2018 (5) TMI 37 - AT - Income Tax

Deduction of certain expenses claimed by the assessee against the project namely Balaji Galaxy - accrual / crystallization of these expenses in the impugned AY - Held that - AO has noted that the project was not completed in the impugned AY and the assessee had unsold inventory in the Balance Sheet, which could not be controverted by Ld. AR. As per the submissions of Ld. AR, the provisions for expenses was not a mere provision but a fair estimation of the expenses which had accrued during the impugned AY and therefore, allowable to assessee. AR has also contended that complete working / details thereof was submitted to Ld. CIT(A) during appellate proceedings, which has completely been ignored. Prima facie, we concur with the said submission. Therefore, on factual matrix, we deem it fit to restore the matter back to the file of Ld. CIT(A) to re-appreciate the claim of the assessee and re-adjudicate the same with a direction to the assessee to demonstrate accrual / crystallization of these expenses in the impugned AY.

Summary

Issues:
Appeal against disallowance of expenses of ?50 Lacs for AY 2010-11.

Analysis:
The appeal contested the disallowance of expenses amounting to ?50 Lacs against the project Balaji Galaxy for AY 2010-11. The assessee, a resident firm engaged in construction, claimed the expenses under Section 37(1) following the mercantile system of accounting. The AO disallowed the expenses, stating the project was not completed in the AY and unsold inventory existed. The CIT(A) upheld the disallowance citing lack of certainty in the estimation of expenses and absence of evidence linking the expenses to the relevant year. The AR argued the expenses were a crystallized liability, supported by detailed evidence ignored by the CIT(A). The ITAT noted the expenses must have crystallized in the AY for deduction, but also considered the AR's claim of fair estimation. Consequently, the matter was remanded to the CIT(A) to reassess the claim based on the accrual/crystallization of expenses in the AY.

The ITAT emphasized that under the mercantile system, expenses accrued and crystallized during the AY are eligible for deduction, even if paid later. However, deductions cannot be granted against mere provisions unless expenses have actually crystallized in the AY. The ITAT found merit in the AR's argument that the provision was a fair estimation of accrued expenses, supported by detailed working submitted to the CIT(A). The ITAT directed the CIT(A) to reconsider the claim, focusing on demonstrating the accrual/crystallization of expenses in the AY for a fair assessment.

In conclusion, the ITAT allowed the assessee's appeal for statistical purposes, remanding the matter to the CIT(A) for a fresh review based on the accrual/crystallization of expenses in the AY.