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Income Tax Appellate Tribunal, “A” BENCH: KOLKATA
Before: Shri A. T. Varkey, JM & Dr. A.L. Saini, AM]
आयकर अपील�य अधीकरण, �यायपीठ – “A” कोलकाता, IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH: KOLKATA (सम� �ी ए.ट�. वक�, �या�यक सद�य एवं डॉ ए.एल. सैनी, लेखा सद�य) [Before Shri A. T. Varkey, JM & Dr. A.L. Saini, AM] Assessment Year: 2014-15 Khetawat Properties Ltd. Pr. CIT-4 19A, Sarat Bose Road, Kolkata. Vs. Kolkata-700 020. (PAN: AAACL 5633 M) Appellant Respondent For the Appellant Shri Manish Tiwari, AR For the Respondent Dr. P.K. Srihari, CIT(DR) Date of Hearing 23.10.2019 Date of Pronouncement 22.11.2019 ORDER Per Shri A.T.Varkey, JM
This is an appeal preferred by the assessee against the action of the Ld. Pr. CIT-4, Kolkata dated 25.02.2019 u/s 263 of the Income Tax Act, 1961 (hereinafter ‘the Act’) for Assessment Year (hereinafter ‘AY’) 2014-15.
The assessee has raised the legal issue of validity of revisional jurisdiction invoked by the Ld. Pr. CIT. Brief facts of the case is that the assessee company had filed its return of income declaring total income of ₹4,48,82,720/-. Later the case was selected for scrutiny through CASS and thereafter the AO after consideration of the outcomes of the enquiries and after verification of details furnished by the assessee completed the assessment on 28.12.2016 at a total income of ₹4,54,33,110/-; and the book profit was computed u/s 115JB of the Act at a sum of ₹4,72,27,670/- as against the book profit of ₹4,67,81,771/- disclosed by the assessee and the assessment order u/s 143(3) of the Act was passed by AO on 28.12.2016. Thereafter, the Pr. CIT issued show cause notice (hereinafter ‘SCN’) u/s 263 of the Act dated 08.02.2019 proposing
Assessment Year: 2014-15 Khetawat Properties Ltd. to interfere with the assessment order passed by the AO wherein he had found fault with the assessment order passed by the AO dated 28.12.2016 as under:
“On perusal of the Assessment record, it is observed that the assessee company was engaged in the business of “Real Estate Development". During the relevant FY the assessee was following completion method and booked the revenue for all the flats sold out. The assessee used to sale bare flats. It is further noticed that the assessee company had made a provision of Rs. 5,75,01,370/- for expenses to be incurred to complete the flat in the accounts and included the same in cost of construction and development expenses. On going through the record, it is noticed that the assessee had made the said provision on estimate basis. No documents as such was collected from the buying parties to examine whether the assessee have to incur such expenses on sold out flats. The aforesaid liability of the assessee is an unascertained liability. As per the provisions of the section 115JB of the Income Tax Act any amount set aside for meeting the unascertained liability is to be added back for the purpose of calculating Book Profit u/s 115JB of the Act. Hence the aforesaid liability was to be disallowed.”
Pursuant to the aforesaid SCN, the assessee submitted its reply and thereafter the Ld. Pr. CIT after considering the submissions of the assessee held as under:
I have carefully considered the material available on record and found that the issues pointed out in the show cause needs verification as merely accepting submission during the course of assessment proceedings the A.O. failed to examine the above referred issue. After having considered the position of law and facts and circumstances of the instant case, I am of the considered opinion that the assessment order passed by the A.O. is erroneous in so far as it is prejudicial to the interest of revenue in accordance with the Explanation 2(c) below section 263(1) of the Act. Accordingly, the issue is set aside to the table of AO on specific point mentioned in para 2 above. The A.O. is directed to provide reasonable opportunity to the assessee company to produce documents & evidences which it may choose to rely upon for substantiating its own claim. Thereafter a fresh assessment order may be passed in accordance with the relevant provisions of law.
Aggrieved by the aforesaid action of the Ld. Pr. CIT the assessee is before us challenging the exercise of revisional jurisdiction by the Pr. CIT u/s 263 of the Act. Assailing the decision of the Ld. Pr. CIT, the Ld. AR, Sh. Manish Tiwari contended that a perusal of the SCN would reveal that the Ld. Pr. CIT had taken note that the assessee company was engaged in the business of “Real Estate Development” and since the assessee was following the completed contract method/project completion method has booked the revenue for all the flats sold out (sale of only bare flats i.e. shell of the building i.e. not the interior work completed) during the relevant assessment year, however, had made a provision of ₹5,75,01,370/- for expenses to be incurred to complete the flat (the interior) in the accounts and included the same in cost of construction of development expenses. According to the Ld. Pr. CIT the Assessment Year: 2014-15 Khetawat Properties Ltd. assessee has made the said provision on estimate basis and therefore, the said liability of the assessee is an unascertained liability. Therefore, according to the Ld. Pr. CIT as per the provision of Section 115JB of the Act any amount set aside for meeting the unascertained liability needs to have been added back for the purpose of calculating book profit u/s 115JB of the Act, which the AO did not do by disallowing the same which has not been done. Therefore he would like to interfere with the order passed by the AO. When the Ld. Pr. CIT brought to the notice of assessee by issuing SCN (supra), the defaults from the part of AO, the Ld. AR for assessee replied that this precise question as to whether the provision debited in the profit & loss account is an ascertained liability or not has been examined in detail by the AO during the assessment proceedings and for that purpose he took our attention to page 63 of Paper Book wherein we note a query as addressed by the AO dated 06.12.2016 to the assessee therein question no. 2 is reproduced as under:
2. In the aforesaid letter you have claimed that you are developing only one project which started in year 2008 and you have been following completion method for recognizing revenue on sale of properties. On the said logic by no stretch of imagination can provision for expenses Rs. 5.75 Crores be allowed in your case.
