TMI Blog2016 (10) TMI 966X X X X Extracts X X X X X X X X Extracts X X X X ..... gard, the decision of the Hon’ble Supreme Court in the case of ‘Bharat Earth Movers Vs CIT’, (2000 (8) TMI 4 - SUPREME Court ), which was followed by the Hon’ble Delhi High Court in the case of ‘Yum Restaurants (I)(P) Ltd.’(2015 (2) TMI 17 - DELHI HIGH COURT ), under similar circumstances, is directly attracted. Therefore, we are of the considered opinion that the ld. CIT(A) has gone wrong in sustaining the addition to the extent of ₹ 43,06,801/-. The same should also have been deleted. We order so now. Therefore, the addition of ₹ 5,11,50,000/- is deleted in toto. - Decided in favour of assessee - ITA No. 149/JP/2015, ITA No. 205/JP/2015 - - - Dated:- 14-9-2016 - SHRI A.D. JAIN, JM SHRI VIKRAM SINGH YADAV, AM For The Assessee : Shri Rajiv Sogani and Shri Rohan Sogani (CA) For The Revenue : Shri M.S. Meena (CIT) ORDER PER: A.D. JAIN, J.M. These are cross appeals, one by the assessee and the other by the revenue, against the order dated 15/12/2014 passed by the ld CIT(A)-II, Jaipur for A.Y. 2010-11, wherein, the following effective grounds of assessee s as well as revenue s appeals have been taken:- Grounds of assessee s appeal:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the provisions of the Income Tax Act,, nor any accounting practice. The Assessing Officer, accordingly, added the amount of ₹ 5,11,50,000/- to the total income of the assessee. The ld. CIT(A) restricted the disallowance of ₹ 43,06,801/- and allowed relief of ₹ 4,68,43,199/- to the assessee. 4. Aggrieved, both the parties are before us, by way of their respective appeals. 5. The ld. CIT DR has contended that the ld. CIT(A) has erred in deleting the addition of ₹ 5,11,50,000/-, to the extent of ₹ 4,68,43,199/-, failing to consider that the assessee had followed the mercantile system of accounting and had followed the concept of accrual liability. The ld CIT DR has placed strong reliance on the elaborate findings recorded by the Assessing Officer for making the addition. 6. On the other hand, the ld counsel for the assessee has contended that once the ld. CIT(A) had accepted the liability as being an ascertained liability, he ought to have deleted the entire addition made. 7. We have heard the rival contentions of both the parties and have perused the material available on the record. 8. While making the addition, the Assessing Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arge the said liabilities. The provisions made by the assessee are based neither on a scientific method that is consistently followed nor on a reasonable estimation. As such, the principle laid down in the case under reference is not applicable in the instant case. Moreover the assessee has created the said provision by debiting the said amount in the Profit Loss for the year under consideration against the revenue of the current year whereas the liabilities for which provision has been made relates with the revenue which is likely to be fetched in coming future. 10. At a later stage of assessment proceedings the assessee furnished the details of expenditure made against the above mentioned provision of ₹ 5,11,50,000/-. Perusal of the said details reveals that the assessee has incurred expenditure of ₹ 3,40,14,675/- and ₹ 49,08,406/- during the A.Y. 2011-12 and 2012-13 respectively totaling to ₹ 3,89,23,081/-. For the remaining amount of ₹ 1,22,26,919/- (51150000 - 38923081) left out of the said provision of ₹ 5,11,50,000/-the assessee has stated as under :- (i) The project is situated at the bank of Ganda Naala. During the course of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tand by taking plea for providing Bisalpur water to the buyers of its project. Whereas contrary to above plea on other hand the assessee has made provision for expenses of ₹ 5,00,000/- out of the above ₹ 5,11,50,000/- for digging two borewells, which is totally against to its contention. The PHED Department is taking care of Bisalpur water. The assessee has not furnished any evidence/ correspondence with the PHED in support of its claim. Moreover, in support of its claim the assessee has placed reliance over the case of Rotork Controls India Pvt. Ltd. Vs CIT (2009) 223 CTR 425 (SC). However, the claim of the assessee is not towards a warranty liability under a condition or stipulation made in the sale document imposing a liability upon the assessee to discharge its obligation under warranty. Therefore, the principle laid down in the case under reference is not applicable in the case of assessee. 