ACIT, Circle-6, Jaipur, Jaipur V. Spytech Buildcon Pvt. Ltd., Jaipur

ITA 274/JPR/2023

AI Insights

The case revolves around the appeal by the revenue against the decision of the CIT(A)/NFAC which allowed the deduction claimed by Spytech Buildcon Pvt. Ltd. for a provision made for expected losses amounting to Rs. 1,60,49,082 from the Pearl Avantika Project. The revenue contended that the provision for expected future losses is not allowable under the law, and the auditor of the company did not comment on the expected loss/provision being not allowable. The Tribunal examined the method of accounting adopted by the assessee, which was consistently followed and in accordance with Accounting Standard-7 (AS-7). The Tribunal noted that the provision made was added back to the total income and offered for taxation, thus neutralizing the accounting impact of the provision.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 132150 (ITAT-JAIPUR)
• Duration Of Justice: 2 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-07-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 26-06-2023
• Assessment Year: 2018-2019
• Appeal Filed On: 01-05-2023
• Other Referred Cases: CIT v. M/s. Woodward Governor India P. Ltd., CIT v. Realest Builders & Services Ltd
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset converted into stock in trade; Business income; Rule of consistency
• Section: 145; 143(3); 142(1); 143(2)

Judgement Text

vk;dj vihyh; vf/kdj.k] t;iqj U;k;ihB] t;iqj IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES,”A” JAIPUR Jh laanhi xkslkbZ] U;kf;d lnL; ,oa Jh jkBkSM+ deys'k t;arHkkbZ] ys[kk lnL; ds le{k BEFORE: SHRI SANDEEP GOSAIN, JM & SHRI RATHOD KAMLESH JAYANTBHAI, AM vk;dj vihy la-@ITA No. 274/JP/2023 fu/kZkj.k o"kZ@Assessment Years : 2018-19 ACIT, Circle-06, Jaipur cuke Vs. Spytech Buildcon Private Limited 501, Geetansh Class of Pearl, K-48, 49, Income Tax Colony Tonk Road, Jaipur LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAJCS 3782 M vihykFkhZ@Appellant izR;FkhZ@Respondent fu/kZkfjrh dh vksj ls@ Assessee by : Sh. Rajeev Sogani (CA) jktLo dh vksj ls@ Revenue by : Sh. A. S. Nehra (Addl. CIT) lquokbZ dh rkjh[k@ Date of Hearing : 27/06/2023 mn?kks"k.kk dh rkjh[k@Date of Pronouncement: 26/07/2023 vkns'k@ ORDER PER: RATHOD KAMLESH JAYANTBHAI, AM This appeal is filed by revenue and is arising out of the order of the National Faceless Appeal Centre, Delhi dated 09/03/2023 [here in after (NFAC)] for assessment year 2018-19 which in turn arise from the order dated 15.02.2021 passed under section 143(3) of the Income Tax Act, by National e-Assessment Centre, Delhi. 2 ITA No. 274/JP/2023 ACIT vs. Spytech Buildcon Pvt. Ltd. 2. In this appeal, the revenue has raised only one grounds as stated herein below: - “1. Ground whether in facts and circumstances and in law, the ld. CIT(A) erred in deleting the addition made by the AO on account of provision for expected losses amounting to Rs. 160490182/- which the same is unascertained liability and not deductible. 3. Succinctly, the fact as culled out from the records is that the assessee company has filed e-return on 25.10.2018 by declaring nil income. During the period under consideration, the assessee has derived income under the heads LTCG and other sources which have been set off against the losses from business. Unabsorbed loss of Rs. 8,82,60,924/- has been carried over to the subsequent assessment year. The return so filed by the assessee was selected for limited scrutiny through CASS citing reasons for selection. The case was selected for limited scrutiny assessment by the Computer Assisted Scrutiny Selection (CASS) and notice u/s 143(2) was issued and served on the assessee electronically on 28.09.2019. A detailed questionnaire along with a notice u/s 142(1) was issued on 09.12.2019 fixing the case for hearing on 24.12.2019. Subsequent notices u/s 142(1) were also issued during the course of assessment proceedings and replies have been received from the assessee which were duly considered. 3 ITA No. 274/JP/2023 ACIT vs. Spytech Buildcon Pvt. Ltd. 3.1 In the assessment proceeding the ld. AO noted that the assessee has claimed a sum of Rs. 1,60,49,082/- as any other amount allowable as deduction claimed in Schedule BP the ITR filed. On query, it has been replied by the assessee that the assessee consistently adopted a practice as per Accounting Standard-7 (AS-7) and reversing it in the next year by replacing a new provision for the year. Whenever the provision is reversed, the assessee has offered it as income under the head any other liability of a contingent nature at item No. 7(i) of Part A-OI (other information). During the period under consideration, the assessee has made a fresh provision of Rs. 1,60,49,082/- on account of expected losses from Pearl Avantika Project which has been claimed as any other amount allowable as deduction claimed in Schedule BP of return. However, at the same time the assessee has offered an income of Rs. 2,38,18,114/- on account of reversal of provision made in AY 2017-18 in respect of expected losses in Pearl Avantika and Pearl Bellazio Projects. Thus, the ld. AO has disallowed the fresh provision of Rs. 1,60,49,082/- being the provision for expected losses. 