Pursuant to the aforesaid query of the AO during assessment proceedings, the assessee had given detailed reply to the AO vide reply letter dated 21.12.2016 which is seen placed from page 79 to 88 of the Paper Book. Thus, according to the Ld. AR the AO had raised the query on this issue and after going through the detailed reply of the assessee, the AO has accepted the contention of the assessee that the amount of ₹5.75 crores is an ascertained liability and therefore, he was pleased to allow the same and therefore, while calculating the book profit u/s 115JB of the Act did not prefer to add the same which view is a plausible view taken by the AO. Further, the Ld. AR also pointed out that it was explained before the AO vide this reply that the assessee had filed along with reply also brought to the notice that the assessee had filed a copy of the certificate issued by the architect supervising the Elgin Road Project by M/s. Saha & Associates that since the construction of the building was substantially completed, the company could legally handover the possession of the units to the flat purchasers. Taking note of the same, and that since the assessee was following the Assessment Year: 2014-15 Khetawat Properties Ltd. completed contractual method/project completion method, booked/recognized in the accounts for the year ended 31.03.2014 the gross revenue of the Elgin Road Project. Moreover according to the Ld. AR, at the time of inspection of the project, the architect also certified that although the building was substantially in an advanced stage of completion, yet certain work/jobs were required to be carried out to fulfill the company’s contractual obligation and the architect also provided the estimate of cost and expenses which the company would be required to incur to complete the project in all respect till obtaining the completion certificate. Thereafter according to the Ld. AR the company required the site engineer to carry out site inspection and prepare a detailed cost estimate of the work to be completed in consultation with the site supervisors as also the suppliers and contractors who had to execute the pending works and jobs. The site engineer vide his report dated 19.03.2014 provided detailed cost estimate of expenses to be incurred till completion of the building and it was brought to our notice that this fact was also brought to the notice of the AO. It was also brought to our notice that based on the cost estimate prepared by the site engineer the assessee made “provision for expenses” in its books for this relevant assessment year and deduction was claimed in a scientific manner and method. It was also further pointed out that the provision which the company created was in fact lower than the expenses which the company ultimately incurred in the subsequent assessment year for completion of the Flats. For buttressing this fact, the Ld. AR submitted that as against the provision of ₹5.75 crores created in this assessment year, the assessee actually incurred cost of ₹3,69,93,931/- in the next financial year (2014-15) and ₹2,52,29,052/- in the subsequent financial year thereafter (2015-16) totaling ₹6,22,22,983/-. Thus it was contended by the Ld. AR that this cost was incurred towards fulfilling company’s contractual obligations incurred under the agreements with the flat purchasers and according to him the assessee company made the provisions for expenses on fair, equitable and scientific basis and it can be seen that the actual expenditure which the company actually incurred in the subsequent years towards fulfilling its contractual obligation was higher than the provision created on conservative basis this year and therefore taking note of all these facts and since the Assessment Year: 2014-15 Khetawat Properties Ltd. assessee in this assessment year has booked its revenue following the principles of matching concepts that the expenditure need to be allowed as deduction which claim was accepted by the AO after going through the architect’s report as well as the site engineer’s report (as well as the expenses on this issue which had taken place in subsequent years). Therefore according to the Ld. AR that the view taken by the AO was a plausible view and he cited the order of the coordinate Bench of this Tribunal in in the case of DCIT vs. M/s. Ashiana Housing Limited wherein the question was whether deduction can be given for provision in respect of ascertained liability wherein the Tribunal has held as under:
“6. We have considered the rival submissions and also perused the relevant material available on record. It is observed that the assessee in the present case is carrying on the business of real estate development and revenue from the said business was being recognised by it by following the project completion method. As per the said method, the revenue of 7 projects which were completed or substantially completed was recognised by the assessee in the year under consideration, out of the said 7 projects, 2 projects were fully completed and since no expenditure in relation to the said projects was to be incurred by the assessee, no provision for such expenditure was made. In respect of remaining 5 projects which was substantially completed, certain expenditure was still to be incurred by the assessee and details of the same in respect of each and every projects were furnished by the assessee during the course of assessment proceedings before the AO. It was also pointed out by the assessee that the said expenditure to the extent it was in respect of unsold flats of the projects completed was added to the cost of unsold flats lying in the closing stock and the remaining amount was claimed as deduction. Since the entire revenue from the relevant projects was recognised by the assessee during the year under consideration as per the project completion method followed by it, the corresponding expenses still to be incurred in respect of the said projects as identified and provided by the assessee were claimed as deduction as per the matching principle and the same in our opinion was rightly claimed by the assessee as per the method of accounting consistently followed by it.
