SHREE SALASAR OVERSEAS P LTD., Jaipur V. CIT-1, Jaipur

ITA 433/JPR/2011

• Counselvise Citation: 43323114 RSA 2011
• Duration Of Justice: 6 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-11-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 15-11-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 09-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUBHASH CHANDRA
• Keywords: Business income; Audit objection; Set aside
• Section: 143(3); 263; 10

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL JAIPUR BENCH B JAIPUR (BEFORE SHRI R.K.GUPTA AND SHRI N.L.KALRA) ITA NO. 433/ JP/2011 ASSESSMENT YEAR: 2006-07 PAN: AAGCS 8940L M/S. SHREE SALASAR OVERSEAS (P) LTD. VS. THE CIT -1 B-14, HEERA NAGATR, GANGA JAMUNA JAIPUR CROSSING, SHIPRA PATH, MANSAROVAR, JAIPUR (APPELLANT ) (RESPONDENT) ASSESSEE BY: SHRI VIJAY GOYAL DEPARTMENT BY : SHRI SUBHASH CHANDRA DATE OF HEARING: 15-11-2011 DATE OF PRONOUNCEMENT: 22-11-2011 ORDER PER N.L. KALRA, AM:- THE ASSESSEE HAS FILED THE APPEAL AGAINST THE OR DER OF THE LD. CIT-I, JAIPUR DATED 21-03-2011 U/S 263 OF THE ACT FOR THE ASSESSMENT YEAR 2006-07. 2.1 THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE AR E AS UNDER:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE, THE ORDER UNDER S. 263 OF THE ACT PASSED BY THE CIT IS ILLEGAL AND WITHOUT JURISDICTION. 2) THAT LEARNED CIT ERRED IN HOLDING THAT THE ORDER UNDER S. 143(3) PASSED BY THE AO WAS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE. 2 3) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE CIT IS NOT JUSTIFIED IN INVOKING THE PROC EEDINGS OF S. 263 AND SETTING ASIDE THE ORDER PASSED BY THE AO U/S 143(3) OF INCOME TAX ACT AND DIRECTING THE AO TO VE RIFY THE CLAIM OF PROVISION FOR DEVELOPMENT EXPENSES WI THOUT ARRIVING ON ANY CONCLUSION. 4) THAT THE DIRECTIONS OF THE LEARNED CIT ARE CONTRARY TO THE DECISION OF SUPREME COURT IN THE CA SE OF CALCUTTA CO LTD VS COMMISSIONER OF INCOME TAX (1959 ) 37 ITR 1 (SC) AND ROTORK CONTROLS INDIA (P) LTD VS CIT (2009) 314 ITR 62 (SC) 5) THAT THE ORDER PASSED BY THE CIT IS INCONSISTENT WITH THE PAST PRACTICE FOLLOWED BY THE APPELLANT OF ESTIMATING THE OBLIGATION OF DEVELOPME NT EXPENSES ON ROADS ETC. TO BE INCURRED IN FUTURE AGA INST THE CURRENT YEARS SALE AND CLAIMING THE SAME AS ALLOWA BLE EXPENSES AGAINST THE CURRENTS YEARS INCOME MORE SO WHEN THE ESTIMATION OF DEVELOPMENT EXPENSES WAS MADE ON THE SAME BASIS OF PAST PRACTICE AND COMPLETE DETAILS OF SUCH WORKING WAS FILED AND EXAMINED BY THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS U/S 143(3) OF INCO ME TAX ACT. IT IS CONTENDED THAT THE ASSESSMENTS OF TH E ASSESSEE FOR AY 2004-2005 AND 2005-2006 WERE COMPLETED U/S 143(3) WHEREIN THE SAME PRACTICE WAS FOLLOWED AND EXPENSES ON DEVELOPMENT CHARGES WERE CLAIMED ON SAME BASIS WERE ALLOWED. 6) THAT THE ORDER OF THE CIT MAY BE CANCELLED. 