Expenditure cannot be disallowed on the submission of proper vouchers and books for the expenses

IN THE INCOME TAX APPELLATE TRIBUNAL

MUMBAI BENCHES, ‘J’, MUMBAI

BEFORE SHRI D.K.AGARWAL(JM) AND SHRI P.M.JAGTAP(AM)

ITA No.2663/Mum/2010

(Assessment Year: 2006-07)

Sharp Construction Co.

203, Marine Chambers,

New Marine Lines,

Mumbai-400020.

PAN:AACFS4181L

APPELLANT

V/s

Income Tax Officer,

Ward 12(2)(3),

Aayakar Bhavan,

M.K.Road,

Mumbai-400020.

RESPONDENT

Date of Hearing: 8.2.2012

Date of Pronouncement: 24.2.2012

Appellant by: Shri K.Shivaram

Respondent by: Shri C.G.K.Nair

O R D E R

PER D.K.AGARWAL (JM)

This appeal preferred by the assessee is directed against the order dated 5.1.2010 passed by the ld. CIT(A) for the Assessment Year 2006-07.

2. Briefly stated facts of the case are that the assessee company is engaged in the business as builders, building contractors, labour contractors, property developers etc. The return was filed declaring total income at Rs.4,71,330/- on 30.10.2006, which was processed u/s 143(1) of the Income Tax Act, Act, 1961 (in short the Act). However, the case was taken up for scrutiny and the assessment was completed at an income of Rs.32,75,330/- including the addition of out of costs of purchase of land of Rs.17,00,000/- and disallowance of expenses of sale of plot of land Rs.11,04,004, vide order dated 26.12.2008 passed u/s 143(3) of the Act. On appeal, the ld. CIT(A) while agreeing with the views of the AO, confirmed the addition/disallowance made by the AO.

3. Being aggrieved by the order of the ld. CIT(A), the assessee is in appeal before us.

4. Ground No.1 is against the sustenance of addition of Rs.17,00,000/-.

5. The brief facts of the above issue are that the assessee is following project completion method of accounting. The AO noted that during the year the project named “Mayur Classic” was completed. The Assessing Officer further noted that the assessee had claimed Rs.20,00,000/- as expenses under the head “Land Purchased”. The assessee was asked to explain /furnish details with evidence of land purchase  expenses of Rs.20,00,000/-. In response, the assessee furnished a copy of agreement dated 12.12.2001 for purchase of Land, used for the project from one Mr. Mohammed Salim Shaikh. The assessee also furnished its own bank statement of Citibank and the ledger account of Shri Mohammed Salim Shaikh in its books for the period 1.4.2001 to 31.3.2002. The AO after considering the assessee’s explanation observed no entry was passed in the books of account of the assessee reflecting the acquisition of development rights for Rs.20,00,000/- until financial year 2005-06. The assessee has not paid the balance amount of Rs.17,00,000/- at least upto 31.3.2006. Without prejudice, even otherwise, as per clause No.1 on page 5 of the agreement, the assessee is required to pay the balance amount of Rs.17,00,000/- to Shri Mohammed Salim Shaikh on or before the execution of the final deed of conveyance. The assessee has already handed over the possession of the constructed premises and offered income arising thereon in A.Y.2006-07. The conveyance of land by Shri Mohammed Salim Shaikh has not taken place at least upto 31.03.2006. The assessee has not furnished any evidence in respect of the conveyance having taken place even after 1.4.2006. In view of these facts, the Assessing Officer held that the said sum of Rs.17,00,000/- represents a contingent liability which is not al lowable as an expense under the Act and accordingly he added the same to the total income of the assessee.

6. On appeal , the ld. CIT(A) confirmed the addition made by the AO.

7. At the time of hearing, the ld. Counsel for the assessee submits that the assessee is following project completion method. During the year the assessee completed project known as “Mayur Classic”. The return was filed along with the computation of income, tax audit report, balance sheet and profit and loss account. In the profit and loss account the assessee has debited a sum of Rs.20,00,000/- as cost of land towards ‘Mayur Classic”. The development rights for land was purchased from Shri Mohammed Salim Shaikh vide agreement dated 12.12.2001 for Rs.20,00,000/-, copy of the agreement is appearing at pages 57 to 71 of the assessee’s paper book. Out of Rs.20,00,000/-, as per agreement Clause 1(a) & 1(b) the assessee has paid Rs.3,00,000/- and remaining Rs.17,00,000/- was to be paid upon execution of conveyance. Assessing officer disallowed Rs.17,00,000/- by taking Cost of Purchase of development Rights at Rs.3,00,000/- or in the alternative, treated Rs.17,00,000/- as contingent liability. He further submits that the confirmation from Shri Mohammed Sal im Shaikh appearing at page 99 of the assessees paper book was not filed before the AO and the ld. CIT(A). He further submits that in

view of confirmation filed by Shri Mohammed Salim Shaikh, it cannot be said that cost of purchase of Development rights is only Rs.3,00,000/- and Rs.17,00,000/- is a contingent liabil ity. He further submits that it is al lowable as provision for the reasons (a) Liability is a present obligation arising from past events; (b) it is present obligation in view of the confirmation filed; (c) the amount of liability is fixed;(d) as the project is completed, it is highly probable that the liability will now to be stetted and (e) method of Accounting is Accrual. The reliance was also placed on the decisions in (i) Rotork Controls  India P. Ltd V/s CIT (2009) 314 ITR 62(SC) and (ii) DCIT (International Taxation) V/s Bank of Bahrain and Kuwait, (2010) 41 SOT 290 (Mum)(SB). He, therefore, submits that the disallowance made by the AO and sustained by the ld.CIT(A) be deleted.

