of them have not sold to the assessee. Since the Khasaras are in joint names therefore without Takasana it was not possible to carry out development work on the land, which the assessee sold. This is also a reason that the assessee invested huge amount in gold bullion to keep the money in reserve separately for the purpose of development work. However, liability towards development expenses to be incurred in future on the plots sold did not extinguish merely because the assessee has incurred small part of expenses in next few years. The AO held that the funds of provision made for development of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ower authorities, the reassessment proceeding is illegal, bad in law, without jurisdiction and is based on wrong facts, thus all the reassessment proceedings deserve to be declared void ab initio and learned CIT(A) erred in not declaring the reassessment proceedings illegal, without jurisdiction and bad in law. Asst. yr. 2007-08; Revenue's appeal ITA No. 911 /Jp/2013 (i) Whether on the facts and in the circumstances of the case and in law, the learned CIT(A) was justified in deleting the addition of ₹ 11,21,74,877 holding that the provision made by the assessee for development of Land is ascertained liability. Asst. yr. 2008-09; assessee's appeal ITA No. 897/Jp/2013:- (i) That on the facts, in totality of the circumstances and in law, and in view of detailed objections/submissions made before the learned lower authorities, the reassessment proceeding is illegal, bad in law, without jurisdiction and is based on wrong facts, thus all the reassessment proceedings deserve to be declared void ab initio and learned CIT(A) erred in not declaring the reassessment proceedings illegal, without jurisdiction and bad in law. (ii) On the facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons made were deleted by the learned CIT(A) vide order in IT Appeal No. 645 of 2007-08 dt. 1st Feb., 2008 and the order of first appellate authority was confirmed by the Tribunal vide common order dt. 24th April, 2009 in ITA No. 1097/Jp/2007 and ITA No. 737/Jp/208 for the asst. yrs. 2004-05 and 2005-06 respectively. 2.2 In respect of asst. yr. 2007-08 the assessee filed its original return of total income on 15th Nov., 2007 declaring income of ₹ 2,01,20,460. Assessment under s. 143(3) of IT Act, 1961 was completed by AO designated as Addl. CIT, Range-2, Jaipur vide his order dt. 29th Dec., 2009 at total income ₹ 2,50,35,836. The only addition was on account of disallowance of ₹ 49,15,376 under s. 40A(3) of IT Act,. 1961 bn account of cash payments made for purchases of lands. There additions were confirmed by learned CIT(A) vide order in IT Appeal No. 803 of 2009-10 dt. 1st Dec., 2010. The assessee filed appeal before Tribunal against the order of learned CIT(A). Tribunal set aside the orders of learned CIT(A) and AO and deleted the addition made by AO under s. 40A(3) in ITA No. 120/Jp/2011. 2.3 In respect of the asst. yr. 2008-09, the assessee filed its ret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,22,95,340 against original return of ₹ 2,01,20.460 by making addition of ₹ 11,21,74,877 on account of disallowance of provision of development expenses debited in PandL a/c. The income of asst. yr. 2008-09 was reassessed vide order dt. 1st March, 2013 under s. 143(3)/147 of the IT Act on total income of ₹ 18,28.35.530 against original return of ₹ 1,73,71,460 by making the addition of ₹ 16,35,62,072 on account of provision for development expenses and ₹ 19,05,000 on account of disallowance under s. 40A(3) of IT Act. 2.6 The assessee filed appeals before the learned CIT(A). The CIT(A) upheld the validity of the proceedings of s. 148 of IT Act and deleted the addition made by the AO on account of provision for development expenses. Aggrieved from the order of learned CIT(A) the Department as well as the assessee both are in appeal before Tribunal. 2.7 In respect of asst. yr. 2005-06 the learned Authorised Representative submitted that the proceeding under s. 147 of IT Act, 1961 was initiated in the case of the assessee on the basis of the following reasons recorded by the learned AO (copy at paper book p. 118, asst. yr. 2005-06):- On p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment year. The original assessment was completed under s. 143(3) of IT Act after detailed examination and scrutiny of the case. Further, the asst. yr. 2004-05 was also completed under s. 143(3) of IT Act after detailed scrutiny and certain legal issues/principles which were decided in asst. yr. 2004-05 were followed in this year also. The copy of reasons recorded is placed at paper book p. 118. The AO simply mentioned that the expenses incurred during the previous year are only allowable for deduction under s. 37(1) of IT Act and provisions are not allowable and the AO has wrongly allowed the provision for development expenses in the original assessment. Since the AO in original assessment has allowed provision against development expenses, the reassessment proceedings were undertaken under s. 147 of IT Act. Thus, the AO wanted to start revision proceedings under the guise of reassessment proceedings. However, in the present case the detail working of provision for development expenses was given in audited balance sheet itself which was filed along with the IT return (working at paper book pp. 19-21). The assessment of the assessee was completed by Jt. CIT, Range-2, Jaipur after de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that provision for development expenses was wrongly allowed. Therefore, the allegation of the learned AO is that then AO while passing the original assessment had failed to draw correct legal inferences from the said primary facts. This is not an error or omission on the part of the assessee. It is not alleged that the assessee had suppressed, misrepresented or falsified the records/facts. It .is not alleged that there was any subsequent factual information on the basis of which it was found that the assessee had not fully disclosed the primary facts or had falsified or disclosed incorrect primary facts. Therefore, the entire exercise of reassessment proceedings under s. 147 is without jurisdiction and bad in law and the assessment order deserves to be annulled. Reliance is placed on the following decisions:- (i) CIT vs. Bhanji Lavji (1971) 79 ITR 