PARADISE ASSOCIATES,MUMBAI vs. WARD 19(2)(5), MUMBAI, MUMBAI

ITA No. 6630/Mum/2025 1 Paradise Associates IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “C”, MUMBAI

BEFORE SHRI ANIKESH BANERJEE, JUDICIAL MEMBER AND SHRI MAKARAND VASANT MAHADEOKAR, ACCOUNTANT MEMBER

ITA No.6630/Mum/2025 (Assessment year: 2017-18)

Paradise Associates vs Ward 19(2)(5), Mumbai 209, Konark Shram, Tardeo 5th Floor, Piramal Chamber, Lal Road, Mumbai - 400034 Baug, Parel, Mumbai – 400012. PAN: AAIFP8598E APPELLANT RESPONDENT Assessee by : Shri Rajkumar Singh Revenue by : Shri V.S. Mahajan (Sr.DR)

Date of hearing : 13/05/2026 Date of pronouncement : 20/05/2026 O R D E R Per:Anikesh Banerjee (JM): The instant appeal of the revenue filed against the order of the NFAC. Delhi [for brevity the “Ld. CIT(A)”], order passed under section 250 of the Income Tax Act 1961 (for brevity ‘the Act’) for Assessment Year 2017-18, date of order 22/08/2025. The impugned order emanated from the order of the Ld. Income tax Officer, Ward-19(2)(5), Mumbai order passed under section 143(3) of the Act date of order 21/12/2019.

ITA No. 6630/Mum/2025 2 Paradise Associates 2. The brief facts of the case are that the assessee is a partnership firm and filed the return by declaring the total income of Rs. 9,15,930/-. The assessee had taken a redevelopment project at Supariwala and Tambawala, Mumbai. The assessee maintaining the books of accounts as per the prescribed accounting standard and ICDS prescribed under the CBDT. The scrutiny assessment was initiated and the Ld. AO found that the assessee had made provision of construction related expenses amount of Rs. 1,25,00,000/- in the books of accounts. The Ld. AO disallowed the provision of construction expenses Rs. 1,25,00,000/- and added back the same with the total income of the assessee. The aggrieved assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) upheld the impugned assessment order. Being aggrieved, the assessee filed an appeal before us. 3. The Ld. AR argued and filed a paper book comprising pages 1 to 53 which has been produced on record. The Ld. AR contended that the assessee had made the provision in impugned financial year amount to Rs. 1,25,00,000/- in respect of the following construction related expenses. Sl No. Particulars Amount 1. Electrical Fittings & Wiring Work with Labour Rs. 62,40,359/- 2. Plastering Work, Brick Work, Gypsum Work Rs. 59,07,123/- 3. Waterproofing & Colour Work Rs. 10,15,907/- Total Rs. 1,31,63,389/-

Copies if bills duly provided by the service providers are enclosed in APB page 10 to 13. The assessee submitted all the relevant documents before the Ld. AO and

ITA No. 6630/Mum/2025 3 Paradise Associates Ld. CIT(A). The relevant “e-proceeding response acknowledgments” are enclosed in the APB. The assessee had deducted tax related all these payments to the party. 4. The Ld. AR submitted that the assessee is consistently following the mercantile system of accounting. It was contended that the assessee had created a provision amounting to Rs.1,25,00,000/- on an ad hoc basis towards contractual liabilities, wherein substantial work had already been completed up to 31.03.2017, while only a minor portion of the work remained to be completed in the subsequent year. It was further submitted that, in contractual activities, bills are generally raised by vendors/service providers only upon completion of the entire activity. Therefore, the assessee had estimated and provided for the cost pertaining to the substantially completed work. The Ld. AR argued that the Ld. AO disallowed the said provision on the premise that it represented an unascertained liability, without properly appreciating the factual matrix of the case. In fact, according to the assessee, the liability had already crystallized since the work was substantially completed, and only the exact quantification of the expenditure remained to be determined. It was further contended that without completion of the finishing work, the project itself could not be regarded as completed to the extent of 83.09%. The said provision was subsequently reversed/credited in the following financial year. Accordingly, the supporting evidences relating to the provisional expenses clearly establish the genuineness of the assessee’s transactions and demonstrate that the liability was an ascertained liability and not a contingent one.

