DEVRAJ BUILDERS,AHMEDABAD vs. THE PR. CIT-3, AHMEDABAD
Income Tax Appellate Tribunal, AHMEDABAD “D” BENCH, AHMEDABAD
Before: DR. BRR KUMAR & Ms. SUCHITRA KAMBLEAssessment Year: 2017-18
PER SUCHITRA KAMBLE, JUDICIAL MEMBER:
This appeal is filed by the Assessee against order dated 04.03.2022 passed by the PCIT-3, Ahmedabad for the Assessment Year 2017-18. 2. The assessee has raised the following grounds of appeal :-
“1. The Ld. Pr. CIT grossly erred in law and on facts in passing the order under section 263 of the IT Act, 1961 because the assessment order passed by the AO on 18.07.2019 was neither erroneous nor prejudicial to the interest of revenue.
2. The Ld. PCIT grossly erred in law and on facts in not appreciating that there was no ground to invoke his juri iction under section 263 of the Act.
3. a) The Ld. PCIT grossly failed to appreciate that the amount of defect liability debited to the P&L Account of the year under reference was subsequently spent in the following years to meet such liability and Assessment Year: 2017-18
Devraj Builders vs. PCIT-3
Page 2 of 6
surplus, if any, was offered to tax by crediting the P&L Account accordingly.
b)
The Ld. PCIT grossly failed to appreciate that the appellant has already paid due taxes on the surplus so generated after meeting the defect liability in the following years and any disallowance now in the year under reference will not only be illogical but will make the appellant liable for double taxation on the same income.
4. The Ld. PCIT grossly erred in law and on facts in not appreciating that the AO allowed the impugned amount after appreciating the method of accounting consistently being followed by the appellant in this regard. It is a settled principle of law that the Pr. CIT is not permitted under the provisions of section 263 of the Act to substitute his decision.
5. The Ld. PCIT grossly erred in law and on facts in wrongly treating the amount of Rs.90,03,270 debited to the P&L Account under the head
Defect Liability, as contingent liability in total disregard to established accounting standards in this regard.
6. a)
The Ld. PCIT grossly erred in law and on facts in not appreciating the fact that the Appellant as a contractor was bound by the terms and conditions the Tender laid down by the Vadodara Municipal
Corporation (VMC) i.e., the Contractee.
b)
The Ld. PCIT grossly erred in law and on facts to appreciate that as per the terms of tender defect liability was for 10 years for which Performance Guarantee was required to be given 5% of the total tender value to make sure the defects are corrected in the stipulated period.
c)
The Ld. POIT grossly erred in law and on facts to appreciate that since amount and period for defect liability was fixed by the VMC it could not be classified as contingent liability.
7. The Ld. PCIT grossly erred in law and on facts in appreciating that the impugned amount was debited to the Profit and Loss account of the relevant period was neither a personal expense nor a capital expenditure and was purely for business expediency therefore allowable under the provisions of section 37 of the Act.
8. It is prayed that the order of the Pr. CIT passed under section 263 of the IT Act 1961 be set aside and the order of the AO passed under section 143(3) be restored.
9. The appellant craves permission to add, withdraw, alter, amend withdraw grounds of appeal at any time before the completion of appellate proceedings.”
