ITO 5(2)(1), MUMBAI vs. INNOVATIVE CONSTRUCTIONS P.LTD, MUMBAI

The facts relating to the issue are stated in brief. The assessee company is a builder and developer of flats. The AO noticed that the assessee has claimed a sum of Rs.1.25 crores under the head “Provision for expenses”. It was stated in the notes of accounts that the above said provision for expenses relates to expenditure required to be incurred in respect of a completed project. The assessee explained that it has sold all the flats constructed in a project carried out at Mahim, but some work in the basement of project was not completed in all respects. Since entire revenue was offered as income, the assessee estimated the work required to be completed at the basement of the project at Rs.1.25 crores and accordingly provided the same in the books of account. The AO noticed that the assessee has claimed deduction without incurring any expenditure. Further, the AO also noticed that the assessee has handed over the possession of all the flats to the concerned buyers. Hence the AO took the view that it is not the responsibility of the assessee company to carry out such work. Accordingly, he disallowed the claim of Rs.1.25 crores, referred above.

In the appellate proceedings, the assessee furnished details of expenditures incurred by it in the subsequent years in respect of Mahim project and hence, the ld. CIT(A) called for a remand report from the AO. In the remand proceedings, the AO heard the assessee and examined the details submitted by the assessee in respect of expenditure incurred in the subsequent years. The AO submitted in the remand report that the assessee has incurred a sum of Rs.66,36,044/- during the previous year relevant to the assessment year 2009-10 (immediately succeeding year) and the same has not been disputed in the assessment order passed by the AO for the AY 2009-10. However, the AO expressed the view that the claim of provision of Rs.1.25 crores for unfinished work in AY 2008-09, i.e., the year under consideration, is not justified and further expressed the view that the assessee should have claimed the expenses in the year in which they were actually incurred. Considering the remand report, the ld. CIT(A) observed that the AO did not dispute the expenditure to the extent of Rs.66,36,044/- and accordingly allowed the same. With regard to the remaining amount of provision for expenses, the ld.CIT(A) confirmed the addition without making any discussion.

The revenue is aggrieved by the decision of ld.CIT(A) in allowing deduction to the extent of Rs.66,36,044/- and the assessee is aggrieved by the decision of ld. CIT(A) in confirming the disallowance of balance amount.

We heard the parties and perused the record. We notice that there is no dispute between the parties that the assessee had to carry out certain works at the basement of the project executed at Mahim. Even though the AO had observed in the assessment order that it was not the responsibility of assessee, yet in the remand report he has accepted that the assessee has incurred a sum of Rs.66,36,044/- in the year relevant to the AY 2009-10 towards the above said works.

Before the ld.CIT(A), the assessee has furnished the details of expenditure incurred by it in respect of balance works at the project executed at Mahim as under : S.No. Financial year Expenditure incurred to complete unfinished work in Rs. 1 2008-09 66,36,034 2 2009-10 59,60,950 3 2010-11 72,37,160 4 1.4.2011 to 81,53,142 30.11.2011 Total from 1.4.2008 till 2,79,87,286 30.11.2011 that has actually been provided for. We notice that the assessing officer, in his remand report, only observed that the expenditure can be allowed in the year in which they are actually incurred. The said observations, in our view, is not correct when one consider the method of accounting employed by the assessee and also as per the principles of accounting. There is no dispute with regard to the fact that the assessee has handed over all the flats to the concerned buyers and has offered the entire sales revenue as its income. When the assessee has offered the entire revenue relating to the project Mahim, under the matching principle, the assessee is required to provide for all the expenditures incurred/to be incurred that relate to the revenue offered by it. The assessing officer has also noted in the assessment order that the assessee is following mercantile system of accounting and hence it is not necessary that the assessee should have actually disbursed the money in order to claim the expenditure. The above said view finds support from the decision rendered by Hon’ble Supreme Court in the case of Calcutta Co. Ltd Vs. CIT (1959)(37 ITR 1), wherein the Hon’ble Apex Court has held that the estimated expenditure which had to be incurred by the assessee in discharging the liability which it had undertaken under the terms of agreement was an accrued liability and under the mercantile system of accounting, the assessee is entitled to debit in its books of accounts as against the sales receipts. In the instant case, even though the assessing officer has expressed the view that there is no liability on the part of the assessee to incur those expenses, yet we notice that the said observation is bald only without supported by any material. On the contrary, the assessing officer himself has accepted in the remand report that the assessee has incurred the expenditure against the provision made by the assessee in the immediately succeeding year.

We have noticed that the assessee has created the provision for expenditure to the tune of Rs.1.25 crores, whereas the assessee has actually incurred more than that in the succeeding years and the same proves the veracity of provision so created. Further, after having accepted the fact that the assessee was required to incur expenditure to complete the pending work and also after having accepted that the assessee has actually incurred the same in the subsequent years, we do not find any rationale in the order of the Ld CIT(A) in restricting the claim to Rs.66,36,044/-.

In view of the foregoing discussions, we are of the view that the assessee is entitled to claim deduction of entire amount of Rs.1.25 crores provided for by the assessee under the head “Provision for expenses”. Hence, in our view, the ld.CIT(A) was not justified in restricting the claim to Rs.66,36,044/-. Accordingly, we modify the order of ld.CIT(A) and direct the AO to allow the deduction of Rs.1.25 cr. claimed by the assessee under the head provision for expenses.

In the result, the appeal of the assessee is allowed and the appeal of the revenue stands dismissed. Pronounced accordingly in the open court on 4th Nov., 2015. घोषणध खुरे न्मधमधरम भें ददनधंकः4th Nov 2015 को की गई । (संजम गगग/SANJAY GARG) ( बी.आर.बास्करन / B.R. BASKARAN) न्मधनमक सदस्म / JUDICIAL MEMBER रेखध सदस्म / ACCOUNTANT MEMBER

DR, ITAT, Mumbai concerned गधर्ग पधईर / Guard file. 6. आदेशधनुसधय/ BY ORDER,सहधमक ऩंजीकधय (Asstt.