DOSTI REALTY LIMITED,MUMBAI vs. ITO, CIRCLE 1(1)(1), MUMBAI

Briefly, the facts are, the assessee is a registered corporate entity stated to be engaged in the business of development of properties. For the assessment year under dispute, the assessee filed its return of income on 22.11.2014, declaring total income of Rs.20,27,42,800/-. Assessee’s case was picked up for scrutiny and ultimately,

After completion of assessment as aforesaid, the Assessing Officer (‘A.O.’ for short) invoked juri iction u/s. 154 of the Act, alleging mistake apparent on the face of record while passing the assessment order. It is the case of the A.O. that upon revisiting the schedule of cost of flats sold, it was noticed that an amount of Rs.2,06,50,000/- was claimed towards provision for expenses as per note 20(d) of the Audit Report. According to the A.O., since the provision of expenses is an unascertained liability, it is not allowable. Thus, in terms with the notice issued u/s. 154 of the Act, the A.O. ultimately passed an order u/s. 154 of the Act on 31.03.2021, disallowing the expenses of Rs.2,06,50,000/-.

Challenging the validity of the proceeding initiated u/s. 154 of the Act as well as contesting the disallowance made, the assessee preferred an appeal before learned first appellate authority. However, learned first appellate authority not only uphold the validity of juri iction exercised u/s. 154 of the Act, but also sustained the disallowance.

We have heard Dr. K. Shivaram, learned Sr. Counsel appearing for the assessee and Shri R. R. Makwana, learned Departmental Representative. On a perusal of the order passed u/s. 154 of the Act, it is quite evident that the so-called rectification of mistake is for making disallowance of Rs.2,06,50,000/- claimed as provision for expenses. Interestingly, in the second paragraph of the order passed u/s. 154 of the Act, the A.O. has 3 Dosti Realty Limited vs. Dy. CIT concluded that allowance of the expenses has resulted in under assessment, whereas, the A.O. has ultimately proceeded u/s. 154 of the Act. Thus, there is an inherent contradiction in the approach and reasoning of the A.O. The juri ictions u/s. 147 and 154 of the Act are distinct and separate. Therefore, the A.O. once having come to the conclusion that the allowance of provision for expenses has resulted in under assessment of income, he could not have proceeded u/s. 154 of the Act.

Be that as it may, before learned first appellate authority, the assessee had furnished all the requisite evidences to establish that the provision for expenses cannot be treated as ‘unascertained liability’, as the liability has crystalized during the year. After considering the submissions of the assessee and examining the evidences, learned first appellate authority has observed as under: Bills in respect of the provision for expenses were not received during the year. The bills were received by the appellant in the next financial year and therefore the expenses could not be claimed on an actual basis. Since the appellant had a fair idea about the quantum of the expenditure, which was pertaining to the current FY as the bills were received before finalization of the accounts, the appellant made a provision for those expenditures. Therefore, these provisions were made not on estimate basis but were made on the basis of actual estimation of the liability. Hence, this provision is in the nature of contingent liability.

As could be seen from the aforesaid observations, learned first appellate authority has recorded a categorical factual finding that the provision for expenses was made not on estimate basis, but were made on the basis of the actual estimation of liability. Thus, in our view, having recorded a clear factual findings that the provisions were not made on estimate basis, but were made on the basis of actual liability and also the fact that the expenses pertain to the current financial year, the learned first appellate authority could not have treated the expenses as contingent liability. Thus, in our view, not only the exercise of juri iction u/s. 154 of the Act is invalid, but on merits also the disallowance made is 4 Mumbai; Dated : 16.01.2025 Roshani, Sr. PS

The Appellant 2. The Respondent 3. The CIT(A) 4. CIT - concerned 5. DR, ITAT, Mumbai 6. Guard File BY ORDER,