The matching principle is one of the most fundamental principles in accounting. It is an integral part of the accrual accounting system and requires that a company must record expenses in the period in which the related revenues are earned. The matching principle states that expenses should be recognised and recorded when those expenses can be matched with the revenues those expenses helped to generate. In other words, expenses should be recorded as the corresponding revenues are recorded and the matching principle recognises the expense as the revenue recognition principle recognises income. It is important to match expenses with revenue because net income i.e. the net amount earned in a period is calculated by subtracting expenses from revenue. If expenses are not properly recorded in the correct period, the net income from a particular period may be either understated or overstated and so are the related balance sheet balances.
8. It appears that the AO could not appreciate the claim of the assessee in the light of method of accounting followed by the assessee perspective and disallowed the claim of the assessee on the ground that the provision made by the assessee represented Assessment Year: 2014-15 Khetawat Properties Ltd. unascertained liability which was not allowable as deduction in the case of the assessee following mercantile system of accounting. He however ignored the fact that the provision was made by the assessee for the expenses in relation to the projects completed of which the revenue was recognised and since such expenses were duly identified by the assessee in respect of each and every projects and details of the same were also furnished before the AO, the provision made by the assessee represented ascertained liability. Moreover, the expenditure so provided was to be incurred in respect of the projects substantially completed, the entire revenue of which was duly recognised by the assessee in the year under consideration. The said expenditure thus was related to the revenue already recognised by the assessee in the year under consideration by following the project completion method and the same was allowable as deduction in the year under consideration as per the concept of matching principle. It is pertinent to note here that the similar method of accounting was followed by the assessee consistently even in the earlier years and as submitted by the learned counsel for the assessee, similar provision made for the expenses to be incurred in respect of project substantially completed in respect of which revenue was recognised was allowed by the AO even in the assessment completed u/s 143(3). In our opinion, the Ld. CIT(A) appreciated the claim made by the assessee in the right perspective and rightly allowed the same after taking into consideration, the method of accounting followed by the assessee, in the light of relevant accounting standard as well as case laws relied upon by the assessee in support. We, therefore, find no infirmity in the impugned order of the Ld. CIT(A) giving relief to the assessee on this issue and upholding the same. We dismiss this appeal filed by the revenue.
In the result, the appeal of the revenue is dismissed.”
According to the Ld. AR, the Ld. CIT(A) after going through the reply of the assessee, understood that the AO had enquired and verified the facts and details submitted by the assessee on the issue whether the provision of ₹5.42 crores is ascertained liability or not and the AO has accepted the claim of the assessee that the provision is ascertained liability allowed deduction while computing the income as per normal provision and did not disallow u/s 115JB of the Act (which the Ld. Pr. CIT found fault with in his SCN) then changed tact and then in his conclusion was of the opinion that the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the Revenue, in accordance with the Explanation 2(c) below Section 263 of the Act which reads as under:
“the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119” 7. According to the Ld. AR, the explanation 2(c) refers to orders, directions, instructions of the CBDT passed u/s 119 of the Act if that is so according to the Ld. AR the Ld. Pr. CIT should have pointed out which order/instruction/direction of the CBDT passed u/s 119 of the Act has not been followed by the AO which he has not Assessment Year: 2014-15 Khetawat Properties Ltd. spelled out in his impugned order. Therefore, according to Ld. AR, the issue which has been already enquired/examined and looked into by the AO during assessment proceedings could not have been held to be erroneous and cited the judgment of the Hon’ble Supreme Court in the case of M/s. The Malabar Industrial Co. Ltd. Vs. CIT and want us to quash the impugned order of Ld. Pr. CIT, since the condition precedent for invoking revisional jurisdiction is absent in the facts of the case.
Per contra, the Ld. CIT(DR) supporting the order of the Ld. Pr. CIT submitted that though the AO had asked the assessee about this issue, however has simply accepted the reply of the assessee without verifying whether the provision claimed by the assessee as deduction is ascertained liability or not, which makes the order erroneous and prejudicial to the revenue, so Ld. Pr. CIT rightly invoked the jurisdiction u/s 263 of the Act and relied on the judicial precedent cited by Pr. CIT as well as the reasons given by Ld. Pr. CIT. So he does not want us to interfere with the order of the Ld. Pr. CIT.
