ACIT,CC-1(2), KOLKATA, KOLKATA vs M/S FORT PROJECT PVT.LTD., KOLKATA

Income Tax Appellate Tribunal, KOLKATA ‘C’ BENCH, KOLKATA

Before: Sri J. Sudhakar Reddy & Sri S.S. Viswanethra Ravi

Appearances by: Shri Sunil Sharma, FCA, appeared on behalf of the assessee. Shri P.K. Srihari, CIT, D/R, appearing on behalf of the Revenue. Date of concluding the hearing : May 6th,, 2019 Date of pronouncing the order : May 10th, 2019 ORDER Per J. Sudhakar Reddy, AM :-

This appeal filed by the revenue is directed against the order of the Learned Commissioner of Income Tax (Appeals) - 4, Kolkata, (hereinafter the “ld.CIT(A)”), passed u/s. 250 of the Income Tax Act, 1961 (the ‘Act’), dt. 29/08/2016, for the Assessment Year 2012-13.

The assessee is a company and is in the business of real estate development. It filed its return of income declaring nil income for the impugned Assessment Year on 30/09/2012. The current year’s loss was Rs.7,91,59,352/-. The Assessing Officer completed the assessment u/s 143(3) of the Act, determining the total income under the normal provisions at Rs.1,62,93,596/- interalia making a disallowance of Rs.8,93,92,410/-, which was a provision made by the assessee. The assessee’s case is that it follows the project completion method of accounting (PCM) and that it had received project completion certificate from the authorities in respect of the three properties i.e., (a) 36B, Panditia Road, (b) 68, Hindusthan Park & (c) 90A, Bakul Bagan and that the entire income from these projects have been recognised under the PCM and the balance expenditure that has to be incurred as per the contract on these projects, has been estimated and claimed as a deduction. The Assessing Officer Assessment Year: 2012-13 M/s. Fort Project Pvt. Ltd disallowed the provision for expenditure on the ground that the provisions are not reliable estimates and that they have been made in an arbitrary manner. He pointed out to some of the items of expenditure which were provided for and recorded that the same cannot be believed due to the reasons given in para 4.4. of his order. He came to a conclusion that the estimates are not reliable and hence the liability in question which has been provided for is an unascertained liability/contingent liability. Thus, he disallowed the same both while computing the income under the normal provisions of the Act and also added the same as unascertained liability while computing book profits u/s 115JB of the Act. Further disallowance was made u/s 14A r.w.r. 8D of the Income Tax Rules, 1962 (hereinafter the ‘Rules’). 2.1. Aggrieved the assessee carried the matter in appeal. The ld. First Appellate Authority deleted the additions on the ground that, the assessee has been consistently following PCM for recognising income and that, when income of a project has been fully recognised, the corresponding expenditure, is also to be allowed as a deduction. He held that the provision in question was measured by using substantial degree of estimation based on past event and historical trends. He held that the provision was specifically made for pending works, which the assessee was obliged to do under contract. He deleted the addition. On the disallowance made u/s 14A r.w.r. 8D, he restricted the disallowance to those shares which yielded dividend income.

Aggrieved, the revenue is in appeal before us.

The ld. D/R, submitted that the Assessing Officer committed an error in deleting the addition. He argued that the provision was made in an arbitrary matter with no reliable estimates. He distinguished the different case-law referred to by the ld. CIT(A) and submitted that the assessee has not specified as to what was the basis on for which the provision is made. He argued that under the PCM for recognising income, does not permit the assessee to make unrealistic and arbitrary estimates. He submitted that the provision is not based on any scientific method and thus, the ratio of the decision of the Hon’ble Supreme Court in the case of Rotork Controls India (P) Ltd. v. CIT [2009] 180 Taxmann 422 (SC) does not apply. He also referred to the decisions of the Mumbai Bench of the ITAT in the cases of Manish Builders v. ITO (2012-TIOL-159-ITAT-MUM) and DCIT vs. Rajgir Builders (70 ITD 226) (Mum) referred Assessment Year: 2012-13 M/s. Fort Project Pvt. Ltd to by the ld. CIT(A) and submitted that the same does not apply to the facts of the assessee’s case. On the issue of disallowance u/s 14A r.w.r. 8D of the Rules, he relied on the decision of the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. v. Commissioner of Income Tax, New Delhi [2018] 91 taxmann.com 154 (SC).