2.2 THE LD. CIT WAS OF THE OPINION THAT THE ORDER P ASSED BY THE AO WAS ERRONEOUS IN SO FAR AS IT IS PREJUDICIAL TO THE INTEREST OF THE REVENUE AND ACCORDINGLY A SHOW CAUSE NOTICE U/S 263 WAS ISS UED. ACCORDING TO THE LD. CIT, THE ASSESSEE MADE A PROVISION FOR DE VELOPMENT EXPENSES OF RS. 41,65,706/- AGAINST DEVELOPMENT EXPENSES TO BE INCURRED IN 3 SUBSEQUENT YEAR. THE EXPENSES INCURRED DURING THE P REVIOUS YEAR ARE ONLY ALLOWABLE FOR DEDUCTION FROM INCOME UNDER THIS SECTION AND NO PROVISION IS ALLOWABLE. THE AO HAS ALLOWED SUCH PRO VISION AND HENCE, THE LD. CIT WAS OF THE OPINION THAT THERE IS UNDER ASSESSMENT OF BUSINESS INCOME BY RS. 41,65,706/-. IN RESPONSE TO SHOW CAUSE NOTICE, THE ASSESSEE FILED THE REPLY VIDE LETTER DATED 21-0 3-2011. THE SUBMISSIONS OF THE ASSESSEE ARE SUMMARIZED AS UNDER :- 1. THE ASSESSEE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING AND THEREFORE, THE PROVISION HAS BEEN MA DE AGAINST THE DEVELOPMENT EXPENSES ON THE SALES OF TH E CURRENT YEAR. AS PER NORMS OF THE JDA, THE ASSESSEE HAS TO INCUR THE EXPENSES ON ROAD, WATER LINE, AND OTHER DEVELOPMENT EXPENSES. SUCH WORKS CANNOT BE COMPLETE D IN ONE YEAR AND BEFORE THE SALE. THE SALE EFFECTED DURING CURRENT YEAR IS SUBJECT TO OBLIGATION OF DEVELOPMEN T EXPENSES. SINCE THE REVENUE HAS BEEN RECOGNIZED IN CURRENT YEAR, THEREFORE, THE COST RELATING TO THAT REVENUE HAS TO BE FULLY PROVIDED FOR IN RESPECT OF THE REVE NUE ALREADY RECOGNIZED. THE ACCOUNTING OF THE ASSESSEE IS ON ACCRUAL BASIS AND HENCE SUCH EXPENDITURE IS ALLOWAB LE IN ACCORDANCE WITH THE MATCHING CONCEPT. RELIANCE WAS PLACED ON THE DECISION OF HON'BLE APEX COURT IN THE CASE OF ROTORK CONTROLS INDIA (P) LTD. VS. CIT, 314 ITR 62. 2. THE HON'BLE APEX COURT IN THE CASE OF CALCUTTA C O. LTD. VS. CIT , 37 ITR 1 HAD AN OCCASION TO CONSIDER THE 4 CASE OF LAND DEVELOPER WHO UNDERTOOK TO DEVELOP TH E LAND BY LAYING OUT ROAD, PROVIDING OF DRAINAGE SYSTEM ET C. THE ASSESSEE DEBITED AN ESTIMATED SUM ON ACCOUNT OF EXPENDITURE FOR DEVELOPMENT. THE SALE PROCEEDS WERE ALSO TAKEN ON ACCRUAL BASIS THOUGH THE AMOUNTS ACTUALLY RECEIVED WERE LESS. THE HON'BLE COURT HELD THAT TH E ASSESSEE WAS JUSTIFIED IN COMPUTING THE PROFIT IN T HE MANNER IT DID. 3. THE LD. AR ALSO RELIED UPON THE DECISION OF ITAT DELHI BENCH I THE CASE OF GREATER ASHOKA & DEVELOPM ENT CO. (P) LTD. VS. ACIT, 79 ITD 595 IN WHICH IT WAS HELD THAT PROFIT SHOULD BE DETERMINED BY SPREADING OVER THE ESTIMATED COST IN CARRYING OUT THE DEVELOPMENT OF L AND OVER THE SALEABLE AREA OF THE PLOTS. 4. THE COST OF DEVELOPMENT IF CARRIED OUT THROUGH JDA COMES TO RS. 175/- PER. SQ. YDS WHEREAS THE ASS ESSEE HAS MADE PROVISION BY ESTIMATING THE COST OF DEVELO PMENT EXPENSES AT RS. 165/- PER. SQ. YDS . 5. THE ASSESSEE IS FOLLOWING THE SAME SYSTEM OF ACCOUNTING SINCE THE COMMENCEMENT OF THE BUSINESS. 