DCIT, CIRCLE - 8(1), KOLKATA, KOLKATA vs. M/S. ASHIANA HOMES PVT. LTD., KOLKATA

आदेश / O R D E R Per Dr. A.L. Saini, AM:

1.That on the facts and circumstances of the case and in law, the ld. CIT(A) erred in allowing the future development expense amounting to Rs. 3,00,00,000/- by ignoring the fact that the said expense was provision for unascertained liability.

M/s Ashiana Homes Pvt. Ltd. Assessment Year:2011-12 2. That the appellant reserves the right to amend, alter or add to any ground(s) of appeal before or at the time of hearing of the appeal.

M/s Ashiana Homes Pvt. Ltd. Assessment Year: Assessment Year:2011-12 5. Aggrieved by the order of the Assessing Officer, the assessee carried the matter in . Aggrieved by the order of the Assessing Officer, the assessee carried the matter in . Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A) who has deleted the addition made by the Assessing appeal before the ld. CIT(A) who has deleted the addition made by the Assessing appeal before the ld. CIT(A) who has deleted the addition made by the Assessing Officer observing the follo Officer observing the following:

“I have considered the submissions of the assessee carefully. The only issue in this I have considered the submissions of the assessee carefully. The only issue in this I have considered the submissions of the assessee carefully. The only issue in this appeal is disallowance of Rs. 3.00,00.000/ appeal is disallowance of Rs. 3.00,00.000/- made by the AO on account of future made by the AO on account of future development expenses by treating them as contingent in nature. The main contention development expenses by treating them as contingent in nature. The main contention 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 f the AO was that the appellant is following mercantile system of accounting and f 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 under this system only those liability which had crystallized were allowable as an under this system only those liability which had crystallized were allowable as an expense. The AO was of the opinion that the estimated liability cannot be treated as an expense. The AO was of the opinion that the estimated liability cannot be treated as an expense. The AO was of the opinion that the estimated liability cannot be treated as an ascertained liability as the expenditure rtained liability as the expenditure has not actually been incurred. He therefore as not actually been incurred. He therefore treated the future development expenses as unascertained liability and disallowed the treated the future development expenses as unascertained liability and disallowed the treated the future development expenses as unascertained liability and disallowed the same.

It has submitted before me that Future Development Expenses comprises of costs It has submitted before me that Future Development Expenses comprises of costs It has submitted before me that Future Development Expenses comprises of costs which are duly ascertained but not incurred at the time of handing over possession of which are duly ascertained but not incurred at the time of handing over possession of which are duly ascertained but not incurred at the time of handing over possession of the completed flats flats to the buyers. However the liabilities for these expenses are to the buyers. However the liabilities for these expenses are contractual based on the agreement signed with the buyers. Such expenses mostly al based on the agreement signed with the buyers. Such expenses mostly al based on the agreement signed with the buyers. Such expenses mostly relate to common facilities like Electric Work. Common flooring. Painting work. Club relate to common facilities like Electric Work. Common flooring. Painting work. Club relate to common facilities like Electric Work. Common flooring. Painting work. Club House. Sewerage Treatment Plant, and Fire Fighting Equipments etc. It was further House. Sewerage Treatment Plant, and Fire Fighting Equipments etc. It was further House. Sewerage Treatment Plant, and Fire Fighting Equipments etc. It was further submitted as the revenue with respect to the sold flats have already been realized and evenue with respect to the sold flats have already been realized and evenue with respect to the sold flats have already been realized and booked in the sales account: these costs need to be allocated amongst all the flats the booked in the sales account: these costs need to be allocated amongst all the flats the booked in the sales account: these costs need to be allocated amongst all the flats the possession of which is handed over during the financial year. possession of which is handed over during the financial year.