The ld. Counsel for the assessee, on the other hand, controverted the arguments of the ld. D/R and submitted that the assessee had given a detailed reply to the assessing officer, copy of which was placed at page number 107 of the paper book. He drew the attention of the bench to page number 111 of the paper book, which gives a table of item wise provision made for expenditure and the actual expenditure incurred in the subsequent years against each item of such provision, to prove that the provision was scientifically made, based on actual expenditure to be incurred. He pointed out that against the provision of Rs.8,82,23,292/-, the total expenditure incurred was Rs.9,02,65,651/- which proves that the provision was reliable, scientific and based on actuals. 5.1. He argued that the assessee was following project completion method (PCM) of accounting and that a similar disallowance was made for the assessment year 2010-11. The assessee carried the matter in appeal and the ld. CIT(A) vide his order dated 29/08/2016, had deleted similar disallowance made by the assessing officer. He argued that the revenue had accepted this order and not filed an appeal. On the computation of income under the normal provisions, he relied on the decisions of the Mumbai ‘B’ Bench of the Tribunal in the cases of Manish Builders v. ITO (supra) and DCIT vs. Rajgir Builders (supra) and M/s. Bengal Peerless Housing Vs. DCIT in order dt. 31/12/2018, and submitted that all the expenditure corresponding to the income recognised, should be allowed as a deduction for arriving at the correct income of the project under the project completion method. He relied on the judgement of the Honourable Supreme Court in the case of Calcutta Co. Ltd. vs. CIT [1959] 37 ITR 01 (SC), for the same proposition. 5.2. On the disallowance u/s 14A r.w.r. 8D, he relied on the decision of the honourable Calcutta High Court in the case of CIT vs. REI Agro Ltd. in GA 3022 OF Assessment Year: 2012-13 M/s. Fort Project Pvt. Ltd 2013/ ITAT 161 OF 2013, judgement dt. 23rd December, 2013, for the proposition that only dividend yielding investments have to be considered for the purpose of computing disallowance u/s 14A r.w.r. 8D of the Rules. 5.3. In his rejoinder, the ld. D/R, submitted that the assessing officer has nowhere mentioned in his order that the assessee has filed the details of the expenditure incurred is subsequent years against the provisions made. When it was pointed out that this was part of the reply written by the assessee to the Assessing Officer, copy of which is placed at pages 107 to 122 of the paper book, he admitted that the assessing officer had recorded the claim of the assessee that the expenditure was subsequently incurred.

He pleaded that the matter may be remanded to the file of the assessing officer for the limited purpose of verifying whether the expenditure provided for was actually incurred or not, in case his submissions that the entire provision is an unascertained liability, as it was not scientifically made is not accepted by the Bench.

We have heard rival contentions. On careful consideration of the facts and circumstances of the case, perusal of the papers on record, orders of the authorities below as well as case law cited, we hold as follows:- 8. The assessee is in the business of real estate and follows project completion method of accounting. For the three projects in question, the assessee had recognised the entire income arising from the project. The issue is whether matching expenditure should be allowed as a deduction. This issue, in our view, is no more or res-integra. This Bench of the Tribunal in the case of Manish Builders v. ITO (supra) held as follows:- “16. We have heard the rival submissions. The learned D.R. relied on the order of the AO. The learned counsel for the Assessee reiterated submissions made before the Revenue authorities. It was his submission that as far as the Assessee is concerned, income from the project is complete and that it had offered the sale value of all flats and claimed expenses by way of provision. It was his submission that incurring of liability which were claimed as deduction by way of provision was certain. It was only a question of quantification. It was his submission that the quantification as done by the Assessee was reasonable and had to be accepted. In this regard heavy reliance was placed on the decision of the Hon’ble Supreme Court in the case of Bharat Earthmovers (supra). Our attention was also drawn to the fact that in the subsequent assessment years, the expenses which were claimed by way of provision in the Assessment Year: 2012-13 M/s. Fort Project Pvt. Ltd previous years, were actually incurred and were much more than what was claimed by the Assessee by way of provision. The following details were provided by him in this regard. “The assessee spent various amounts to complete the building project upto 31-03- 2005, towards the discharge of liability by making following payments as under :

In fact in October, 2009 and November, 2009 additional amounts have been spent towards discharge of liability for incomplete project provided for in the accounts for the year ended 31-03-2005. The Xerox copies of profit and loss a/c and balance sheet for each year are also filed in the paper book.”

17.

It is thus clear that the actual expenditure details are now available and would afford a guide to decide the reasonableness of the claim for deduction made during the previous year by the Assessee by way of a provision for expenses. This would of course be subject to the upper limit of what is claimed as deduction by way deduction by the Assessee during the previous year. ... In this regard, we now have the benefit of the actual figures of expenditure and we feel that it would be just and proper to direct the AO to examine the actual expenditure claimed to have been incurred by the Assessee, which were claimed by way of provision in this Assessment year. The AO will examine the expenses and on the Assessee showing correlation of the actual expenses with the expenses actually claimed by way of provision during the previous year, the AO will them as deduction. As already stated the claim for deduction cannot exceed the amount claimed as deduction by way of provision by the Assessee. With these observations, the issue is restored to the AO for the limited purpose as directed above.