582 (SC); (ii) Dy. CIT vs. Purolator India Ltd. (2012) 72 DTR (Del) 189: (2012) 343 ITR 155 (Del); (iii) Kimplas Trenton Fittings Ltd. vs. Asstt. CIT (2012) 340 ITR 299 (Bom); (iv) Desai Bros. Ltd. vs. Dy. CIT (2004) 188 CTR (Bom) 375: (2005) 272 ITR 335 (Bom);, (v) Bhor Industries Ltd. vs. Asstt. CIT and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C) has laid down the principle that any provision made for the obligation of expenses to be incurred in future against the current year's sale is allowable expenses. Further, Hon'ble apex Court in the case of Bharat Earth Movers us. CIT (2000) 162 CTR (SC) 325: (2000) 245 ITR 428 (SC) has held that if the business liability has arisen in the accounting year then deduction should be allowed although liability may have to be quantified and discharged at a future date. Hon'ble Rajasthan High Court in the case of Udaipur Mineral Development Syndicate (P) Ltd. us. Dy. CIT (2003) 181 CTR (Raj) 251: (2003) 261 ITR 706 (Raj) had an 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 refil pits accrued as soon as pits were dug. Hon'ble Allahabad High Court in CIT vs. Development Trust (P) Ltd. (1991) 99 CTR (All) 247: (1991) 189 ITR 504 (All) held that expenses in respect of development to be carried by assessee are an allowable deduction under mercantile system of accounting. The Hon'ble Gujarat High Court also in the case of Welding Rods M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed but undischarged liability against revenue expenditure must be allowed. In this case, the assessee follow a the mercantile system of the accounting. The assessee's sale consists of two things; first cost of land and second development expenses. Since the development expenses cannot be incurred on plot-to-plot basis but incur for whole scheme, therefore, the development expenses to be incurred against the plot sold in a particular year have to be estimated and to that extent the sale is set part under the nomenclatural provision for development expenses . Therefore, as soon as the assessee sales the plots, the liability for construction of road, providing water and electric lines etc. accrues. In mercantile system of accounting, a liability already accrued, though is to be discharged' at a future date, would be a proper deduction while working out the true profits and gains of the business. It is not as such the deduction is permissible only in case of amounts actually expended or paid. Just as income; the actual receipts as well as those accrued due are brought in for income-tax assessment, so also liabilities accrued or due would be taken into accounts while working ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obligation of expenses to be incurred in future against the current year's sale is allowable expenses. Further, in asst, yr. 2006-07 on the same issue AG audit party raised the audit objection in the case of assessee on the similar issue i.e. Provision for development charges . The CIT-I, Jaipur, did not accept this objection and requested to the AG audit team to drop the audit objection (copy at paper book pp. 131-132). The audit party did not reply to the letter of CIT-I, Jaipur, then to follow the instruction of CBDT for remedial action, an order under s. 263 was passed wherein it has been accepted by CIT-I, Jaipur, that the provisions for development expenses are allowable as expenses but he directed the AO to examine whether the provision has been made only in respect of area of plots sold and provision for development expenses is in accordance with JDA Guidelines (copy at paper book pp. 133-138). Thus in view of finding of the CIT-I, Jaipur, in the own case of the assessee in order passed under s. 263 of IT Act, 1961 the Department has accepted that the provision for development expenses is an allowable expense to the assessee. Against the order passed under s. 263 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Cal)]. Following decisions are quoted for support. The facts of the case are fully applicable to the facts of the case of the assessee:- (i) ITO and Ors. vs. Lakhmani Mewal Das 1976 CTR (SC) 220: (1976) 103 ITR 437 (SC); (ii) Ganga Saran and Sons (P) Ltd. vs. ITO and Ors. (1981) 22 CTR (SC) 112: (1981) 130 ITR 1 (SC); (iii) Bankipur Club Ltd. vs. CIT 1972 CTR (SC) 245: (1971) 82 ITR 831 (SC); (iv) Pursottam Das Bangur vs. ITO and Ors. (1980) 14 CTR (Raj) 161: (1979) 126 ITR 580 (Raj); (v) Sardar Kehar Singh vs. CIT (1991) 92 CTR (Raj) 88: (1991) 195 ITR 769 (Raj); (vi) Asok Kumar Sen vs. ITO and Ors. (1983) 132 ITR 707 (Del). (vii) Zuari Estate Development and Investment Co. (P) Ltd. vs. J.R. Kanekar, Dy. CIT (2004) 191 CTR (Bom) 189; (viii) Nagininara Veneer and Saw Mills (P) Ltd. vs. Dy. CIT and Ors. (1996) 136 CTR (Gau) 134: (1996) 219 ITR 527 (Gau); (ix) CIT vs. Atlas Cycle Industries (1989) 180 ITR 319 (PandH); Tribunal decisions:- (i) Tribunal Jaipur Bench in the case of Vijeta Cements (P) Ltd. vs. Jt. CIT 25 TW 223 (Jp). (ii) Tribunal Jodhpur Bench in the case of Kajodimal Virdi Chand vs. ITO. ITA No. 72/J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y fee and the amount paid by the assessee to the purchaser for meeting the demand of the State Government towards unearned increase in the value of land were allowed in the computation of long-term capital gains-AO reopened the assessment for the reason that the amount paid to the Government is not allowable as deduction in computing the long-term capital gains-Not justified-There was no tangible material on the basis of which the assessment could be reopened-Reassessment is sought to be made on the basis of mere change of opinion-This is not permissible. 2.11 In respect to asst. yr. 2008-09 the learned Authorised Representative submitted that wrong calculation of disallowance in original assessment cannot be ground for reassessment under s. 147 of IT Act for asst. yr. 2008-09. The learned Authorised Representative submitted that the learned AO took another ground in support of the reassessment proceedings for asst. yr. 2008-09 that in original assessment the disallowance under s. 40A(3) was not correctly calculated. In original assessment the disallowance was calculated @ 20 per cent of cash payment whereas it should be 100 per cent of cash payment. The learned Authorised Repre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent records it is revealed that the assessee made and raised a provision for development expenses of ₹ 63,37,614 against development expenses to be incurred in subsequent year. Expenses incurred during the previous year are only allowable for deduction from income under s. 37(1) of the IT Act, 1961 and no provision is allowable but the same has been wrongly allowed during assessment proceedings. Thus there was under-assessment of business income by ₹ 63,37,614. The provisions of s. 147 to the extent relevant, are as below:- 147.