4. Aggrieved from the order of the National Faceless Assessment Center(NeFAC), assessee preferred and appeal before the ld. CIT(A)/NFAC. Apropos to the grounds so raised by the assessee in that 4 ITA No. 274/JP/2023 ACIT vs. Spytech Buildcon Pvt. Ltd. appeal, the relevant finding of the ld. CIT(A)/NFAC is reiterated here in below:- “5. DECISION: I have carefully considered the facts of the case, the grounds of appeal, statement of facts, as well as the submissions made during the course of appellate proceedings. 5.1 As per the assessment order of the AO, the assessee's case was selected for limited scrutiny assessment under the E-assessment Scheme, 2019 on the following issues:- S. No Issues 1. Claim of Any other Amount Allowable as Deduction in Schedule BP ii. Investment/Advances/Loans iii. Business Loss The assessee company filed e-return on 25.10.2018 declaring nil income. During the period under consideration, the assessee derived income under the heads LTCG and other sources which have been set off against the losses from business. Unabsorbed loss of Rs.8,82,60,924/- has been carried over to the subsequent assessment year. As per the same assessment order of the AO, the return was selected for limited scrutiny through CASS citing reasons for selections as under: 1. Low income in comparison to high loans/advances/investments/in shares appearing in balance sheet. 2. Large "any other amount allowable as deduction" claimed in Schedule BP of return. 3. Large business loss set off against other heads of income. After the issue of statutory notices, the AO began scrutiny proceedings when he noticed that the assessee had claimed a sum of Rs.1,60.49,082/- as any other amount allowable as deduction claimed in Schedule BP of return. On query by the AO, the assessee replied that the assessee had consistently adopted a practice of making a provision on account of expected losses from its real estate projects as per -7(AS-7) and reversing it in the next year by replacing a new provision for the year. Whenever the provision is reversed, the assessee has offered it as income under the head any other liability of a contingent nature at Item No.7(i) of Part A-) (other information). During the period under consideration, the assessee has made a fresh provision of Rs. 1,60.49.082/- on account of expected losses from Pearl Avantika Project which has been claimed as "any other amount allowable as deduction" claimed in Schedule BP of return. However, at the same time the 5 ITA No. 274/JP/2023 ACIT vs. Spytech Buildcon Pvt. Ltd. assessee has offered an income of Rs.2,38,18,114/- on account of reversal of provision made in AY 2017-18 in respect of expected losses in Pearl Avantika and Pearl Bellazion Projects. The income has been duly offered under the head any other liability of a contingent nature at Item No.7(i) of part A-OI (Other information). In view of these facts, the assessee has claimed that deduction claimed on account of provision made for expected losses from sale of inventory is an allowable expenditure. 5.1.1 The explanation offered by the assessee did not find favour with the assessee. The AO was of the view that the Tax Auditor has skipped his comments in col 21(g) of the Tax Audit Report meant for reporting any liability or contingent liability. The Auditor who has audited the books of account as per provisions of Companies Act has not specially mentioned any word of it in notes on accounts. The asseseee has claimed deduction on account of provisions made for expected losses which cannot be allowed unless provision is based on valuation by acutarian. The AO concluded that it was thus clear that the claim of the assessee in this regard was not acceptable and accordingly addition of Rs.1,60,49.082/- was made by him by disallowing the claim of provisions for expected losses. 5.2 On the other hand, it is the contention of the assessee that the provisions for expected losses are accounted for in the books of accounts as mandated in AS-7. Si nce the provisions of Act do not allow the claim of such provisions, the same are added back to the total income and offered for taxation. The creation of provision is a dded back to the net profits to arrive at the correct total income. If this provision is reversed in future, the same is reduced from net profits, again, to arrive at correc t total income. This exercise neutralizes the accounting impact of creation/reversal of provision for expected future losses. 