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Facts
The assessee, engaged in construction, debited provisions for cost of construction (INR 1.27 crore) and tenant dispute (INR 1 crore) in its P&L account. The AO disallowed these provisions, treating them as contingent liabilities. The CIT(A) upheld the AO's decision.
Held
The Tribunal held that the provision for cost of construction was a legitimate business liability estimated with reasonable certainty and incurred in subsequent years, thus allowing the deduction. However, the provision for tenant dispute was considered a contingent liability as the outcome of the litigation was uncertain.
Key Issues
Whether provisions made for cost of construction and tenant dispute are allowable as expenses in the relevant assessment year, considering the principles of accrual and certainty of liability.
Sections Cited
250, 143(3), 142(1), 143(2)
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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
Before: SHRI NARENDRA KUMAR BILLAIYASHRI SANDEEP SINGH KARHAIL
Date of Hearing – 09/09/2025 Date of Order - 12 /09/2025 O R D E R PER SANDEEP SINGH KARHAIL, J.M. The assessee has filed the present appeal against the impugned order dated 13/05/2025, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals)-51, Mumbai, [“learned CIT(A)”], for the assessment year 2017-18.
During the hearing, the learned Authorised Representative (“learned AR”) placed on record the modified grounds of appeal
, which are reproduced hereunder and are considered for adjudication of the present appeal: -
1. That the learned Commissioner of Income Tax (Appeals) erred both in law and on facts in upholding the disallowance of ₹ 1,27,00,000 being provision for project-related expenses, without appreciating that the said provision was made on a scientific and consistent basis in accordance with the matching principle in line with project completion method.
2. That the learned CIT(A) erred in confirming the disallowance of ₹ 1,00,00,000 being provision created towards anticipated legal claims, without considering that the liability had arisen during the year under consideration and was recognized based on a reasonable estimation.
3. That the Ld.CIT(A) has failed to appreciate the principle of "real income" and that disallowing legitimate expenses which are part of the cost of completing the project results in a distorted computation of the Appellant's taxable income.”
3. The brief facts of the case, as emanating from the record, are: The assessee is engaged in the business of construction of residential and commercial buildings. For the year under consideration, the assessee filed its return of income on 31/10/2017, declaring a total income of INR 2,73,81,310. The return filed by the assessee was selected for scrutiny, and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, it was, inter alia, observed that the assessee had debited the provision for the cost of construction completion, amounting to INR 1,27,00,000, and the provision for the cost of tenant dispute in the court, amounting to INR 1 crore, in its profit and loss account. Since there was an uncertainty regarding the recording of such liability in the financial accounts, the assessee was asked to show cause as to why the said provision should not be disallowed. In response, the assessee submitted that the provision was made based on an estimate at the year-end, as the assessee has been following the accrual basis of accounting. It was further submitted that these expenses are not contingent in nature, but have been estimated based on the actual liability to be incurred for the final, necessary, and obligatory expenses of the project. The assessee submitted that, under the sale deed, a contractual obligation was created on the assessee to provide a clear title, as well as common amenities and facilities, as promised to the buyers. Thus, it was submitted that the estimate has been made on the expert's advice, and there is no chance that the expenses to be incurred would be less than the provisions made. Furthermore, the assessee submitted that it had incurred an expenditure amounting to INR 1,08,21,977 during the succeeding financial year and INR 18,78,023 during the period March ending 2019. Further, as regards the provision of the cost of the tenant dispute, the assessee submitted that the same has been estimated on the basis of the present situation and obligation towards the buyer, and pursuant to the directions by the Hon’ble Goa High Court, the assessee had deposited INR 60 lakh. It was further submitted that the assessee is following the mercantile system of accounting and therefore requires to record expenses in relation to the revenue earned.
4. The Assessing Officer (“AO”), vide order dated 23/12/2019 passed under section 143(3) of the Act, disagreed with the submissions of the assessee and held that the provision of cost of tenant dispute may possibly arise from the occurrence or non-occurrence of a certain future event and the assessee has no control over the said event. The AO further held that no reasonable estimate can be made for the pending legal obligation, so the outflow of funds required to discharge these liabilities cannot be determined. The AO rejected the contention of the assessee that the provision is in no way contingent in nature, as the assessee could not produce any scientific or reasonable method applied to determine the expenses. Further, as regards the provision for the cost of construction, the AO held that there is no mention of any scientific method for reliably estimating the provision for the cost of construction in the sale deeds of the assessee. Additionally, there was no review of the liability created by the assessee on a yearly basis to determine how the amount for the provision was estimated. Accordingly, the AO, inter alia, disallowed the provision for the cost of construction, amounting to INR 1.27 crore, and the provision of the cost of tenant dispute, amounting to INR 1 crore, by treating the same as contingent liability, and added the same to the total income of the assessee.
