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

The grounds raised by the assessee, pertain to the validity of the jurisdiction exercised u/s. 154 of the Income Tax Act, 1961 (‘the Act’ for short) as well as the merits of the disallowance of expenses, amounting to Rs.2,06,50,000/-.

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, determining the total income at Rs.20,61,11,211/-, after making disallowance of Rs.33,68,410/- u/s. 14A of the Act.

After completion of assessment as aforesaid, the Assessing Officer (‘A.O.’ for short) invoked jurisdiction 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.

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 jurisdiction 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 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 jurisdictions 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:

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 jurisdiction u/s. 154 of the Act is invalid, but on merits also the disallowance made is allowed.

In the result, the appeal is allowed.