15. Section 145 of the Income Tax Act, 1961 prescribes the method of accounting to be followed by the assessee for computing income chargeable under the head Profit Gains of business or profession . Section 145(1) states that the computation would be in accordance with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbit of taxable income as per sec. 5 of the Income Tax Act, 1961. The assessee has not got the liberty to decide the matter of taxability on the basis of the entries which the assessee may choose to make in his account, but it has to be decided in accordance with the provisions of law [Sutlej Cotton Mills Ltd. Vs CIT (SC) 116 ITR 1]. Moreover, when the question is whether a receipt of money is taxable or not or whether certain deduction from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not with accountancy practice [Tuticorin Alkali Chemicals Fertilizers Ltd. Vs CIT (SC) 227 ITR 172j. Though in the present case the action of the assessee is neither supported with IT. Law nor the accounting principles. 18. During the course of assessment proceedings the assessee has stated that out of estimated cost of work to be executed amounting to ₹ 5,11,50,000/-, the amount related to sales is as under:- Expected Expenses : 5,11,50,000 Total Build up are in Sq. feets : 4,37,761 Cost of Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of when the cash is received, and the reporting of expenses in the period of purchase, regardless of when payment is made. In the present case the assessee has followed part of both the above mentioned method in such a manner so as to suit its requirements. As such, the assessee has not followed the Principles of commercial accounting. Though the assessee is liable to apply the principles of commercial accounting to ascertain the Profit Gains [CIT Vs U. P. State Industrial Development Corporation (SC) 225 ITR 703]. 21. The assessee firm was constituted through Partnership Deed dated 04.01.2006 which was later reorganized vide the Deeds of Reorganization of Partnership dated 01.04.2006 and 13.07.2009. After the constitution of the said Partnership firm, the assessee firm commenced its first project of construction of residential flats in the name of Pearl Green Acres at Paliwal Garden, Shri Gopal Nagar, Gopalpura Byepass, Jaipur. The above quantitative details reveal that there is inconsistency in the revenue recognition and cost as well the arbitrary valuation of closing stock. During the year under consideration the assessee has changed the method of valuing the cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years. The appellant has refuted each of the above contentions. 2.4.1 Now each of the above issues will be discussed. The appellant firm was required to complete the pending work with respect to common facilities which has been specifically mentioned in the sale deeds executed by the appellant firm in favour of the buyers. The relevant extract of the sale deed has been reproduced in para 6 of the order u/s 143(3), in the reply of the assessee to the show cause notice. This registered sale deed creates a contractual obligation on the appellant to provide for the facilities mentioned in the sale deed. The fact that no time frame has been mentioned, in the sale deed, for completing the above pending work does not free the appellant from the obligation to complete the above work. It is implied that this work should be completed in a reasonable time. Therefore, in this case, an ascertained liability accrued on the assessee on the date of the sale deed to complete the work relating to common facilities, which had to be discharged at a future date. Since, this liability was not discharged till the end of the previous year and had to be discharged at a future date, this liability had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the stand of the Assessing Officer in rejecting the claim of the provision merely because it is an estimate and without a binding obligation cannot be sustained in view of the facts of this case, discussed above and the principles relating to provisions which have been discussed by the Supreme Court, in the above judgments. Also, the ITAT, Jaipur has also held in the case of Shree Salasar Overseas (P) Ltd. vs. DCIT (supra) that - Assessee, a colonizer, being bound to carry out internal development of the colony at its cost in terms of JDA regulations, the liability of the assessee to carry out the internal development work in the colony is an ascertained liability which accrued on the date of the sale of the plots and therefore, the provision for development expenses made by the assessee is allowable as deduction. 