2018 (11) TMI 380 - AT - Income Tax

Addition of provision for contract loss / expenses - crystallized liability or uncertain liability - no evidence filed by the assessee with regard to provision for rental compensation - Held that - Just because a claim was filed by the contractor of the assessee, would not mean that assessee was legally bound to pay such amount. The maxim debitum in praesenti solvendum in futuro relied on by the ld. Authorised Representative, can apply only if there is an ascertained liability for which amount is to be crystallized and paid later, and not to a situation where there is only a claim, with no acknowledged liability. Commissioner of Income Tax (Appeals) fell in error in taking cognizance of the arbitration proceedings initiated well after the end of the relevant previous year, and coming to a conclusion that there was a crystallized liability of ₹ 70,00,000/- due from the assessee to M/s. Garabandal Constructions Pvt. Ltd as at the end of the relevant previous year. As for the rental compensation of ₹ 55,00,000/- nothing is available on record to show how it was computed or the basis on which assessee claimed itself to be liable to pay such compensation. In these circumstances, we are of the opinion that ld. Commissioner of Income Tax (Appeals) fell in error in allowing the claim of the assessee to the extent of ₹ 1,25,00,000/-. - decided in favour of revenue

Summary

Issues Involved:
1. Disallowance of provision for contract loss by the Assessing Officer.
2. Validity of the provision for ?70,00,000/- due to M/s. Garabandal Constructions Pvt. Ltd.
3. Validity of the provision for ?55,00,000/- as rental compensation.

Issue-wise Detailed Analysis:

1. Disallowance of Provision for Contract Loss by the Assessing Officer:
The Revenue was aggrieved by the Commissioner of Income Tax (Appeals) [CIT(A)] deleting ?1,25,00,000/- out of the total disallowance of ?1,33,41,882/- made by the Assessing Officer (AO) on the provision for contract loss. The AO noted that the assessee, a real estate company, created a provision of ?1,35,05,446/- against contract loss, which was considered contingent and subsequently written back in later years. The AO disallowed ?1,33,41,882/- of this provision.

2. Validity of the Provision for ?70,00,000/- Due to M/s. Garabandal Constructions Pvt. Ltd.:
The assessee argued that the provision was based on arbitration proceedings initiated by M/s. Garabandal Constructions Pvt. Ltd., which was settled for ?75,00,000/-. The CIT(A) verified the details and concluded that the provision of ?70,00,000/- was based on a sound estimate as the assessee had an obligation to the contractor. However, the Tribunal found no evidence that M/s. Garabandal had claimed this amount during the relevant year or that the liability was acknowledged by the assessee. The Tribunal noted that the arbitration proceedings and the settlement occurred after the relevant financial year, indicating no crystallized liability as of 31.03.2012. Therefore, the provision was not considered an ascertained liability.

3. Validity of the Provision for ?55,00,000/- as Rental Compensation:
The CIT(A) allowed the provision for ?55,00,000/- as rental compensation, considering it a crystallized liability due to delayed delivery of flats. However, the Tribunal found no evidence or basis for this computation. The Tribunal emphasized that the assessee did not provide sufficient documentation to substantiate the liability for rental compensation. Consequently, the Tribunal concluded that the CIT(A) erred in allowing this provision without proper verification.

Conclusion:
The Tribunal set aside the order of the CIT(A), finding that the provisions for ?70,00,000/- and ?55,00,000/- were not crystallized liabilities as of the relevant financial year. The appeal of the Revenue was allowed, and the disallowance by the AO was upheld.