2016 (10) TMI 966 - AT - Income Tax

Disallowance of provision for direct expenses - AO observed that expenditure actually not incurred during the year - mercantile system of accounting - construction activity - Held that - It remains undisputed that the provision was made by the assessee for certain expected expenditure. As such the provision was made due to the arising of the possibility of the expenditure in futuro. This 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 (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 Rs. 43, 06, 801/-. The same should also have been deleted. We order so now. Therefore the addition of Rs. 5, 11, 50, 000/- is deleted in toto. - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance of provision for direct expenses.
2. Disallowance of depreciation on cars.
3. Deletion of addition by disallowing provision of direct expenses.

Issue-wise Detailed Analysis:

1. Disallowance of provision for direct expenses:
The assessee, engaged in real estate and construction, made a provision for direct expenses amounting to Rs. 5,11,50,000 in its trading account. The Assessing Officer (AO) disallowed this provision, arguing it was not an actual expenditure incurred during the year but merely an estimate without proper justification or a reasoned base. The AO highlighted that the provision was not supported by the Income Tax Act or any accounting practice. The AO added the entire amount to the assessee’s total income. However, the Commissioner of Income Tax (Appeals) [CIT(A)] restricted the disallowance to Rs. 43,06,801 and allowed relief of Rs. 4,68,43,199 to the assessee, recognizing the liability as an ascertained one based on contractual obligations mentioned in the sale deeds.

2. Disallowance of depreciation on cars:
This issue was raised by the assessee but was not pressed during the proceedings, leading to its rejection.

3. Deletion of addition by disallowing provision of direct expenses:
The Revenue appealed against the CIT(A)’s decision to delete the addition of Rs. 4,68,43,199. The CIT(A) held that the provision was made based on an ascertained liability arising from contractual obligations to provide common facilities in the sold flats, as mentioned in the sale deeds. The CIT(A) noted that the provision was made for both sold and unsold flats, with the unsold flats' provision included in the closing stock valuation, making it revenue-neutral. The CIT(A) also observed that the actual expenditure incurred by the assessee in subsequent years (Rs. 4,68,43,199) validated the reasonableness of the provision, disallowing only the excessive amount of Rs. 43,06,801, which remained unspent even after four years.

Analysis:

Disallowance of provision for direct expenses:
The AO’s disallowance was based on the view that the provision was an estimate without a reasonable basis, not supported by the Income Tax Act or accounting practices. The AO argued that the provision was not enforceable by any condition in the sale deeds and lacked a specific timeframe for completion. However, the CIT(A) found that the sale deeds created a contractual obligation for the assessee to provide certain facilities, making the liability an ascertained one. The CIT(A) referred to the Supreme Court’s decision in Calcutta Co. Ltd. vs. CIT, which supports the recognition of an ascertained liability even if the exact amount is estimated. The CIT(A) also cited the Supreme Court’s decision in Rotork Controls India (P) Ltd. vs. CIT, which outlines the conditions for recognizing a provision: a present obligation from past events, probable outflow of resources, and a reliable estimate of the obligation amount.

Deletion of addition by disallowing provision of direct expenses:
The CIT(A) justified the deletion of Rs. 4,68,43,199 based on the actual expenditure incurred in subsequent years, validating the reasonableness of the provision. The CIT(A) observed that the provision for unsold flats was included in the closing stock valuation, making it revenue-neutral. The CIT(A) also noted that the provision for the repair of Ganda Nala was based on a condition laid by the Jaipur Development Authority (JDA) and was not an afterthought. The CIT(A) concluded that the provision was excessive only to the extent of Rs. 43,06,801, which remained unspent even after four years, and disallowed this amount.

Conclusion:
The Tribunal upheld the CIT(A)’s decision to delete the addition of Rs. 4,68,43,199, finding no merit in the Revenue’s objection. The Tribunal also found the CIT(A) wrong in sustaining the addition of Rs. 43,06,801, stating that the provision was made based on a fair estimate of the expenditure to be incurred. The Tribunal ordered the deletion of the entire addition of Rs. 5,11,50,000. The appeal of the department was dismissed, and the appeal of the assessee was partly allowed, leading to the deletion of the entire disallowance of Rs. 5,11,50,000.

Order:
The appeal of the department was dismissed, and the appeal of the assessee was partly allowed, resulting in the deletion of the entire addition of Rs. 5,11,50,000. The order was pronounced in the open court on 14/09/2016.