5.3 Having considered the facts of the case, ground of appeal, assessment order of the AO and the submissions of the appellant, I find that the AO has not fully appreciated the submissions of the appellant that the provisions for expected losses are accounted for in the books of accounts as mandated in AS-7 and Since the prov isions of Act do not allow the claim of such provisions, the same were added back to the total income and offered for taxation by the assessee. The creation of provisi on is added back to the net profits to arrive at the correct total income. If this provisi on is reversed in future, the same is reduced from net profits, again, to arrive at correct total income. This exercise neutralizes the accounting impact of creation/reve rsal of provision for expected future losses. It was also submitted by the assessee before the AO during the assessment proceedings that during the period under consideration, the assessee has made a fresh provision of 6 ITA No. 274/JP/2023 ACIT vs. Spytech Buildcon Pvt. Ltd. Rs.1,60,49,082/- on account of expected losses from Pearl Avantika Project which has been claimed as "any other amount allowable as deduction claimed in Schedule BP of return. However, at the same time the assessee has offered an income of Rs.2,38,18,114/- on account of reversal of provision made in AY 2017- 18 in respect of expected losses in Pearl Avantika and Pearl Bellazion Projects and the income has been duly offered under the head any other liability of a contingent nature at Item No.7(1) of part A-Ol. It has also been the assessee's contention that this method of accounting is regularly and consistently followed by the assessee. The AO has not controverted these arguments of the assessee. There is a plethora of case laws which says that the method of accounting regularly and consistently followed by a taxpayer should not be disturbed by the Revenue unless the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in section 145 (1) or accounting standards as notified under section 145 (2), have not been regularly followed by the assessee. In such a situation, the Assessing Officer may make an assessment in the manner provided in section 144. In the present case, it is not the case of the AO that practice of debiting provision for losses has resulted in under estimation of profit. Further, the AO has not disturbed the practice of the assessee of crediting the P&L account with provision of losses which has resulted in lop sided results. The Hon'ble Supreme Court in the cases of CIT v. M/s. Woodward Governor India P. Ltd. [2009] 312 ITR 254 (SC) and CIT v. Realest Builders & Services Ltd [2008] 170 TAXMAN 218 (SC) had emphasised the importance of method of accounting regularly employed by the taxpayer. The Supreme Court in the case of Realest Builders & Services Ltd. had held that the tax department needs to provide facts and figures that the impugned method of accounting adopted by the taxpayer results in underestimation of profits for changing the method of accounting under Section 145 of the Act. Otherwise, it will be presumed that the entire exercise is revenue neutral. In the case of M/s. Woodward Governor India P. Ltd., Supra to the question, Whether accounting method followed by an assessee continuously for a given period of time needs to be presumed to be correct till Assessing Officer comes to conclusion for reasons to be given that said system does not reflect true and correct profits, it was held to be in affirmative. It was held thus: “14.................As profits for income-tax purposes are to be computed in accordance with ordinary principles of commercial accounting, unless, such principles stand superseded or modified by legislative enactments, unrealized profits in the shape of appreciated value of goods remaining unsold at the end of the accounting year and carried over to the following years account in a continuing business are not brought to the charge as a matter of practice. though, as stated 7 ITA No. 274/JP/2023 ACIT vs. Spytech Buildcon Pvt. Ltd. above, loss due to fall in the price below cost is allowed even though such loss has not been realized actually. At this stage, we need to emphasise once again that the above system of commercial accounting can be superseded or modified by legislative enactment. This is where section 145(2) comes into play. Under that section, the Central Government is empowered to notify from time to time the Accounting Standards to be followed by any class of assessees or in respect of any class of income Accordingly, under section 209 of the Companies Act, mercantile system of accounting is made mandatory for companies. In other words, accounting standard which is continuously adopted by an assessee can be superseded or modified by Legislative intervention. However, but for such intervention or in cases falling under section 145(3), the method of accounting undertaken by the assessee continuously is supreme. In the present batch of cases, there is no finding given by the Assessing Officer on the correctness or completeness of the accounts of the assessee. Equally, there is no finding given by the Assessing Officer stating that the assessee has not complied with the accounting standards.” In the present case also, there is no finding given by the Assessing Officer on the correctness or completeness of the accounts of the assessee. Equally, there is no finding given by the Assessing Officer stating that the assessee has not complied with the accounting standards. In the case of Rearest Builders & Services Ltd., supra, while answering the question. Whether in cases where department wants to