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TMI Blog2016 (12) TMI 941X X X X Extracts X X X X X X X X Extracts X X X X ..... grounds of appeal :- Whether on the facts and in the circumstances of the case and in law the ld. CIT (A) has erred in deleting the addition made by the AO on the issue of expenses claimed by the assessee under the head provision for development expenses of R. 43,23,423/- . 2. Briefly stated the facts of the case are that the case of the assessee was picked up for scrutiny assessment and the assessment under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act) was framed vide order dated 10th July, 2014. While framing the assessment, the AO disallowed the provision for Development Expenses and made addition of ₹ 43,23,423/-. The Assessing Officer also disallowed the interest on TDS of ₹ 3,804/-. The assessee aggrieved by this order, preferred an appeal before ld. CIT (A), who after considering the submissions and following the decision of the ITAT, partly allowed the appeal. While allowing the appeal, ld. CIT (A) confirmed the addition of ₹ 3,804/- and deleted the disallowance in respect of Provision for Development Expenses of ₹ 43,23,423/-. 3. Aggrieved by this order, the revenue is in appeal before us. 4. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mentioned earlier in this order. (ii) It is noted from the material placed on record that for Phase-I and Phase-II of Green Triveni Project, the appellant has made total provision for development from AY 2009-10 to AY 2012-13 at ₹ 2,49,01,178/- and ₹ 4,82,69,089/- and incurred actual expenses of ₹ 3,24,92,579/- and ₹ 2,52,67,205/- for Phase-I and Phase-II respectively. Thus, it is evident that for Phase-I, the actual expenditure on development of the project are much more than the provision made for the development expenses. (iii) During appellate proceedings, the AR was required to submit the details of to6tal provision made and actual expenditure incurred till 31.03.2015 for Phase-II. From the details submitted, it is observed that the appellant has made total provision of ₹ 9,76,86,715/- for development expenses and incurred a sum of ₹ 5,65,73,315/- on account of development expenses for Phase-II. Therefore, the observation of the AO that actual expenditure incurred on development of the project is meager in comparison to the provisions made for development is misplaced and without proper appreciation of the facts. (iv) As pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both the parties. The learned CIT issued the show-cause notice under s. 263 of the Act on 13th Sept., 2010. In the show-cause notice, the learned CIT mentioned that the provisions for development expenses to be incurred in subsequent years are not allowable. Only the expenses during the previous year are allowable for deduction from income. The order under s. 263 can be passed after giving the opportunity to the assessee. If the issue raised in show-cause notice is different from the issue on which the learned CIT has passed the order under s. 263 of the Act then it cannot be said the assessee has been given an opportunity. We accept the contention of the learned Authorized Representative that details were filed before the AO vide letter dt. 5th Dec., 2008. In this letter, it was mentioned that such expenses are being allowed in earlier years. Hence, this is not a case where there is no enquiry. Action under s. 263 cannot be taken on account of inadequate enquiry. The Apex Court in the case of Bharat Earth Movers v. CIT (2000) 162 CTR (SC) 325/[2000] 245 ITR 428 (SC) has held that if the business liability has arisen in the accounting year then deduction should be allowed although ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idental to the business and the course of carrying on its business and was incidental to the business and having regard to the accepted commercial practice and trading principles, was a deduction which, if there was no specific provision for it under s.10(2) of the IT Act, was certainly an allowable deduction in arriving at the profits and gains of the business of the appellant, under s.10(1) of the Act, there being no prohibition against it, express or implied, in the Act. The expression profits and gains in s.10(1) of the IT Act has to be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure which is necessary 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 Apex Court in the case of Madras Industrial Investment Corporation Ltd. V.CIT [1997] 139 CTR (SC) 555/[1997] 225 ITR 802 (SC) held that discount on debentures is to be written off proportionately each year over period of redemption. The head note is as under: Sec.37 of the IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia) Ltd (2003) 261 ITR 753 (Mad.) allowed pro rata annual allocation of premium payble at future date. Hence, the expenditure allowable under mercantile system of accounting does not mean that it should be spent in that year. 36. The Hon ble Allahabad High Court in CIT v. Development trust (P) Ltd. (1991) 99 CTR (All) 247/1991) 189 ITR 504 (All.) held that expenses in respect of development to be carried by assessee are an allowable deduction under mercantile system of accounting. 37. The Hon ble Delhi High court in the case of CIT v. Nav Bharat Nirman (P) Ltd. (1983) 141 ITR 723 (Delhi) had an occasion to consider the liability for evicting tenants as the agreement provided for eviction of tenants by lessor. The headnote is as under : Held, that it was clear that the assessee s responsibility to evict the 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 in-built 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 g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, the obligation of the trader is purely contingent, no question of estimating its present value may arise, for to be a permissible outgoing or allowance, there must in the year of account be a present obligation capable of commercial valuation. It was further observed that where accounts are maintained on the mercantile system, if liability to make the payment has arisen during the time the business is carried on, it may appropriately be regarded as expenditure. But where the liability is during the whole of the period that the business is carried on, wholly contingent and does not raise any definite obligation during the time that the business is carried on, it cannot fall within the expression expenditure laid out or expended wholly and exclusively for the purpose of the business . 