Advocate Akhilesh Kumar Sah
DCIT Vs Ashiana Housing Ltd. (ITAT Kolkata)
Recently, in DCIT vs. Ashiana Housing Ltd. [I.T.A. No. 714/Kol/2018 A.Y.: 2013-14, decided on 06.03.2019], in brief, the appeal was preferred by the Revenue against the order of CIT(A) – 3, Kolkata dated 23.02.2018 and the solitary issue involved therein was raised by the Revenue by way of the following ground:
“That on the facts and circumstances of the case and in law, the CIT(A) erred in allowing the future development expenses amounting to Rs. 2,25,01,129/- by ignoring the fact that the said expenses was provision for unascertained liability.”
The assessee being a company engaged in the business of real estate development & rendering hospitality services in the revised return of income filed for the year under consideration on 02.09.2014, the total income of Rs. 46,14,17,450/- was declared by the assessee. In the profit and loss account filed along with the said return, a sum of Rs. 2,25,01,129/- was debited by the assessee on account of future development expenses. During the course of assessment proceedings, the assessee was called upon by the AO to explain as to why the future development expenses should not be disallowed as the assessee was following the mercantile system of accounting. In reply, it was submitted by the assessee that the provisions for future development expenses was made in accordance with the AS-29 and similar provisions were also contained in ICDS-X applicable w.e.f. 01.04.2015 under section 145 of the Income Tax Act, 1961 (for short ‘the Act’). It was also submitted on behalf of the assessee that the relevant projects were completed in the year under consideration and non accounting of such future development expenses would lead to incorrect amount of completion of the phase. It was further submitted that the cost provided as future development was not unascertained liabilities. This contention of the assessee was not found acceptable by the AO. According to him, when the mercantile system of accounting was being followed by the assessee, only crystallized liabilities were allowable and unascertained liabilities could not be allowed. He held that the future development expenses were claimed by the assessee on estimated basis and such estimated expenditure which had not been incurred could not lead to crystallization of liability in the year under consideration. He held that the amount in question thus represented provision for meeting unascertained liabilities which was not allowable as deduction in the case of the assessee. He accordingly made a disallowance of Rs. 2,25,01,129/- on account of future development expenses and made addition to that extent to the total income of the assessee in the assessment completed under section 143(3) vide an order dated 31.03.2016.
The disallowance made by the AO on account of future development expenses was challenged by the assessee in the appeal filed before the CIT(A) and after considering the submissions made by the assessee as well as the material available on record, the CIT(A) deleted the disallowance made by the AO.
Against the order of the CIT(A), the Revenue preferred the appeal before the Tribunal.
The learned Members of the Kolkata ITAT considered the rival submissions and also perused the relevant material available on record. It was observed that the assessee was carrying on the business of real estate development and revenue from the said business was being recognised by it by following the project completion method. As per the said method, the revenue of 7 projects which were completed or substantially completed was recognised by the assessee in the year under consideration, out of the said 7 projects, 2 projects were fully completed and since no expenditure in relation to the said projects was to be incurred by the assessee, no provision for such expenditure was made. In respect of remaining 5 projects which was substantially completed, certain expenditure was still to be incurred by the assessee and details of the same in respect of each and every projects were furnished by the assessee during the course of assessment proceedings before the AO. It was also pointed out by the assessee that the said expenditure to the extent it was in respect of unsold flats of the projects completed was added to the cost of unsold flats lying in the closing stock and the remaining amount was claimed as deduction. Since the entire revenue from the relevant projects was recognised by the assessee during the year under consideration as per the project completion method followed by it, the corresponding expenses still to be incurred in respect of the said projects as identified and provided by the assessee were claimed as deduction as per the matching principle and the same in our opinion was rightly claimed by the assessee as per the method of accounting consistently followed by it.
The matching principle is one of the most fundamental principles in accounting. It is an integral part of the accrual accounting system and requires that a company must record expenses in the period in which the related revenues are earned. The matching principle states that expenses should be recognised and recorded when those expenses can be matched with the revenues those expenses helped to generate. In other words, expenses should be recorded as the corresponding revenues are recorded and the matching principle recognises the expense as the revenue recognition principle recognises income. It is important to match expenses with revenue because net income i.e. the net amount earned in a period is calculated by subtracting expenses from revenue. If expenses are not properly recorded in the correct period, the net income from a particular period may be either understated or overstated and so are the related balance sheet balances.
