2017 (12) TMI 574 - AT - Income Tax

Allowable business expenditure - provision towards the development expenditure - Held that - As noted that the assessee has prepared an estimate of development expenses from an architect and detailed working has been submitted. It is noted that the development work has to be carried out by the assessee as per the specifications of the JDA and the same have been considered while working out the above estimation which has been worked out at 15, 55, 73, 066/- and given the total saleable area of 310052.60 Sq. yards it gives the development cost of 501.76 per Sq. yard against which the assessee has made a provision of 500/- per Sq Yard. As contended that the said estimate of development expenditure is also comparable to development expenditure estimated by JDA s own scheme at Village Prithvisinghpura wherein the JDA estimated the cost of development expenses at about 1700/- per sq. Mts. as on 14.02.2014 nothing has been brought on record which dispute the specification of development activities which has to be carried out by the assessee and also in terms of quantification thereof. We accordingly confirm the basis and reasonability of such provision towards the development expenditure and a claim towards such an ascertained liability is therefore clearly allowable for tax purposes under the provisions of section 37 of the Act. Further we note that the assessee has been consistent in its accounting policy whereby it creates provision towards the development expenditure and there is no deviation from the past years. Further we note that the assessee has been incurring actual expenditure out of such provision account and it is not a case that where the provision has been built over a period of time without any actual expenditure. The AO has allowed the provision for development expenses in A.Y 2007-08 A.Y 2008-09 and A.Y 2009-10 while completing the assessment u/s 143(3) of the Act and we don t see any justifiable basis to disturb the same for the impunged assessment year. - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of addition made by the AO by disallowing the unascertained liability towards the "Provision made for Development Expenses."
2. Deletion of addition made on account of disallowance of provisions for development expenses without considering the provisions of section 37(1) of the I.T Act, 1961.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made by the AO by Disallowing the Unascertained Liability Towards the "Provision Made for Development Expenses":

The Assessing Officer (AO) disallowed the provision for development expenses amounting to ?62,67,210/- made by the assessee, a private limited company engaged in real estate, on the grounds that it was not an actual expenditure but merely a provision. The assessee argued that the provision was made for future development expenses as per the norms of the Jaipur Development Authority (JDA) for the "Sachivalaya Enclave" scheme. The assessee justified the provision by explaining that the development expenses were included in the sale price of the plots and that the liability to incur these expenses arose in the year of the sale.

The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the appeal in favor of the assessee, stating that the provision for development expenses was an ascertained liability and not a contingent one. The CIT(A) noted that the provision was made based on the actual sale of plots and the estimated development expenses, which were necessary to meet the regulatory requirements of JDA. The CIT(A) also highlighted that the provision was consistent with the past practice and had been allowed in previous scrutiny assessments.

The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, emphasizing that the provision for development expenses was an ascertained liability, supported by proper documentation and expert estimation. The ITAT also noted that the assessee followed the mercantile system of accounting, where such provisions are allowable under the matching principle. The ITAT referred to the Supreme Court's decision in Rotork Controls India (P) Ltd. vs. CIT, which allows provisions for future obligations against current year sales as deductible expenses.

2. Deletion of Addition Made on Account of Disallowance of Provisions for Development Expenses Without Considering the Provisions of Section 37(1) of the I.T Act, 1961:

The Revenue contended that the provision for development expenses was not allowable under section 37(1) of the Income Tax Act, 1961, as it was not an actual expenditure incurred during the year. The AO argued that only actual expenses incurred should be allowed as deductions.

The CIT(A) rejected this contention, stating that the provision for development expenses was an ascertained liability arising from the contractual obligation to develop the plots sold. The CIT(A) pointed out that the provision was made based on a reasonable estimate of future development costs and was consistent with the accounting principles and past practices. The CIT(A) also noted that the AO had allowed similar provisions in previous years' assessments.

The ITAT affirmed the CIT(A)'s decision, reiterating that the provision for development expenses was an ascertained liability and not a contingent one. The ITAT emphasized that the provision was made based on a reasonable estimate and was necessary to reflect the true profit/loss situation as per the matching principle of accounting. The ITAT also referred to the Rajasthan High Court's decision in CIT vs. Shree Salasar Overseas Pvt. Ltd., which held that development expenses for plots sold are ascertained committed legal liabilities.

Conclusion:

The ITAT upheld the CIT(A)'s decision to delete the additions made by the AO, affirming that the provision for development expenses was an ascertained liability and allowable as a deductible expense under section 37(1) of the Income Tax Act, 1961. The ITAT emphasized the consistency of the assessee's accounting practices and the regulatory and contractual obligations to incur development expenses, thereby dismissing the Revenue's appeals for both assessment years.