-Income escaping assessment-If the AO has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of ss. 148 to 153,,,assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in ss. 148 to 153 referred to as the relevant assessment year):- Provided that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed to the assessee. Therefore, from the averments made by him in the reasons recorded, it is clear that the AO has issued notice under s. 148 of the Act in the light of the details or facts available in the assessment records as well as in the audit report and annexure thereto filed with the return of income by the assessee. The learned AO has not pointed out any material or basic fact which came to his notice subsequently after the assessment was made under s. 143(3) of the Act, and which was not disclosed by the assessee during the original assessment proceedings. The AO has further stated in the reasons that expenses incurred during the previous year are only allowable for deduction from income under s. 37(1) of the IT Act and no provision is allowable but the same has been wrongly allowed during the assessment proceedings. The reasons recorded by the AO, therefore, make it clear without any doubt that there was no failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. The fact that the assessee claimed provision for development expenses as deduction was duly available in the return of income as well as annexure thereto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessing authority has to draw inferences as regards certain other facts; and ultimately, from the primary facts and the further facts interred from them, the authority has to draw the proper legal inferences, and ascertain on a correct interpretation of the taxing enactment, the proper tax is leviable. Dwelling on the said aspect in Sri Krishna (P) Ltd. vs. ITO and Ors. (1996) 135 CTR (SC) 75: (1996) 221 ITR 538 (SC), it was held that the AO for the purpose of determining the tax due from the assessee is required to know all facts which would help him in coming to the said conclusion. Material facts are in the possession of the assessee and, therefore, should be fully and truly disclosed. However, once these are disclosed then it is for the AO/authority to draw proper legal inferences, and ascertain on correct interpretation of the taxing enactment, the proper tax leviable. In the said case, there was subsequent information to show that the material facts disclosed by the assessee at the time of original assessment were not incorrect and true[see also Malegaon Electricity Co. (P) Ltd. vs. CIT (1970) 78 ITR 466 (SC); CIT vs. Gillendars Arbuthnot and Co. 1973 CTR (SC) 136: (1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (P) Ltd. vs. ITO (2013) 215 Taxman 479 (Guj) has held as under:- 5.1 The exercise of powers beyond four years is fettered by an additional condition that the escapement of income has resulted on account of failure on the part of the assessee inter alia to disclose fully and truly material facts necessary for the assessment for that assessment year. The import of the said proviso is that where the assessee is not in default in disclosing fully and truly all material facts necessary for assessment for the assessment year in question, notwithstanding that there is an escapement of income for assessment in his opinion, the assessment cannot be reopened. In other words, a failure on the part of the assessee to disclose material facts has to be demonstrated. The attribution of failure to disclose to the assessee is sine quo non for reopening the assessment after lapse of four years. 5.2 A close reading of reasons recorded by the respondent would show that the reopening was not on the premise that there was failure on the part of the assessee to disclose any material fact. It was based on the ground that the benefit was wrongly claimed. A wrong claim made would not necessarily ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24 ITR 560 (SC), wherein the assessee was granted a lease for quarrying stones by the then Maharao of Kotah State under an agreement of lease. The royalty was inclusive of income-tax. When the State of Kotah later merged with United State of Rajasthan, a tri-partite dispute amongst the assesee, Stale of Rajasthan and Union of India arose pursuant to an application of the assessee-company to the CIT for a declaration that it was exempt from payment of income-tax in accordance with the terms of the lease agreement. In that context, the Supreme Court observed that the primary fact in the case was the lease agreement entered into by the appellant-assessee with Maharao of Kotah State, which was placed before the ITO at the time of original assessment, and it was not the duty of the assessee to draw attention of the ITO to any particular clause or portion of the document and invite him to draw any particular inference therefrom. The Supreme Court held that the expression materia facts refers to only primary facts. It was observed that there is no duty cast on the assessee to indicate or draw attention of the ITO to what factual, legal or other inference can be drawn from the primary f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the respondent-ITO seeking to reopen the assessment for the asst. yr. 2005-06 was, therefore, beyond his powers and, was illegal. As a result, the impugned notice dt. 18th March, 2011 under s. 148 of the Act issued by the respondent is hereby set aside. The petition succeeds. There shall be no order as to costs. 