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ITO, Ward-1 (2) , Jaipur Versus M/s Ranka Colonizers Pvt. Ltd.

2017 (12) TMI 574 - ITAT JAIPUR

Allowable business expenditure - provision towards the development expenditure - Held that:- As noted that the assessee has prepared an estimate of development expenses from an architect and detailed working has been submitted. It is noted that the development work has to be carried out by the assessee as per the specifications of the JDA and the same have been considered while working out the above estimation which has been worked out at ₹ 15,55,73,066/- and given the total saleable area .....

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he specification of development activities which has to be carried out by the assessee and also in terms of quantification thereof. We accordingly confirm the basis and reasonability of such provision towards the development expenditure and a claim towards such an ascertained liability is therefore clearly allowable for tax purposes under the provisions of section 37 of the Act. - Further, we note that the assessee has been consistent in its accounting policy whereby it creates provision tow .....

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urb the same for the impunged assessment year. - Decided in favour of assessee. - ITA. No. 642/JP/2017, ITA. No. 232/JP/2017 - Dated:- 5-12-2017 - Shri Vijay Pal Rao, JM And Shri Vikram Singh Yadav, AM Revenue by : Shri P. P. Meena Assessee by : Shri Vijay Goyal ORDER Per : Vikram Singh Yadav, A. M. These are appeals filed by the Revenue against the order of ld. CIT(A) Jaipur dated 26.05.2017 for AY 2012-12 and dated 09.01.2017 for AY 2012-13 respectively. The respective grounds of appeal are as .....

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opment expenses without going through the provisions of section 37(1) of the I.T Act, 1961. 2. At the outset, ld. AR submitted that matter pertaining to AY 2011- 12 may be taken as lead case since the issues involved is common and the matter in this case has been examined at length by the ld. CIT(A) pursuant to the direction of the Hon ble Tribunal in the first round of appellate proceedings. With the consent of the both parties, the matter pertaining to AY 2011-12 has been taken as lead case fo .....

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the Assessing Officer in his order, had offered the following justification: The development expenses of ₹ 6267210/- debited in P&L account consist the provision for development made on are sold during the year @ ₹ 500/- per sq. yards in the scheme of assessee naming "Sachivalaya Enclave". The actual development expenses incurred during the year are being debited in the a/c naming "Provision for development expenses". The copy of such ledger a/c consisting the .....

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development expenses to be incurred by the developer is not being charged in addition to the sale price of the plot taken by the developer. The development work has to be carried out as per the specification of the JDA. The sales of the assessee represents to two things, first cost of land and second cost of development expenses. Since the cost of the development expenses is to be incurred in the next years, therefore, the sales to the extent of the cost of development expenses is carried forwa .....

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of the plot. The said liability ought to have been deducted from the amount of income accrued in order to arrive the true and fair profits of a business or profession, therefore the estimation of further cost of development nomenclature in books of account as " Provision against development expenses" are allowable expenses u/s 37 of the Income Tax Act read with section 28 of Income Tax Act. The development work has to be carried out as per the specification of the JDA. 3.1 However, the .....

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e ld CIT(A) with the following directions which are reproduced as under:- 7. We have heard the rival submissions and perused the material available on the record. On a consideration of the peculiar facts and circumstances of the case, we find that, though, prima facie, the assessee appears to have an arguable case as canvassed before us. However, arguments have to be supported on facts and this is an area, which is required to be considered. Since the evidence and supporting facts have not been .....

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first caring to marshal the facts. Legal precedent is available both for and against a general proposition of law and it is only when the facts are first addressed and the material facts are culled out that the conclusion can be supported by legal precedent. Considering the fact that it is a recurring issue for the assessee and the tax authorities, we deem it appropriate to set aside the impugned order and restore the issue back to the file of the ld. CIT(A) with a direction to pass a speaking o .....

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has since been examined at length by the ld. CIT(A) wherein the relevant facts have been brought on record and properly analyized and taking into consideration the decision of Hon ble Rajasthan High Court in case of CIT vs. Shree Salasar Overseas Pvt. Ltd. in ITA No. 147/2014 dated 29.04.2016 and the decision of various Benches of the Jaipur Tribunal, the ld. CIT(A) has rightly allowed the provision for development expenses amounting to ₹ 62,67,210/-. He further relied on the written subm .....