8. On the other hand, the ld. DR supports the order of the AO and the ld. CIT(A).

9. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that there is no dispute that as per copy of development agreement–cum-sale appearing at pages 57 to 71 of the assessee’s paper book at internal page 6 of the agreement, it was agreed by the parties that the assessee shall pay Rs.20,00,000/- at lump sum consideration for the purchase of property. As per clause (a) Rs.3,00,000/- was to be paid by the assessee to the owner at the time of execution of the development-cum-sale-deed and balance amount of Rs.17,00,000/- as per clause (b) shall be paid by the assessee on or before execution of final deed of conveyance. The assessee has paid Rs.3,00,000/- in the Financial Year 2001-02 and the balance amount of Rs.17,00,000/- was not paid as there is a dispute in execution of final deed of conveyance, however, the assessee has passed entry of Rs.20,00,000/- ( Rs.3,00,000/- + Rs.17,00,000/-) in the current profit and loss account for the year ended on 31.3.2006 and has claimed the same as cost of land. The assessee has also passed corresponding entries of sale of flats amounting to Rs.2,09,96,000/- in the profit and loss account appearing at page 25 of the assessee’s paper book. There is no dispute that the assessee is following the mercantile system of accounting the liability for the expenses has been accrued. Merely because the assessee has not paid a part payment of Rs.17,00,000/- on the ground that final conveyance deed has not been executed does not mean that the assessee has no liability to make final payment of Rs.17,00,000/-.

10. In Rotork Controls India P. Ltd (supra) the Hon’ble Supreme Court has laid down following

conditions for recognition of a provision of a liability which are as under :

“….A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when: (a) an enterprise has a present obligation as a result of a past event ; (b) it is probable that an outflow of resources will be required to settle the obl igation ; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized.”

11. Respectfully applying all the conditions laid down by the Hon’ble Supreme Court(supra) to the facts of the assessee’s case we hold that all the three conditions for recognition of a provisions are satisfied in this case. In this view of the matter, we are of the view that the assessee is entitled to deduction of Rs.17,00,000/- of the costs of the land and the AO and the ld.CIT(A) were not justified in disallowing the same. The ground taken by the assessee is, therefore, allowed.

12. Ground No.2 is against the sustenance of disallowance of expenditure of Rs.11,04,400/-.

13. The brief facts of the above issue are that the AO noted that the assessee has credited an amount of Rs.3,95,996/- towards profit on sale of bonus plot. The assessee was asked to furnish the details of profit on sale of plots with necessary evidence. The assessee furnished the details of the expenses and also furnished the copy of development agreement dated 23.8.2005 for grant of development rights in favour of M/s Landline Builders for Rs.15,00,000/-. However, the AO was of the view that as against the expenses incurred by the assessee, the assessee got a plot of land with FSI about 6000 sq.ft hence no such expenses is allowable and accordingly disallowed the same. On appeal , the ld. CIT(A) while agreeing with the views of the AO confirmed the disallowance made by the AO.

14. At the time of hearing, the ld.counsel for the assessee submits that the assessee has filed certain additional evidences i.e. vouchers relating to expenses, balances sheet for the period from

31.3.1999 to 31.3.2005 and bank statement of the assessee showing receipt of Rs.15,00,000/- from M/s Landline Builder Pvt.Ltd. vide sale agreement dated 23.3.1987 appearing at pages 100 to 215 of the assessee’s paper book. He further submits that the above additional evidence goes to the root of the matter, therefore, the same may be admitted and the issue may be set aside to the file of the AO to examine and decide the same afresh after due verification.

15. On the other hand, the ld.DR while relying on the orders of the AO and the ld.CIT(A) submits that he has no objection, if the issue is set aside to the file of the AO for fresh adjudication

16. We have carefully considered the submissions of the rival parties and perused the material available on record. We find merit in the plea of the ld. Counsel for the assessee that the additional evidence furnished by the assessee at this stage goes to the root of the matter and hence, in the interests of justice, we admit the same. However, the above documents have not been examined by the AO or the ld. CIT(A), therefore, in the interests of justice, we consider it fair and reasonable that the matter should go back to the file of the AO and accordingly, we set aside the orders passed by the Revenue authorities on this account and send back the matter to the file of the AO to decide the same afresh in the light of our observations hereinabove and according to law after providing reasonable opportunity of being heard to the assessee. The ground taken by the assessee is, therefore, partly allowed for statistical purposes.

17. In the result, assessee’s appeal stands partly allowed for statistical purpose.

Order pronounced in the open court on 24thFeb.,2012.

                                                       Sd                                       Sd

                                             (P.M.JAGTAP)                   (D.K.AGARWAL)

                                  ACCOUNTANT MEMBER     JUDICIAL MEMBER

Mumbai, 24th February, 2012

SRL:

Copy to:

1. Appellant

2. Respondent

3. CIT Concerned

4. CIT(A) concerned

5. DR concerned Bench

6. Guard file.

True copy

BY ORDER

ASSTT. REGISTRAR,

ITAT, MUMBAI