2.19 Hon'ble jurisdictional High Court in the case of CIT vs. Manish Ajmera (2011) 238 CTR (Raj) 469: (2011) 51 DTR (Raj) 117 has held that when the assessment is reopened after the expiry of four years from the end of the assessment year, escapement of income has got to be by reason of failure of the assessee to file return or failure of the assessee to disclose fully and truly all material facts for assessment. In this case, even the AO has not alleged that there was any non-disclosure of material facts by the assessee at the time of original assessment. The sole basis on which the assessment has been reopened is that while framing the original assessment order, the AO has accepted the system of accounting adopted by the assessee as valid, whereas in the reassessment made under s. 147, the system of accounting adopted by the assessee has not been considered to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in detail. After examination of this issue in detail, the provision for development expenses was allowed in asst. yr. 2004-05. Therefore, there was no reason to disallow the same in asst. yr. 2005-06, asst. yr. 2007-08 and asst. yr. 2008-09. 2.22 The provisions of s. 37(1) of IT Act are as under:- Any expenditure (not being expenditure of the nature described in ss. 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'. Explanation:- For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for (he purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. 2.23 We find that this section does not restrict that the future liability towards revenue expenses will not be allowed in the relevant year in which the liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arious development works. Further, it is explained by the assessee that he has made full disclosure of facts in audit report. and after examination of relevant records claim was allowed. The assessee placed reliance on the decision of Hon'ble apex Court in the case of Calcutta Co. Ltd. us. ITO (1961) 37 ITR 1 (SC). Therefore, the CIT-I Jaipur himself found that the provisions for development expenses are allowable expenses. However, the order under s. 263 dt. 21st March, 2011 of IT Act was passed. In this order also, it was accepted by the CIT-I, Jaipur, that the provision is allowable under s. 37(1) of IT Act. The relevant finding of CIT-I, Jaipur at p. 4 of the order (paper book p. 74 ABP asst. yr. 2008-09) is as under:- I have considered the submission made by the Authorised Representative of the assessee. No doubt not only the expenditure incurred during the year is required to be allowed but also the expenditure which has accrued during the year although no incurred is also requidred to be allowed.... However, the Tribunal has set aside the order of CIT-I, Jaipur, passed under s. 263 of IT Act in ITA No. 433/Jp/2011 vide order dt. 22nd Nov., 2011 (copy at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yr. 2007-08 and asst. yr. 2008-09 respectively. Moreover, the view taken by the AO was in consonance with the view already taken while framing the assessment for the preceding years i.e., asst. yr. 2004-05 and asst. yr. 2006-07, the same view had been taken in the subsequent years i.e., asst. yr. 2005-06, asst. yr. 2007-08 and asst. yr. 2008-09 wherein also the assessment was framed under s. 143(3) of the Act. From the above facts, it is clear that the AO while framing original assessment under s. 143(3) applied his mind and framed the assessment. Later on, the AO issued notice under s. 148 of the Act for reopening the assessment under s. 147 of the Act. It is not in dispute that the amendment had been made in s. 147 of the Act by Direct Tax Laws (Amendment) Act, 1987 w.e.f. 1st April, 1989. Prior to the amendment, reopening could have been done if the AO was of the opinion that any income chargeable to tax had escaped assessment by recording the reason in writing, but w.e.f. 1st April, 1989 the only condition is that if the AO has reason to believe that income has escaped assessment, he enjoys the jurisdiction to reopen the assessment. However, a mere change of opinion per se cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , if (a) the ITO had reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under s. 139 for any assessment year to the ITO or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax had escaped assessment for that year, or (b) the ITO had in consequence of information in his possession reason to believe that income chargeable to tax had escaped assessment for any assessment year. The fulfilment of the said conditions alone conferred jurisdiction on the AO to make a back assessment, but in s. 147 of the Act w.e.f. 1st April. 1989, those conditions are given a go-by and only one condition has remained, viz., where the AO has reason to believe that income has escaped assessment, the section confers jurisdiction to reopen the assessment. Therefore, post 1st April, 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words 'reason to believe' failing which s. 147 would give arbitrary powers to the AO to reopen assessments on the basis of 'mere change of opinion', which cannot be per se reason to reopen. One must also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g passage from the said judgment:.... Various other judgments are also referred to by the Tribunal in support of its aforesaid view. 6. In these circumstances, we do not find any substantial question of law that would arise for consideration in this appeal. The appeal is devoid of any merit and is accordingly dismissed. 2.28 In view of the aforesaid discussions, submissions made by the learned Authorised Representative and learned Departmental Representative, the facts of the present case and in view of the ratio laid down by various Hon'ble Courts in the aforesaid referred cases, we find there was no failure on the part of the assessee in furnishing all the necessary information and material and in view of proviso to s. 147 of IT Act, the reassessment proceedings for asst. yr. 2005-06 cannot be initiated by issue of notice under s. 148 of IT Act. The notice under s. 148 issued by the AO in this regard for asst. yr. 2005-06 was thus beyond jurisdiction of the AO. The same is held as invalid and the assessment in question made in furtherance thereto for asst. yr. 2005-06 is also held invalid and not maintainable. 