SOLANKI DEVELOPERS, THANE V. D.C.I.T. CIRCLE 3, THANE

ITA 1854/MUM/2011

• Counselvise Citation: 185419914 RSA 2011
• Duration Of Justice: 4 year(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-03-2015
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: J
• Next Hearing Date: 26-11-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 07-03-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: AKHILENDRA YADAV
• Assessee Lawyers: M SUBRAMANIAN

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES J MUMBAI . . , . . , 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, NIRMAL HOUSE, TEMHI NAKA, THANE 400 601. PAN: AAEFS 5793A (APPELLANT ) VS. THE D.C.I.T, THANE. (RESPONDENT) APPELLANT BY : SHRI M.SUBRAMANIAN RESPONDENT BY : SHRI AKH ILENDRA 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 ASSESS MENT YEAR 2006-07. GROUNDS OF APPEAL READ AS UNDER: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E & IN LAW, THE LEARNED AO, DY. CIT, CIR.3, THANE ERRED IN DISALLOWING BALA NCE WORK EXPENSES OF RS.75,000/- ON ADHOC BASIS, WITHOUT HAVING ANY AUTH ORITY 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 BALA NCE WORK EXPENSES OF RS 7,50,000/- THOUGH THESE ARE FULLY ALLOWABLE. ITA NO.1854/MUM/2011(A.Y. 2006-07) 2 3 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE & IN LAW, THE LEARNED CIT (A) -L ERRED IN DISMISSING THE APPEAL WITHOUT G IVING FULLY AND PROPERLY APPRECIATING THE FACTS AND CIRCUMSTANCES OF THE CAS E. 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 SUBMITTE D 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 CONSI DERATION ITS GROSS RECEIPTS ARE RS.1,46,04,963/- AS AGAINST PREVIOUS YEAR GROSS R ECEIPTS 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 I N PARA -3. WHILE EXAMINING P&L ACCOUNT OF THE ASSESSEE THE AO OBSERVED THAT I T 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. TH US, 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 O F RS.7,50,000/- WAS KEPT APART UNDER THE HEAD BALANCE WORK EXPENSES. IT WAS CLA IMED THAT THE DISALLOWANCE OF RS.75,000/- WAS NOT JUSTIFIED. ITA NO.1854/MUM/2011(A.Y. 2006-07) 3 2.1 LD. CIT(A) HAS EXAMINED SUCH CONTENTION OF THE ASSESSEE AND ALSO REFERRED TO THE WRITTEN SUBMISSIONS SUBMITTED BY THE ASSESSE E. FROM THE P&L ACCOUNT HE OBSERVED THAT THE DEBIT MADE BY THE ASSESSEE OF R S.7,50,000/- WAS IN FACT IN THE NATURE OF PROVISIONS FOR FUTURE EXPENSES. HE FOU ND 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 RESPE CTIVELY. ACCORDING TO LD. CIT(A) SUCH EXPENSES WHICH WERE NOT ACTUALLY INCURR ED DURING THE YEAR COULD NOT BE CLAIMED AS EXPENDITURE AND EXPENDITURE TO BE IN CURRED 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 MA DE OF THE WHOLE AMOUNT INSTEAD OF ONLY A SUM OF RS.75,000/-. THE SUBMISS IONS 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 PROV IDED FOR IN THE YEAR UNDER CONSIDERATION TO ARRIVE AT THE TRUE PROFIT OF THE P ROJECT. 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 T O 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 HONBLE SUPREME COURT IN THE CAS E OF CALCUTTA COMPANY LTD. CIT, 37 ITR 1(SC) AND METAL BOX CO. LTD. VS. WORKME N, 73 ITR 53(SC) AND IT WAS SUBMITTED THAT WHERE THE ASSESSEE IS MAINTAININ G 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 P ROFIT 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 EXPEN SES ON AN ADHOC BASIS AND WRITTEN OFF THE SAME IN THE SUBSEQUENT YEARS. ACCO RDING TO THE FINDINGS RECORDED ITA NO.1854/MUM/2011(A.Y. 2006-07) 4 BY THE AO THE VOUCHERS FOR EXPENSES ARE UNVERIFIAB LE. AFTER SCRUTINY OF THE DETAILS, LD. CIT(A) HAS FOUND THAT DURING THE ASSES SMENT YEAR 2007-08 A TOTAL PAYMENT OF RS.36,224/- HAS BEEN MADE TOWARDS SECURI TY SERVICES. DURING THE YEAR RELEVANT TO ASSESSMENT YEAR 2008-09, THE TOTAL EXPE NDITURE OF RS.5,76,158/- IS INCURRED WHICH INCLUDE PURCHASES AND CONTRACT CHARG ES 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 ALLO WED 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 AR E 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 HONBLE SUPREME COUR T IN THE CASE OF BHARAT EARTH MOVERS VS. CIT, 245 ITR 428. IT WAS SUBMITTED BY L D.