Embassy Property Developments Private Limited Vs ACIT (ITAT Bangalore)
Bangalore ITAT: Provision for Future Losses of Real Estate Developers Requires Substance Over Label; Matter Remanded for Verification
In a significant ruling on the tax treatment of provisions made by real estate developers, the Bangalore ITAT held that the true nature of a provision must be determined based on its substance and not merely the nomenclature used in the financial statements. The assessee had claimed a deduction of ₹119.56 crore described in its books as a “provision for expected losses” relating to ongoing real estate projects executed under the percentage completion method. The Assessing Officer treated the amount as an expected loss hit by sections 36(1)(xviii), 40A(13) and the ICDS framework, while the CIT(A) confirmed the disallowance by holding that ICDS did not permit recognition of such losses.
The Tribunal observed that neither the assessee nor the tax authorities had actually examined the composition of the provision, its methodology, project-wise working, supporting evidence, or whether it represented an anticipated loss or merely the cost required to complete projects for which revenue had already been recognised. Merely because the amount was described as a “provision for future losses” in the accounts could not conclude the issue. The Tribunal emphasised that ICDS-I itself requires transactions to be governed by their substance rather than their legal form or accounting description.
The Tribunal held that if the provision genuinely represents future losses or mark-to-market losses, the statutory bar under sections 36(1)(xviii) and 40A(13) would operate, particularly after the retrospective amendments introduced by the Finance Act, 2018. However, if on verification the amount actually represents accrued expenditure required to complete construction corresponding to revenue already recognised under the percentage completion method, it would constitute a provision for expenses, deductible under section 28 read with the matching principle and ICDS X, and would not fall within the mischief of section 40A(13). The Tribunal further observed that there is a fundamental distinction between an “expected loss” and an “accrued expenditure”, and the latter cannot automatically be disallowed merely because of the terminology used in the books.
Since the lower authorities had never examined the project-wise computation, cost already incurred, costs yet to be incurred, inventory write-downs, or the basis of the provision, the Tribunal restored the matter to the Assessing Officer for fresh verification. It directed the Assessing Officer to segregate the provision into (i) inventory or work-in-progress write-downs allowable under ICDS II, (ii) accrued provisions for expenses allowable under ICDS X and section 28, and (iii) purely anticipatory expected losses hit by section 40A(13). The Tribunal also directed that if any amount is disallowed in the present year, the corresponding actual expenditure should be allowed in the year of incurrence and any subsequent write-back should not again be taxed. The appeal was accordingly partly allowed for statistical purposes.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
1. These are the two appeals for two assessment years filed by Embassy Property Developments Private Limited (“the assessee”/ “the appellant”) for assessment year 2017-18 and 2018-19 against the appellate order dated 6 October 2025 passed by the Principal Commissioner of Income Tax (Appeals)-11, Bengaluru [“the learned CIT(A)”]. The said consolidated appellate order covered assessment years 2016-17 to 2018-19 and some common issues, both the parties argued them together and therefore these are disposed of by this common order.
