2016 (4) TMI 666 - AT - Income Tax

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 the assessee. Even though the assessee has claimed to have completed the project in the year relevant to the financial year 2010-11, yet the Ld CIT(A) has noticed that the assessee was not given the land till 2013 (even after expiry of more than three years). Further, the assessee also could not show that it did incur any expenditure against the provision so made by it. As pointed out by Ld CIT(A), the question of incurring expenditure would arise only upon handing over of the relevant portion of 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

Summary

Issues:
1. Disallowance of claim of "Provision for Expenses" by Ld CIT(A).
2. Whether the provision made by the assessee is towards an ascertained liability or a contingent liability.

Analysis:
1. The assessee, engaged in building construction, challenged the order disallowing the claim of "Provision for Expenses" for the assessment year 2010-11. The claim related to a project under the Slum Redevelopment Scheme. The assessee offered full revenue from the project during the year under consideration. The provision made was towards construction of built-up premises required to be handed over to M.C.G.M. The AO disallowed the claim due to lack of expenditure evidence against the provision.

2. The Ld CIT(A) upheld the disallowance stating that the liability was contingent upon land allotment, which had not occurred. The assessee argued that under the "Revenue cost matching principle," expenses should be provided for, as the project was completed. The dispute centered on whether the liability was ascertained or contingent. The terms of the project's sanction imposed the liability on the assessee, but the actual conduct showed no expenditure against the provision made. The land required for construction had not been handed over to the assessee, leading to a conclusion of contingent liability.

3. The Tribunal found that although the liability was part of the project expenditure, it was contingent upon land allotment. The assessee's failure to show expenditure against the provision, coupled with the absence of land allotment, supported the view of a contingent liability. Despite claiming project completion, the assessee had not received the land. The Tribunal upheld the disallowance of the provision for expenses, as clarity on the liability discharge was lacking. The decision favored the tax authorities, leading to the dismissal of the assessee's appeal.