2.3 THE LD. CIT ACCEPTED THE CONTENTION OF THE ASSE SSEE THAT THE EXPENDITURE WHICH HAVE BEEN ACCRUED DURING THE YEAR ALTHOUGH NOT INCURRED IS ALSO REQUIRED TO BE ALLOWED IN ADDITION TO THE EXPENDITURE INCURRED DURING THE YEAR. THE OBJECTION OF THE LD. CIT WAS THAT THE 5 ASSESSEE CAN CLAIM THE PROVISION IF THE SAME HAS BE EN MADE ON SCIENTIFIC BASIS. RELIANCE PLACED ON THE DECISION OF HON'BLE APEX COURT IN THE CASE OF CALCUTTA COMPANY LTD. (SUPRA) WAS HELD AS CORRECT. THE LD. CIT IN HIS ORDER U/S 263 OF THE AC T HAS RECORDED THE FOLLOWING FINDINGS. 1. IT IS NOT CLEAR FROM THE RECORD AS TO WHETHER TH E PROVISIONS MADE IS IN RESPECT OF SALES EFFECTED AN D IS MADE ON SCIENTIFIC BASIS HAVING RELATION TO THE ACC RUED LIABILITY INCURRED BY THE ASSESSEE. 2. THE AO HAS NOT VERIFIED THAT THE PROVISIONS SO MADE IS NOT IN RESPECT OF AREA OF PLOT IN STOCK IN TRADE. ANY PROVISIONS MADE FOR THE AREA OF PLOT IN STOCK I N TRADE IS TO BE CONSIDERED AS PART OF THE CLOSING STOCK. 2.4 THE LD. CIT FURTHER OBSERVED THAT THE AO HAS NO T VERIFIED THAT PROVISIONS MADE BY THE ASSESSEE IS IN ACCORDANCE WI TH JDA GUIDELINES. ACCORDINGLY THE LD. CIT SET ASIDE THE ASSESSMENT OR DER. 2.5 DURING THE COURSE OF PROCEEDING BEFORE US, THE LD. AR DREW OUR ATTENTION TO LETTER DATED 05 TH DEC. 2008 FILED BEFORE THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS. IN THIS LETTER, T HE ASSESSEE HAS FILED THE EXPLANATION ON DIFFERENT ISSUES INCLUDING THE J USTIFICATION ON PROVISIONS OF DEVELOPMENT EXPENSES. THE AO WAS INFO RMED THAT DEVELOPER HAS TO INCUR SEVERAL EXPENSES ON THE DEVE LOPMENT OF THE 6 SCHEME AS PER NORMS OF THE JDA AND SEPARATE CHARGES AGAINST THE DEVELOPMENT EXPENSES CANNOT BE CHARGED IN ADDITION TO THE SALE PRICE OF THE PLOT. THE DEVELOPMENT WORK HAS TO BE CARRIED OUT AS PER SPECIFICATION OF THE JDA. THE SALE OF THE ASSESSEE REPRESENTS THE COST OF LAND AND COST OF DEVELOPMENT EXPENSES. THE COST OF DEVELOPMENT EXPENSES IS TO BE INCURRED IN NEXT YEAR. THEREFORE, THE SALE TO THE EXTENT OF THE COST OF DEVELOPMENT EXPENSES IS CARRIED FORW ARD FROM NEXT YEARS UNDER THE NOMENCLATURE PROVISION AGAINST DEVELOPME NT EXPENSES. IT WAS MENTIONED THAT DEVELOPMENTS ARE ESTIMATED ONLY IN RESPECT OF PLOT SOLD DURING THE YEAR AND NOT ON WHOLE LAND. SUCH LI ABILITY IS REQUIRED TO BE DEDUCTED FROM THE AMOUNT OF INCOME ACCRUED. REFE RENCE WAS MADE TO THE DECISION OF HON'BLE JURISDICTIONAL HIGH COUR T IN THE CASE OF CIT VS. GOVIND GRAH NRMAN SAHKARI SAMITI LTD., 258 ITR 208 . IN THIS LETTER, THE ASSESSEE SUBMITTED THAT THE SALE PROCEE DS RECEIVED BY THE ASSESSEE IS SUBJECT TO LIABILITY OF THE DEVELOPMENT WORK TO BE DONE BY THE ASSESSEE. SUCH PROVISION WAS STATED TO BE ALLOW ABLE U/S 37 OF THE ACT. IN THIS LETTER, THE ASSESSEE GAVE THE BASIS OF ESTIMATION FOR THE PROVISIONS MADE TO SHOW THAT CLAIM IS FAIR AND REAS ONABLE DEVELOPMENT EXPENSES. THE COPY OF THE LETTER OF JDA WAS ALSO EN CLOSED WITH THIS LETTER IN WHICH JDA HAS GIVEN THE DETAILS OF DEVELO PMENT WORK TO BE 7 DONE AND THE EXPENDITURE PER SQ. MTR TO BE INCURRED IN CASE SUCH DEVELOPMENT WILL BE DONE THROUGH JDA. THE JDA ALSO PRESCRIBED THE RATES FOR DIFFERENT WORKS TO BE DONE