LALANI CONSTRUCTIONS P.LTD,MUMBAI vs. ITO WD 9(2)(2), MUMBAI

This appeal, filed by the assessee, being 12th April, 2012 passed by learned Commissioner of Income Tax (Appeals)- 20,Mumbai (hereinafter called “the CIT(A)”), for the assessment year 2009-10, the appellate proceedings before the learned CIT(A) arising from the assessment order dated 31st October, 2011 passed by the learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) of the Income Tax Act,1961 (Hereinafter called “the Act”).

The grounds of appeal raised by the assessee in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called “the Tribunal”) read as under:-

The brief facts of the case are that the assessee is a builder and developer. During the course of assessment proceedings u/s. 143(3) read with Section 143(2) of the Act, the assessee was asked to justify the expenses of Rs. 3,81,098/- being cost of sales of Hill road property whereby the assessee failed furnish any reasons of expenditure that the same are related to its business income earned during the year and pertained to the project shown in last year being cost of sales. The A.O. held that if the expenses under the head cost of sales were genuine and exigible to the project, the assessee should have made provision in the books of account of the last year accordingly. Instead, the assessee has claimed the said expenditure in the profit and loss account without making any provision of expenditure in earlier years. Since these are not related to any of the projects under taken by the assessee (WIP), nor to the income earned during the year i.e. income from other sources, hence the same were not allowable within the meaning of section 37(1) of the Act, vide assessment order dated 31.10.2011 passed by the AO u/s 143(3) of the Act .

Before the ld. CIT(A) , the assessee submitted that this expense relates to the project which was completed in the preceding year and the same were disallowed by the A.O. on the basis of that they were prior period expenses. The assessee submitted that the expenses were incurred during the relevant assessment year and the payments were also made during the relevant assessment year. The assessee completed the project in March, 2008 and handed over the same after occupancy certificate was received in March 2008. It was submitted that the project was sold to Pusti Enterprises Pvt. Ltd. No provisions were made towards the expenses as the nature of expenses incurred after the completion of the project were towards water connection, accessories required in the fire fighting equipments and other minor wear and tear electric, plumbing and miscellaneous work related to the project Hill Road project. It was submitted that the entire project of commercial mall sold to Pusti Enterprises Pvt. Ltd. were of Rs. 0.77 crores and the details of expenditure were furnished along with nature of work carried out. As regards to the contractual expenses of Rs. 2,03,259/- paid to various parties were purely towards maintenance and repairing of the project, BMC charges of Rs. 1,14,379/- was paid for new water connection and road opening charges. It was submitted that the water connection is always given after occupancy certificate was issued. There was some minor expenses towards purchase of material which were incurred amounting to Rs. 11,910/-. It was also submitted that in order to carry out these expenses, the assessee had to incur site expense charges towards supervision charges, purchase of sand and bricks, thus it was submitted that none of these expenses were of prior period and the expenses incurred were necessary expenses and which could have been incurred only after completion and handing over of the project. It was ITA 4275/Mum/2012 4 submitted that assessee had also incurred expenses towards conveyance and registration charges and payment of stamp duty for its project ‘Royal Manor’ which was an earlier project and expenses were incurred during the year as conveyance was entered with the society during the relevant assessment year.

Aggrieved by the appellate orders dated 12.04.2012 passed by the ld. CIT(A) , the assessee is in appeal before the Tribunal.

The ld. Counsel for the assessee submitted that the expenses were incurred after the project was completed and on the request of the buyer these expenses were incurred relating to water connection, accessories required in the fire fighting equipments and other minor wear and tear expenses electric, plumbing and miscellaneous work related to the project Hill Road. Although the project was sold in March 2008, these are not prior period expenses but were incurred during the previous year relevant to the impugned assessment year.

On the other hand ,the ld. D.R. relied on the order of the ld. CIT(A).

We have considered the rival contentions and also perused the material available on record. We have observed that the assessee has incurred certain expenses which are related to the assessee’s project which was sold in the preceding year . It is the submission of the assessee that these expenses incurred by the assessee are related to the project which is already sold but on the complaint of the buyer to meet the expenses to cover the deficiency in the project like water connection, accessories required in the fire fighting equipments and other minor wear and tear expenses etc. which are required to comply with the terms and conditions of the sale agreement and to honour the commitment to rectify minor deficiencies and defects in the project as pointed out by the buyer. The project was sold in the preceding year but based on the minor defects and deficiencies pointed out by the buyer during the previous year relevant to the assessment year, these expenses were incurred by the assessee during the previous year relevant to the impugned assessment year to rectify those minor defect and deficiencies pointed out by buyers and hence cannot be considered to be prior period expenses as the ITA 4275/Mum/2012 6 same were arisen, accrued and incurred in the impugned assessment year and are wholly and exclusively for the purposes of business of the assessee. In our considered view, these are not prior period expenses but have arisen , accrued and incurred during previous year relevant to impugned assessment year and are wholly and exclusively connected with the project which was already sold in March, 2008 and hence have direct and live nexus with the business carried on by the assessee . Thus, based on our detailed discussion and reasoning as set-out above , we order deletion of the additions of Rs.3,81,098/- as made by the AO and sustained by the learned CIT(A). We order accordingly.

In the result, the appeal filed by the assessee in 2009-10 is allowed as indicated above.