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TMI Blog2012 (1) TMI 279X X X X Extracts X X X X X X X X Extracts X X X X ..... the appeals by a consolidated order. The ground of appeal raised by the revenue in ITA No. 1076/ JP/2011 is as under:- On the facts and in the circumstances of the case and in law the ld. CIT(A) has erred in :- (1) deleting the addition of ₹ 62,34,041/- made by the AO by disallowing development expenses without appreciating the fact that this was mere a provision and there was no scientific method work out liability. 2.2 The facts of the case are that the assessee is engaged in the business of real estate developer. During the year under reference, the assessee has shown sale of ₹ 2,36,62,503/- and declared loss of ₹ 22,58,693/-. The AO noticed that the assessee debited the expenses on account of development to the tune of ₹ 62,34,041/- in the profit and loss account the AO noticed that the assessee has not actually incurred such expenses but has simply made the provisions and the same was shown as outstanding current liability in the balance sheet. The provisions has been made at ₹ 175/- per. Sq. Yd in respect of the sale carried out during the year. The AO further noticed that the assessee has not incurred any expenses during next a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made. The provision so created by the assessee can be debited to subsequent year when these are actually incurred as the costing of the plots were worked out by the assessee taking into account the overhead expenses which the assessee needs to incur later on. The AO further mentioned that the assessee was unable to explain as to which year these provisions would be exhausted. The assessee has debited the provision so as to declare the income as per sweet will of the assessee. The provisions can be allowed in case the following three conditions are satisfied. 1. Reasonableness of the provisions. 2. Honesty of the provisioning of expenses 3. A fair basis / estimation of expenses for making provisions 2.5 According to the AO, the assessee has failed to fulfill either of the above conditions. The AO has relied on the following decisions in disallowing the provisions for expenses. 1 Rajasthan State Mines and Mineral Ltd. Vs. CIT 208 ITR 1010 (Raj.) 2. TN Small Industries Development Corp. Vs. CIT, 242 ITR 122 (Mad.) 2.6 Accordingly, the AO disallowed a sum of ₹ 62,34,041/-. 2.7 Before the ld. CIT(A), the assessee argued that development expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T Act, tax shall be payable by an assessee under the head Profits and gains of business in respect of the profits and gains of any business carried on by him. The said profit and gains are profits of a business computed on business principles. The assessee follows the mercantile system OF the accounting. The assessee's sales consisted of two things; first the cost of land and second development expenses. Since the development expenses cannot be incurred on plot to plot basis and but are incurred for whole scheme and sometimes for all the schemes. Therefore, the development expenses have to be incurred against the plot sold in a particular year and it has to be estimated and to that extent the sales are set apart under the nomenclature provision for development expenses . As per the norms of JDA for Private Township, the developer has to incur several expenses on the development of the scheme such as expenses on internal roads, electrification, water supply and development of public parks and facilities etc. The cost of these expenses is included in the sale price of the plot and the charges against the development expenses (which to be incurred by the developer) is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Electric Park/Facility Others (Street light, Plantation, etc) Total Estimated cost to be incurred Provision Made 51 47 38 17 27 180 175 Therefore, the estimation of the assessee company was supported by the estimation of the expenses by Government Agency. Further, the assessee was bound to carry out these works as per JDA regulations. However, the Private Colonizers had liberty to carry out development work through JDA as against to carry out development work themselves. It was argued that there was direct decision of Hon'ble Apex Court on this issue. In the case of Calcutta Co Ltd Vs Commissioner of Income Tax (37 ITR 1), the Supreme Court was considering a case of a land developer, who had undertaken to develop the land by laying out roads, providing of drainage system and installation of lights etc. Some of the plots were sold by the assessee against a consideration of ₹ 29,392/-. Following mercantile system of accounting, the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 235 and 236. On final approval of scheme, the scheme plan was subject of change by JDA therefore, the construction of road etc could not be completed before final approval of scheme plan by JDA. Further there was court case by some party over this land. The coparcener and other parties had filed court case against the assessee and the actual possession of the land was not allowed to be taken by the assessee. This scheme was very small scheme consisting of only 37 plots (total area 6962.04 sq yard). The total area sold was 2488.92 sq yard. The assessee was not absolved from the liability to construct the roads, laying of electric poles, water lines etc merely because the assessee had not constructed the same in AY 2009-2010 or AY 2010-2011. The