2017 (5) TMI 6 - AT - Income Tax

Accrual of liability - Held that - The claim of the expenditure for which the provision has been made was having direct nexus with the income as declared by the assessee, therefore, such provision made by the assessee was allowable during the year under consideration - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of addition made by the Assessing Officer (A.O.) on account of disallowance of 'provision for development expenses' claimed by the assessee firm for A.Y. 2011-12 and A.Y. 2013-14.

Issue-wise Detailed Analysis:

1. Deletion of Addition by CIT(A):
The primary issue revolves around whether the CIT(A) was right in deleting the addition made by the A.O. concerning the disallowance of 'provision for development expenses' claimed by the assessee firm for A.Y. 2011-12 and A.Y. 2013-14. The A.O. disallowed the provision for development expenses amounting to ?13,61,02,357 for A.Y. 2011-12 and ?11,07,83,044 for A.Y. 2013-14, arguing that it was a contingent liability and not an accrued one.

Facts and Arguments:
- The assessee firm, engaged in developing an integrated township named "Mayura City," made provisions for development expenses based on the estimated project cost and actual sales made.
- The CIT(A) deleted the additions, noting that the A.O. did not point out any mistakes in the detailed working or perform any physical verification of the site. The A.O. also did not refer to any incriminating documents seized during the year to support his contention.
- The CIT(A) emphasized that the provision was made following prevailing accounting principles and had a direct nexus with the income declared by the assessee. The provision was based on the commitment to complete the development as per the terms of sale agreements with the buyers.

Legal Precedents:
- The CIT(A) relied on judgments from the Hon'ble Supreme Court in cases such as Bharat Earth Movers and Calcutta Co. Ltd., which established that a liability that has definitely arisen in the accounting year, even if to be discharged at a future date, is deductible.
- The CIT(A) also referenced the Rajasthan High Court's decision in Om Metals and Minerals P Ltd., which supported the view that such provisions are allowable deductions.

Tribunal's Findings:
- The Tribunal agreed with the CIT(A)'s findings, noting that the assessee's liability had accrued and was to be discharged at a later date. The provision was made based on a reasonable estimate of the development expenses required to fulfill the commitments made in the sale agreements.
- The Tribunal cited several case laws, including Bharat Earth Movers v/s Commissioner of Income Tax and Calcutta Co. Limited v CIT, which supported the principle that an accrued liability, even if to be discharged in the future, is deductible if it can be estimated with reasonable certainty.
- The Tribunal concluded that the provision made by the assessee was allowable during the year under consideration, dismissing the revenue's appeals for both A.Y. 2011-12 and A.Y. 2013-14.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to delete the additions made by the A.O. for the disallowance of 'provision for development expenses.' The Tribunal found that the provision was based on a reasonable estimate and had a direct nexus with the income declared by the assessee, aligning with established legal principles. Consequently, both appeals by the revenue were dismissed.