GRACE SHELTER,MUMBAI vs. ACIT 21(2), MUMBAI

The assessee has filed this appeal challenging the order dated 12- 07-2013 passed by Ld CIT(A)-32, Mumbai and it relates to the assessment year 2010-11. The assessee is aggrieved by the decision of Ld CIT(A) in confirming the order of the AO in disallowing the claim of “Provision for Expenses”.

The assessee is engaged in the business of building construction. It undertook a project of construction of a property at Morechiwadi, Opposite Wadala Teephone Exchange, Dadar (East) under Slum Redevelopment Scheme. The project was sanctioned in the year 2004 and was completed in the year 2010 relevant to the assessment year under consideration. The assessee followed “Percentage completion method” for offering income from this project in the earlier years. During the year under consideration, it appears that the assessee has offered full revenue relating to the flats, which the assessee is entitled to sell. The sale consideration is stated to be Rs.4,87,60,500/-.

As per the Slum Redevelopment Scheme, the assessee is required to construct 1140.52 Sq. mt. of built up premises towards Municipal Staff Quarters and 54.99 Sq. mt. of built up premises towards Road Depot. It is further provided that the assessee shall hand over both the above said buildings at free of cost to M.C.G.M. As on 31.3.2010, the assessee had not constructed the above said built up area. However, since it is liable to construct the above said area and is required to hand over the same at free of cost to M.C.G.M and since it is part of the condition of sanction of the project approved by the Slum Rehabilitation Authority, the assessee provided for a sum of Rs.1,22,10,000/- towards construction of the above said built up area and claimed the same as deduction. Even though the project was approved way back in 2004, the assessee claimed the above said provision only in the year relevant to the assessment year 2010-11, since the assessee had offered the entire sales revenue during this year and further the above said liability was forming part of this project. Before the AO, the assessee submitted that the expenditure likely to be incurred on construction of the above said premises was estimated by an Architect and accordingly, it was provided for in the accounts. The assessee also submitted that the Accounting Standard 7 issued by the Institute of Chartered Accountants of India mandates making of such provisions.

The AO noticed that the assessee is following mercantile system of accounting and it has offered income in the earlier years under percentage completion method. Further, the assessee appears to have taker different stand before the AO, i.e., at one stage, it has claimed that the project was completed 100% and later it was submitted that the project was completed at 95%. The AO also noticed that the assessee has not expended any amount against the provision till the date of assessment order (31.12.2012, i.e., even after two years). The assessee claimed that it has spent following amounts in respect of this project in the succeeding years:- F.Y 2010-11 28,67,346/- (Approx) F.Y 2011-12 14,30,689/- (Approx) F.Y 2012-13 (till date) 2,63,223/- (Approx) The AO noticed that the assessee did not furnish any specific figures of expenditure incurred by it against the provision made with relevant evidences. Accordingly, the AO did not agree with the claim of “Provision for expenses” and accordingly disallowed the claim of Rs.1,22,10,000/-.

The Ld CIT(A) noticed that the land, where the construction of Municipal staff quarters and Road depot was to be undertaken, was not allotted to the assessee till date. Hence, the Ld CIT(A) took the view that the liability fasted upon the assessee in this regard was contingent upon the allotment of land for the stated purposes and the said liability existed right from 29.9.2004 onwards. The Ld CIT(A) also noticed that the assessee could not furnish the details of expenses, if any, incurred against the provision made. Accordingly, the Ld CIT(A) took the view that the liability of the assessee cannot be considered to be an ascertained liability and accordingly upheld the view taken by the AO. Aggrieved, the assessee has filed this appeal before us.

We have heard rival contentions and perused the record. The Ld A.R submitted that the assessee has completed the project during the year under consideration and hence under “Revenue cost matching principle”, all the expenses relating to the project have to be provided for. He submitted that the provision made by the assessee represents “provision of expenses towards uncompleted works” and hence the same should have been allowed by the tax authorities. The Ld A.R placed reliance on the terms and conditions of sanction of the project to show that the assessee is fasted with a liability to construct certain built up area and hand over the same at free of cost to M.C.G.M.

On the contrary, the ld D.R submitted that the assessee has not constructed any building till date and the assessee has also failed to show that it has incurred any amount against the provision made by it. Hence the liability claimed by the assessee is a contingent liability only and hence the Ld CIT(A) was justified in upholding the order of the AO.

We have heard rival contentions and perused the record. The dispute, as we understand, is whether the provision of Rs.1.22 crores made by the assessee is towards an ascertained liability or towards a contingent liability. The assessee heavily places reliance on the terms and conditions of sanction of Slum Rehabilitation Scheme to show that it is liable to construct Municipal staff quarters & Road depot and hand over the same at free of cost to M.C.G.M. Since the liability has been imposed upon the assessee as per the terms of sanction of the scheme, it is contended that liability is an ascertained liability. It is submitted that the liability was claimed during the year under consideration, since the entire sales revenue has been offered during this year.

On the contrary, even though the tax authorities have accepted the fact that the assessee has been imposed with a liability, they noticed from the actual conduct of the assessee that it has not incurred any expenditure against the provision so made by it. Further, it was noticed that the liability to construct the buildings would accrue to the assessee only if the relevant portion of land was handed over to the assessee. The Ld CIT(A) has specifically noticed that the land was not handed over to the assessee till date and hence held that the liability claimed by the assessee is contingent upon handing over the land. Accordingly he has taken the view that the liability is only a contingent liability. 10. There appears to be no dispute that a liability is imposed upon the assessee to construct certain premises at free of cost and under normal circumstances, it would form part of the project expenditure and is liable to be deducted against the project revenue. However, the peculiar facts brought on record by the tax authorities show that the liability of the assessee is contingent upon handing over of the relevant portion of land to the assessee. Even though the assessee has claimed to have completed the project in the year relevant to the financial year 2010-11, yet the Ld CIT(A) has noticed that the assessee was not given the land till 2013 (even after expiry of more than three years). Further, the assessee also could not show that it did incur any expenditure against the provision so made by it. As pointed out by Ld CIT(A), the question of incurring expenditure would arise only upon handing over of the relevant portion of land to the assessee. These facts support of the case of the revenue that there is no clarify as to whether the assessee is required to discharge the said liability or not. In the absence of clarity on this point, coupled with the fact that the assessee has not been handed over the relevant portion of land, we are of the view that the tax authorities are justified in disallowing the claim of provision for expenses made in the accounts of the assessee. Accordingly, we uphold the order of Ld CIT(A) on this issue.

In the result, the appeal filed by the assessee is dismissed.