2.4.1. Now the reasonableness of the provision debited by the appellant in its books of accounts will be examined. As regards, the provision for the repair work of the ganda nalla which the Assessing Officer has held to be an afterthought, the appellant has stated that at the time of sanctioning the project, the Jaipur Development Authority, vide letter dated 19.01 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been incurred till 31.03.2014 against the above provision. This shows that the estimate of provision made is accurate to the extent of ₹ 4,68,43,199/-. Hence, the provision made is excessive to the extent of ₹ 43,06,801/- which has not been spent even till 31.03.2014 i.e. four years from the end of the year in which the provision was made. Therefore, provision to the extent of ₹ 43,06,801/- is considered to be excessive and is disallowed. The balance addition of ₹ 4,68,43,199/- on account of disallowance of provision, is directed to be deleted. This ground is partly allowed. 10. Thus, the Assessing Officer held that in the sale deed/contract, no condition had been laid down, whereby the assessee could be enforced to meet out the liabilities for which, the assessee created the provision. It was observed that in the sale deed/contract, no time frame had been set for the discharge of the liabilities. However, as correctly observed by the ld. CIT(A), despite no time frame having been fixed in the sale deed/contract for discharge of the liabilities of the assessee, it could not be said that the work was not to be taken to be required to be completed withi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowed by the assessee, it is the income and the expenditure for the same accounting period which have to be matched. The Assessing Officer further observed that the assessee had partially followed the completed contract method and partially, the percentage of completion method. However, the Assessing Officer did not bring on record anything adverse to the assessee, which could support the disallowance of the provision made by the assessee in its books of account. The books of account of the assessee were duly audited. The Assessing Officer himself did not reject them too. The non-rejection of books of account by the Assessing Officer also speaks volume against the surmisical and conjectural observation made in the assessment order that the assessee was inconsistent in revenue recognition and cost, as also arbitrary in valuation of closing stock. Further, the Assessing Officer did not bring anything on record to support his observation that the assessee had followed partially, the project completion method and partially, the completed contract method. Rather, as per its accounting policy regarding revenue recognition, the revenue from property development activity is recognized wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e work. Obviously, therefore, once this liability had to be discharged in future, the same had to be estimated. Also, before the Assessing Officer, the assessee had duly submitted the basis for arriving at the estimate of the provision made. Rather, the breakup of the provision qua the expenses concerning Ganda Nala, corresponded to the last figure with the breakup provided to the Assessing Officer by the assessee in the assessment proceedings. Taking note of this relevant fact, the ld. CIT(A) correctly observed that the Assessing Officer had erred in holding the provision to be just an afterthought of the assessee, raised to suit its convenience. The ld. CIT(A) also observed that the provision of ₹ 2,73,72,976/-, which provision does not stood included in the closing stock of the assessee, relating to unsold flax, was revenue neutral. 17. A similar provision for supplies on work executed on a dam, which was incomplete at the end of the revenue financial year, has been allowed by the Hon ble Jurisdictional High Court in the case of Om Metals Minerals (P) Ltd. , (2015) 373 ITR 406 (Raj). The Hon ble High Court observed, inter alia, that if the expenditure is not paid by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his was what had prompted the estimation. Now, if the provision does not stand exhausted even four years from the end of the year in which it was made, this does not mean that the provision to that extent was ill conceived. The details of the expenditure intended were duly made available. That such incurrence of expenditure did not come about, cannot put to naught the provision which was made bonafide. The legal position remains that the amount unutilized would be available for being offered to tax in the next assessment year. The basis of the provision made has not been observed by the ld. CIT(A) to be irrational. In this regard, the decision of the Hon ble Supreme Court in the case of Bharat Earth Movers Vs CIT , (2000) 245 ITR 428 (SC), which was followed by the Hon ble Delhi High Court in the case of Yum Restaurants (I)(P) Ltd. , (2015) 371 ITR 139 (Del), under similar circumstances, is directly attracted. 26. Therefore, we are of the considered opinion that the ld. CIT(A) has gone wrong in sustaining the addition to the extent of ₹ 43,06,801/-. The same should also have been deleted. We order so now. Therefore, the addition of ₹ 5,11,50,000/- is deleted in tot ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