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ee purchases the agriculture land and thereafter it applies to JDA for conversion of land for residential and commercial purpose as per the provision of Rajasthan Land Revenue Act and Jaipur Development Authority. The assessee divides the land in plots of various sizes and carries development activities like construction of road, lying of water supply lines, electricity facility wiring, sewerage, construction of overhead tanks etc. As per the norms and regulations of JDA for Private Township, th .....

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ribed minimum standards of work and quality and the developer has to carry out the work as per the minimum standards laid down by the JDA. In order to secure the carry out of the development work as per the standards and specification laid down by it, JDA keeps 12.5% plots as pledged security and these plots can be released only after completion of development work. In case the developer does not carry out the development work, the JDA sales these plots in open market and out of the sale proceed .....

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asis irrespective to realization and expenses are booked on accrual basis. The assessee started the sales without completing the development work and the development work is to be carried out in different phases in coming years. Therefore, the sales effected by the assessee are subject to liability of development expenses which is to be incurred in future. The basic principle of the accounting is matching i.e. matching of expenses with revenue. Therefore, the assessee makes the provision for dev .....

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7,210/-. During this year, the assessee incurred actual expenses of ₹ 19,60,751/- on development work which were debited to Provision for development expenses. (Reference:PB pg 37-38). The sales vis a vis Provision for development Expenses in the previous years is as under:- AY Sales in (SY) Provision made during the year Expenses incurred during the year Status of Assessment Asses sment Order at PB pg No. 2007-08 29121.03 1,45,60,515 0.00 Justification for provision submitted before AO (P .....

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he provisions for development expenses. Although all the facts and circumstances of the current year were similar to previous years but the AO took a divergent view and disallowed the provision for development expenses of ₹ 62,67,210/-. Further, the actual expenses incurred by the assessee amounting to ₹ 19,60,751/- which was debited to Provision for development expenses , were also not allowed by AO. However, AO straightway disallowed the provision for development expenses by holdin .....

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so not taken a note of the case laws relied upon. Therefore, considering all these facts and circumstances of the case, under power vested u/s 250(4) of the Act, assessee has been asked to provide following: (i) furnish the details regarding the nature and basis of provision, (ii) how the assessee is abide by JDA circulars and (iii) past history of the case. The ld AR explained that the assessee s scheme is approved by JDA. The approval process was under progress since 20/07/2006 and scheme was .....

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f, it has to keep 12.5% of plots with JDA as security and these plots can be released only after the completion of the work. The development work is to be carried out under the supervision and control of JDA and it should be in accordance with the standards prescribed by JDA. The assessee filed copy of JDA Circular to support its contentions. I have also perused the approved MAP of the scheme wherein clear cut marking is made in para 5 of Notes that 12.5% plots total area of 37181.61 are pledged .....

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business of M/s Shree Salasar Overseas Pvt Ltd. Therefore, in view of the above facts and circumstances of the case and most respectfully following the decision of Hon ble Rajasthan High Court in the case of M/s Shree Salasar Overseas Private Ltd. I am of considerate view that the liability of 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. Now the question arises on the issue .....

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ed the estimation of development cost as made by architect. The total estimation of development cost as made by Architect is of ₹ 15,55,73,066/- and total saleable area is 310052.60 Sq yard. This gives the development cost of ₹ 501.76 per SQ yard against which the assessee made the provision of ₹ 500/- per Sq Yard. The assessee has further submitted that as per the circular of JDA in respect of the guidance for development work and estimate amount of expenses on each activity o .....

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the reasonableness of estimation of development expenses by submitting the copy of note sheet taken from the file of JDA in respect of JDA s own scheme at Village Prithvisinghpura wherein the JDA estimated the cost of development expenses about ₹ 1700/- per sq. Mts. as on 14.02.2014. Hon ble ITAT Jaipur Bench in the case of DCIT vs. M/s Shree Ram Kripa Buildcon Pvt Ltd ITA No 1076/JP/2011 order dated 13-01-2012 has made the finding on excessive provision if any made as under:- "2.15 .....