2.29 Further, in view of the aforesaid discussions, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d sale of land and the expenditure debited against purchase of land tantamount to the business of the assessee and same is covered under s. 40A(3) of the IT Act, 1961. Aggrieved from the order of the AO on this issue, the assessee has challenged the addition before the learned CIT(A). The learned CIT(A) confirmed the addition by holding that the appellant has relied on its submission made earlier. The appellant has not been able to bring on records any fact to show that its case was covered by any of the exception provided in r. 6DD as amended by IT (8th Amendment) Rules, 2007 w.e.f. asst. yr. 2008-09. 3.2 The learned Authorised Representative submitted that Tribunal Jaipur Bench in assessee's case itself for assessment year applying the provisions of s. 40A(3). The facts and circumstances of the business are same. The circumstances of the payment made to the farmers are also same. Therefore, the disallowance confirmed by learned CIT(A) deserves to be deleted. The learned Authorised Representative further submitted that admittedly, genuineness of transactions and identity of parties are not in doubt. The payments were made to the farmers for purchase of agricultural land and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then there was no need to add these words. The intention of the law is to give proper weightage to availability of banking facilities, business expediency and other relevant factors. The AO should have considered the applicability of r. 6DD after considering the other factors also like availability of banking facilities and business expediency. The reliance is placed on the following decisions:- (i) Jurisdictional High Court in the case of Kanti Lal Purshottam and Co. vs. CIT (1986) 53 CTR (Raj) 19: (1985) 155 ITR 519 (Raj) held that proviso to s. 40A(3) shows that the legislature intended not to make the provision of s. 40A(3) very strict and absolutely mandatory. The rigour of the whole restriction was loosened by the proviso and by making r. 6DD. (ii) The appellant further seeks to place reliance on the judgment of the Hon'ble Calcutta High Court in the case of Girdharilal Goenka vs. CIT (1989) 80 CTR (Cal) 140: (1989) 179 ITR 122 (Cal) wherein their Lordships held as under:- The ITO has to take a pragmatic view of the matter. The ITO should take a practical approach to problem and strike a balance between the direction of law and hardship to the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in a village where assessee has not maintained any bank account constituted exceptional circumstances. (vi) Hon'ble Jaipur Bench in its recent decision in the case of PACL India Ltd. vs. Asstt. CIT in ITA No. 944/Jp/2007[reported at (2010) 38 DTR (Jp)(Trib) 1-Ed.] vide order dt. 12th March, 2010 has deleted the addition made by applying the provisions of s. 40A(3) by considering the second proviso to s. 40A(3) of IT Act. The copy of decision is enclosed herewith. In view of the above submissions, the disallowance of ₹ 19,05,000 made by applying the provisions of s. 40A(3) deserves to be deleted. 3.4 On the other hand the learned Departmental Representative supported the orders of lower authorities. The learned Departmental Representative submitted that at the stage of original assessment proceedings, the assessee has submitted that all the cash payments have been made on Sundays. Hence, the same are covered under r. 6DD(j) of IT Rules. However, on verification the AO notices that the payments were not on Sundays and are not covered under r. 6DD(j). 3.5 In rejoinder, the learned Authorised Representative submitted that in some cases the payments wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions of s. 40A(3) say that if the cash payment exceeds ₹ 20,000 and they do not fall under the exception clause of r. 6DD, then addition @ 20 per cent of such cash payment has to be made. However, the background of the case has to be seen and it should be enquired whether there is any real difficulty with the assessee to make payment in cash. In the present case it is seen that assessee was forced to make cash payment as agriculturists were not ready to accept the cheques as' many other purchasers were available in the market and willing to pay in cash. Being a prudent businessman, the assessee thought it proper to make cash payment so that their agreement of purchase of land may not be cancelled or agriculturists may refuse to sell the land to assessee the next day. In view of these facts and circumstances we are of the view that case of the assessee falls under the exceptional clause of r. 6DD of IT Rules. 14.10 In case of Rishabhdev Township and Developers (P) Ltd. decided in ITA No. 181/Jp/2010 for asst. yr. 2006-07 vide order dt. 29th April, 2011 similar view has been taken in favour of the assessee. In this case also a payment of ₹ 84,25,000 was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 40A(3) for both the years. Accordingly the entire additions for both the years are deleted. 3.7 The nature and circumstances of the business of the assessee are same as they were in the asst. yr. 2006-07 and asst. yr. 2007-08. Therefore the above findings of Tribunal are applicable for the asst. yr. 2008-09 also. Therefore, in view of the above decision of Tribunal in the case of assessee itself, we hold that the learned CIT(A) was not justified in confirming the addition of ₹ 19,05,000 made by the AO by disallowing the cash payment under s. 40A(3) of IT Act. Accordingly, the addition of ₹ 19,05,000 is deleted. 4.0 Now we take up the following appeals filed by the Department:- Asst. yr. 2005-06 Revenue's appeal ITA No. 910/Jp/2013-Asst. yr. 2007-08 Revenue's appeal ITA No. 91 l/Jp/2013-Asst. yr. 2008-09 Revenue's appeal ITA No. 912/Jp/2013 4.1 In all these appeals a common ground as regard deletion of addition by learned CIT(A) is involved. The AO made the addition of ₹ 1,07,47,296 ₹ 11,21,74,877-and of ₹ 16,35,62,072 in asst. yr. 2005-06, asst. yr. 2007-08 and asst. yr. 2008-09 respectively by disallowing the provision f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the plot is subject to a liability for development work to be carried out in colony in future. This liability accrues as soon as the sales of the plot are made. The assessee made the provision for development expenses for the plots sold out during the year. Whatever actual expenses on development work incurred in the colony are accounted for by reversing the provision made in respect to the plots sold by it. The assessments of assessee for asst. yr. 2004-05, asst. yr. 2005-06 asst. yr. 2006-07, asst. yr. 2007-08, asst. yr. 2008-09 and