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... private colonizer has to abide by the circulars, directions and orders of the JDA if it wants to develop private township in Jaipur and it cannot wriggle out from its obligations fixed by JDA. Therefore, the liability of the assessee to carry out the internal development work in the colony is not a contingent liability but ascertained liability which accrued on the date of sale of the plot. 4.8. Further, the AO mentioned that the assessee has incurred very meager amount in development work. The lerned Authorized Representative explained that liability towards development expenses to be incurred in future on the plots sold did not extinguish merely because the assessee has not incurred expenses in next year or for next few years. This liability extinguishes only when the assessee is absolved from the liability to construct the road or laying down electric pole/water line etc. and the assessee cannot be absolved from this liability because of the regulations of JDA and the plots sold by the assessee are subject to this liability of the assessee. Furthermore, 12.5 per cent of assessee s plots are with JDA as security against development work. In case the development work is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus, the orders of learned CIT (A) for asst. yr. 2005-06 asst. yr. 2007-08 and asst. yr. 2008-09 are upheld in this regard. (viii) As the facts and circumstances of the issue under consideration are identical with the facts of the case of Shree Salasar Overseas P Ltd. (supra), therefore in view of the discussion made in this order and respectfully following the binding decision of jurisdictional Hon ble ITAT, Jaipur it is held that the provision made for development expenses is an ascertained liability and thus is to be allowed and hence the AO was not justified in disallowing provision for development made by the appellant at ₹ 43,23,423/- for the year under consideration. Therefore, the disallowance of ₹ 43,23,423/- made by the AO is hereby deleted. The Coordinate Bench in case of Shree Salasar Overseas (Pvt.) Ltd. vs. ACIT in ITA No. 910/JP/2013, the Tribunal examined allowability of the Development Expenses and decided the issue in favour of the assessee. Further, the Coordinate Bench in ITA No. 1076/JP/2011 and 1078/JP/2011 decided the issue of allowability of Provision for Development Expenses by observing as under :- 2.14 We have heard both the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he mercantile system of accounting before it was actually disbursed. The difficulty in the estimation thereof did not convert the accrued liability into a conditional one, because it was always open to the Income-tax authorities concerned to arrive at a proper estimate thereof having regard to all the circumstances of the case. (ii) That the sum of ₹ 24,809/- represented the estimated amount which would have to be expended by the assessee in the course of carrying on its business and was incidental to the business and, having regard to the accepted commercial practice and trading principles, was a deduction which, if there was no specific provision for it under section 10(2) of the Income-tax Act, was certainly an allowable deduction in arriving at the profits and gains of the business of the appellant, under section 10(I) of the Act, there being no prohibition against it, express or implied, in the Act. The expression profits or gains in section 10 (I) of the Income-tax Act has to be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure which is necessary for the purpose of earning the receipts is de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... land in the original condition and hence the liability to refill pits accrued as soon as pits were dug. In the instant case, the assessee as per agreement was to provide insurance policy to members having attained S-I category and hence liability accruals as and when such members got category of S-I. 35. The Hon ble Madras High Court in the case of CIT V/s Tube Investments of (India) Ltd. 261 ITR 753 allowed pro-rata annual allocation of premium payable at future date. Hence the expenditure allowable under mercantile system of accounting does not mean that it should be spent in that year. 36. The Hon ble Allahabad High Court in CIT V/s Development Trust (P) Ltd. 189 ITR 504 held that expenses in respect of development to be carried by assessee is an allowable deduction under mercantile system of accounting. 37. The Hon ble Delhi High Court in the case of CIT V/s Nav Bharat Nirman (P) Ltd. 141 ITR 723 had on occasion to consider the liability for evicting tenants as the agreement provided for eviction of tenants by lessor. The headnote is as under:- Held, that it was clear that the assessee s responsibility to evict the tenants who were occupying almost 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1967) 65 ITR 643 (headnote) : Broadly stated, the present value on commercial valuation of money to become due in future, under a definite obligation, will be a permissible outgoing or deduction in computing the taxable profits of a trader, even if in certain conditions the obligation may cease to exist because of forfeiture of the right . Where, however, the obligation of the trader is purely contingent, no question of estimating its present value may arise, for to be a permissible outgoing or allowance, there must in the year of account be a present obligation capable of commercial valuation . It was further observed that where accounts are maintained on the mercantile system, if liability to make the payment has arisen during the time the business is carried on, it may appropriately be regarded as expenditure. But where the liability is, during the whole of the period that the business is carried on, wholly contingent and does not raise any de3finite obligation during the time that the business is carried on, it cannot fall within the expression expenditure laid out or expended wholly and exclusively for the purpose of the business . A liability which is dependent on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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