Solanki Developers, Thane vs Assessee

आयकर अपीलीय अिधकरण, अिधकरण मुंबई IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES 'J' MUMBAI सव ौी आय.पी. बंसल, याियक सदःय एवं ौी आर.सी. शमा , लेखा सदःय के सम BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER AND SHRI R.C.SHARMA , ACCOUNTANT MEMBER

ITA NO.1854/MUM/2011(A.Y. 2006-07)

M/s. Solanki Developers, The D.C.I.T, Nirmal House, Temhi Naka, Thane. Thane 400 601. Vs. (Respondent) PAN: AAEFS 5793A (Appellant )

Appellant by : Shri M.Subramanian Respondent by : Shri Akhilendra Yadav Date of hearing : 09/03/2015 Date of pronouncement : 09/03/2015

ORDER

PER I.P.BANSAL, J.M:

This is an appeal filed by the assessee and is directed against order passed by Ld. CIT(A)-1, Thane dated 31/12/2010 for assessment year 2006-07. Grounds of appeal read as under:

1. On the facts and in the circumstances of the case & in law, the learned AO, Dy. CIT, Cir.3, Thane erred in disallowing Balance work expenses of Rs.75,000/- on adhoc basis, without having any authority to do so under the provisions of Income Tax Act, 1961.

2 On the facts and in the circumstances of the case & in law the learned CIT (A) - I, Thane erred in disallowing entire Balance work expenses of Rs 7,50,000/- though these are fully allowable.

2 ITA NO.1854/MUM/2011(A.Y. 2006-07) 3 On the facts and in the circumstances of the case & in law, the learned CIT (A) -l erred in dismissing the appeal without giving fully and properly appreciating the facts and circumstances of the case.

4 On the facts and in the circumstances of the case & in law, the learned CIT (A) - I erred in dismissing the appeal without taking into consideration fully and properly the written submissions submitted during the course of hearing proceedings.

2. The assessee is a builder and developer. During the year the assessee has developed one project namely "Jai Santoshi Ma Tower", situated at Pipeline Road, Louisewadi, Thane (W). During the year under consideration its gross receipts are Rs.1,46,04,963/- as against previous year gross receipts of Rs.4,54,62,864/- and gross profit has been declared at 32.18% as against 9.68% of the earlier year. These facts are mentioned in the assessment order in para -3. While examining P&L Account of the assessee the AO observed that it has claimed a sum of Rs.7,50,000/- under the head "balance work expenses" and after going through the details he observed that some of the expenses were made in cash and were accounted through self made bills and vouchers. Thus, AO has arrived at a conclusion that details are not fully authenticated and AO disallowed a sum of Rs.75,000/- on adhoc basis. The disallowance was agitated in appeal filed before Ld. CIT(A). It was submitted that the assessee is following mercantile system of accounting and as the project was almost complete and assessee had to discharge certain obligations and for that purpose a sum of Rs.7,50,000/- was kept apart under the head "balance work expenses". It was claimed that the disallowance of Rs.75,000/- was not justified.

3 ITA NO.1854/MUM/2011(A.Y. 2006-07) 2.1 Ld. CIT(A) has examined such contention of the assessee and also referred to the written submissions submitted by the assessee. From the P&L Account he observed that the debit made by the assessee of Rs.7,50,000/- was in fact in the nature of provisions for future expenses. He found that assessee has incurred expenses of Rs.37,224/-, Rs.5,76,158/- and Rs.1,36,618/- during the subsequent assessment years 2007-08, 2008-09 and 2011-12 respectively. According to Ld. CIT(A) such expenses which were not actually incurred during the year could not be claimed as expenditure and expenditure to be incurred in future could not be allowed in the year under consideration. He issued notice of enhancement under section 251(2) of the Income Tax Act, 1961 (the Act) requiring the assessee to explain as to why the disallowance should not be made of the whole amount instead of only a sum of Rs.75,000/-. The submissions made earlier were reiterated and it was submitted that the assessee had to incur expenses regarding society formation, repairs, boundary wall painting etc. which were incurred in subsequent years. Thus, these expenses are provided for in the year under consideration to arrive at the true profit of the project. It was submitted that assessee is following project completion method and all expenses of the project till final completion and handing over of the project to the members of the society are to be provided in the current year to arrive at the true profit. Reliance was placed on the decision of Hon'ble Supreme Court in the case of Calcutta Company Ltd. CIT, 37 ITR 1(SC) and Metal Box Co. Ltd. vs. Workmen, 73 ITR 53(SC) and it was submitted that where the assessee is maintaining mercantile system of accounting, a liability already accrued, though to be discharged at a future date would be a proper deduction while working out the profit and loss account of the project. However, Ld. CIT(A) has rejected such contention of the assessee on the ground that the assessee has provided for expenses on an adhoc basis and written off the same in the subsequent years. According to the findings recorded 4 ITA NO.1854/MUM/2011(A.Y. 2006-07)

by the AO the vouchers for expenses are unverifiable. After scrutiny of the details, Ld. CIT(A) has found that during the assessment year 2007-08 a total payment of Rs.36,224/- has been made towards security services. During the year relevant to assessment year 2008-09, the total expenditure of Rs.5,76,158/- is incurred which include purchases and contract charges and thus, Ld. CIT(A) has observed that the claim of the assessee could not be allowed as under section 37 of the Act and the expenditure which could be allowed are expenditure which have been incurred in the year under consideration. It is further observed by Ld. CIT(A) that the case law relied upon by assessee are distinguishable and in this manner Ld. CIT(A) has arrived at a conclusion that entire disallowance was called for and the same has been held to be not allowable. The assessee is aggrieved, hence, has filed aforementioned grounds of appeal.