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ut any remedy in case the provision is excessive." In the case of the assessee, the estimation is supported by expert s opinion also. Even otherwise also if excess provision is found after completion of the project, the legislation has remedy to tax excessive provision by applying the provisions of section 41(1) of Income-tax Act 1961. Therefore, in view of the above facts and circumstances, the provision for development expenses which was made by assessee @ ₹ 500/- per sq yard on the .....

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In view of the above facts and circumstances of the case and respectfully following the decision of Hon ble Supreme Court in the case of Rotark Controls India (P) Ltd Vs CIT (supra) and decision of Hon ble Rajasthan High Court in the case of CIT Vs. Shree Salasar Overseas Pvt Ltd. (supra), I am of the considerate view that the AO has not justified in disallowing the provision for development expenses. Accordingly, AO is directed to delete the addition of ₹ 62,67,210/-. Assessee s appeal s .....

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being developed under the name and style of Sachivalaya Enclave . The said scheme has been approved by JDA on 14.9.2012 and the approved scheme map has been placed on record which has been verified by the ld CIT(A). The ld CIT(A) has returned a finding that as per JDA Circular no D-1694 dated 1/12/2005, internal development work has to be undertaken by the assessee and in pursuance of the same, in the instant case, 12.5% plot area of measuring an area of 37181.61 sq. yard is pledged with JDA as .....

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and use application (90-B(3)) dated 24.08.09 that internal development work will be carried out as per norms of JDA and in future, JDA and other govt. agencies will not be requested for any funds and no demand shall be made for carrying out the internal development in terms of road, water, electricity, sewerage, facility, etc. The above facts thus clearly demonstrate that from a regulatory standpoint, the assessee is required to carry out the internal development work in respect of scheme being .....

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ng to be collected in future in respect of such development expenditure. It was accordingly submitted that the assessee had a contractual obligation with the customer to carry out the development work. In support of the said contention, it was further submitted that the sales of the assessee consists the sales of plots in Private Khatedar Scheme for which no sales agreement is executed. In the Private Khatedar scheme, the buyer of plot apply for purchase of plot in scheme by way of application f .....

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s governed as per rules and regulations of Rajasthan Land Revenue Act and the JDA, and as per JDA circular, the development expenses cannot be charged from customers in addition to the cost of the plot. It was submitted that after taking into consideration the assessee s submissions that the consideration towards the sale of plots of land includes the cost of development expenditure has been accepted by the Revenue and the same is not in dispute. We find that the similar contentions have been ra .....

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. As we have noted above, during the year under consideration, the assessee has reported sale of plots measuring 12534.42 sq. yard amounting to ₹ 3,09,04,182. It has been contended before us that the provision of ₹ 62,67,210 towards the development expenditure is in relation to said sale of plots which have been actually executed during the year, duly reflected in the financial statements and offered to tax in the return of income. It was contended that under the well accepted accoun .....

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he same. 10. Now, coming to the contention of the Revenue that what has been claimed by the assessee is a mere provision towards development expenditure and not an actual expenditure which has been incurred by the assessee during the year and the same is thus not allowable under the provisions of the Act. In the instant case, the assessee has executed sale of plots of land and consideration for such sale of plots, as we have noted above, is inclusive of charges towards the development expenditur .....

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can be demonstrated with appropriate documentation, a claim towards such an ascertained liability will therefore be allowable for tax purposes. It is noted that the assessee has prepared an estimate of development expenses from an architect and detailed working has been submitted as part of the paperbook pages 137-154. It is noted that the development work has to be carried out by the assessee as per the specifications of the JDA and the same have been considered while working out the above est .....

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₹ 1700/- per sq. Mts. as on 14.02.2014. Nothing has been brought on record which dispute the specification of development activities which has to be carried out by the assessee and also in terms of quantification thereof. We accordingly confirm the basis and reasonability of such provision towards the development expenditure and a claim towards such an ascertained liability is therefore clearly allowable for tax purposes under the provisions of section 37 of the Act. 11. Further, we note .....

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completing the assessment u/s 143(3) of the Act and we don t see any justifiable basis to disturb the same for the impunged assessment year. 12. Our view is also fortified by the decision of the Hon ble Rajasthan High Court in case of Salasar Overseas Pvt ltd (Supra) wherein it was held as under: 8. Admittedly, the assessee is following the mercantile system of accounting and it is recognising the same on accrual basis as and when the possession of the plot is passed/ given. The sale of plot is .....

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