2013 (2) TMI 288 - AT - Income Tax

Disallowance of provisional cost of site development - Whether provisional cost of site development debited to the P&L u/s 37(1) is to be treated as an admissible expenditure as it s ascertained liability - Whether this expenditure is a crystalised or a contingent liability - Assessee is accounting the sale of plots at the time of registration - Against this sale, the cost of the plot is shown in the P&L which also includes the component of cost of site development Held that - The liability on accrual basis has to be recognized when the assessee is following the mercantile method of account in accordance with AS-I, which is recognized in section 145. The expenditure committed to be incurred in terms of sale agreement besides the regulations prescribed by the local authorities are expenditures, which are partly actually incurred and partly to be incurred. It is not a mere provision but liability in praesenti As decided in case of Bharat Earth Movers (2000 (8) TMI 4 - SUPREME COURT) there are certain requirements to be met before such provisions are allowed and they revolve around reasonable estimations. In that sense, the revenue s objection on the quantification of the same is definitely justified. The said judgments concur with each other in allowing such liabilities, as long as such liabilities are capable of being estimated with reasonable certainty. Till these requirements are satisfied, the liability is not a contingent one The assessee is under obligation to explain to A.O. the mode and manner of arriving at the figure of Rs. 250/- per unit towards the site development expenses to be incurred in future. It is not the requirement of the law that the assessee can debit the said expenditure on actually incurring the same. Remand back to AO

Summary

Issues:
1. Treatment of provisional cost of site development as an admissible expenditure.
2. Validity of the revised return filed by the assessee.
3. Recognition of liability on accrual basis.
4. Justification of quantification of site development expenses.

Issue 1: Treatment of provisional cost of site development as an admissible expenditure

The Appellate Tribunal considered the addition of Rs. 1,48,45,000/- towards provisional cost of site development made by the Assessing Officer. The Tribunal referred to the decision of the Hon'ble Supreme Court in the case of Rotork Controls India Pvt. Ltd. vs. CIT and held that the cost of site development is an ascertained liability, thus deeming the provisional cost as an admissible expenditure under section 37(1) of the Income Tax Act.

Issue 2: Validity of the revised return filed by the assessee

The CIT(A) acknowledged the revised return filed by the assessee on 10/03/2008 as valid. The revised return was based on the surrender of income estimated at 8% of the gross turnover for the assessment year 2007-08. The Tribunal upheld the validity of the revised return, determining the income of the assessee for the relevant year as Rs. 51,69,667/- as per the revised return.

Issue 3: Recognition of liability on accrual basis

The Tribunal analyzed whether the expenditure for site development constituted a crystalized or contingent liability. Following the mercantile method of accounting in accordance with AS-I, the Tribunal concluded that the liability to incur site development expenditure was a liability in praesenti, not merely a provision. The Tribunal cited the decision of the Apex Court in the case of Calcutta Co. Ltd., 37 ITR 1 to support this view.

Issue 4: Justification of quantification of site development expenses

The Tribunal noted that the expenditure in question was partly a provision and partly an ascertained liability. Referring to judgments such as Bharat Earth Movers Ltd, 245 ITR 428(SC), the Tribunal emphasized the importance of reasonable estimations in allowing such liabilities. While agreeing with the CIT(A) in principle, the Tribunal instructed the assessee to explain and justify the quantification of site development expenses, setting aside the core issue to the file of the Assessing Officer for further examination.

In conclusion, the Appellate Tribunal allowed the appeal of the revenue for statistical purposes, emphasizing the need for the assessee to clarify and substantiate the quantification of site development expenses in line with legal requirements and judgments of the Hon'ble Supreme Court.