AND TO BE CHAR GED FROM THE OWNERS OF THE PLOT. HENCE, FROM THIS LETTER, THE LD. AR SU BMITTED THAT THE AO HAS MADE ENQUIRY AND IT IS NOT THE CASE WHERE EXPEN DITURE HAS BEEN ALLOWED WITHOUT MAKING ENQUIRY. IN THE WRITTEN SUBM ISSION IT WAS FURTHER SUBMITTED THAT THE AUDIT PARTY HAS RAISED T HE AUDIT OBJECTION ON THE ISSUE OF ALLOWING PROVISIONS FOR DEVELOPMENT EX PENSES. ON THE BASIS OF THE AUDIT OBJECTION, LD. CIT-1, JAIPUR ISS UED NOTICE U/S 263 OF THE ACT. THE ASSESSEE REPLIED THE NOTICE VIDE LETTE R DATED 20-09-2010 AND 14-10-10. THE LD. CIT WAS SATISFIED WITH THE EX PLANATION OF THE ASSESSEE AND WROTE A LETTER TO THE ACCOUNTANT GENER AL TO DROP THE AUDIT OBJECTION. THE ASSESSEE AGAIN FILED THE DETAILED RE PLY ON THE ISSUE OF ALLOWANCE OF PROVISIONS FOR DEVELOPMENT EXPENSES. B EFORE THE LD. CIT, THE ASSESSEE FILED THE CHART SHOWING ACTUAL DEVELOP MENT EXPENSES FOR DIFFERENT ASSESSMENT YEARS. 2.6 THE LD. AR DREW OUR ATTENTION THAT LD. CIT HAS ADMITTED THAT THE EXPENSES ACCRUED DURING THE YEAR BUT NOT INCURRED D URING THE YEAR ARE TO BE ALLOWED. IF THE EXPENDITURE IS ALLOWABLE THEN THE ORDER CANNOT BE TERMED AS ERRONEOUS. THE ASSESSEE HAS MADE THE PROV ISIONS ON 8 SCIENTIFIC BASIS AND THE DETAILS WERE FILED BEFORE THE AO AS WELL AS BEFORE THE LD. CIT. 2.7 ON THE OTHER HAND, THE LD. DR STATED THAT THE P ROVISION IS NOT AN ALLOWABLE EXPENDITURE. THE ASSESSMENT ORDER DOES NO T SHOW THAT THE AO HAS EXAMINED THE ISSUE. IT WAS FURTHER SUBMITTED THAT THE LD. CIT HAS ONLY SET ASIDE ISSUE ON THE FILE OF THE AO AND THE ASSESSEE IS NOT ADVERSELY AFFECTED BY THE ORDER. 2.8 WE HAVE HEARD BOTH THE PARTIES. THE LD. CIT ISS UED THE SHOW CAUSE NOTICE U/S 263 OF THE ACT ON 13-09-2010. IN T HE SHOW CAUSE NOTICE, THE LD. CIT MENTIONED THAT THE PROVISIONS F OR DEVELOPMENT EXPENSES TO BE INCURRED IN SUBSEQUENT YEARS ARE NOT ALLOWABLE. ONLY THE EXPENSES DURING THE PREVIOUS YEAR ARE ALLOWABLE FOR DEDUCTION FROM INCOME. THE ORDER U/S 263 CAN BE PASSED AFTER GIVIN G THE OPPORTUNITY TO THE ASSESSEE. IF THE ISSUE RAISED IN SHOW CAUSE NOT ICE IS DIFFERENT FROM THE ISSUE ON WHICH THE LD. CIT HAS PASSED THE ORDER U/S 263 OF THE ACT THEN IT CANNOT BE SAID THE ASSESSEE HAS BEEN GIVEN AN OPPORTUNITY. WE ACCEPT THE CONTENTION OF THE LD. AR THAT DETAILS WE RE FILED BEFORE THE AO VIDE LETTER DATED 5 TH DEC. 08. IN THIS LETTER, IT WAS MENTIONED THAT SUCH EXPENSES ARE BEING ALLOWED IN EARLIER YEARS. H ENCE, THIS IS NOT A CASE WHERE THERE IS NO ENQUIRY. ACTION U/S 263 CANN OT BE TAKEN ON 9 ACCOUNT OF INADEQUATE ENQUIRY. THE HON'BLE APEX CO URT IN THE CASE OF BHARAT EARTH MOVERS VS. CIT 245 ITR 428 HAS HELD THAT IF THE BUSINESS LIABILITY HAS ARISEN IN THE ACCOUNTING YEA R THEN DEDUCTION SHOULD BE ALLOWED ALTHOUGH LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. IN THE INSTANT CASE, THE ASSESSEE MENTIONED THAT SALE PROCEEDS OF THE PLOTS INCLUDED THE COST P LUS DEVELOPMENT EXPENSES AS JDA HAD PRESCRIBED THE NORMS THAT