9. Having heard both the parties, and on a careful consideration of the facts and circumstances of the case, we find that the ld. PrCIT invoked the revisionary jurisdiction on finding fault that the AO had simply accepted the version of assessee and allowed deduction of provision which is an un-ascertained liability, as well as the same [un-ascertained liability] could not have been allowed by the AO while computing book-profit. Therefore, according to ld. PrCIT, there was a requirement for verification and as a result the AO passed an order which in the opinion of ld. Pr CIT was erroneous in so far as prejudicial to the revenue and therefore liable for revision u/s 263 of the Act. Before adjudicating the issues arising from the impugned order of the ld. CIT, we have to remind ourselves as to the scope of revisional jurisdiction u/s. 263 of the Act. For that, let us take the guidance of judicial precedence laid down by the Hon'ble Apex Court in Malabar Industries Ltd. vs. CIT [2000] 243 ITR 83(SC) wherein their Lordship have held that twin conditions should be satisfied before jurisdiction u/s 263 of the Act is exercised by the ld. CIT. The twin conditions which need to be satisfied are that (i) the order of the Assessing Officer must be erroneous
Assessment Year: 2014-15 Khetawat Properties Ltd. and(ii) as a consequence of passing an erroneous order, prejudice is caused to the interest of the Revenue. In the following circumstances, the order of the AO can be held to be erroneous i.e. (i) if the Assessing Officer's order was passed on assumption of incorrect facts; or assumption of incorrect law; (ii) Assessing Officer's order is in violation of the principles of natural justice; (iii) if the AO's order is passed by the without application of mind; or (iv) if the AO has not investigated the issue before him. In the circumstances enumerated above only the order passed by the Assessing Officer can be termed as erroneous for the purpose of S.263 of the Act. Coming next to the second limb, the AO's erroneous order can be revised by the Ld. CIT only when it is shown that the said order is prejudicial to the interest of Revenue. When this aspect is examined one has to understand what is prejudicial to the interest of the revenue. The Hon'ble Supreme Court in the case of Malabar Industries (supra) held that this phrase i.e. "prejudicial to the interest of the revenue'' has to be read in conjunction with an "erroneous" order passed by the Assessing Officer. The Hon’ble Supreme Court, held that for invoking powers conferred by S.263; the CIT should not only show that the AO's order is erroneous as a result of any of the situations enumerated above but CIT must also further show that as a result of an erroneous order, some loss is caused to the interest of the revenue. Their Lordship in the said judgment held that every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interest of the revenue. It was further observed that when the Assessing Officer adopts one of the course permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the Ld. CIT does not agree, it cannot be treated as an order prejudicial to the interest of the revenue unless the view taken by the Assessing Officer is unsustainable in law.
We note that the sheet anchor on which the ld. CIT has found fault with the AO's order in the present case is the lack of enquiry/verification on the part of the AO to have simply accepted the version of assessee and allowed deduction of provision which is an un-ascertained liability, as well as the same [un-ascertained liability]
Assessment Year: 2014-15 Khetawat Properties Ltd. could not have been allowed while computing book-profit. In this context we find that there is a clear distinction between "lack of enquiry" and "inadequate enquiry". If there is an enquiry, even if inadequate, that would not by itself give occasion to the ld. PrCIT to interdict and interfere by exercising his revisional jurisdiction merely because he is of the opinion that some more enquiries should have been conducted in the matter. In a case where the ld.Pr CIT finds that the enquiry conducted by the AO is not in accordance with his subjective standards, then the ld. PrCIT should himself conduct the investigation and thereafter record a clear finding in his order u/s. 263 that the view followed or acted upon by the AO in his order was unsustainable in law and therefore the order of the AO was erroneous. In addition, the ld. PrCIT should also prima facie show that the erroneous order caused prejudice to the Revenue and thereby twin conditions prescribed by Section 263 are satisfied. If even one condition is not satisfied, then it is open for the ld. PrCIT to usurp the revisionary jurisdiction u/s 263 of the Act.
We note that the Ld. Pr. CIT has found fault at the time of sending notice (SCN) to the assessee proposing his intention to interfere with the assessment order was that since the assessee is engaged in the business of “Real Estate Development” and is following the completion method has booked the revenue for all the flats sold (shell of the flats) however has made a provision of ₹5.75 crores for expenses to be incurred to complete the flat and included the same in cost of constructions and development expenses. According to the Pr. CIT this provision of ₹5.75 crores is based on estimation and no documents were collected from the buying parties to examine whether the assessee had to incur such expenses on sold out flats and therefore this liability is an unascertained liability, which should have been disallowed also while computing the book profit u/s 115JB of the Act. However, after going through the reply of the assessee that the issue whether the provision of ₹5.75 crores which the assessee claimed is an ascertained liability was in fact raised by the AO during the assessment proceedings which had been duly replied by the assessee to AO wherein it was brought to the notice of AO the architects certificate, Site Engineer/architect’s estimation, and that the actual expenditure was more than the Assessment Year: 2014-15 Khetawat Properties Ltd. amount shown as provision was taken note by the AO before allowing the “Provision” of ₹5.75 crores as deduction while computing total income under normal provision of the Act as well as did not to add the same while calculating book profit u/s 115JB of the Act. However, the ld Pr CIT after going through the aforesaid submission of assessee has finally concluded by stating that in his opinion the AO’s order is erroneous as well as prejudicial to the interest of Revenue in accordance with the Explanation 2(c) below Section 263 of the Act. So we reproduce Explanation 2(c) below Section263 of the Act which reads as under:
the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119
We note that in the impugned order, the Ld. CIT has fortified his usurpation of revisionary jurisdiction u/s 263 of the Act, by relying on the amendment to Section 263 whereby second Explanation to sub-section (1) of sec. 263 of the Act was inserted with effect from 01.06.2015. The said amendment inserted the words “in the opinion of Principal commissioner or Commissioner”. According to ld. CIT, after this amendment was brought into statute, the order passed by the AO can be deemed to be erroneous insofar as prejudicial to the interest of the revenue if in the opinion of the Pr. CIT or CIT, the order has been passed without making enquiries or verification which should have been made. According to us, however, the insertion of the amendment which has brought in the word ‘in the opinion of Principal commissioner or Commissioner” cannot be read in isolation. And it has to be kept in mind that “Explanation” cannot over-ride the substantive provision of the law which the Explanation only tries to explain/clarify. Before we advert further, let us look at Section 263 of the Act, which is reproduced as under:-
“263. (1) The Principal Commissioner or] Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. [Explanation 1.]—For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,— Assessment Year: 2014-15 Khetawat Properties Ltd. (a) an order passed [on or before or after the 1st day of June, 1988] by the Assessing Officer shall include— (i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner] or the Income-tax Officer on the basis of the directions issued by the [Joint] Commissioner under section 144A; (ii) an order made by the [Joint] Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the [Principal Chief Commissioner or] Chief Commissioner or [Principal Director General or] Director General or [Principal Commissioner or] Commissioner authorised by the Board in this behalf under section 120; (b) "record" [shall include and shall be deemed always to have included] all records relating to any proceeding under this Act available at the time of examination by the [Principal Commissioner or] Commissioner; (c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matterof any appeal [filed on or before or after the 1st day of June, 1988], the powers of the [Principal Commissioner or] Commissioner under this sub- section shall extend [and shall be deemed always to have extended] to such matters as had not been considered and decided in such appeal.] [Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner,— (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.] [(2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.] (3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, [National Tax Tribunal,] the High Court or the Supreme Court. Explanation.—In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded."