asst. yr. 2009-10 were made under s. 143(3) and provision for development expenses was allowed in these assessments. On the basis of AG audit objection on the allowance of the provision for development expenses the proceeding under s. 263 of IT Act was initiated for asst. yr. 2006-07. The Tribunal set aside the order of CIT-I, Jaipur passed under s. 263 of IT Act by passing order dt. 21st March, 2011. Then the AO started reassessment proceedings under s. 147 of IT Act for asst. yr. 2005-06, asst. yr. 2007-08 and asst. yr. 2008-09 by issue of notice under s. 148 of IT Act on 27th March, 2012. AO rejected the claim of provision for development expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in ITA No. 433/Jp/2011. Para-wise submission on the facts on which the submission given before AO was rejected (pp. 3 to 9 of assessment order:- (a) At S. No. 1 the learned AO rejected the submission of the assessee on the ground that the assessee has not abided itself by obligation of development expenses to be with the purchasers. No such terms and conditions are made while selling the plots of land. No such agreement is entered when a plot is sold. In this regard we may submit that the finding of the AO on this issue is merely on suspicion and given without properly understanding the concept of private Khatedar scheme and how it governs. The learned AO himself in para No. 3 at p. 4 cited the JDA Order No. D-1694 dt. 1st Dec., 2005, which clearly mentions that the developer has to carry out internal development of the scheme and this internal development can either be carried out through JDA or by the developer himself. In case the development work is not carried out by the developer, he has to keep 12.5 per cent of plots with JDA as security and these plots will be released only after the completion of the work. Therefore, there is in-built system in JDA whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. 2 the learned AO rejected the submission of assessee by replying on the decision of Sri Krishna (P) Ltd. vs. ITO and Ors. (supra). In this regard we submit that in the above referred case law it was held that full and true disclosure-The disclosure by the assessee (for avoiding reassessment) must not only be true but also full and a false assertion or statement of a material fact would attract s. 147-Fact that ITO could have investigated the truth of the assertion does not relieve the assessee of his obligation-In the case of assessee there is no justification/finding that the provisions for development expenses is not certain liability of the assessee and the assessee is bound to incur the same. At S. No. 3 the learned AO rejected the submission of assessee on the ground that JDA does not authorize a developer to charge expenses related to development from the purchases of the plots and also does not authorize the developer to keep/create provision for such expenses to incur in future. What can be understood from the order of the JDA is that a developer would cariy out development work of suitable standard and that too under the monitoring and supervision of the JDA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecurity and these plots will be released only after the completion of the work. Therefore, there is in built system in JDA which abides the developer to carry out the development work in accordance with the specification laid down by the JDA. Therefore, the assessee has contractual obligation with the customers to carry out the development work. However, at any stage, if the AO finds that the liability against the development work is extinguished, he may apply the provisions of s. 41(1) of IT Act. In IT Act also there is in-built system to tax the liability which is found to have extinguished or seized. (e) At S. No. 5 the learned AO rejected the submission of assessee on the ground that a liability in pure commercial sense is the liability for which one abides himself statutorily by entering into an agreement or which can be recovered from the assessee by the State like deferred sales-tax liability. This is not the case here. Further the cases relied by the assessee were also rejected by the AO saying that the same are distinguishable from the facts of the case of the assessee. The abovementioned issue has already been covered by the submissions made in paras 1, 3, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d should be allowed to the assessee following the principle laid down in the judgment. Hon'ble Supreme Court in the case of CIT vs. Shooiji Vallabhdas and Co. (supra): The learned AO distinguished this case law on the ground that the case pertains to asst. yr. 1948-49 and in this case was regarding allowability of commission on shipping freights agreed upon in the previous years. The learned AO failed to understand the ratio or principles laid down by Hon'ble Court in this case. In this case the finding given by Hon'ble Court that ''income-tax is levy on the real income of business or profession. Therefore in the case of the assessee the real income of the assessee can only be computed after deducting the liability for development expenses incurred or to be incurred on the plots sold during the year. (iv) Poona Electric Supply Co Ltd. vs. CIT (supra): On this case law the learned AO not gave any opinion that why the same is not applicable in the case of the assessee. However, this case was on the issue to decide assessee's claim of deduction of amount credited (asst. yrs. 1953-54 and 1954-55) in its books of account Consumer Benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee in its books of account is not in dispute and difference in nature of receiving the sales consideration does not in dispute. Further the scheme of the assessee is governed as per norms and regulations of the JDA and the development work is mandatory as per such norms, therefore the learned AO erred in holding that in the case of the assessee the very presence of terms and condition of development is not there. In the case of the assessee the terms and condition are with JDA as the assessee is to carry the development of whole scheme not for the plot of individual plot holder. Greater Ashoka Land and Development Co. (P) Ltd. vs. Asstt. CIT (2004) 89 TTJ (Del) 281: (2001) 79 ITD 595 (Del): The learned AO distinguished this case law on the ground that in this case the assessee