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TMI Blog2019 (3) TMI 493X X X X Extracts X X X X X X X X Extracts X X X X ..... entire revenue of which was duly recognised by the assessee in the year under consideration. The said expenditure thus was related to the revenue already recognised by the assessee in the year under consideration by following the project completion method and the same was allowable as deduction in the year under consideration as per the concept of matching principle. Similar method of accounting was followed by the assessee consistently even in the earlier years and as submitted by the learned counsel for the assessee, similar provision made for the expenses to be incurred in respect of project substantially completed in respect of which revenue was recognised was allowed by the AO even in the assessment completed u/s 143(3). In our opinion, the Ld. CIT(A) appreciated the claim made by the assessee in the right perspective and rightly allowed the same after taking into consideration, the method of accounting followed by the assessee, in the light of relevant accounting standard as well as case laws relied upon by the assessee in support. - Decided against revenue - I.T.A. No. 714/Kol/2018 - - - Dated:- 6-3-2019 - Shri P.M. Jagtap, Vice President And Shri A. T. Varkey, JM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e held that the amount in question thus represented provision for meeting unascertained liabilities which was not allowable as deduction in the case of the assessee. He accordingly made a disallowance of ₹ 2,25,01,129/- on account of future development expenses and made addition to that extent to the total income of the assessee in the assessment completed u/s 143(3) vide an order dated 31.03.2016. 3. The disallowance made by the AO on account of future development expenses was challenged by the assessee in the appeal filed before the Ld. CIT(A) and after considering the submissions made by the assessee as well as the material available on record, the Ld. CIT(A) deleted the disallowance made by the AO for the following reasons given in his impugned order: I have considered the submissions of the assessee carefully. The only issue in this appeal is disallowance of ₹ 2,25,01,129/- made by the AO on account of future development expenses by treating them as contingent in nature. The main contention of the AO was that the appellant is following mercantile system of accounting and under this system only those liability which had crystallized were allowable as an expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years. Hence it was argued that the addition made by the AO should be deleted. In this case before analyzing the issue the methodology adopted for computing the future development expenses requires to be seen. It was stated that proportionate amount of future expenses debited to the P/L Account is based on the percentage of inventory sold during the year. In this respect the computation, project wise is depicted in the table below: S. No. Branch Amount 1 Lavasa Phase I 80,05,000 2 Ashiana Aangan Ph. V - 3 Ashiana Aangan Ph. IV 4 Ashiana Aangan Ph. VI 12,74,000 5 Aangan Development 83,82,000 6 Brahmananda 10,15,000 7 Village Centre 38,25,129 Total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,59,45,156 65,55,973 From the above table it can be seen that only an amount of ₹ 1,59,45,156/- has been debited to the P/L account. The expenses with respect to Village Centre was never charged to the P/L Account as it has been reflected as an investment. Therefore the future development expenses capitalized during the year is ₹ 65,55,973/- which is proportionate to the inventory of unsold flats. Only to the extent the flats have been sold, the revenue realized, there being a contractual liability the proportionate expenses have been charged to the profit and loss account. This has been consistently done on the accounting principle AS- 29 which is now recognized in the ICDS provisions. On these facts it is to be seen whether the expenses are allowable or not. In this regard the assessee has placed reliance on the decision in the case of Mayura Infrastructure Development Company - ITA No.873 874/JP/2016 A.Y. 2011-12 2013-14, order dated: 25/04/2017, where the issue before the Hon'ble Tribunal was regarding future development expenses. The, Hon'ble Tribunal has considered the issue and has held as under: He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der that it has been held that the claim of the expenditure, for which the provision was made, was having direct nexus with the income, as declared by the assessee. Therefore, such provision made by the assessee was allowable during the year under consideration. In the impugned case also it is seen that there is direct nexus with the income booked in the P/L account and the expenditure allocated. Further, the assessee has placed reliance on the decision in the case of Ranka Colonizers Pvt. Ltd. ITA No.787/JP/2016, order dated: 24/03/2017, where the issue before the Hon'ble Tribunal was regarding provision for future development expenses. The Hon'ble Tribunal has considered the issue and has held as under: It is further submitted that the assessee has shown fulfilment of three elements (i) Reasonableness of the provision (ii) Honesty of Provisioning of expenses (iii) A fair basis/estimation of expenses for making provisions. It is also a fact that the AO has not brought any material to show that the provision made by the assessee is excessive. Further, AO has examined the books of account but books of account were not rejected by him. It is submitted that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /2014, there was incurrence of expenditure to the tune of ₹ 4,68,43,199/- and that the sum of ₹ 43,06,801/- remained unspent even four years from the end of the year in which the provision was made. It was on this basis, that the provision made was taken to be excessive to the extent of ₹ 29/- ITA 149 205/JP/201 5_ M/s Spytech Buildcon Vs ACIT 4 3,06,801 /-. The question is as to whether this action of the ld. CIT(A) is justified. 25. It remains undisputed that the provision was made by the assessee for certain expected expenditure. As such, the provision was made due to the arising of the possibility of the expenditure in future. This was what had prompted the estimation. Now, if the provision does not stand exhausted even four years from the end of the year in which it was made, this does not mean that the provision to that extent was ill conceived. The details of the expenditure intended were duly made available. That such incurrence of expenditure did not come about, cannot put to naught the provision which was made bonafide. The legal position remains that the amount unutilized would be available for being offered to tax in the next assessment year. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the assessee following the mercantile system of accounting was not entitled to claim it as deduction as rightly held by the AO. 5. The learned counsel for the assessee, on the other hand, strongly relied on the impugned order of the Ld. CIT(A) giving relief to the assessee and submitted that the well discussed and well reasoned order passed by the Ld. CIT(A) while giving relief to the assessee on the issue under consideration deserves to be upheld. He also submitted that similar deduction claimed by the assessee on accounting of provision for future development expenses was allowed by the AO himself in the assessment completed u/s 143(3) for A.Y. 2009-10. He contended that the revenue of its real estate development business was recognised by the assessee as per the project completion method and provision was made for the expenses to be incurred in respect of the projects which were already completed in the year under consideration and revenue of the same was duly recognised. He also contended that such expenses to the extent they were in respect of flat sold were debited to the profit and loss account whereas the expenses to the extent they were in respect of unsold flats were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recorded when those expenses can be matched with the revenues those expenses helped to generate. In other words, expenses should be recorded as the corresponding revenues are recorded and the matching principle recognises the expense as the revenue recognition principle recognises income. It is important to match expenses with revenue because net income i.e. the net amount earned in a period is calculated by subtracting expenses from revenue. If expenses are not properly recorded in the correct period, the net income from a particular period may be either understated or overstated and so are the related balance sheet balances. 8. It appears that the AO could not appreciate the claim of the assessee in the light of method of accounting followed by the assessee perspective and disallowed the claim of the assessee on the ground that the provision made by the assessee represented unascertained liability which was not allowable as deduction in the case of the assessee following mercantile system of accounting. He however ignored the fact that the provision was made by the assessee for the expenses in relation to the projects completed of which the revenue was recognised and since suc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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