BALAJI HOMES,NAVI MUMBAI vs. JT CIT 22(3), MUMBAI

The captioned appeal by assessee for Assessment Year [AY] 2010-11 contest the order of the Ld. Commissioner of Income-Tax (Appeals)-26 Balaji Homes Assessment Year 2010-11 [CIT(A)], Mumbai, Appeal No.CIT(A)-26/IT/24/2013-14 dated 19/05/2016 qua confirmation of disallowance of certain expenses amounting to Rs.50 Lacs. The assessment for impugned AY was framed by Ld. Joint Commissioner of Income Tax Range-22(3), Mumbai [AO] u/s 143(3) of the Income Tax Act, 1961 on 06/03/2013 wherein the income of the assessee has been assessed at Rs.177.09 Lacs after certain additions as against returned income of Rs.108.66 Lacs e-filed by the assessee on 14/10/2010. 2.1 Facts in brief are that the assessee being resident firm engaged as builders and developers carried out two projects namely Balaji Residency and Balaji Galaxy during the impugned AY. Both the projects were completed during the year and accordingly the income of the same has been offered on completion method. The solitary issue before us is deduction of certain expenses amounting to Rs.50 Lacs claimed by the assessee against the project namely Balaji Galaxy. 2.2 During assessment proceedings, it was noted that the assessee debited provision for expenses amounting to Rs.50 Lacs against the project Balaji Galaxy. The assessee justified the same in terms of Section 37(1) and contended that the same were allowable to the assessee following mercantile system of accounting. It was further pointed out that the income from the aforesaid project was to be offered on net basis after accounting for all expenses and therefore, since the revenue from the project was offered to tax in impugned AY, the deduction of estimated expenses was allowable to the assessee. However, not convinced, Ld. AO opined that the Balaji Homes Assessment Year 2010-11 project was not completed during the impugned AY since completion certificate was received by the assessee in the year 2012 and the assessee was having closing stock of units and therefore, the assessee could generate further revenues in subsequent years and hence, the provisions of expenses was not allowable to the assessee. Accordingly, the same were disallowed and added to the income of the assessee.

Aggrieved, the assessee contested the same without any success before Ld. CIT(A) vide impugned order dated 19/05/2016 where Ld. CIT(A) confirmed the stand of Ld. AO by making following observations:- 15. A provision can be allowed if it can be worked out with reasonable certainty. In the present case, no basis let alone scientific basis has been shown as to how Rs.50 Lakhs was worked out. It remains an estimate only.

Further, there is nothing on record to show that such expenditure pertains to the relevant previous year. The appellant has not submitted any details to show that this amount relates to any obligation, matching which revenue has been recognized.

Hon’ble Supreme court in case of Rotork Controls India Pvt.ltd. [314 ITR 62], explained the term “provision”. “what is a provision? This is the question which needs to be answered. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when: (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized.”

As already mentioned, in the case of project Balaji Galaxy, the amount of Rs.50 lakhs has not been shown to be a reliable estimate. And appellant has also not shown that sum relates to any present obligation (sale of flats corresponding to which sale proceeds have been accounted for as income).

Considering the above facts of the case, the ground of appeal, in so far as it relates to provision of Rs.50 lakhs, is dismissed.

The Ld. Authorised Representative [AR] for assessee contended that the provision for expenses has been made in the books of accounts by Balaji Homes Assessment Year 2010-11 making fair estimation of the expenses and the same has been paid by the assessee in subsequent years and therefore, the same was not mere provision in nature but a crystallized liability, the deduction of which was available to the assessee. The Ld. AR further submitted that complete details of expenses were furnished to Ld. CIT(A) with documentary evidences which has completely been ignored by Ld. CIT(A). Per Contra, Ld. DR submitted that deduction of mere provisions could not be allowed to the assessee and therefore, the stand of lower authorities was quite justified.

We have carefully heard the rival contentions and perused relevant material on record. Undisputedly, the assessee, following mercantile system of accounting, was eligible to claim all expenses accrued and crystallized during the impugned AY notwithstanding the fact that the same has been paid subsequently. However, in terms of statutory provisions, the deductions could not be granted to assessee against mere provisions unless the expenses have actually crystallized in the impugned AY. The Ld. AO has noted that the project was not completed in the impugned AY and the assessee had unsold inventory in the Balance Sheet, which could not be controverted by Ld. AR. At the same time, as per the submissions of Ld. AR, the provisions for expenses was not a mere provision but a fair estimation of the expenses which had accrued during the impugned AY and therefore, allowable to assessee. The Ld. AR has also contended that complete working / details thereof was submitted to Ld. CIT(A) during Balaji Homes Assessment Year 2010-11 appellate proceedings, which has completely been ignored. Prima facie, we concur with the said submission. Therefore, on factual matrix, we deem it fit to restore the matter back to the file of Ld. CIT(A) to re-appreciate the claim of the assessee and re-adjudicate the same with a direction to the assessee to demonstrate accrual / crystallization of these expenses in the impugned AY.

Resultantly, the assessee’s appeals stands allowed for statistical purposes in terms of our above order. Order pronounced in the open court on 06th April, 2018.