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06-03-2019, Ashiana Housing, Section 10(2), 145, Tribunal Kolkata

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2 months 1 week ago #8739 by amit
Section - 10(2), 145
Order Date - 06-03-2019
Favouring - Assessee
Court - Tribunal Kolkata
Appellant - DCIT
Respondent - Ashiana Housing Limited
Justice - P.M. Jagtap, VP & A. T. Varkey, JM
Citation - 219Taxpundit179
Appeal No. - I.T.A. No. 714/Kol/2018
Asstt. Year - 2013-14


PER : P.M. Jagtap

This appeal is preferred by the revenue against the order of Ld. CIT(A) – 3, Kolkata dated 23.02.2018 and the solitary issue involved therein is raised by the revenue by way of the following ground:

“That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing the future development expenses amounting to Rs. 2,25,01,129/- by ignoring the fact that the said expenses was provision for unascertained liability.”

2. The assessee in the present case is a company which is engaged in the business of real estate development & rendering hospitality services. In the revised return of income filed for the year under consideration on 02.09.2014, the total income of Rs. 46,14,17,450/- was declared by the assessee. In the profit and loss account filed along with the said return, a sum of Rs. 2,25,01,129/- was debited by the assessee on account of future development expenses. During the course of assessment proceedings, the assessee was called upon by the AO to explain as to why the future development expenses should not be disallowed as the assessee was following the mercantile system of accounting. In reply, it was submitted by the assessee that the provisions for future development expenses was made in accordance with the AS-29 and similar provisions were also contained in ICDS-X applicable w.e.f. 01.04.2015 u/s 145 of the Act. It was also submitted on behalf of the assessee that the relevant projects were completed in the year under consideration and nonaccounting of such future development expenses would lead to incorrect amount of completion of the phase. It was further submitted that the cost provided as future development was not unascertained liabilities. This contention of the assessee was not found acceptable by the AO. According to him, when the mercantile system of accounting was being followed by the assessee, only crystallized liabilities were allowable and unascertained liabilities could not be allowed. He held that the future development expenses were claimed by the assessee on estimated basis and such estimated expenditure which had not been incurred could not lead to crystallization of liability in the year under consideration. He held that the amount in question thus represented provision for meeting unascertained liabilities which was not allowable as deduction in the case of the assessee. He accordingly made a disallowance of Rs. 2,25,01,129/- on account of future development expenses and made addition to that extent to the total income of the assessee in the assessment completed u/s 143(3) vide an order dated 31.03.2016.

3. The disallowance made by the AO on account of future development expenses was challenged by the assessee in the appeal filed before the Ld. CIT(A) and after considering the submissions made by the assessee as well as the material available on record, the Ld. CIT(A) deleted the disallowance made by the AO for the following reasons given in his impugned order:

I have considered the submissions of the assessee carefully. The only issue in this appeal is disallowance of Rs.2,25,01,129/- made by the AO on account of future development expenses by treating them as contingent in nature. The main contention of the AO was that the appellant is following mercantile system of accounting and under this system only those liability which had crystallized were allowable as an expense. The AO was of the opinion that the estimated liability cannot be treated as an ascertained liability as the expenditure has not actually been incurred. He therefore treated the future development expenses as unascertained liability and disallowed the same.

It has submitted before me hat Future Development Expenses comprises of costs which are duly ascertained but not incurred at the time of handing over possession of the completed flats to the buyers. However the liabilities for these expenses are contractual based on the agreement signed with the buyers. Such expenses mostly relate to common facilities like Club House, Sewerage Treatment Plant, Landscaping, Roads and Fire Fighting Equ pments etc. It was further submitted as the revenue with respect to the sold flats have already been realized and booked in the sales account; these costs need to be allocated amongst all the flats the possession of which is handed over during the financial year.

It was further submitted that the expenses are not unascertained and ontingent in nature. The cost of such unfinished work is ascertained on the basis of purchase orders placed on vendors and orders placed on service suppliers. The computation of such expenses is supported by sanction plan, project engineers’ drawings and requirements of materials & labour etc. Accordingly it was stated that the provision made for future expenses is in accordance with the AS-29 and similar provisions contained in ICDS-X under sec 145 of the Act.

It was further submitted that the assessee has consistently been following the same method of accounting for a number of years.

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