This Bench of the Tribunal in the case of M/s. Bengal Peerless Housing Vs. DCIT (supra) held as follows:-

“10. We have given a careful consideration to the rival submissions and perused the material available on record. We note that recognition of contract revenue and expenses are done by the contractors by following either percentage of completion method or completed contract method. The completed contract method is also known as project completion method. In percentage completion method the revenue and contract costs Assessment Year: 2012-13 M/s. Fort Project Pvt. Ltd associated with the construction contract shall be recognized as Revenue and Expenses respectively by reference to the stage of completion of the contract activity at the end of the accounting period. Whereas in completed contract method, which is also known as project completion method, the revenue and expenses are recognized at the time of substantial completion of the project. The substantial completion of the project means the project should be completed by and large, except to some ancillary and minor/miscellaneous work, which can be completed in subsequent years. The another feature of project completion method is that, in this method, the financial statements, that is, profit and loss account and balance sheet is prepared once in the life of the project therefore it is necessary to make the provision in the books of accounts for expenses like ancillary and minor/miscellaneous work, which are yet to be completed or to be completed in subsequent years. The assessee company, before us, is following project completion method and made provision for expenses on account of ancillary and minor/miscellaneous work, which is to be completed in subsequent years. We note that the Assessing Officer, in the assessee's case under consideration has not disputed the method, which has been adopted by the assessee. The assessee as a matter of consistency has been following the project completion method. In project completion method, as we pointed out earlier that the assessee prepares balance sheet, profit & loss account and other financial statement once in a life of the project i.e. for a particular project the financial statements consisting profit & loss account and balance sheet is prepared only once in a life of the said project. Therefore, if the assessee is of the view that his project has substantially completed and only some minor/ ancillary and miscellaneous works are pending, which is yet to be completed, in that situation, the assessee prepares financial statements, in that year itself and will show the entire expenses and entire sales receipts in the profit & loss account. Since in project completion method, the entire expenses and entire sales should be shown, therefore, it is necessary for the assessee to make provision for estimated expenditures which are to be incurred in subsequent years on account of minor/miscellaneous work. If the assessee does not make provision for estimated expenditures, like, exp. on minor/miscellaneous work, then in that case assessee will not able to show true profit and loss, in its profit and loss account. As we pointed out in our earlier para that in project completion method, the assessee prepares profit and loss account and other financial statements once in life of a project, therefore, these estimated expenditures, like, exp. on minor/miscellaneous work, can not be shown next year. Another important point is that in project completion method, the assessee has shown entire sales/Revenue therefore he is entitled to record the entire expenses which had incurred by him or to be incurred to earn the said entire sales/Revenue. Therefore, in order to derive the true net profit in project completion method it is necessary to show these estimated expenditures, like, Exp. on minor/miscellaneous work. Hence, we accept the treatment made by the assessee in respect of estimated expenditures, like, Exp.on minor/miscellaneous work, in its books of accounts.”

10.

Applying the above proposition of law to the facts of this case, we have to hold that, as the assessee is undisputedly following project completion method of accounting and as it has recognised the entire income of the project this year, the Assessment Year: 2012-13 M/s. Fort Project Pvt. Ltd provisions made for expenditure to be incurred to complete the project has to be allowed as a deduction to arrive at the correct income.

11.

The next issue is whether the assessee made this provision on a scientific basis.

12.

The allegations of the ld. D/R is that the provision is made in an arbitrary manner. We have examine the reply given by the assessee to the Assessing Officer on this issue. He has given item wise provision for pending works made in the previous year 2011-12 and has also given the corresponding expenditure incurred as each of these items of work provided for and which was incurred in the subsequent years. The chart giving this information is at page 111 of the paper book. A perusal of this chart demonstrates that the expenditure incurred in the subsequent years is close to the figure of the estimates made of the expenditure for the purpose of the provision. The deviations are within limits. On examination of this chart we come to the conclusion that a very reliable estimate has been made by the assessee, for making this provision. The appeal of the ld. D/R that a social angle is involved and that the builders generally do not fulfil promises etc. are not the grounds on which we can base our decision. The assessee has also provided copies of each of the bills expenditure actually incurred by it, which are at pages 1 to 77 of the paper book to prove the correctness of his estimates. Thus, on facts we find no infirmity in the order of the ld. CIT(A) on this issue. We uphold the same and dismiss this ground of the revenue.

12. Coming to the disallowance u/s 14A r.w.r. 8D, the order of the ld. CIT(A) is in line with the propositions of law laid down in the case of CIT vs. REI Agro Ltd. (supra) . Thus, we find no infirmity in the same and dismiss this ground of the revenue.

13.

In the result, appeal of the revenue is dismissed. Kolkata, the 10th day of May, 2019. Sd/- Sd/- [S.S. Viswanethra Ravi] [J. Sudhakar Reddy] Judicial Member Accountant Member Dated : 10.05.2019 {SC SPS} Assessment Year: 2012-13 M/s. Fort Project Pvt. Ltd Copy of the order forwarded to: 1. M/s. Fort Project Pvt. Ltd 7/1A, Hazra Road Kolkata – 700 026 2. Asstt. Commissioner of Income Tax, Central Circle-1(2), Kolkata

3. CIT(A)- 4. CIT- , 5. CIT(DR), Kolkata Benches, Kolkata.

ACIT,CC-1(2), KOLKATA, KOLKATA vs. M/S FORT PROJECT PVT.LTD., KOLKATA