THE ITO, WD-1, KANNUR vs. M/S.RAINBOW REALTORS, KANNUR

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

This appeal by revenue is directed against order of CIT(A) Kozhikode Kerala dated 26.2.2020 for the assessment year 2014- 15. The revenue has raised following grounds of appeal:-

Page 2 of 5 head "other payable" during the current year was added back by the AO as the details called for was not provided. 3. The learned Commissioner of Income Tax (Appeals) held that the assessee has not claimed the expenses in the profit and loss account and therefore it was not disallowable. The learned Commissioner of Income Tax (Appeals) is erred in facts by giving relief to the assessee without proving the genuineness of the liabilities.

4. The Commissioner of Income Tax (Appeals) arrived at the conclusion without considering the fact that if there is corresponding increase in work in progress then what will be the expenses claimed when recognizing the sales. The decision of the Commissioner of Income Tax (Appeals) is without appreciating the fact of the case and not considering the fact that, when the income was recognized in subsequent years, the work in progress is claimed as expenditure and therefore there will be inflation of expenses.

Page 3 of 5 and Raintree Nest. On examination of details furnished, the AO noticed that the assessee has debited the following amounts to the respective projects as provision for expenses:

Rainscape Rs. 1,44,53,989/- Raintree Rs. 40,03,905/- Rain Nest Rs. 10,46,009/- Total Rs. 1,95,03,903/- 3.1 AO further observed that the assessee has completed and sold residential unit to various customers out of their projects mentioned above. The AO noted that the assessee has debited all the expenditure in the books of accounts and to inflate the expenses incurred in the construction of residential units, the assessee has made provisions for expenses. The Ld. AR of the assessee had no valid explanation for the provisions debited and failed to adduce any documentary evidence to substantiate the expenses debited in the books of accounts. As per the AO, the provisions debited in the books of accounts by the assessee was not in order. Therefore, he disallowed the same and added to the income declared by the assessee and completed the assessment accordingly. Aggrieved, the assessee filed this appeal.

3.2 The Ld. CIT(A) observed that the assessee is following mercantile system of accounting. As per ledger copy of accounts produced before him, the assessee is not debiting 'provision for expenses' in profit & loss account, but these expenses are debited to 'work in progress' of each project account. The 'work in progress' account is a running account and at year end or at time of sale, proportionate 'work in /Cochin/2020 M/s. Rainbow Realtors, Kannur

Page 4 of 5 progress' is transferred to profit and loss account as cost of sale or expenses corresponding to sales. Sales is credited in profit & loss account at same time. The corresponding 'work in progress' for that project is reduced by amount transferred to profit & loss account. The Assessing Officer has not appreciated the accounting method and without brining any material on record or examining books of accounts or rejecting it, disallowed the provision of expenses which were never debited by assessee in profit & loss account. The A.O. has not examined or even mentioned work in progress account maintained by assessee for each project so as to doubt the genuineness of expenses. The order of AO is clearly flawed and without appreciating the accounting principles and facts of the case. Considering this, the addition of Rs.1,95,03,903/- is deleted by Ld. CIT(A).

3.3 We have heard the rival submissions and perused the materials available on record. The order of Ld. CIT(A) is very cryptic and he has considered the provisions for expenses as work in progress which was not the plea of assessee before the AO. Hence, this plea of the assessee has to be examined at the end of the AO. Accordingly, the issue is remitted back to the AO for fresh consideration. All the materials, which has not produced by the assessee before CIT(A) are to be produced before AO for his consideration. /Cochin/2020 M/s. Rainbow Realtors, Kannur