3. After narrating the facts the Ld. AR relied upon the aforementioned decisions and the decision of Hon'ble Supreme Court in the case of Bharat Earth Movers vs. CIT, 245 ITR 428. It was submitted by Ld.AR that project of the assessee was complete and assessee had to incur the expenditure which were debited to P&L Account. It was submitted that these expenditure have not been claimed in subsequent years and according to the aforementioned decisions the claim of the assessee was allowable and Ld. CIT(A) has committed an error in making the disallowance in its entirety. It was submitted that even AO did not disallow the entire amount. Thus, it was pleaded by Ld. AR that order passed by Ld. CIT(A) should be set aside and disallowance should be deleted in its entirety.

4. On the other hand, Ld. DR relied upon the order passed by Ld. CIT(A).

5 ITA NO.1854/MUM/2011(A.Y. 2006-07) 5. We have heard both the parties and their contentions have carefully been considered. The law relating to allowability of business liability in a particular year is settled by the decision of Hon'ble Supreme Court in the case of Metal Box Company Ltd.(supra). In the said case assessee company had estimated its liability under two gratuity schemes framed by the company and the amount of liability was deducted from the gross receipts in the P&L Account. On the basis of actuarial valuation, the company estimated its liability and made provision for such liability not all at once but spread over a number of years. Such practice was followed by the company year to year for working out the additional liability incurred by it on the employees putting in every additional year of service. The gratuity was payable on the termination of an employee's service either due to retirement, death or termination of services - the exacts time occurrence of the latter two events being not determinable before hand, in such circumstances their Lordships of Hon'ble Supreme Court laid down following principles: (i) For an assessee maintaining his accounts on mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in case of amounts actually expended or paid ;(ii) Just as receipts, though not actual receipts but accrued due are brought in for income-tax assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business; (iii) A condition subsequent, the fulfillment of which may result in the reduction or even extinction of the liability, would not have the effect of converting that liability into a contingent liability; (iv) A trader computing his taxable profits for a particular year may properly deduct not only the payments actually made to his employees but also the present value of any payments in 6 ITA NO.1854/MUM/2011(A.Y. 2006-07)

respect of their services in that year to be made in a subsequent year if it can be satisfactorily estimated.

5.1 Looking into the above principles, the first requirement would be that liability which is being claimed should arise in the accounting year itself. The said liability may be quantified or discharged at future date. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied, then the liability cannot be said to be contingent liability. If case of the assessee is examined from view point of first and foremost condition, it would be seen that there is no material on record placed by the assessee to say that the liability on account of which a sum of Rs.7,50,000/- was set apart had definitely arisen in the year under consideration. The liability was to be established with the positive material that without incurring these expenditure the assessee would not be able to fulfill the obligation cast upon the assessee. Though it has been stated that project was complete but major part of the expenses have been incurred during the financial year 2007-08, relevant to A.Y 2008-09. In financial year 2006-07 i.e. immediate proceeding year a sum of Rs.36,224/- is made only towards security services. No material has been brought on record to suggest that payment made for security services was part of obligation of the assessee without which it could not be said that project of the assessee was complete. Similar is the position with subsequent expenditure which include purchases and contract charges. No material has been brought on record to show that these were the expenditure incurred by the assesse in relation to project with regard to which income was shown during the year under consideration, more particularly the material to show that without incurring these expenditure the assessee would be held to be not discharged its obligation towards its customers. Keeping in view all these facts and circumstances of the case we are 7 ITA NO.1854/MUM/2011(A.Y. 2006-07)

of the opinion that the decision relied upon by Ld. AR have no application to the facts of the case as the assessee has not been able to place material on record to justify the liability of sum of Rs.7,50,000/- which has been claimed in the P&L account of the current year. We decline to interfere in the disallowance made by Ld. CIT(A) and the appeal filed by the assessee is dismissed.

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

Order pronounced in the open court on 09/03/2015 आदे श क घोषणा खुले यायालय म" 09/03/2015 को क गई ।

Sd/- Sd/- (आर.सी. शमा /R.C.SHARMA ) (आय.पी. बंसल / I.P. BANSAL) लेखा सदःय /ACCOUNTANT MEMBER याियक सदःय / JUDICIAL MEMBER मुंबई Mumbai; %दनांक Dated 09/03/2015 आदे श क ूितिल)प अमे)षत/Copy षत of the Order forwarded to : 1. अपीलाथ, / The Appellant 2. ू-यथ, / The Respondent. 3. आयकर आयु.(अपील) / The CIT(A)- 4. आयकर आयु. / CIT 5. )वभागीय ूितिनिध, आयकर अपीलीय अिधकरण, मुंबई / DR, ITAT, Mumbai 6. गाड फाईल / Guard file.

आदे शानुसार/ ार BY ORDER, स-या)पत ूित //True Copy//

उप/सहायक उप सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपीलीय अिधकरण, अिधकरण मुंबई / ITAT, Mumbai व.िन.स./Vm, Sr. PS