Assessment Year: 2017-18
Devraj Builders vs. PCIT-3
Page 3 of 6
The assessee firm M/s Devraj Builders is engaged in the business of construction and development of residential, commercial complexes and multiplexes. The assessee filed return of income for the Assessment Year 2017-18 on 08.10.2017 declaring total income of Rs.95,73,800/-. The case was selected for scrutiny by issuing notice under Section 143(2) of the Income Tax Act, 1961 and assessment was finalised under Section 143(3) of the act on 18.07.2019 assessing the total income at Rs.95,73,800/- as per return of income. The PCIT noticed that deduction for provision for defect liability of Rs.90,03,270/- was claimed under the head “Site Miscellaneous Expenses in Profit & Loss Account”. The PCIT observed that as per Section 37(1) of the Act, any expenditure, not being expenditure of the nature described under Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out expended wholly or exclusively for the purpose of business or profession shall be allowed in computing the income chargeable under the head “Profit and Gains of Business and Profession”. The PCIT further observed that the provision for defect liability expenses claimed by the assessee was not ascertained or crystalised during the year under consideration and merely represented a provision for future contingencies and therefore the assessee is not entitled to claim it as deduction. The assessee has simply made a provision for future contingent liability and thus the expenses claimed on account of provision for defect liability of Rs.90,03,270/- is not allowable under Section 37(1) of the Act as observed by the PCIT. A show cause notice under Section 263 of the Act was issued on 03.01.2022 and subsequently the assessee filed reply dated 29.01.2022. The PCIT after giving finding, directed the Assessing Officer to make requisite enquiry and proper verification with regard to the said issue and set aside the Assessment Order. Being aggrieved by the order under Section 263 of the Act passed by the PCIT, the assessee file appeal before us. 4. The Ld. AR submitted that the PCIT failed to appreciate that the amount of defect liability debited to the Profit & Loss Account of the year under reference was subsequently spent in the following years to meet such liability and surplus, was offered to tax by crediting the Profit & Loss Account. The assessee has already paid due taxes on the surplus so generated after meeting the defect liability in the following years and any disallowance now in the year under reference will not only be illogical Assessment Year: 2017-18 Devraj Builders vs. PCIT-3 Page 4 of 6
but will make the assessee liable for double taxation on the same income. The Assessing Officer allowed the impugned amount after appreciating the method of accounting consistently being followed by the assessee in this regard. The Ld. AR further submitted that it is a settled principle of law that the PCIT is not permitted under the provisions of Section 263 of the Act to substitute his decision. In fact, the PCIT was wrong in treating the amount of Rs.90,03,270/- debited to the Profit & Loss
Account under the head “defect liability” as contingent liability in total disregard to established accounting standards in this regard. The Ld. AR further submitted that the assessee, as a contractor, is bound by the terms and conditions laid down in the Tender by the Vadodara Municipal Corporation i.e. Contractee. As per the terms of the said defect liability was for 10 years for which Performance Guarantee was required to be given at 5% of the total tender value to make sure the defects are corrected in the stipulated period. The Ld. AR further submitted that the PCIT did not appreciate the fact that since the amount and period for defect liability was fixed by the Vadodara Municipal Corporation, it cannot be classified as contingent liability. The impugned amount was debited to the Profit and Loss Account of the relevant period was neither a personal expense nor a capital expenditure and was purely for business expediency, therefore, allowable under the provisions of Section 37 of the Act. Thus, the ld. AR submitted that the PCIT has not invoked Section 263 of the Act rightly.
5. The Ld. DR submitted that the PCIT has categorically mentioned in paragraph no.6.3 that admittedly, provisions in this regard has been made by mechanically applying 5% flat rate on the work certified at the year end. Thus, there was no thinking in respect of making the said provision. There is no utilisation of provision made from Financial Year 2014-15 to Financial Year 2018-19 and even thereafter, there is huge difference in the amount of provision made and actual utilisation. The Ld. DR submitted that in case of Rotork Controls India (P) Ltd. vs CIT (2009) 13 SCC 283
which was relied by the assessee will not be applicable in assessee’s case and in fact whenever there is a provision, the same has to be at the reasonable rate as per scientific method. In fact, the assessee is reversing the loss subsequently. The Ld.
DR, therefore, submitted that the PCIT has rightly invoked Section 263 of the Act.
6. We have heard both the parties and perused all the relevant material available on record. At the time of hearing, the assessee submitted a chart of reversal of defect
Assessment Year: 2017-18
Devraj Builders vs. PCIT-3
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liability which categorically demonstrate that as regards the additional liability ratio of reversal of provision from the year 2014-15 to 2017-18 is that of 5% only and, therefore, there was no change of method. The said chart is reproduced as under:-
Devraj Builders
Defect Liability Provision Calculation-site wise
Sr.
No.
F.Y.