assessee had to incur these expenses as per JDA regularization. The Hanuman Vatika A-3 scheme was situated on the proposed sector road of 200 ft wide. The construction of sector road was to be made by JDA. The JDA did not start work for sector road, therefore, the connectivity of this scheme by road was not there. The approach road was not given by the other agriculturists from their farms and due to this, the transportation of material not p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tute a contingent liability not entitled to deduction under section 37 of the said Act. However, when there is manufacture and sale of an army of items running into thousands of units of sophisticated goods, the past event of defects being detected in some of such items leads to a present obligation which results in an enterprise having no alternative to settling that obligation. In the present case, the appellant has been manufacturing and selling valve actuators. They are in the business from assessment year 1983-84 onwards. Valve actuators are sophisticated goods. Over the years appellant has been manufacturing valve actuators in large numbers. The statistical data indicates that every year some of these manufactured actuators are found to be defective. The statistical data over the years also indicates that being sophisticated item no customer is prepared to buy valve actuator without a warranty. Therefore, warranty became integral part of the sale price of the valve actuator(s). In other words, warranty stood attached to the sale price of the product. These aspects are important. As stated above, obligations arising from past events have to be recognized as provisions. These p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, sewer lines, water supply and development of public parks and facilities etc. The cost of such expenses is included in the sale price of the plot. 4. The assessee can account for development expenditure in the year in which it was actually incurred. However, the option based on cash basis is not correct when the assessee is following the mercantile system of accounting . As per Companies Act, the assessee is required to follow the mercantile system of accounting. The accounting standards issued by the Institute of Chartered Accountant of India also mentions that such expenses are to be debited on the basis of accrual of such liability. 5. Under the matching concept, the cost is to be claimed in the year in which revenue is received. The cost includes the future liability relating to the item included in the revenue receipts. 2.9 The ld. CIT(A) has referred to the decision of Hon'ble Apex Court in the case of Bharat Earthmovers Vs. CIT, 245 ITR 428 in which it has been held that deduction should be allowed although the liability may have to be quantified and discharged at future date. During the year, the a has two schemes namely Hanuman Vatika A-2 and Hanuman ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Development Expenses is direct cost attributable to the sales therefore the true profit of the business can be computed by deducting the all the direct or indirect expenses from the sales. Since construction of road, laying pipelines, electric lines etc and other development work cannot be completed in a particular year, the estimation is required to be made against the expenses to be incurred towards the development cost. The provision for development expenses is not setting apart the profits but it is an estimation of expenses to be incurred on the project in future. The sale proceed received by the assessee is subject to the liability of development work to be done by the assessee. The liability to incur the development expenses has arisen in the year of the sale of the plot. The said liability ought to have been deducted from the amount of income accrued in order to calculate true profit. Hon ble Rajasthan High Court in the case of CIT Vs Govind Grah Nirman Sahakari Samiti Ltd 258 ITR 208 (Raj) has held that the expenditure in developing the land, laying down pipe line dividing the land into small plots were expenses required to be incurred for the purpose of carrying on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred by the developer) is not being charged separately in addition to the sale price of the plot taken by the developer. The development work has to be carried out as per the specification of the JDA. Thus, the sale of the assessee is subject to ascertained liability of development expenses. This liability has arisen in the year of the sale of the plot. The said liability ought to have been deducted from the amount of income accrued in order to arrive the true and fair profits of a business or profession, therefore the estimation of future cost of development nomenclatured in books of account as Provision against development expenses are allowable expenses u/s 37 of Income Tax Act read with section 28 of Income Tax Act. 2.3.5 Consistent Accounting Policy It is prevailing accounting policy of assessee and other assessees of similar trade to make provision of development expenses to be incurred on area sold in order to arrive the true and correct profit and the assessee is consistently following this accounting practice. 