A reading of Section 263 of the Act and the Explanations as well as the amendments brought in by the Finance Act, 2015, w.e.f. 01.06.2015, by inserting Explanation 2, we note that Explanation -2, is a deeming provision and the well settled position of law is that while construing a deeming provision, it has to be strictly interpreted and that the legal fictions should not be stretched beyond the purpose for Assessment Year: 2014-15 Khetawat Properties Ltd. which they were enacted and should not extend that legitimate field (Raymond Vs. State of Chattisgarh AIR 20-07 SC 2854) and it should be kept in mind that deeming provision should be in respect of facts, from which legal consequences will follow. However, a legal consequence cannot be deemed[DCM Vs. State of Rajasthan (1996) 2 SCC 449. AIR 1996 SC 2930 (3 judges of Hon’ble Supreme Court) and same view reiterated in State of Karnataka Vs. State of Tamil Nadu (2017) 3 SCC 362. So when we look at Explanation-2, we note that deeming fiction of law that the order of the Assessing Officer is deemed to be erroneous insofar as it is prejudicial to the interest of the Revenue only if in the opinion of the ld. CIT, which necessarily has to be a finding of fact in the following four events. Then legal consequence follows, if not it does not. So, the CIT has to make a finding of fact in the following:
(a) the assessment order passed by the Assessing Officer is without inquiry or verification, (b) the Assessing Officer allowed a claim without enquiry, (c) the Assessing Officer passed the order not in accordance with any order, directions or instructions issue by the CBDT u/s 119 of the Act, (d) theAssessing Officer passed the order not in accordance to the decision of the Hon’ble Jurisdictional High Court or the Hon’ble Supreme Court, which is prejudicial to the assessee, which is rendered either in the assessee’s case or any other person.
So, the amendment brought by the Finance Act, 2015, by way of insertion of Explanation-2, can come to the aid of the ld. Pr. CIT or ld. CIT only when any of the four conditions is satisfied and there is a clear finding of fact to that effect is recorded by the Ld. CIT, then only the legal consequence that AO’s order is erroneous insofar as prejudicial to the revenue can be deemed or else it cannot be deemed. Then in that case only the assessment order framed by the Assessing Officer can be deemed to be erroneous insofar as prejudicial to the interest of the Revenue, not otherwise. To say it
Assessment Year: 2014-15 Khetawat Properties Ltd. differently, the “opinion of Ld. Pr. CIT or CIT” cannot be read in isolation, and it has to be read with the four conditions stipulated under Explanation-2 as (a) to (d) and has to be read along with it. And only in the event that any one of the situation is satisfied and there is a finding of fact by the Ld. CIT to that effect in his sec. 263 order, then only the deeming provision of Explanation-2 can be pressed into service for rendering an assessment order as erroneous, insofar as prejudicial to the Revenue, which is the jurisdictional fact & law required for the ld. Pr. CIT/CIT to invoke revisional jurisdiction u/s 263 of the Act.
Coming to the expression in Explanation -2 “in the opinion of the Ld. CIT”, it cannot be an arbitrary opinion bereft of facts or law by the Ld CIT. It must be the considered opinion of the CIT which is based on the correct facts and in accordance to well established principles of law. The aforesaid clause only provides for situation where inquiries or verifications should be made by reasonable and prudent officer in the context of the case. Such clause cannot be read to authorize or give unfettered powers to the Commissioner to revise each and every assessment order. The applicability of the clause is thus essentially contextual. It has to be the opinion of a prudent person instructed in law. The Hon’ble Supreme Court in Maneka Gandhi Vs. Union of India reported in 1978 AIR (SC) 597 has laid down the law that a public authority should discharge his duties in a fair, just and reasonable, manner and the principle of due process of law was recognized by the Hon’ble Supreme Court. Therefore the opinion of the Ld. CIT has to be in consonance with that of the well settled judicial principles and cannot be arbitrarily made discarding the judicial precedent on the subject. The opinion of the Ld. Pr. CIT has to be reasonable and that of a prudent person instructed in law. Moreover, it has to be kept in mind that an Explanation to substantive section should be read as to harmonize with and clear up any ambiguity in the main section and should not be so construed as to widen the ambit of the section as held by the Hon’ble Supreme Court in Bihta Cooperative Development Cane Marketing Union Ltd. Vs. Bank of Bihar, AIR 1967 SC 389 and M/s. Oblum Electrical Industries Pvt. Ltd., Hyderabad vs. Collector of Customs,
Assessment Year: 2014-15 Khetawat Properties Ltd. Bombay - AIR 1997 SC 3467 at page 3471 and also see Justice G. P. Singh, Principal of Statutory Interpretation 234 Lexus 2016. It has to be kept in mind that while the Commissioner is exercising his revisional jurisdiction over the assessment order, he has to exercise his power in an objective manner and not arbitrarily or subjectively since he is discharging quasi-judicial powers vested in him while doing so. Thus according to us, Explanation (2) inserted by the Parliament u/s. 263 cannot override the main section i.e. sec. 263(1) of the Act. The Ld. PrCIT can exercise his revisional jurisdiction in the event the assessment order is erroneous as well as prejudicial to the interest of the Revenue as discussed above and not otherwise.
So when we look at Explanation-2, we note that deeming fiction of law that the order of the Assessing Officer is deemed to be erroneous insofar as it is prejudicial to the interest of the Revenue only if in the opinion of the ld. PrCIT, which necessarily has to be a finding of fact in the four events discussed supra. Then legal consequence follows, if not it does not. So, the PrCIT has to make a finding of fact that the Assessing Officer passed the order not in accordance with any order, directions or instructions issue by the CBDT u/s 119 of the Act. So when the ld PrCIT has taken the aid of this deeming provision he has to give a finding of fact that the assessment order has been framed by the AO, not in accordance with any order, directions or instructions issued by the CBDT u/s 119 of the Act, which he has not spelled out. So we asked the Ld. CIT(DR) to tell us which order, direction of CBDT issued u/s 119 of the Act has not been followed by the AO, which he was not able to spell out. The Ld. Pr. CIT has simply made an averment that the assessment order is not in accordance to Explanation 2(c) below Section 263 of the Act, without spelling out which order, direction of CBDT has not been followed by the AO. So we do not countenance such a bald finding of the Ld. Pr. CIT to bring in the deeming provision to hold that the assessment order is erroneous as well as prejudicial to the interest of the revenue. We note that the fault which the Ld. Pr. CIT noted was that the provision of ₹5.75 crores is based on estimation and whether there is any liability for the assessee to complete the flats and whether the liability is ascertained liability or not and since according to Assessment Year: 2014-15 Khetawat Properties Ltd. the Ld. Pr. CIT it is unascertained liability, ₹5.75 crores should have been added u/s 115JB of the Act.
We note that this issue was raised as a query by the AO during assessment proceedings vide notice u/s 142(1) of the Act vide notice dated 06.12.2016 (supra and page 63-64 of PB). The assessee had furnished detailed reply by letter dated 21.12.2016 which is found placed at page 65-88 (relevant reply at page 79-88) wherein the assessee replied as under:
“In the circumstances, even though the entire sale consideration due from the flat purchasers was not fully received in terms of the Agreement for Sale yet the Company in its books recognized the full revenue due from the flat purchasers in accordance with terms contained and evidenced in the Agreements for Sale. Since the Company had recognized the full revenue receivable in the form of sale proceeds of the entire saleable area in F.Y. 2013-14, in arriving at taxable income of the Company; it was also necessary to make appropriate provision for expenses which the Company had not incurred till 31.03.2014, but the Company had obligation to incur such expenses in discharging its contractual obligations under the Agreements executed with the flat purchasers. As submitted in the foregoing the construction of the building was substantially completed in F.Y.2013-14 when the building had reached a stage where the residential units were certified by the project architect to be in habitable condition though completion certificate was not obtained. In terms of the Agreement for Sale the Company had agreed to provide host of amenities, facilities to the residents of the building for their common use and enjoyment. Considerable part of the common area and common amenities in the building were not complete till 31.03.2014 even though civil construction within the individual apartments/units was complete. As per the Company’s understanding with the flat purchasers, once the Company handed over possession of the individual flats/units to the purchasers it was the individual obligation of the flat purchasers to carry out the further civil construction 8s other engineering work inside the apartment at own cost. In the circumstances, after the Company handed over possession of the individual flat to flat purchasers, considerable civil work was carried out by the individual flat owners inside their apartment areas. For this purpose, considerable movement of men 85 material occurred in the common areas which were to be developed in a proper manner by the Company in terms of its contractual obligations under the Agreement. Since considerable civil work was being carried out inside the individual apartments which was causing wear 85 tear to the common areas of the building it was deemed prudent not to carry out the development of the common areas and amenities till civil work inside the individual apartments was not complete. However, under the Agreements executed with the flat owners the Company had contractual obligation to provide amenities 8s facilities for the common areas which the Company was expected to provide. As submitted in the foregoing since the Company recognized the entire revenue derived from sale of entire saleable area in the Company’s accounts for the year ended 31.03.2014, the Company had to make provision for expenses to be incurred in foreseeable future to meet its contractual obligations. The contractual obligation of incurring the expenditure was inherent 8s intrinsically related to Company’s entitlement to receive the full consideration amounts from the flat purchasers.
