2018 (3) TMI 1040 - AT - Income Tax

Allowability of expenditure under the head of Provision of Expenses - contingent expenses or actual expenses - Held that - CIT(A) observed that assessee has actually spent ₹ 20,68,120/- in the F.Y.2010-11 as against provision of ₹ 18,00,000/- made in the case of Nova Space. CIT(A) also observed that assessee has actually spent ₹ 66,51,354/-in subsequent years(Rs.38,48,253/- in A.Y. 11-12, ₹ 3,79,886 in A.Y. 2012-13 and ₹ 24,23,215/- in A.Y. 2013-14) out of the total provisions of ₹ 85,00,000/- and ₹ 18,48,646/- was written back and offered for taxation in the Assessment year 2013-14 in the project called Vaishnavi Project in M/s Divya Development. Balance amount of ₹ 18,48,646/- which was not spent in the case of Divya Development had also been incorporated by the assessee as its income in the A.Y.2013-14. No infirmity in the order of CIT(A) for deleting the addition made on account of provision of expenses. We also found that similar issue has been dealt with by the Tribunal in assessee s own case for immediately preceding year and decided in favour of the assessee. Invocation of provisions u/s. 40(a)(ia) entire provision so made was not liable for tax deduction at source because the expenditure were below the prescribed limits and were in the nature of purchase of raw materials and in some cases required TDS has been deducted at a different point of time i.e., either at the time of giving advance or at later point of time when the actual payee is identified. Detailed finding of CIT(A) has not been controverted by Department by bringing any positive material on record. No reason to interfere in the order of CIT(A). Purchases from the suspicion suppliers - CIT(A) has deleted the addition so made - Held that - Considering the observation so made by the AO vis- -vis, finding so recorded by the CIT(A), we are of the opinion that some disallowance is required to be made. Accordingly, we modify the order of lower authorities and direct the AO to restrict addition to the extent of 2% of such purchases. We direct accordingly.

Summary

Issues Involved:
1. Disallowance of provisions for expenses.
2. Non-deduction of TDS under section 40(a)(ia).
3. Disallowance of purchases from suspicious suppliers.

Issue-wise Detailed Analysis:

1. Disallowance of Provisions for Expenses:
The Revenue contested the CIT(A)'s decision to allow provisions for expenses amounting to ?85,00,000 in M/s Divya Development and ?18,00,000 in M/s Nova Space. The CIT(A) determined that these provisions were not contingent liabilities but were based on reasonable estimates for pending work such as compound wall, carpentry, and plumbing, which were contractual obligations. The CIT(A) found that the provisions were gradually spent in subsequent years, substantiating their necessity. Additionally, the CIT(A) referenced Accounting Standard AS-1, which supports making provisions for known liabilities even if the exact amount is uncertain. The CIT(A) also cited judicial precedents, including the Supreme Court's ruling in Calcutta Co. Ltd. vs CIT, which allows estimated liabilities arising from contracts. The ITAT upheld the CIT(A)'s decision, noting that the provisions were based on substantial evidence and were necessary for the completion of the projects.

2. Non-deduction of TDS under Section 40(a)(ia):
The Revenue argued that the provisions for expenses should be disallowed due to non-deduction of TDS. The CIT(A) observed that since the payees were not identified at the time of making these provisions, TDS could not be deducted. This view was supported by the ITAT Mumbai's decision in Industrial Development Bank of India Ltd., which held that TDS provisions do not apply when the payees are unidentifiable. The CIT(A) also noted that some expenses were below the prescribed TDS limits or were for raw materials, and in some cases, TDS was deducted at a later stage when the payees were identified. The ITAT found no reason to interfere with the CIT(A)'s findings and dismissed this ground of the Revenue's appeal.

3. Disallowance of Purchases from Suspicious Suppliers:
The Revenue challenged the CIT(A)'s decision to delete the addition of ?83,78,916 for non-genuine purchases in M/s Divya Development. The CIT(A) noted that the AO had accepted the assessee's sales and books of accounts without discrepancies, and disallowing purchases without rejecting the books was unjustified. The CIT(A) referenced judicial rulings that support allowing purchases if corresponding sales are accepted. However, the ITAT modified the CIT(A)'s decision, directing the AO to restrict the addition to 2% of the suspicious purchases, acknowledging the need for some disallowance.

Conclusion:
The ITAT upheld the CIT(A)'s decisions on allowing provisions for expenses and non-deduction of TDS, finding them justified based on substantial evidence and judicial precedents. However, the ITAT modified the CIT(A)'s decision on disallowance of purchases, directing a 2% addition on suspicious purchases. The Revenue's appeal was thus allowed in part.