NO SE PARATE AMOUNT SHOULD BE CHARGED FOR DEVELOPMENT. THIS ITAT JAIPUR BENCH IN THE CASE OF M/S SWAPAN SAKAR INSURANCE CONSULTANT & MAR KETING SERVICES (P) LTD. ( ITA NO.117/ JP/2010 FOR THE ASSESSMENT Y EAR 2006-07 DATED 06-01-2011) HAD AN OCCASION TO CONSIDER THE ALLOWAB ILITY OF EXPENSES TO BE INCURRED IN THE SUBSEQUENT YEARS THOUGH THE L IABILITY OF INCURRING SUCH EXPENDITURE HAS ACCRUED DURING THE PREVIOUS YE AR. IT WILL BE USEFUL TO REPRODUCE THE FOLLOWING PARAS FROM THE JUDGEMENT DATED 06-01-2011 30. THE HONBLE APEX COURT IN THE CASE OF CALCUT TA CO. LTD. V/S. CIT 37 ITR 1 HAD AN OCCASION TO CONSIDER THE ALLOWABILITY OF EXPENDITURE WHICH WAS TO BE INCURRE D FOR DEVELOPMENT OF PLOT. THE ASSESSEE RECEIVED RS. 29,3 92 TOWARDS SALE PRICE OF LANDS BUT CREDITED THE ENTIRE FULL PRICE OF LAND IN ACCOUNTS ON THE BASIS OF MERCANTIL E SYSTEM OF ACCOUNTING. A SUM OF RS. 24,809/- WAS DEBITED AS ESTIMATED EXPENDITURE FOR DEVELOPMENT, THOUGH NO SU CH 10 SUM WAS SPENT. THE HEADNOTES OF THIS DECISION ARE REPRODUCED. HELD, (I) THAT THE UNDERTAKING TO CARRY OUT THE DEVELOPMENTS WITHIN SIX MONTHS FROM THE DATES OF TH E DEEDS OF SALE (WHICH, IN VIEW OF THE FACT THAT TIME WAS NOTE OF THE ESSENCE OF THE CONTRACT, MEANT A REASONABLE TIME) WAS UNCONDITIONAL, THE APPELLANT BINDING ITSELF ABS OLUTELY TO CARRY OUT THE SAME. THAT UNDERTAKING IMPORTED A LIABILITY ON THE APPELLANT WHICH ACCRUED ON THE DAT ES OF THE DEEDS OF SALE, THOUGH THAT LIABILITY WAS TO BE DISCHARGED AT A FUTURE DATE. IT WAS THUS AN ACCRUED LIABILITY AND THE ESTIMATED EXPENDITURE WHICH WOULD BE INCURRED IN DISCHARGING THE SAME COULD BE DEDUCTED FROM THE PROFITS AND GAINS OF THE BUSINESS, AND THE AMOU NT TO BE EXPENDED COULD BE DEBITED IN ACCOUNTS MAINTAINED IN THE MERCANTILE SYSTEM OF ACCOUNTING BEFORE IT WAS ACTUA LLY DISBURSED. THE DIFFICULTY IN THE ESTIMATION THEREOF DID NOT CONVERT THE ACCRUED LIABILITY INTO A CONDITIONAL ON E, BECAUSE IT WAS ALWAYS OPEN TO THE INCOME-TAX AUTHOR ITIES CONCERNED TO ARRIVE AT A PROPER ESTIMATE THEREOF HA VING REGARD TO ALL THE CIRCUMSTANCES OF THE CASE. (II) THAT THE SUM OF RS. 24,809/- REPRESENTED THE ESTIMATED AMOUNT WHICH WOULD HAVE TO BE EXPENDED BY THE ASSESSEE IN THE COURSE OF CARRYING ON ITS BUSIN ESS AND WAS INCIDENTAL TO THE BUSINESS AND, HAVING REGARD T O THE ACCEPTED COMMERCIAL PRACTICE AND TRADING PRINCIPLES , WAS A DEDUCTION WHICH, IF THERE WAS NO SPECIFIC PROVISI ON FOR IT UNDER SECTION 10(2) OF THE INCOME-TAX ACT, WAS CERT AINLY AN ALLOWABLE DEDUCTION IN ARRIVING AT THE PROFITS A ND GAINS OF THE BUSINESS OF THE APPELLANT, UNDER SECTI ON 10(I) OF THE ACT, THERE BEING NO PROHIBITION AGAINST IT, EXPRESS OR IMPLIED, IN THE ACT. THE EXPRESSION PROFITS OR GAINS IN SECTION 10 (I) OF THE INCOME-TAX ACT HAS TO BE UNDERSTOOD IN ITS C OMMERCIAL SENSE AND THERE CAN BE NO COMPUTATION OF SUCH PROFI TS AND GAINS UNTIL THE EXPENDITURE WHICH IS NECESSARY FOR THE PURPOSE OF EARNING THE RECEIPTS IS DEDUCTED