It was further submitted that the ex It was further submitted that the expenses are not unascertained and contingent in penses are not unascertained and contingent in nature. The cost of such unfinished work is ascertained on the basis of purchase nature. The cost of such unfinished work is ascertained on the basis of purchase nature. The cost of such unfinished work is ascertained on the basis of purchase orders placed on vendors and orders placed on service suppliers. The computation of orders placed on vendors and orders placed on service suppliers. The computation of orders placed on vendors and orders placed on service suppliers. The computation of such expenses is supported by sanction plan, such expenses is supported by sanction plan, project engineers' drawings and project engineers' drawings and requirements of materials & requirements of materials & labour etc. Accordingly it was stated that the provision labour etc. Accordingly it was stated that the provision made for future expenses is in accordance with the AS made for future expenses is in accordance with the AS-29 and similar provisions 29 and similar provisions contained in ICDS ICDS-X under sec 145 of the Act.It was furthe 145 of the Act.It was further submitted that the assessee has consistently been following the same method o assessee has consistently been following the same method of accounting accounting for a number of years. It is submitted that no such disallowance out of future development expenses of years. It is submitted that no such disallowance out of future development expenses of years. It is submitted that no such disallowance out of future development expenses were made in the scrutiny orders passed by the were made in the scrutiny orders passed by the AO for Asst. Yr. for Asst. Yr. 2012-13. 13-14 and 14-15.The A/R of the appellant placed reliance on the decision in the case of The A/R of the appellant placed reliance on the decision in the case of The A/R of the appellant placed reliance on the decision in the case of Consulting Engineering Services (India) Limited. 250 ITR 849 (Delh Consulting Engineering Services (India) Limited. 250 ITR 849 (Delh Consulting Engineering Services (India) Limited. 250 ITR 849 (Delhi) for the proposition that "Where a system of accountin "Where a system of accounting (which includes allocation of indirect (which includes allocation of indirect expenses) is consistently adopted and /allowed the same cannot he altered in expenses) is consistently adopted and /allowed the same cannot he altered in expenses) is consistently adopted and /allowed the same cannot he altered in subsequent years".In this case before analyzing the issue the methodology adopted for In this case before analyzing the issue the methodology adopted for In this case before analyzing the issue the methodology adopted for computing the future development expenses requires to computing the future development expenses requires to be seen, it was stated that be seen, it was stated that proportionate amount of future expenses debited to the P/L Account is based on the proportionate amount of future expenses debited to the P/L Account is based on the 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 percentage of inventory sold during the year. In this respect the computation, project percentage of inventory sold during the year. In this respect the computation, project wise is depicted in the table below: wise is depicted in the table below:

M/s Ashiana Homes Pvt. Ltd. Assessment Year: Assessment Year:2011-12 The allocation of above expense is debited to P/L Account on the basis of sales made The allocation of above expense is debited to P/L Account on the basis of sales made The allocation of above expense is debited to P/L Account on the basis of sales made is shown below:

From the above table it can be seen that only an amount of Rs. 76 From the above table it can be seen that only an amount of Rs. 76 From the above table it can be seen that only an amount of Rs. 76,26.264/- has been debited to the P/L account. The expenses with respect to Village C debited to the P/L account. The expenses with respect to Village C 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 charged to the P/L Account as it has been reflected as an investment. Therefore the charged to the P/L Account as it has been reflected as an investment. Therefore the future development expenses capitalized during the year is Rs. 2.22.62.626 which is future development expenses capitalized during the year is Rs. 2.22.62.626 which is future development expenses capitalized during the year is Rs. 2.22.62.626 which is proportionate to the inventory of unsold flats. Only to the extent the f proportionate to the inventory of unsold flats. Only to the extent the f 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 sold, the revenue realized, there being a contractual liability the proportionate 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 expenses have been charged to the profit and loss account. This has been consistently expenses have been charged to the profit and loss account. This has been consistently done on the accounting principle AS done on the accounting principle AS-29 which is now recognized in the 1CD 29 which is now recognized in the 1CDS provisions. On these facts it is to be seen whether the expenses are allowable or not. provisions. On these facts it is to be seen whether the expenses are allowable or not. 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 In this regard the assessee has placed reliance on the decision in the case of Mayura In this regard the assessee has placed reliance on the decision in the case of Mayura Infrastructure Development Company Development Company - 874/JP/2016 A.Y. 201 1 & 874/JP/2016 A.Y. 201 1-12 & 2012-14. order dated: 25/04/2017. where theissue before the Ho 14. order dated: 25/04/2017. where theissue before the Ho 14. order dated: 25/04/2017. where theissue before the Hon’ble Tribunal was regarding future development expenses. The Hon’ e development expenses. The Hon’ble Tribunal has ble Tribunal has considered the issue and has held as under: issue and has held as under:

-Held, (i) that that the undertaking to curry mil the developments within six months the undertaking to curry mil the developments within six months from the dales of the deeds of sale (which, in view of the fact dial lone was not from the dales of the deeds of sale (which, in view of the fact dial lone was not from the dales of the deeds of sale (which, in view of the fact dial lone was not of the essence o of the essence of the contract. meant a reasonable time) was unconditional, the the contract. meant a reasonable time) was unconditional, the appellant binding itself abso appellant binding itself absolutely to carry out the same. That undertaking lutely to carry out the same. That undertaking imported a liability on the appellant which accrued on the imported a liability on the appellant which accrued on the imported a liability on the appellant which accrued on the dates of the deeds of sale, though that liability was to be discharged at a future dale It was thus an sale, though that liability was to be discharged at a future dale It was thus an sale, though that liability was to be discharged at a future dale It was thus an accrued liability and the estimated expenditure accrued liability and the estimated expenditure which would be incurred in which would be incurred in discharging the same could discharging the same could be deducted from the profits and gains of the e deducted from the profits and gains of the business, and the amount to be expended could be debited in accounts business, and the amount to be expended could be debited in accounts business, and the amount to be expended could be debited in accounts maintained in the mercantile system of accounting before it was actually maintained in the mercantile system of accounting before it was actually maintained in the mercantile system of accounting before it was actually disbursed. Th . The difficultyin the estimation thereof did not convert the accrued in the estimation thereof did not convert the accrued liability into liability into the conditional one, because it was always open to the Income because it was always open to the Income-tax authorities concerned to arrive at a proper estimate thereof having regard authorities concerned to arrive at a proper estimate thereof having regard authorities concerned to arrive at a proper estimate thereof having regard to all the circumstances of the ca all the circumstances of the case Page | 4

M/s Ashiana Homes Pvt. Ltd. Assessment Year:2011-12

(ii) That the sum of Rs 24,809 represented the estimated amount which would have to be expended by the assessee in the course of carrying on its business andwas incidental to the business and, having regard to the accepted commercial practice and trading principles, was a deduction which, if there was no specific provision for it under section 10(2) of the Income-tax Act. was certainly an allowable deduction, in arriving at the profits and gains of the business of the appellant, under section 10(1) of the Act, there being no prohibition against itexpress or implied, in the Act, 10 ITA 873 & 874/JP/2016 ACIT vs. Mayura Infrastructure Devlp. Co. The expression "profits or gains" in section 10(1) of the Income-tax Act has to be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure which is necessary for the purpose of earning the receipts is deducted there from-whether the expenditure is actually incurred or the liability in respect thereof has accrued even though it may have to be discharged at some future date In viewof the ratio laid down by the Hon'ble Supreme Court in the above judgments, we do not see any infirmity in the order of the Id. CIT(A). therefore, revenue's appeal being stands dismissed. "

It is observed in the above order 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 fulfillment of three elements of the 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 madebythe assessee is excessive, further. AO has examined the books of accountbut books of account were not rejected by him. It is submitted that the assessee has filed complete details of actual expenses and the AO has verified the same with vouchers and no deficiency has been pointed out by him. The provision for the development expenses were made at the same rate which was applied by the assessee in previous year. Therefore, in viewof facts and circumstances of the ease as well as respectfully billowing above case laws, addition of Rs. 62,67,210/- made by the Assessing Officer in total income of the assessee by disallowing 'Provision made for development expenses is hereby deleted Assessee's appeal stands allowed.

Further the assessee has placed reliance on the decision in the case of M/s. Green Triveni Developers – A Y. 2012-13 - Date of Pronouncement: 27/09/2016. The facts of the case and the findings of the Hon’ble Tribunal summarized in short are as follows:

M/s Ashiana Homes Pvt. Ltd. Assessment Year:2011-12 Issue: Disallowance of the provision for Development Expenses of Rs. 43,23,423/- Facts: The AO disallowed the provision for development expenses on account of it only being a provision and the expenditure not actually incurred. The AO treated the provision as an unascertained liability.

Held The cost of these expenses were already included in the sale price of the plot and the developer could not charge-any extra amount from the customers in Inline Jar complete development of the project.

The Hon'ble Tribunal relied on the Apex Court decisions in the case of Calcutta Co. Ltd. V CIT (1959) 37 ITR 1 (SC). Rotork Controls India (P) Ltd. vs. CIT [2009] 23 DTR (SC) 79 and in the case of Bharat Earth Movers v CIT [2000] 162 CTR (SC 325/[2000] 245 ITR -128 (SC), and held that the liability is allowable if it has arisen in the year though it may be quantified and discharged at a future date.

