2023 (2) TMI 156 - AT - Income Tax

Scope of the limited Scrutiny assessment - Allowability of provision for expenditure - assessee who is a builder following the percentage of completion method for the purpose of recognition of income for the purpose of tax - HELD THAT - When an assessee following the percentage of completion method, it means that the revenue expenses of the contracts are recognized, as the percentage of work completed during the period. The method recognise revenue expenses in proportionate to the completion of the contracted project, which means the question of providing for expenses to be incurred in future does not arise. It is neither the case of the appellant that the corresponding entire income has been offered to tax. The ratio of the decisions of Rotork Controls India (P.) Ltd. 2009 (5) TMI 16 - SUPREME COURT and Bharat Earth Movers Ltd. 2000 (8) TMI 4 - SUPREME COURT laid down by the ld. AR have no application to the facts of the present case. CIT(A) had rightly held that when the case was taken up for scrutiny under Limited Scrutiny for the purpose of verification of low income, verification of expenses also falls within its sweep. Thus, we are of the considered opinion that the provision for expenses as claimed by the assessee was rightly disallowed by the Assessing Officer. Accordingly, the order of the ld. CIT(A) is based on proper appreciation of facts of the case and just and proper and does not warrant any inference by this Tribunal. Appeal filed by the assessee stands dismissed.

Summary

Issues:
Allowability of provision for expenditure in case of a builder following the percentage of completion method for recognition of income.

Analysis:

Issue 1: Allowability of provision for expenditure
The appellant, a partnership firm engaged in the business of builders, filed an appeal against the order of the Commissioner of Income Tax for the assessment year 2015-16. The Assessing Officer disallowed provisions for expenses amounting to Rs. 42,11,245 and Rs. 55,02,281 made towards common emanates and expenses of building 'A' and 'B', respectively. The appellant contended that the provisions were based on an architect's certificate and should be allowed as deductions. However, the Commissioner dismissed the appeal, stating that the appellant failed to prove the actual incurrence of these expenses. The appellant further argued that the Assessing Officer exceeded the guidelines for limited scrutiny assessment. The Tribunal held that when an assessee follows the percentage of completion method, recognizing revenue expenses in proportion to work completed, provisions for future expenses are unnecessary. Citing the Supreme Court decisions in Rotork Controls India (P.) Ltd. vs. CIT and Bharat Earth Movers Ltd., the Tribunal concluded that the provisions for expenses were rightly disallowed by the Assessing Officer. The Tribunal upheld the Commissioner's order, stating it was based on a proper understanding of the facts and did not require interference.

Conclusion:
The Tribunal dismissed the appeal filed by the assessee regarding the disallowance of provisions for expenses, affirming the decision of the Commissioner of Income Tax (Appeals) and finding the disallowance to be justified under the percentage of completion method followed by the builder.