THERE FROM- WHE THER THE EXPENDITURE IS ACTUALLY INCURRED OR THE LIABILITY I N RESPECT 11 THEREOF HAS ACCRUED EVEN THOUGH IT MAY HAVE TO BE D ISCHARGED AT SOME FUTURE DATE. 32. THE HONBLE APEX COURT IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. V/S CIT 225 ITR 802 HELD THAT DISCOUNT ON DEBENTURES IS TO BE WRITTEN I F PROPORTIONALLY EACH YEAR EVEN PERIOD OF EXEMPTION. THE HEADNOTE IS AS UNDER: SECTION 37 OF THE INCOME-TAX ACT, 1961, ENJOINS THAT ANY EXPENDITURE NOTE BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIONS 30 TO 36 LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OR PROFESSION SHOULD BE ALLOWED IN COMPUTING THE INCOM E CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUS INESS OR PROFESSION. THE EXPRESSION PROFIT OR GAINS HA S TO BE UNDERSTOOD IN ITS COMMERCIAL SENSE: AND THERE COULD BE NO COMPUTATION OF SUCH PROFITS AND GAINS UNTIL THE EXP ENDITURE WHICH IS NECESSARY FOR THE PURPOSE OF EARNING THE RECEIPT IS DEDUCTED THEREFROM, WHETHER THE EXPENDITURE IS A CTUALLY INCURRED OR THE LIABILITY IN RESPECT THEREOF HAS AC CRUED EVEN THOUGH IT MAY HAVE TO BE DISCHARGED AT SOME FU TURE DATE. THUS, EXPENDITURE IS NOT NECESSARILY CONFIN ED TO THE MONEY WHICH HAS BEEN ACTUALLY PAID OUT. IT COVE RS A LIABILITY WHICH HAS ACCRUED OR WHICH HAS BEEN INCUR RED ALTHOUGH IT MAY HAVE TO BE DISCHARGED AT A FUTURE D ATE. HOWEVER, A CONTINGENT LIABILITY WHICH MAY HAVE TO B E DISCHARGED IN FUTURE CANNOT BE CONSIDERED AS EXPEND ITURE. 33. THE HONBLE GUJARAT HIGH COURT IN THE CASE OF WELDING RODS MANUFACTURING CO. V/S CIT 225 ITR 525 HAD ON OCCASION TO CONSIDER THE ALLOWABILITY OF PROVISION MADE THOUGH AMOUNT NOT ACTUALLY SPENT. THE ASSESSEE BORROWED WE LDING RODS AND WERE TO BE RETURNED ON DEMAND. THE ASSESSEE MAD E A PROVISION OF LIABILITY ON ACCOUNT OF THE RISE IN PR ICES. THE HONBLE HIGH COURT OBSERVED THAT IN MERCANTILE SYS TEM OF ACCOUNTING, THE BUSINESSMAN HAS TO TAKE INTO CONSID ERATION HIS 12 LIABILITIES WHICH MIGHT BE EVEN CONTINGENT IN ORDER TO ARRIVE AT WHAT IS REAL BUSINESS PROFIT IN THAT YEAR. THE ASSE SSEE HAS TO TAKE INTO CONSIDERATION HIS LEGAL LIABILITIES. 34. THE HONBLE RAJ. HIGH COURT IN THE CASE OF UDA IPUR MINERAL DEVELOPMENT SYNDICATE PVT. LTD. V/S DCIT 26 1 ITR 706 HAD ON OCCASION TO CONSIDER THE ACCRUAL OF LIAB ILITY. IN THIS CASE THE ASSESSEE AS PER AGREEMENT WAS REQUIRED TO RESTORE THE SURFACE LAND IN THE ORIGINAL CONDITION AND HENCE TH E LIABILITY TO REFILL PITS ACCRUED AS SOON AS PITS WERE DUG. IN TH E INSTANT CASE, THE ASSESSEE AS PER AGREEMENT WAS TO PROVIDE INSURA NCE POLICY TO MEMBERS HAVING ATTAINED S-I CATEGORY AND HENCE LIAB ILITY ACCRUALS AS AND WHEN SUCH MEMBERS GOT CATEGORY OF S -I. 35. THE HONBLE MADRAS HIGH COURT IN THE CASE OF C IT V/S TUBE INVESTMENTS OF (INDIA) LTD. 261 ITR 753 ALLOWED PRO- RATA ANNUAL ALLOCATION OF PREMIUM PAYABLE AT FUTURE DATE. HENCE THE EXPENDITURE ALLOWABLE UNDER MERCANTILE SYSTEM O F ACCOUNTING DOES NOT MEAN THAT IT SHOULD BE SPENT IN THAT YEAR. 36. THE HONBLE ALLAHABAD HIGH COURT IN CIT V/S DEVELOPMENT TRUST (P) LTD. 189 ITR 504 HELD THAT EX PENSES IN RESPECT OF DEVELOPMENT TO BE CARRIED BY ASSESSEE IS AN ALLOWABLE DEDUCTION UNDER MERCANTILE SYSTEM OF ACCOUNTING. 