It was further observed that the AO could not appreciate the claim of the assessee in the light of method of accounting followed by the assessee perspective and disallowed the claim of the assessee on the ground that the provision made by the assessee represented unascertained liability which was not allowable as deduction in the case of the assessee following mercantile system of accounting. He however ignored the fact that the provision was made by the assessee for the expenses in relation to the projects completed of which the revenue was recognised and since such expenses were duly identified by the assessee in respect of each and every projects and details of the same were also furnished before the AO, the provision made by the assessee represented ascertained liability. Moreover, the expenditure so provided was to be incurred in respect of the projects substantially completed, the entire revenue of which was duly recognised by the assessee in the year under consideration. The said expenditure thus was related to the Revenue already recognised by the assessee in the year under consideration by following the project completion method and the same was allowable as deduction in the year under consideration as per the concept of matching principle. It is pertinent to note here that the similar method of accounting was followed by the assessee consistently even in the earlier years and as submitted by the learned counsel for the assessee, similar provision made for the expenses to be incurred in respect of project substantially completed in respect of which Revenue was recognised was allowed by the AO even in the assessment completed under section 143(3) of the Act. The learned Members opined that the CIT(A) appreciated the claim made by the assessee in the right perspective and rightly allowed the same after taking into consideration, the method of accounting followed by the assessee, in the light of relevant accounting standard as well as case laws relied upon by the assessee in support. The learned Members of the ITAT found no infirmity in the order of the CIT(A) giving relief to the assessee on this issue and upholding the same. The appeal of the Revenue was dismissed.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal is preferred by the revenue against the order of Ld. CIT(A) – 3, Kolkata dated 23.02.2018 and the solitary issue involved therein is raised by the revenue by way of the following ground:
“That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing the future development expenses amounting to Rs. 2,25,01,129/- by ignoring the fact that the said expenses was provision for unascertained liability.”
2. The assessee in the present case is a company which is engaged in the business of real estate development & rendering hospitality services. In the revised return of income filed for the year under consideration on 02.09.2014, the total income of Rs. 46,14,17,450/-was declared by the assessee. In the profit and loss account filed along with the said return, a sum of Rs. 2,25,01,129/- was debited by the assessee on account of future development expenses. During the course of assessment proceedings, the assessee was called upon by the AO to explain as to why the future development expenses should not be disallowed as the assessee was following the mercantile system of accounting. In reply, it was submitted by the assessee that the provisions for future development expenses was made in accordance with the AS-29 and similar provisions were also contained in ICDS-X applicable w.e.f. 01.04.2015 u/s 145 of the Act. It was also submitted on behalf of the assessee that the relevant projects were completed in the year under consideration and non-accounting of such future development expenses would lead to incorrect amount of completion of the phase. It was further submitted that the cost provided as future development was not unascertained liabilities. This contention of the assessee was not found acceptable by the AO. According to him, when the mercantile system of accounting was being followed by the assessee, only crystallized liabilities were allowable and unascertained liabilities could not be allowed. He held that the future development expenses were claimed by the assessee on estimated basis and such estimated expenditure which had not been incurred could not lead to crystallization of liability in the year under consideration. He held that the amount in question thus represented provision for meeting unascertained liabilities which was not allowable as deduction in the case of the assessee. He accordingly made a disallowance of Rs. 2,25,01,129/- on account of future development expenses and made addition to that extent to the total income of the assessee in the assessment completed u/s 143(3) vide an order dated 31.03.2016.
3. The disallowance made by the AO on account of future development expenses was challenged by the assessee in the appeal filed before the Ld. CIT(A) and after considering the submissions made by the assessee as well as the material available on record, the Ld. CIT(A) deleted the disallowance made by the AO for the following reasons given in his impugned order:
I have considered the submissions of the assessee carefully. The only issue in this appeal is disallowance of Rs.2,25,01,129/- made by the AO on account of future development expenses by treating them as contingent in nature. The main contention of the AO was that the appellant is following mercantile system of accounting and under this system only those liability which had crystallized were allowable as an expense. The AO was of the opinion that the estimated liability cannot be treated as an ascertained liability as the expenditure has not actually been incurred. He therefore treated the future development expenses as unascertained liability and disallowed the same.
It has submitted before me that Future Development Expenses comprises of costs which are duly ascertained but not incurred at the time of handing over possession of the completed flats to the buyers. However the liabilities for these expenses are contractual based on the agreement signed with the buyers. Such expenses mostly relate to common facilities like Club House, Sewerage Treatment Plant, Landscaping, Roads and Fire Fighting Equipments etc. It was further submitted as the revenue with respect to the sold flats have already been realized and booked in the sales account; these costs need to be allocated amongst all the flats the possession of which is handed over during the financial year.
It was further submitted that the expenses are not unascertained and ontingent in nature. The cost of such unfinished work is ascertained on the basis of purchase orders placed on vendors and orders placed on service suppliers. The computation of such expenses is supported by sanction plan, project engineers’ drawings and requirements of materials & labour etc. Accordingly it was stated that the provision made for future expenses is in accordance with the AS-29 and similar provisions contained in ICDS-X under sec 145 of the Act.
It was further submitted that the assessee has consistently been following the same method of accounting for a number of years.
The A/R of the appellant placed reliance on the decision in the case of Consulting Engineering Services (India) Limited, 250 ITR 849 (Delhi) for the proposition that “Where a system of accounting (which includes allocation of indirect expenses) is consistently adopted and followed, the same cannot be altered in subsequent years”.
On going through the submissions of the assessee it has been stated that this method of accounting regularly followed by the assessee has always been accepted by the department and variation has been made only in three assessment years namely Asst. Years 2012-13 to 2014-15. Therefore it was argued that there is no basis for the AO to change the method of accounting regularly adopted by the assessee in the earlier years. Hence it was argued that the addition made by the AO should be deleted.
In this case before analyzing the issue the methodology adopted for computing the future development expenses requires to be seen. It was stated that proportionate amount of future expenses debited to the P/L Account is based on the percentage of inventory sold during the year. In this respect the computation, project wise is depicted in the table below:
