2016 (12) TMI 941 - AT - Income Tax

Disallowance of expenses under the head provision for development expenses - Held that - It is useful to note that the assessee has used the percentage completion method. When an assessee follows the percentage completion method then at the completion of the project, the assessee has to make up the accounts. At that relevant time, the assessee can offer surpluses from the provisions or may claim the deficit in case the actual expenditure is more than the provisions. Hence, the revenue is not without any remedy in case the provision is excessive. See Shree Salasar Overseas (Pvt.) Ltd. vs. ACIT 2014 (3) TMI 1055 - ITAT JAIPUR - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance of provision for development expenses.
2. Disallowance of interest on TDS.

Issue-wise Detailed Analysis:

1. Disallowance of Provision for Development Expenses:
The primary issue in this case was whether the provision for development expenses amounting to ?43,23,423/- claimed by the assessee should be allowed as a deductible expense. The Assessing Officer (AO) disallowed this provision on the grounds that it was an unascertained liability and not actually spent by the assessee. The AO argued that such expenses should be claimed in the year they are incurred.

The assessee, a partnership firm engaged in real estate development, made a provision for future development expenses on plots sold during the year. The CIT (A) deleted the disallowance, noting that the provision was an ascertained liability and thus allowable. The CIT (A) observed that the actual expenses incurred by the assessee in previous years were higher than the provisions made, indicating that the provisions were reasonable and necessary for the business.

The Tribunal reviewed the CIT (A)’s findings and the relevant case laws, including decisions in similar cases like Shree Salasar Overseas (Pvt.) Ltd. vs. ACIT and Bharat Earth Movers v. CIT. The Tribunal upheld the CIT (A)’s decision, emphasizing that the provision for development expenses was an ascertained liability incurred as part of the business operations and should be allowed as a deduction. The Tribunal also noted that the liability was not contingent but accrued at the time of sale of the plots, aligning with the matching principle in accounting where revenue and related expenses are recognized in the same period.

2. Disallowance of Interest on TDS:
The AO also disallowed an amount of ?3,804/- as interest on TDS. The CIT (A) confirmed this disallowance, and the Tribunal did not find any reason to interfere with this part of the order.

Conclusion:
The Tribunal dismissed the revenue’s appeal, affirming the CIT (A)’s decision to delete the disallowance of ?43,23,423/- for provision of development expenses and upholding the disallowance of ?3,804/- for interest on TDS. The Tribunal’s decision was based on the principle that the provision for development expenses was an ascertained liability and should be allowed as a deductible expense in the year of sale of the plots.