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 TH ESE EXPENDITURE HAVE NOT BEEN CLAIMED IN SUBSEQUENT YEARS AND ACCORDING TO THE AF OREMENTIONED 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 SU BMITTED THAT EVEN AO DID NOT DISALLOW THE ENTIRE AMOUNT. THUS, IT WAS PLEADED B Y LD. AR THAT ORDER PASSED BY LD. CIT(A) SHOULD BE SET ASIDE AND DISALLOWANCE SHO ULD BE DELETED IN ITS ENTIRETY. 4. ON THE OTHER HAND, LD. DR RELIED UPON THE ORDER PASSED BY LD. CIT(A). ITA NO.1854/MUM/2011(A.Y. 2006-07) 5 5. WE HAVE HEARD BOTH THE PARTIES AND THEIR CONTENT IONS HAVE CAREFULLY BEEN CONSIDERED. THE LAW RELATING TO ALLOWABILITY OF BU SINESS LIABILITY IN A PARTICULAR YEAR IS SETTLED BY THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF METAL BOX COMPANY LTD.(SUPRA). IN THE SAID CASE ASSESSEE COM PANY HAD ESTIMATED ITS LIABILITY UNDER TWO GRATUITY SCHEMES FRAMED BY THE COMPANY AN D 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 ADDITI ONAL LIABILITY INCURRED BY IT ON THE EMPLOYEES PUTTING IN EVERY ADDITIONAL YEAR OF SERVICE. THE GRATUITY WAS PAYABLE ON THE TERMINATION OF AN EMPLOYEES SERVICE EITHER DUE TO RETIREMENT, DEATH OR TERMINATION OF SERVICES THE EXACTS TIME OCCURR ENCE OF THE LATTER TWO EVENTS BEING NOT DETERMINABLE BEFORE HAND, IN SUCH CIRCUMS TANCES THEIR LORDSHIPS OF HONBLE SUPREME COURT LAID DOWN FOLLOWING PRINCIPLE S: (I) FOR AN ASSESSEE MAINTAINING HIS ACCOUNTS ON MERCANTILE SYSTEM, A LI ABILITY ALREADY ACCRUED, THOUGH TO BE DISCHARGED AT A FUTURE DATE, WOULD BE A PROPE R 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 I F 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 SUBSEQ UENT, THE FULFILLMENT OF WHICH MAY RESULT IN THE REDUCTION OR EVEN EXTINCTION OF T HE LIABILITY, WOULD NOT HAVE THE EFFECT OF CONVERTING THAT LIABILITY INTO A CONTINGE NT LIABILITY; (IV) A TRADER COMPUTING HIS TAXABLE PROFITS FOR A PARTICULAR YEAR MAY PROPE RLY DEDUCT NOT ONLY THE PAYMENTS ACTUALLY MADE TO HIS EMPLOYEES BUT ALSO THE PRESENT VALUE OF ANY PAYMENTS IN ITA NO.1854/MUM/2011(A.Y. 2006-07) 6 RESPECT OF THEIR SERVICES IN THAT YEAR TO BE MADE I N A SUBSEQUENT YEAR IF IT CAN BE SATISFACTORILY ESTIMATED. 5.1 LOOKING INTO THE ABOVE PRINCIPLES, THE FIRST R EQUIREMENT WOULD BE THAT LIABILITY WHICH IS BEING CLAIMED SHOULD ARISE IN TH E 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 SATISF IED, THEN THE LIABILITY CANNOT BE SAID TO BE CONTINGENT LIABILITY. IF CASE OF THE A SSESSEE 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 LIABI LITY ON ACCOUNT OF WHICH A SUM OF RS.7,50,000/- WAS SET APART HAD DEFINITELY ARISEN I N THE YEAR UNDER CONSIDERATION. THE LIABILITY WAS TO BE ESTABLISHED WITH THE POSITI VE 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 PROJE CT WAS COMPLETE BUT MAJOR PART OF THE EXPENSES HAVE BEEN INCURRED DURING THE FINANCIA L 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 SECURIT Y SERVICES WAS PART OF OBLIGATION OF THE ASSESSEE WITHOUT WHICH IT COULD N OT BE SAID THAT PROJECT OF THE ASSESSEE WAS COMPLETE. SIMILAR IS THE POSITION WIT H SUBSEQUENT EXPENDITURE WHICH INCLUDE PURCHASES AND CONTRACT CHARGES. NO MATERI AL 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 DURIN G THE YEAR UNDER CONSIDERATION, MORE PARTICULARLY THE MATERIAL TO SHOW THAT WITHOUT INCURRING THESE EXPENDITURE THE ASSESSEE WOULD BE HELD TO BE NOT D ISCHARGED ITS OBLIGATION TOWARDS ITS CUSTOMERS. KEEPING IN VIEW ALL THESE FACTS AND CIRCUMSTANCES OF THE CASE WE ARE ITA NO.1854/MUM/2011(A.Y. 2006-07) 7 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 ABL E 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 INTERFE RE 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 ASSESSE E IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 09/03/2015 ! ' 09/03/2015 # $ SD/- SD/- ( . . /R.C.SHARMA ) ( . . / I.P. BANSAL ) /ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI; %& DATED 09/03/2015 '() '() '() '() *)!( *)!( *)!( *)!( / COPY OF THE ORDER FORWARDED TO : 1. +, / THE APPELLANT 2. '-+, / THE RESPONDENT. 3. . ( ) / THE CIT(A)- 4. . / CIT 5. )/# '(& , , / DR, ITAT, MUMBAI 6. #0 1 / GUARD FILE. & & & & / BY ORDER, -)( '( //TRUE COPY// 2 22 2 / 3 3 3 3 4 4 4 4 (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI . & . ./ VM , SR. PS