ITA No. 6630/Mum/2025 4 Paradise Associates 5. The Ld. AR also invited our attention to the Profit & Loss Account of the assessee for F.Y. 2017-18 relevant to A.Y. 2018-19, wherein it is reflected that the aforesaid provision was duly credited back in the subsequent year. The Ld. AR further contended that the issue is squarely covered in favour of the assessee by the decision of the Coordinate Bench of ITAT, Mumbai “K” Bench in the case of L'Oréal India Pvt. Ltd. vs. Addl. CIT in ITA No.1398/Mum/2021 and ITA No.802/Mum/2022 dated 22.06.2022. The relevant observations of the Coordinate Bench in para 13 are reproduced here in below: “13. There is no dispute with regard to the fact that the assessee is following "mercantile system of accounting". Under the mercantile system of accounting and also as per the requirement of AS-29 issued by the Institute of Chartered Accountants of India (ICAI), a provision for expenses should be made when:- a. an enterprise has a present obligation as a result of past event. b. it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and c. a reliable estimate can be made of the amount of obligation. Hence it is imperative for a concern, following mercantile system of accounting, to provide for all known expenses and losses as at the year end, even if the relevant bills have not been received. As per standard accounting practices, not providing for known expenses/losses would, in fact, distort the operating results of the business concern and it would not reflect true and fair profit of the year. We have noticed that the assessee has provided for expenses for which services have been availed by it, meaning thereby, the liability towards those expenses has already accrued to the assessee. However, the actual liability to pay shall arise only upon on production of bills by the service provider. Thus, there is distinction between "accrual of liability" and "liability to pay for expenses". There should not be any dispute that the "accrued liability cannot be considered as "unascertained liability". Accrued liability is an ascertained liability, but the liability to pay it has not arisen. We notice that the tax officials have been carried away by the fact that the liability to pay shall arise upon the assessee only after the receipt of the relevant bills and have not considered its accrual. The fact that there was an obligation upon the

ITA No. 6630/Mum/2025 5 Paradise Associates assessee to pay for the liability as a result of past event cannot be denied. By belated receipt of bills, the payment only gets postponed, but not the liability that has already accrued to the assessee. It is also fact that the assessee has been providing for known expenses and losses year after year and the said provision has been verified by the statutory auditors of the assessee company. The Ld A.R submitted that the provision for expenses so created has been accepted by the AO in the past. Accordingly, we are of the view that the tax authorities are not justified in holding that the Provision for expenses is an unascertained liability. As per the accounting principles discussed above, it is an ascertained liability and the same is eligible for deduction while computing total income. Accordingly, we direct the AO to delete the disallowance of Provision for expenses.” 6. The Ld. DR relied upon the orders of the revenue authorities and submitted that the provision created by the assessee during the impugned assessment year resulted in a loss of revenue to the Department. Accordingly, the Ld. DR prayed for upholding the impugned assessment order. 7. We heard the rival submissions and perused the material available on record. The issue in dispute pertains to the provision for construction expenses amounting to Rs.1,25,00,000/- created by the assessee. It is an undisputed fact that the assessee is following the mercantile system of accounting. Under the mercantile system of accounting, as well as in accordance with Accounting Standard (AS)-29 issued by the Institute of Chartered Accountants of India (ICAI), a provision for expenses is required to be recognized when: (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation.

ITA No. 6630/Mum/2025 6 Paradise Associates In the present case, the assessee created the impugned provision towards construction-related expenses aggregating to Rs.1,31,63,389/-. Out of the same, a provision of Rs.1,25,00,000/- was created on an ad hoc basis in respect of contractual liabilities where substantial work had already been completed up to 31.03.2017, while only a minor portion of the work remained to be completed in the subsequent year. It has also been explained that, in contractual activities, vendors/service providers generally raise their invoices only upon completion of the work. Therefore, the assessee estimated the cost relating to the substantially completed work and created the provision accordingly. The Ld. AO disallowed the said provision on the ground that it represented an unascertained liability. However, from the facts available on record, it is evident that the liability had already crystallized since the work had substantially been completed, and only the precise quantification of the expenditure remained to be determined. Merely because the amount was estimated, the liability would not become contingent in nature. We further note that without completion of the finishing work, the project itself could not have been regarded as completed to the extent of 83.09%. It is also an undisputed fact that the said provision was duly reversed/credited in the subsequent assessment year relevant to A.Y. 2018-19. The Ld. AR placed before us the assessment order for A.Y. 2018-19 passed by the National e- Assessment Centre, Delhi dated 12.02.2021, wherein the revenue itself accepted the reversal/adjustment of the provision for contractual expenses. Respectfully following the decision of the Coordinate Bench in the case of L'Oréal India Pvt. Ltd. (supra), we hold that the disallowance made by the revenue is unjustified. Accordingly, the impugned appellate order passed by the Ld. CIT(A) is set aside and the addition of Rs.1,25,00,000/- is hereby deleted.

ITA No. 6630/Mum/2025 7 Paradise Associates 8. In the result, the appeal of the assessee bearing ITA No.6630/Mum/2025 is allowed. Order pronounced in the open court on 20th day of May 2026. Sd/- Sd/- (MAKARAND VASANT MAHADEOKAR) (ANIKESH BANERJEE) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai,िदनांक/Dated: 20/05/2026 Soumili Das, .PS Copy of the Order forwarded to: 1. अपीलाथ�/The Appellant , 2. �ितवादी/ The Respondent. 3. आयकरआयु� CIT 4. िवभागीय�ितिनिध, आय.अपी.अिध., मुंबई/DR, ITAT, Mumbai 5. गाड�फाइल/Guard file. BY ORDER, //True Copy// (Asstt. Registrar), ITAT, MUMBAI