2.3.6. Basis of estimation for provision made for development expenses. The development work has to be carried out as per the specification of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... current year s incurred during the against sale year Development Provision 2008-2009 6234040.75 6234040.75 0.00 6234040.75 2009-2010 260477.00 260477.00 0.00 6494517.75 2010-2011 2495806.95 3025312.77 1244645.00 8275185.52 Total 9519830.52 1244645.00 2.3.9 Liability towards development expenses to be incurred in future on the plots sold did not extinguish merely the assessee has not incurred expenses in next year or incurred small part of expenses in AY 2010-2011 Liability towards development expenses to be incurred in future on the plots sold did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 006-07 dated 22-11-2011). 2.14 We have heard both the parties. The issue before us has been decided by the Tribunal vide order dated 22-11-2011 in the case of Shree Salasar Oveseas (P) Ltd. (supra) . It will be useful to reproduce following para from the above order. ..The Hon'ble Apex Court in the case of Bharat Earth Movers Vs. CIT 245 ITR 428 has held that if the business liability has arisen in the accounting year then deduction should be allowed although liability may have to be quantified and discharged at a future date. In the instant case, the assessee mentioned that sale proceeds of the plots included the cost plus development expenses as JDA had prescribed the norms that no separate amount should be charged for development. This ITAT Jaipur Bench in the case of M/s Swapan Sakar Insurance Consultant Marketing Services (P) Ltd. ( ITA No.117/ JP/2010 for the assessment year 2006-07 dated 06-01-2011) had an occasion to consider the allowability of expenses to be incurred in the subsequent years though the liability of incurring such expenditure has accrued during the previous year. It will be useful to reproduce the following paras from the judgement dated 06- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y for the purpose of earning the receipts is deducted there from- whether the expenditure is actually incurred or the liability in respect thereof has accrued even though it may have to be discharged at some future date. 32. The Hon ble Apex Court in the case of Madras Industrial Investment Corporation Ltd. V/s CIT 225 ITR 802 held that discount on debentures is to be written if proportionally each year even period of exemption. The Headnote is as under: Section 37 of the Income-tax Act, 1961, enjoins that any expenditure note being expenditure of the nature described in sections 30 to 36 laid out or expended wholly and exclusively for the purpose of the business or profession should be allowed in computing the income chargeable under the head Profits and gains of business or profession . The expression Profit or gains has to be understood in its commercial sense: and there could be no computation of such profits and gains until the expenditure which is necessary for the purpose of earning the receipt is deducted therefrom, whether the expenditure is actually incurred or the liability in respect thereof has accrued even though it may have to be discharged at some fut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e tenants who were occupying almost 200 bighas of the land was an onerous responsibility. As late as 1972, practically none of the tenants had been evicted. The liability to evict the tenants was in the nature of an inbuilt liability under the lease deed. The estimated amount in regard to the assessee s liability to evict the tenants was allowable. The ITO had given good reasons for restricting the allowance to ₹ 1,60,000/-. This was a fair and equitable conclusion arrived at by the ITO and since it was a only a question of estimate, with which the Tribunal had agree, it could not be interfered with. The assessee was therefore, entitled to a deduction of ₹ 1,60,000/- for the assessment year 1962- 63 . 38. The Hon ble jurisdictional High Court in the case of Rajasthan State mines minerals V/s CIT 208 ITR 1010 has observed at page 1014. A liability which is not accurately estimated could be a contingent liability and is not an expenditure. The apex court in Indian Molasses Co. (Private) Ltd. V/s CIT (1959) 37 ITR 66 referred to above, has held that the expenditure is what is paid out or away and is something which has gone irretrievably. Expenditure, which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A liability which is dependent on fulfillment of a condition which may result in reduction or in extinction of the liability is a contingent liability. It is only the actual liability which is existing in the relevant assessment year which is allowable to be considered as an expenditure. If the liability is contingent then it would amount to allowing the apprehended losses in future from the profits which is not accepted on any principle of law or accountancy. The question of estimation in a contingent liability also does not arise in order to allow the deduction under section 37 of the Act. 39. The warranty provision is an allowable provision as it as part of the agreement of sale. The Hon ble Apex Court in the case of Rotork Control India (P) Ltd. V/s CIT 23 DTR 79 held that such provision is allowable as it relates to present obligation and involves flow of resources. In the case of Bharat Earth Movers V/s CIT 245 ITR 428, the Hon ble Apex Court held that the liability is allowable if it has arisen in the gees though it may be qualified and discharged at a future date. 2.15 Following that order, we hold that the ld. CIT(A) was justified in deleting the addition. It is us ..... X X X X Extracts X X X X X X X X Extracts X X X X
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