tax an assessee on ground of liability arising in a particular year, it should always ascertain method of accounting followed by assessee in past and whether change in method of accounting was warranted on ground that profits are being underestimated under impugned method of accounting and if Assessing Officer comes to conclusion that there is underestimation of profits, he must give facts and figures in that regard, was answeredin the affirmative while holding as under "6. We are proceeding on the basis that the transaction in this case is genuine as there is no challenge on that account by the Department. The basic controversy is in the context of the year in which taxability arose. The basic controversy is in which year the liability arose whether it arose during the assessment year 1994-95 or whether it accrued in the year when conveyance stood executed. Under the Income-tax Act, under section 145, it is always open to the Department to insist on the change in the method of accounting followed by the assessee over the years (which is the case herein) if the impugned method of accounting results in under- estimation of profits/net income. In this case, no allegation of that nature was ever 8 ITA No. 274/JP/2023 ACIT vs. Spytech Buildcon Pvt. Ltd. made by the Department. In fact, the chart annexed at page 29 (Assessment Order) also does not indicate whether the impugned method of accounting followed by the assessee results in underestimation of the profi ts/net income. Therefore, though we do not agree with the reasons given by the High Court in its impugned judgment, since the Department has not gone into the above vital aspect regarding method of accounting under section 145 of the Income-tax Act, we see no reason to interfere with the impugned judgment. 7. Before concluding, we may state that the High Court has proceeded on the basis of 'rule of consistency. We do not agree with the view taken by the High Court on that count. In cases where the Department wants to tax an assessee on the ground of the liability arising in a particular year, it should always ascertain the method of accounting followed by the assessee in the past and whether change in method of accounting was warranted on the ground that profit is being underestimated under the impugned method of accounting. If the Assessing Officer comes to the conclusion that there is under-estimation of profits, he must give facts and figures in that regard and demonstrate to the Court that the impugned method of accounting adopted by the assessee results in under-estimation of profits and is, therefore, rejected. Otherwise, the presumption would be that the entire exercise is revenue neutral In this case, that exercise has never been undertaken. The Assessing Officer was required to demonstrate both the methods, one adopted by the assessee and the other by the Department. In the circumstances. we see no reason to interfere with the conclusion given by the High Court and the Tribunal In the present case also if the AO was of the view that if the provision for future losses results in under-estimation of profits, he should have given facts and figures in that regard and he should have demonstrated that the impugned method of accounting adopted by the assessee results in under-estimation of profits and is, therefore, liable to be rejected. Otherwise, the presumption would be that the entire exercise is revenue neutral. 5.3.1 In view of the foregoing respectfully following the ratio of the hon'ble Supreme court decisions as reproduced above, I am of the considered view that the AO was not justified in disturbing the method of accounting consistently followed by the assessee and in disallowing the provision of losses amounting to Rs. 1,60,49,082/- Accordingly, I delete the addition made by the AO. Hence, the ground of appeal of the assessee is Allowed.” 9 ITA No. 274/JP/2023 ACIT vs. Spytech Buildcon Pvt. Ltd. 5. Feeling dissatisfied with the order of the NFAC, revenue has preferred this appeal on the solitary ground for deleting the addition of expected provision of loss of Rs. 1,60,49,082/-. To support the contentions so raised the ld. DR is heard who has relied on the findings of the ld. AO and vehemently argued that there is no provision in the law to allow the provision of expected future losses. The assessee has claimed that loss and the auditor of the company has also not commented upon that this expected loss / provision is not allowable. The ld. CIT(A) has without referring to the provision of the law has allowed the claim of the assessee for the expected future losses of the assessee. The ld. DR also based on the contention of reversing that provision supported the view that the claim of the assessee rightly disallowed. 6. On the other hand, the ld. AR of the assessee relied on the detailed finding of the ld. NFAC which is passed in the faceless regime. The ld. AR of the assessee to support the contention of the ld. CIT(A)/NFAC also filed the following documents: S. No. Particulars Page No. 1 Copy of the Computation of total income for the A.Y 2017-18. 