37. THE HONBLE DELHI HIGH COURT IN THE CASE OF C IT V/S NAV BHARAT NIRMAN (P) LTD. 141 ITR 723 HAD ON O CCASION TO CONSIDER THE LIABILITY FOR EVICTING TENANTS AS THE AGREEMENT PROVIDED FOR EVICTION OF TENANTS BY LESSOR. THE HEA DNOTE IS AS UNDER:- 13 HELD, THAT IT WAS CLEAR THAT THE ASSESSEES RESPONSIBILITY TO EVICT THE TENANTS WHO WERE OCCUPY ING ALMOST 200 BIGHAS OF THE LAND WAS AN ONEROUS RESPONSIBILITY. AS LATE AS 1972, PRACTICALLY NONE O F THE TENANTS HAD BEEN EVICTED. THE LIABILITY TO EVICT T HE TENANTS WAS IN THE NATURE OF AN INBUILT LIABILITY UNDER THE LEASE DEED. THE ESTIMATED AMOUNT IN REGARD TO THE ASSESSE ES LIABILITY TO EVICT THE TENANTS WAS ALLOWABLE. THE I TO HAD GIVEN GOOD REASONS FOR RESTRICTING THE ALLOWANCE TO RS. 1,60,000/-. THIS WAS A FAIR AND EQUITABLE CONCLUSIO N ARRIVED AT BY THE ITO AND SINCE IT WAS A ONLY A QUE STION OF ESTIMATE, WITH WHICH THE TRIBUNAL HAD AGREE, IT COU LD NOT BE INTERFERED WITH. THE ASSESSEE WAS THEREFORE, ENT ITLED TO A DEDUCTION OF RS. 1,60,000/- FOR THE ASSESSMENT YEAR 1962- 63 . 38. THE HONBLE JURISDICTIONAL HIGH COURT IN THE C ASE OF RAJASTHAN STATE MINES & MINERALS V/S CIT 208 ITR 1010 HAS OBSERVED AT PAGE 1014. A LIABILITY WHICH IS NOT ACCURATELY ESTIMATED COULD BE A CONTINGENT LIABILITY AND IS NOT AN EXPENDITURE . THE APEX COURT IN INDIAN MOLASSES CO. (PRIVATE) LTD. V/S CIT (1959) 37 ITR 66 REFERRED TO ABOVE, HAS HELD THAT THE EXPENDITURE IS WHAT IS PAID OUT OR AWAY AND IS SOMETHING WHICH HAS GONE IRRETRIEVABLY. EXPENDITURE , WHICH IS DEDUCTIBLE FOR INCOME-TAX PURPOSE, IS ONE WHICH IS TOWARDS A LIABILITY ACTUALLY EXISTING AT THE TIME, BUT THE PUTTING ASIDE OF MONEY WHICH MAY BECOME EXPENDITURE ON THE HAPPENING OF AN EVENT IS NOT EXPENDITURE. THE I NCOME- TAX LAW MAKES A DISTINCTION BETWEEN AN ACTUAL LIABI LITY IN PRESENT AND A LIABILITY DE FUTURE WHICH, FOR THE TI ME BEING, IS ONLY CONTINGENT. THE FORMER IS DEDUCTIBLE BUT NOT T HE LATTER. IN CALCUTTA CO. LTD. V/S CIT (1959) 37 ITR, I, I T WAS HELD BY THE APEX COURT THAT IF A LIABILITY HAS DEFINITELY BEEN INCURRED IN THE ACCOUNTING YEAR, EG., ON UNCON DITIONAL ACCRUED LIABILITY, IT CANNOT BE REGARDED AS A CONTI NGENT LIABILITY MERELY BECAUSE IT IS TO BE DISCHARGED AT A FUTURE DATE AND THE COST OF DISCHARGING IT IS NOT DEFINITE BUT HAS TO BE ESTIMATED. 