was following the single venture method and sales proceeds credited in PandL a/c on completion of project. Further in this case the Hon'ble Tribunal Delhi observed that the project was completed till the decision of appeal accordingly the actual amount of expenditure was directed to be spread over to the saleable area. The learned AO failed to appreciate the ratio and principles laid down ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity and this security will be released only after the completion of development work. Therefore, the assessee is under the contractual obligation to carry out the development work. The estimation of the development expenses is made on the basis of estimation of development cost in the order of the JDA and the development work is to be carried out as per norms and regulations of the JDA, therefore it is not at the option of the assessee as to how much expenses are to be incurred. As per rules of JDA if the assessee failed to complete the development work the amount has to be deposited in JDA for development work. The above recent decision of Hon'ble apex Court supports that the assessee has correctly made accounting for treatment of development expenses and since the provision against the development expenses is an obligation of the assessee against the current year's sale, it is allowable expenses. Further, the accounting of development expenses on cash basis is not correct method of accounting. (g) At S. No. 7, the learned AO made discussion on order passed under s. 263 of IT Act, 1961 in asst. yr. 2006-07 in the case of the assessee. In the order passed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As regards to copy of order of JDA, dt. 1st Dec., 2005 this is to submit that it was the latest order issued by JDA and was in force as on the date when the assessment proceedings were being carried out. This order was submitted to AO only for proving that the assessee has to carry out development work as per the norms and specifications of the JDA. This does not mean that the liability to carry out development work started from 1st Dec., 2005 in asst. yr. 2005-06 the assessee was not bound to carry out development work or to deposit the amount against development work before that. We are enclosing herewith the copy of previous order of JDA of May-2003 (Paper book pp. 90-106) and there is also similar terms and conditions regarding development work. The development expenses incurred by the assessee are duly supported by bills and vouchers and in most of the cases the payment was made through account payee cheque and the TDS has also been deducted in case where possible, therefore it cannot be presumed that there was no actual development work by the assessee. The assessee is bound to incur development expenses:- (i) The learned AO at p. 12 para 1 of assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... blem in possession of land due to disputes with Khatedars, problem of way (Rasta) by adjoining farmers, non construction of sector roads by JDA, Takashna problem in case of joint ownership of land, etc. The main problem which the assessee is facing that most of the lands were in joint names. Some of the original Khatedars sold the land to the assessee but some of them not sold to the assessee. Since the Khasara are in joint names therefore without Takasana it was not possible to carry out development work on the land, which the assessee sold. This is also a reason that the assessee invested huge amount in gold bullion to keep the money in reserve separately for the purpose of development work. However, liability towards development expenses to be incurred in future on the plots sold did not extinguish merely because the assessee has incurred small part of expenses in next few years. The AO holding that the funds of provision made for development of land are being used for expansion of the business. The assessee used the funds for expansion of business as the development work could not be carried out at full swap due to certain reasons. The surplus funds were not used otherwis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he learned CIT(A) has deleted the addition on the basis of following findings:- 6, I have considered submissions made by the appellant and have also gone through the assessment order. The appellant company is a colonizer. Its business is to buy agricultural land, get it converted into residential/commercial land by obtaining approval from JDA in accordance with the provisions of Rajasthan Land Revenue Act and Jaipur Development Authority, The assessee divides the land into plots of various sizes and carries various development activities. The assessee sells plots directly and/or through the brokers to the customers. It is also engaged in selling plots on commission basis. 6.1 A perusal of the assessment order shows that the AO has disallowed the provision for development on the ground that it was an unascertained liability and therefore, not allowable under s. 37(1). The reason for treating it as unascertained liability is that although the appellant has claimed this provision, it has not incurred the relevant expenses even in the later years. Major part of provision has been carried forward for years together without being utilized for development of land, even though ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o nor the buyers start constructing houses simultaneously. There is bound to be some time-lag in the sale of plots and further developmental activities. Since the appellant was following mercantile system of accounting, it had to make provision for developing the plots as soon as the liability was incurred. The expenditure upon development of infrastructure was mandatory as per the notification of JDA. Unless the assessee incurs these expenses and develops internal roads, water lines etc. the JDA would not issue Patta against these plots which were sold by the appellant. These facts clearly show that what the assessee had incurred was an ascertained liability, which was clear and present. As held by the apex Court Bharat Earth Movers vs. CIT (2000) 162 CTR (SC) 325: (2000) 245 ITR 428 (SC), if a business liability has definitely arisen in the accounting year, the deduction has to be allowed although the liability may have to be quantified and discharged at a future date. Apart from this even