1-3 2 Copy of Administrative & other expenses audited financial statements of F.Y 2016-17 4 3 Copy of the Computation of total income for the A.Y 2018-19 5-6 4 Copy of other income audited financial statements F.Y 2017-18 7 10 ITA No. 274/JP/2023 ACIT vs. Spytech Buildcon Pvt. Ltd. 5 Copy of Administrative & other expenses audited financial statements F.Y 2017-18 8 6 Copy of Accounting Standard 7 Construction Contract- relevant portion 9-10 7. We have heard the rival contentions and perused the material placed on record. The Bench noted that during the period under consideration, the assessee has made a fresh provision of Rs.1,60,49,082/- on account of expected losses from Pearl Avantika Project which has been claimed as "any other amount allowable as deduction" claimed in Schedule BP of return i.e. for A.Y 2018-19. However, at the same time the assessee has offered an income of Rs. 2,38,18,114/- on account of reversal of provision made in AY 2017-18 in respect of expected losses in Pearl Avantika and Pearl Bellazion Projects. The income has been duly offered under the head any other liability of a contingent nature at Item No.7(i) of part A-OI (Other information). In view of these facts, the assessee has claimed that deduction claimed on account of provision made for expected losses from sale of inventory is an allowable expenditure in the books but in fact while computing the income under the head business income the same is added. The AO was of the view that the Tax Auditor has skipped his comments in col 21(g) of the Tax Audit Report meant for reporting any liability or contingent liability. The assessee has claimed deduction on account of 11 ITA No. 274/JP/2023 ACIT vs. Spytech Buildcon Pvt. Ltd. provisions made for expected losses which cannot be allowed unless provision is based on valuation by acutarian. The AO concluded that it was thus clear that the claim of the assessee in this regard was not acceptable and accordingly addition of Rs.1,60,49.082/- was made by him by disallowing the claim of provisions for expected losses. On this issue, we find that the AO has not fully appreciated the submissions of the appellant that the provisions for expected losses are accounted for in the books of accounts as mandated in AS-7 and Since the provisions of Act do not allow the claim of such provisions, the same were added back to the total income and offered for taxation by the assessee. The creation of provision is added back to the net profits to arrive at the correct total income. If this provision is reversed in future, the same is reduced from net profits, again, to arrive at correct total income. This exercise neutralizes the accounting impact of creation/reversal of provision for expected future losses. The AO has not controverted these arguments of the assessee. There is a plethora of case laws which says that the method of accounting regularly and consistently followed by a taxpayer should not be disturbed by the Revenue unless the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in section 145 (1) or accounting standards as notified under section 145 (2), 12 ITA No. 274/JP/2023 ACIT vs. Spytech Buildcon Pvt. Ltd. have not been regularly followed by the assessee. Not only that it would be in the interest of justice to extract the relevant part of the computation that the assessee has not claimed in the computation that expected loss is evident from the computation filed by the assessee before us at page No. 1 & 2 of the paper book, the same is reproduced herein below: 13 ITA No. 274/JP/2023 ACIT vs. Spytech Buildcon Pvt. Ltd. Thus, it is not the case of the revenue that the assessee has claimed that provision while computing the income for the year under consideration and therefore, we see no infirmity in the finding of ld. CIT(A) who has not only discussed the issue thread back by analyzing actual facts of the case and has allowed the claim of the assessee. Therefore, we are of the view that there is no infirmity in the finding of the ld. CIT(A) that the issue raised by the Revenue is revenue neutral and the exercise of provisioning and adding back in the computation neutralized the claim while offering the income of the assessee and therefore, based on these set of facts, we find no merits in the arguments or the contentions of the revenue and therefore, the appeal filed by the revenue stands dismissed. In the result, appeal of the revenue is dismissed. Order pronounced in the open court on 26/07/2023. Sd/- Sd/- ¼ lanhi xkslkbZ ½ ¼ jkBkSM deys’k t;arHkkbZ ½ (Sandeep Gosain) (Rathod Kamlesh Jayantbhai) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member Tk;iqj@Jaipur fnukad@Dated:- 26/07/2023 *Ganesh Kumar, PS vkns'k dh izfrfyfi vxzsf’kr@Copy of the order forwarded to: 1. The Appellant- ACIT, Circle-06, Jaipur 2. izR;FkhZ@ The Respondent- Spytech Buildcon Pvt. Ltd. 3. vk;dj vk;qDr@ The ld CIT 4. vk;dj vk;qDr¼vihy½@The ld CIT(A) 14 ITA No. 274/JP/2023 ACIT vs. Spytech Buildcon Pvt. Ltd. 5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur 6. xkMZ QkbZy@ Guard File (ITA No. 274/JP/2023) vkns'kkuqlkj@ By order, lgk;d iathdkj@Asst. Registrar