14 SIMILARLY, IN BRITISH SOUTH AFRICA CO. V/S CIT (1946) 14 ITR 17 (SUPPL)(PC) IT HAS BEEN HELD BY T HE PRIVY COUNCIL THAT WHERE A LIABILITY CLEARLY EXISTS THEN QUANTIFICATION OF THE SUM SHOULD NOT COME IN THE WA Y OF THE ASSESSEE IN DEBITING THE SUM AND CLAIMING THE DEDUC TION THEREOF. IN ORDER TO ESTIMATE THE TRUE PROFITS A LI ABILITY HAS TO BE DETERMINED. IT WAS OBSERVED BY THE SUPREME COURT IN THE CASE OF CIT V/S GEMINI CASHEW SALES CORPORATION (1967) 65 ITR 643 (HEADNOTE) : BROADLY STATED, THE PRESENT VALUE ON COMMERCIAL VALUATION OF MONEY TO BECOME DUE IN FUTU RE, UNDER A DEFINITE OBLIGATION, WILL BE A PERMISSIBLE OUTGOING OR DEDUCTION IN COMPUTING THE TAXABLE PROFITS OF A TRADER, EVEN IF IN CERTAIN CONDITIONS THE OBLIGATION MAY CE ASE TO EXIST BECAUSE OF FORFEITURE OF THE RIGHT . WHERE, H OWEVER, THE OBLIGATION OF THE TRADER IS PURELY CONTINGENT, NO Q UESTION OF ESTIMATING ITS PRESENT VALUE MAY ARISE, FOR TO BE A PERMISSIBLE OUTGOING OR ALLOWANCE, THERE MUST IN TH E YEAR OF ACCOUNT BE A PRESENT OBLIGATION CAPABLE OF COMME RCIAL VALUATION. IT WAS FURTHER OBSERVED THAT WHERE ACC OUNTS ARE MAINTAINED ON THE MERCANTILE SYSTEM, IF LIABILI TY TO MAKE THE PAYMENT HAS ARISEN DURING THE TIME THE BUSINESS IS CARRIED ON, IT MAY APPROPRIATELY BE REGARDED AS EXPENDITURE. BUT WHERE THE LIABILITY IS, DURING THE WHOLE OF THE PERIOD THAT THE BUSINESS IS CARRIED ON, WHOLLY CONTINGENT AND DOES NOT RAISE ANY DE3FINITE OBLIGATION DURING THE TIME THAT THE BUSINESS IS CARRIED ON, IT CANNOT FALL WIT HIN THE EXPRESSION EXPENDITURE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS. A LIABILITY WHICH IS DEPENDENT ON FULFILLMENT OF A CONDITION WHICH MAY RESULT IN REDUCTION OR IN EXTIN CTION OF THE LIABILITY IS A CONTINGENT LIABILITY. IT IS ONLY THE ACTUAL LIABILITY WHICH IS EXISTING IN THE RELEVANT ASSESSM ENT YEAR WHICH IS ALLOWABLE TO BE CONSIDERED AS AN EXPENDITU RE. IF THE LIABILITY IS CONTINGENT THEN IT WOULD AMOUNT TO ALLOWING THE APPREHENDED LOSSES IN FUTURE FROM THE PROFITS W HICH IS NOT ACCEPTED ON ANY PRINCIPLE OF LAW OR ACCOUNTANCY . THE QUESTION OF ESTIMATION IN A CONTINGENT LIABILITY AL SO DOES NOT ARISE IN ORDER TO ALLOW THE DEDUCTION UNDER SECTION 37 OF THE ACT. 15 39. THE WARRANTY PROVISION IS AN ALLOWABLE PROVISIO N AS IT AS PART OF THE AGREEMENT OF SALE. THE HONBLE AP EX COURT IN THE CASE OF ROTORK CONTROL INDIA (P) LTD. V/S CIT 2 3 DTR 79 HELD THAT SUCH PROVISION IS ALLOWABLE AS IT RELATES TO PRESENT OBLIGATION AND INVOLVES FLOW OF RESOURCES. IN THE C ASE OF BHARAT EARTH MOVERS V/S CIT 245 ITR 428, THE HONBLE APEX COURT HELD THAT THE LIABILITY IS ALLOWABLE IF IT HAS ARIS EN IN THE GEES THOUGH IT MAY BE QUALIFIED AND DISCHARGED AT A FUTU RE DATE. 2.9 LOOKING TO THE ABOVE FACTS, WE FEEL THAT THE LD . CIT WAS NOT JUSTIFIED IN SETTING ASIDE THE ORDER U/S 263 OF THE ACT. THE ORDER OF THE LD. CIT IS CANCELLED AND THE APPEAL OF THE ASSESSEE IS ALLOWED. 3. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED.. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 22-11 -2011. SD/- SD/- (R.K. GUPTA) (N.L. KALRA) JUDICIAL MEMBER ACCOUNTANT MEMBER JAIPUR DATED; 22/11/2011 *MISHRA COPY FORWARDED TO :- 1. M/S. SHREE SALASAAR OVERSEAS (P) LTD., JAIPUR 2. THE ITO WARD 2 (2), JAIPUR 3. THE LD. CIT BY ORDER 4. THE LD.DR 5. THE GUARD FILE (ITA NO. 433/JP /11) A.R, ITAT, JAIPUR 16 17