the matching principle of accountancy requires that once sale price has been received and accounted for, the expenses which are obligatory and in the nature of committed legal liability have al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13th Sept., 2010. In the show-cause notice, the learned CIT mentioned that the provisions for development expenses to be incurred in subsequent years are not allowable. Only the expenses during the previous year are allowable for deduction from income. The order under s. 263 can be passed after giving the opportunity to the assessee. If the issue raised in show-cause notice is different from the issue on which the learned CIT has passed the order under s. 263 of the Act then it cannot be said the assessee has been given an opportunity. We accept the contention of the learned Authorised Representative that details were filed before the AO vide letter dt. 5th Dec, 2008. In this letter, it was mentioned that such expenses are being allowed in earlier years. Hence, this is not a case where there is no enquiry. Action under s. 263 cannot be taken on account of inadequate enquiry. The Hon'ble apex Court in the case of Bharat Earth Movers vs. CIT (2000) 162 CTR (SC) 325: (2000) 245 ITR 428 (SC) has held that if the business liability has arisen in the accounting year then deduction should be allowed although liability may have to be quantified and discharged at a future date. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d commercial practice and trading principles, was a deduction which, if there was no specific . provision for it under s. 10(2) of the IT Act, was certainly an allowable deduction in arriving at the profits and gains of the business of the appellant, under s, 10(1) of the Act, there being no prohibition against it, express or implied, in the Act. The expression 'profits and gains' in s. 10(1) of the IT Act has to be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure which is necessary for the purpose of earning (he receipts is deducted therefrom-whether the expenditure is actually incurred or the liability in respect thereof has accrued even though it may have to be discharged at some future date.' 32. The Hon'ble apex Court in the case of Madras Industrial Investment Corporation Ltd. vs. CIT (1997) 139 CTR (SC) 555: (1997) 225 ITR 802 (SC) held that discount on debentures is to be written off proportionately each year over period of redemption. The headnote is as under: 'Sec. 37 of the IT Act, 1961, enjoins that any expenditure not being expenditure of the nature described in ss. 30 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnual allocation of premium payable at future date. Hence, the expenditure allowable under mercantile system of accounting does not mean that it should be spent in that year. 36. The Hon'ble Allahabad High Court in CIT vs. Development Trust (P) Ltd. (1991) 99 CTR (All) 247: (1991) 189 ITR 504 (All) held that expenses in respect of development to be carried by assessee are an allowable deduction under mercantile system of accounting. 37. The Hon'ble Delhi High Court in the case of CIT vs. Nav Bharat Nirman (P) Ltd. (1983) 141 ITR 723 (Del) had an occasion to consider the liability for evicting tenants as the agreement provided for eviction of tenants by lessor. The headnote is as under: Held, that it was clear that the assessee s responsibility to evict the tenants who were occupying almost 200 Bighas of the land was an onerous responsibility. As late as 1972, practically none of the tenants had been evicted. The liability to evict the tenants was in the nature of an in built liability under the lease deed. The estimated amount in regard to the assessee's liability to evict the tenants was allowable. The ITO had given good reasons for restricting the allowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bligation of the trader is purely contingent, no question of estimating its present value may arise, for to be a permissible outgoing or allowance, there must in the year of account be a present obligation capable of commercial valuation'. It was further observed that 'where accounts are maintained on the. mercantile system, if liability to make the payment has arisen during the lime the business is carried on, it may appropriately be regarded as expenditure. But where the liability is, during the whole of the period that the business is carried on, wholly contingent and does not raise any definite obligation during the time that the business is carried on, it cannot fall within the expression 'expenditure laid out or expended wholly and exclusively for the purpose of the business'. A liability which is dependent on fulfilment of a condition which may result in reduction or in extinction of the liability is a contingent liability. It is only the actual liability which is existing in the relevant assessment year which is allowable to be considered as an expenditure. If the liability is contingent then it would amount to allowing the. apprehended losses in futur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to approval and norms of the JDA. The private colonizer has to abide by the circulars, directions and orders of the JDA if it wants to develop private township in Jaipur and it cannot wriggle out from its obligations fixed by JDA. Therefore, the liability of the assessee to carry out the internal development work in the colony is not a contingent liability but ascertained liability which accrued on the date of sale of the plot. 4.8 Further, the AO mentioned that the assessee has incurred very meagre amount in development work. The learned Authorised Representative explained that liability towards development expenses to be incurred in future on the plots sold did not extinguish merely because the assessee has not incurred expenses in next year or for next few years. This liability extinguishes only when the assessee is absolved from the liability to construct the road or laying down electric pole/water line etc. and the assessee cannot be absolved from this liability because of the regulations of JDA and the plots sold by the assessee are subject to this liability of the assessee. Furthermore, 12.5 per cent of assessee's plots are with JDA as security against development w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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