Assessment Year: 2014-15 Khetawat Properties Ltd. Since the Company had not fulfilled its entire contractual obligation which inter-alia included development and provision of common areas and amenities till 31.03.2014 the flat purchasers had also not paid to the Company full value of consideration even though in the Company’s books for F.Y. 2013-14 it had recognized the gross revenue. From the company’s Balance-Sheet you will note that the Sundry Debtors in respect of this project was Rs. 18.67 crores approx whereas the gross revenue recognized in respect of the Elgin Road project was Rs. 65.94 crores. You will therefore appreciate that just as the Company did not actually pay the construction cost to the tune of Rs.5.75 crores; in the same manner the flat purchasers had also not fully paid for the sale consideration even though the company had recognized the gross revenue from sale of constructed spaces in its accounts for the year ended 31.03.2014. In the month of March 2014 the Company was granted a Certificate by M/s. M/s. Saha & Associates represented by its proprietor Mr. Bichitresh Saha who were the present Architect supervising the Elgin Road Project. The Certificate was given after they carried out physical inspection of the project Site. In the said Certificate the Architect had declared that the construction of the building was substantially complete and the building was fit for human habitation. The Architect had also certified that since the construction of the building was substantially complete; the Company could legally handover possession of the units/flats to the flat purchasers. It was on the basis of this Certificate the Company had come to conclusion that the gross revenue of Elgin Road project was required to be recognized in the accounts for the year ended 31.03.2014 under the ‘project completion method’ since the construction of the building was certified to be substantially complete. At the time of inspection of the project the said Architect also certified that although the building was in a substantially advanced stage of completion yet certain work/jobs were required to be carried out to fulfill Company’s contractual obligation.' The said Architect also provided the estimate of cost & expenses which the Company would be required to incur to complete the project in all respect till obtaining the completion certificate. A copy of the Certificate issued by M/s. M/s. Saha & Associates has already been enclosed as (herein annexed as Annex-II) After the Certificate was received from M/s. Saha & Associates represented by its proprietor Mr. Bichitresh Saha the Company required Mr. Susanta Kumar Mukhopadhyay who was on Site Engineer employed for supervising the construction work to carry out site inspection and prepare a detailed cost estimate of the work to be completed in consultation with the Site Supervisors as also the Suppliers & Contractors who were to execute the pending works & jobs. Mr. Susanta Kumar Mukhopadhyay vide his Report dated 19.03.2014 provided detailed cost estimate for expenses to be incurred till completion of the building. The Report of Mr. Susanta Kumar Mukhopadhyay is enclosed (herein annexed as Annex-XI) Based on the cost estimate prepared by the Site Engineer, the Company made provision for expenses in its books for the year ended 31.03.2014 and accordingly the deduction therefore is claimed in the Company’s return of income for F.Y. 2013-14, A.Y. 2014-15. It is further pertinent to submit that the provision which the Company created was in fact lower than the expenses which the Company ultimately incurred in the subsequent Financial Years. As against the provision of Rs.5.75 Crs. created in F.Y. ended on 31.03.2014, the Company actually incurred cost of Rs.3,69,93,931/- in F.Y. 2014-15, A.Y. 2015-16 and Rs.2,52,29,052/-in F.Y. 2015-16, A.Y. 2016-17 totaling Rs.6,22,22,983/-. These costs were incurred towards fulfilling Company’s contractual obligations incurred under the Agreements with the Flat purchasers. You will thus appreciate that not only the Company made the provision for expenses on fair, equitable & scientific basis, but the actual expenditure which the Company actually incurred in the subsequent years towards fulfilling its contractual obligation was higher than the provision created on conservative basis. We therefore submit that no adverse inference in this regard is called for.
Assessment Year: 2014-15 Khetawat Properties Ltd. We further submit that merely because the company did not actually defray the expenses of Rs.5.75 crores in F.Y. 2013-14; such fact by itself cannot negate the fact that the liability for such expenditure was not incurred by the Company in connection with earning of the income which the Company derived from the Elgin Road Project. We submit that since the gross revenue from the said Elgin Road Project was credited to the Company’s Profit 8s Loss A/c for the year ended 31.03.2014 in arriving at true and correct income in respect of such project it was necessary that the deduction was granted to all such expenses, outgoings& costs for which the Company had incurred obligation under the Agreements with the flat purchasers. The Company’s claim in this regard is supported by the judgment of the Supreme Court in the case of Calcutta Company Ltd Vs CIT (37 ITR 1).”