Manjalpur
Harni-151
Harni-152
Tandalia
Total
Total to reverse
Exp Done till year end
DLP
Reversed
Ratio of reversal of provision
19.59%
34.70%
17.87%
27.85%
A Defect Liability Provision (DLP) Made
2014-15
17,29,720
6,69,905
0
0
23,99,625
2015-16
27,00,212
49,77,320
0
0
76,77,532
2016-17
15,63,766
33,95,976
4,64,654
35,78,874
90,03,270
2017-18
11,80,836
36,72,493
60,81,633
66,27,521
1,75,62,483
Total A 71,74,534
1,27,15,694
65,46,287
1,02,06,395
3,66,42,910
B
Break up of Defect Liability (refer Note below)
Structur al
Liability
30% of DLP for 10
years
21,52,360
38,14,708
19,63,886
30,61,919
1,09,92,873
Other
Liability
70% of DLP for 5
years
50,22,174
89,00,986
45,82,401
71,44,477
2,56,50,037
Total B
71,74,534
1,27,15,694
65,46,287
1,02,06,395
3,66,42,910
C
Reversal of Defect Liability to income
(Refer
Note Below)
To be reversed
Total to Reverse
Exp
Done till year end
DLP
Reversed
Date of Completion
10/09/2016
29/04/2017
27/05/2018
14/11/2019
Year wise
2017-18
12,19,671
21,61,668
0
0
33,81,339
1,85,99,049
72,04,500
1,13,94,549
2018-19
12,19,671
21,61,668
11,12,869
0
44,94,208
2019-20
12,19,671
21,61,668
11,12,869
0
44,94,208
2020-21
12,19,671
21,61,668
11,12,869
17,35,087
62,29,295
2021-22
12,19,671
21,61,668
11,12,869
17,35,087
62,29,295
62,29,295
22,30,614
39,98,681
2022-23
2,15,236
3,81,471
11,12,869
17,35,087
34,44,663
34,44,663
15,72,270
50,41,850
2023-24
2,15,236
3,81,471
1,96,389
17,35,087
25,28,183
25,28,183
37,65,681
2024-25
2,15,236
3,81,471
1,96,389
17,35,087
25,28,183
25,28,183
2025-26
2,15,236
3,81,471
1,96,389
3,06,192
10,99,287
10,99,287
2026-27
2,15,236
3,81,471
1,96,389
3,06,192
10,99,287
10,99,287
2027-28
0
0
1,96,389
3,06,192
5,02,580
5,02,580
2028-29
0
0
0
3,06,192
3,06,192
3,06,192
2029-30
0
0
0
3,06,192
3,06,192
3,06,192
Total C
71,74,534
1,27,15,694
65,46,287
1,02,06,395
3,66,42,910
3,66,42,910
1,47,73,065
2,04,35,079
Note:
Structural Liability to be written off in 10 years.
Lift, Tubewell, Submersible, DG Set Solar Panel, Street Light and Common Light to be written off in 5 years.
Assessment Year: 2017-18
Devraj Builders vs. PCIT-3
Page 6 of 6
1 From the perusal of the order of the PCIT under Section 263 of the Act, the observation made by the PCIT that the defect liability is akin to warranty because the assessee is required to rectify the defects in the specified items of construction and allied goods during the period of 5/10 years free of cost has been outrightly rejected but the fact remains that the Vadodara Municipal Corporation categorically had the terms in the tender related to defect liability for ten years for which performance guarantee was required to be given at 5%. This fact was totally ignored by the PCIT and in fact the liability as mentioned by the assessee in the category of site miscellaneous expenses in Profit & Loss Account will become a revenue neutral at this juncture. Therefore, the Assessing Officer has taken plausible view. Thus, the PCIT thereby setting aside the Assessment Order is not justified as per provisions of Section 263 of the Act. Hence, appeal of the assessee is allowed.
In the result, appeal filed by the assessee is allowed.
Order pronounced in the open Court on this 6th January, 2025. (DR. BRR KUMAR)
Judicial Member
Ahmedabad, the 6th January, 2025
PBN/*
Copies to:
(1)
The appellant
(2)
The respondent
(3)
CIT
(4)
CIT(A)
(5)
Departmental Representative
(6)
Guard File
By order