Further, the assesses has placed reliance on the decision in the case of M/s Spytech Buildcon vs. A.C.I T. Circle -6, Jaipur - & 205/JP/20I5 - A.Y. 2010-11 - Date of Pronouncement -14/09/2016 , where the issue before the Hon'ble Tribunal was regarding provision for "expected expenses”. The Hon'ble Tribunal has considered the issue and has held as under:

M/s Ashiana Homes Pvt. Ltd. Assessment Year: Assessment Year:2011-12 It is observed in the impugned case that the appellant has an obligation towards his It is observed in the impugned case that the appellant has an obligation towards his It is observed in the impugned case that the appellant has an obligation towards his customers to whom the flats have been sold and payment received to complete the customers to whom the flats have been sold and payment received to complete the customers to whom the flats have been sold and payment received to complete the pending work relating to common facilities, as a result of ork relating to common facilities, as a result of the sale deeds. The fulfilling the sale deeds. The fulfilling of this obligation would result in an out flow of resources. An estimate of this of this obligation would result in an out flow of resources. An estimate of this of this obligation would result in an out flow of resources. An estimate of this expenditure has been made by the assessee the basis of which was given during the expenditure has been made by the assessee the basis of which was given during the expenditure has been made by the assessee the basis of which was given during the course of assessment proceedings. In this case the sale deed creates a contractual ssessment proceedings. In this case the sale deed creates a contractual ssessment proceedings. In this case the sale deed creates a contractual obligation on the assessee to provide the common amenities and facilities as promised obligation on the assessee to provide the common amenities and facilities as promised obligation on the assessee to provide the common amenities and facilities as promised to the buyers. As the revenue has been booked as per matching principle the expenses to the buyers. As the revenue has been booked as per matching principle the expenses to the buyers. As the revenue has been booked as per matching principle the expenses are also required to be booked to that extent. The future development expenses of Rs.3 ired to be booked to that extent. The future development expenses of Rs.3 ired to be booked to that extent. The future development expenses of Rs.3 Crores has been claimedover a period of 4 assessment years as follows: Crores has been claimedover a period of 4 assessment years as follows: Crores has been claimedover a period of 4 assessment years as follows:-

The expenses claimed from Asst. Yrs 2012 The expenses claimed from Asst. Yrs 2012-13 to Asst. yrs 14-15 has been allowed in 15 has been allowed in scrutiny proceedings by the Assessing Officer himself therefore, the Assessing Officer scrutiny proceedings by the Assessing Officer himself therefore, the Assessing Officer scrutiny proceedings by the Assessing Officer himself therefore, the Assessing Officer cannot take different stand, on the same issue, in different accounting years. cannot take different stand, on the same issue, in different accounting years. cannot take different stand, on the same issue, in different accounting years. Accordingly, in my considered opinion the disallowance made by the Assessing ngly, in my considered opinion the disallowance made by the Assessing ngly, in my considered opinion the disallowance made by the Assessing Officer of the future development expenses is not proper. Therefore, in view of the Officer of the future development expenses is not proper. Therefore, in view of the Officer of the future development expenses is not proper. Therefore, in view of the facts and decisions discussed above, the addition made by the Assessing Officer of Rs. facts and decisions discussed above, the addition made by the Assessing Officer of Rs. facts and decisions discussed above, the addition made by the Assessing Officer of Rs. 3,00,00,000/- is hereby deleted.” s hereby deleted.”

M/s Ashiana Homes Pvt. Ltd. Assessment Year:2011-12 flooring, painting work, club house, sewerage treatment, plant and fire fighting equipments etc. The Revenue with respect to the sold flats have already been realized and booked in the sales account. These costs need to be allocated amongst all the flats, the possession of which is handed over during the financial year. The ld. Counsel submitted before us that these expenses are not unascertained and contingent in nature. The cost of such unfinished work is ascertained on the basis of purchase orders placed on service suppliers. We note that assessee has an obligation towards his customers to whom the flats have been sold and payment received to complete the pending work relating to these common facilities, as a result of the sale deeds. Hence, it is accrued liability and therefore ld. CIT(A) has rightly deleted the addition. We have gone through the detailed findings of the ld. CIT(A) and we note that there is no infirmity in the order passed by the ld. CIT(A). That being so, we decline to interfere in the order passed by the ld. CIT(A), his order on this issue, is hereby upheld and the grounds of appeal raised by the revenue is dismissed.

Order pronounced in the Court on 21.02.2020