We also note that the principle of law laid in respect of claim of provision as in the present case of assessee before us, has been laid by the Hon’ble Supreme Court in Calcutta Company (supra) which was relied upon by the co-ordinate Bench of this Tribunal (Pune) in page 85-87 of PB can be seen as under:
“In the case of ACIT Vs Ashok Buildcon Ltd (61Taxman.com 330 - Pune) dated 31.12.2014. In this case also the assessee was engaged in the business of civil construction and implementation of infrastructure projects. The assessee followed mercantile system of accounting. In 2001 Tamil Nadu Road Development Corporation awarded a composite contract which involved improvement/construction of road as well as maintenance of road. During the A.Y. 2003-04 the assessee completed the construction of the road but assessee continued to remain under obligation to maintain the road for 5 years free of cost. The assessee anticipated the expenses to be incurred on account of maintenance work and determined future foreseeable losses on account of such obligation at the certain amount and made provision therefore in its accounts for year ended 31.03.2003. The assessee’s claim for deducting such provision was disallowed by the AO treating the same as contingent liability. On appeal the CIT (A) as well as the ITAT held that the provision made for future foreseeable losses represented an ascertained liability which was eligible as deduction while computing the income. In arriving at this conclusion the ITAT relied on the judgment of the Supreme Court in the case of Calcutta Company Limited (supra). The ratio laid down by the Supreme Court in the case of Calcutta Company Ltd was applied by the Gujarat High Court in the case of Amrish & Co. Vs CIT (121 Taxman 604). The ratio laid down in the same decision was also applied by the Calcutta High Court in the case of Shree Annapurna Financing Co. Pvt. Ltd Vs CIT (273 ITR 284). In this judgment the High Court made following observations which are relevant for deciding for the present appeal: As regards allowability of the expenditure, if it could be shown that liability had accrued and the expenditure had been incurred, in that event there was no scope of disallowing the same on the score of Sec 37 even if it was shown as accrued liability payable in future and it has not been paid. An accrued liability and the estimated expenditure incurred in discharging the same is deductible from the profits & gains and the amount to be expended could be debited in the accounts maintained under Mercantile System of Accounting before it was actually disbursed. The difficulty in the estimation thereof did not convert the accrued liability into contingent one since it is always open to tax authority to arrive at a proper estimate having regard to all the circumstances of the case. Under the Mercantile System, it is an accepted commercial practice and trading principle that the estimated amount which would have been expended in arrying on business and incidental to its business, would be a allowable deduction in arriving at Assessment Year: 2014-15 Khetawat Properties Ltd. profit & gain of the business. The liability in present though to be discharged in future is not a contingent one. If it is shown to be a business liability and if it arises in the accounting year, the liability is eligible for deduction. If the provision is made for meeting the liability incurred then it would be allowed as a deduction. Just as receipts thought not actually received but accrued due are brought in for income tax assessment, so also liabilities accrued due would be taken into account while working out the profit and gain. A mere possibility of reduction or even extinguishment of the liability would not have the effect of converting liability into a contingent one. In computing its taxable profits of a particular year the assessee may properly deduct not only the payment actually made but also the amounts payable in the subsequent years.”
Thus we note that the AO has rightly appreciated the claim of the deduction of provision for ₹5.75 crores. We also note that this Tribunal in DCIT vs. M/s. Ashiana Housing Ltd. (for A.Y. 2013-14) has observed as under in similar case:
8. It appears that the AO could not appreciate the claim of the assessee in the light of method of accounting followed by the assessee perspective and disallowed the claim of the assessee on the ground that the provision made by the assessee represented unascertained liability which was not allowable as deduction in the case of the assessee following mercantile system of Recounting. He however ignored the fact that the provision was made by the assessee for the expenses in relation to the projects completed of which the revenue was recognised and since such expenses were duly identified by the assessee in respect of each and every projects and details of the same were also furnished before the AO, the provision made by the assessee represented ascertained liability. Moreover, the expenditure so provided was to be incurred in respect of the projects substantially completed, the entire revenue of which was duly recognised by the assessee in the year under consideration. The said expenditure thus was related to the revenue already recognised by the assessee in the year under consideration by following the project completion method and the same was allowable as deduction in the year under consideration as per the concept of matching principle. It is pertinent to note here that the similar method of accounting was followed by the assessee consistently even in the earlier years and as submitted by the learned counsel for the assessee, similar provision made for the expenses to be incurred in respect of project substantially completed in respect of which revenue was recognised was allowed by the AO even in the assessment completed u/s 143(3). In our opinion, the Ld. CIT(A) appreciated the claim made by the assessee in the right perspective and rightly allowed the same after taking into consideration, the method of accounting followed by the assessee, in the light of relevant accounting standard as well as case laws relied upon by the assessee in support. We, therefore, find no infirmity in the impugned order of the Ld. CIT(A) giving relief to the assessee on this issue and upholding the same. We dismiss this appeal filed by the revenue.
Therefore, we note that the AO had taken note of the issue of provision of ₹5.75 crores claimed by the assessee as deduction and has raised queries and the assessee has duly replied (supra) and the AO has accepted the claim of the assessee. Since the provision the assessee claimed is an ascertained liability, there was no Assessment Year: 2014-15 Khetawat Properties Ltd. question that AO could have disallowed the same neither in the normal computation nor while computing book profit u/s 115JB of the Act. So the AO has discharged his duty as an investigator as well as an adjudicator and allowed the claim which is a plausible view, which cannot at any rate be called as an unsustainable view. So the Ld. Pr. CIT failed to make out a case that the order of AO is erroneous as well as prejudicial to the interest of the revenue, which was a condition precedent for invoking jurisdiction u/s 263 of the Act. Therefore the impugned order of Ld. Pr. CIT is without jurisdiction and null in eyes of law. So we are inclined to quash it. We order accordingly.
In the result, appeal of the assessee is allowed.
Order is pronounced in the open court on 22 November, 2019.