The learned CIT(A), vide impugned order, dismissed the appeal filed by the assessee and upheld the addition on both counts on the basis that the provision made is found to be unascertained and contingent, as the exact liability had not arisen as on the balance sheet date. Furthermore, the learned CIT(A) held that the liability arising from the legal dispute has not yet crystallised and is dependent on the outcome of the judicial proceedings. Therefore, it was held that the same is also contingent in nature during the year under consideration. Being aggrieved, the assessee is in appeal before us.
We have considered the submissions of both sides and perused the material available on record as per Rule 18(6) of the ITAT Rules, 1963. During the assessment proceedings, it was observed that the assessee, inter alia, had debited a provision for the cost of construction, amounting to INR 1.27 crore, and a provision for the cost of tenant dispute, amounting to INR 1 crore, in its profit and loss account. According to the assessee, the provision for the cost of construction was made as it was under an obligation towards its customers, to whom the flats were sold, and payments were received to provide a clean, marketable title and complete the pending work relating to common facilities. In this regard, during the assessment proceedings, the assessee provided the summary details of expenses relating to the cost of construction amounting to INR 1.27 crore, which also forms part of the paper book on page 23. The assessee submitted that the said expenditure was incurred in the subsequent years, i.e. INR 1,08,21,977 was incurred towards the cost of construction during the succeeding financial year, and INR 18,78,023 was incurred during the financial year 2018-19. It is evident from the record, as noted by the learned CIT(A), that in order to substantiate that actual expenditure was incurred in the subsequent years, the assessee also furnished a ledger account, vouchers and bank statements. We find that the said documents also form part of the paper book filed by the assessee before us.
The Hon’ble Supreme Court in Bharat Earth Movers vs. CIT, reported in [2000] 245 ITR 428 (SC), observed as follows: – “4. The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied, the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain.”
Therefore, we find that the assessee with reasonable certainty estimated the expenditure, which it was required to incur on the cost of construction and the said expenditure was also incurred in the subsequent assessment years, details of which form part of the record for carpentry, plumbing, electrical work, Garden fencing, CCTV installations, etc. No material has been placed on record by the Revenue contrary to the submission of the assessee that the said expenditure was incurred shortly after the balance sheet date, thereby validating the accuracy of the original estimate on the basis of which the said provision for construction cost was debited to the profit and loss account. Accordingly, we find merit in the assessee's submissions, and the disallowance of the provision for construction cost is deleted.
As regards the provision for the cost of a tenant dispute, the assessee submitted that the said provision was made in respect of an ongoing civil dispute filed against the assessee by Mrs Dsouza, who claimed that her house was illegally demolished by the assessee during a residential project construction. Accordingly, in light of legal consultation and the seriousness of the claim involved, the assessee made a provision of INR 1 crore in respect of the ongoing civil dispute. As per the assessee, the Hon’ble Civil Court on 02/02/2019 directed the assessee to reconstruct the house, restore amenities and pay a compensation of INR 60 lakh with interest. It is evident from the record that the lower authorities disagreed with the submission of the assessee, as the provision was made prior to the court’s final ruling, and at the time of making the provision, the liability was not yet crystallised and was dependent on the outcome of the judicial proceedings. Therefore, it was held that the liability was contingent in nature during the relevant assessment year, and the provision made does not qualify as an ascertained liability.
During the hearing, the learned AR submitted that the aforesaid decision of the Hon’ble Civil Court has not been accepted by the assessee, and a further appeal has been filed before the Hon’ble High Court, and the same is pending disposal. Therefore, from the facts available on record, it is amply evident that there is no finality on the civil dispute. Thus, the liability on the assessee is solely dependent on the outcome of the litigation. Accordingly, we agree with the findings of the lower authorities that the liability on this issue has not yet crystallised. Therefore, we are of the considered view that the assessee can claim the deduction of the expenditure in the year of payment to Mrs Dsouza. As a result, the disallowance of the provision for the cost of tenant dispute is upheld.
In the result, the appeal by the assessee is partly allowed. Order pronounced in the open Court on 12/09/2025