Income Tax Appellate Tribunal - Hyderabad
Goodwill Homes (P) Ltd.,, Hyderabad vs Department Of Income Tax on 2 July, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "B", HYDERABAD
BEFORE SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
AND SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER
ITA No. 830/HYD/2011
Assessment Year: 2007-08
Income Tax Officer-Ward-2(2), ... Appellant
Hyderabad
Vs.
M/s Goodwill Homes (P.) Ld., ...Respondent
Hyderabad
(PAN - AABCG4589J)
Appellant by : Shri K. Gnana Prakash
Respondent by : Shri C.P. Ramaswamy
Date of Hearing : 02/07/2012
Date of Pronouncement :
ORDER
PER ASHA VIJAYARAGHAVAN, J.M.:
This appeal filed by the revenue is directed against the order of CIT(A), Vijayawada dated 28/02/2011 for the assessment year 2007-08.
2. Briefly stated the facts of the case are that the assessee company is in the business of real estate. For the year under consideration, the assessee filed its return of income on 31/10/2007 declaring total income of Rs. 20,64,775/- and the same was processed on 24/07/2008. The Assessing Officer conducted a survey u/s 133A on 28 th February, 2008 and during the survey a statement on oath was recorded from Shri B. Sunil Kumar, Executive Director of the assessee. In accordance with the declaration made in answer to question no. 18, revised return 2 ITA NO. 830/Hyd/11 M/s Goodwill Homes (P) Ltd.
of income was filed on 10 th March, 2008 declaring additional income of Rs. 30,04,317/-. The assessee has been maintaining its accounts on mercantile basis and in accordance with AS-1. Accordingly, the assessee accounted for income on the basis of sale of plots registered during the financial year relevant for AY 2007-08 and on matching principles, the development expenditure estimated on proper basis was debited as cost of site development. As per the registered sale deeds, the assessee is obliged to incur the expenditure for site development and the sale price is inclusive of such expenditure. When the Assessing Officer questioned such debit, the assessee replied in detail by its letters dated 04/12/2009, 24/12/2009 and 29/12/2009, which were reproduced by the Assessing Officer vide pages 2,3 and 4 of the impugned assessment order. The assessee placed reliance on the decision of the Supreme Court in the case of Rotork Controls India(p) Ltd. Vs. CIT, 314 ITR 62. However, the Assessing Officer did not find the contention of the assessee as acceptable one nor did the Assessing Officer give any other reason for not accepting the explanation of the assessee that the liability to incur site development expenditure is liability in praesenti and not a contingent liability.
3. Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the CIT(A). Before the CIT(A) the assessee filed written submissions and the contents of which were extracted by the CIT(A) in his order are reproduced below:-
"a) As noted above in the statement of facts, the revised return was filed in accordance with the surrender of income estimated @8% of the gross turnover viz., the actual amount of sale consideration received during the financial year 2006-08 relevant for assessment year 2007-08. Since the original return of income was filed on 31/10/2007 as a valid return, the revised return filed on 10/03/2008 is also a 3 ITA NO. 830/Hyd/11 M/s Goodwill Homes (P) Ltd.
valid return. Consequently, the Assessing Officer had no reason to ignore the revised return.
b) The Assessing Officer proceeded on his computation of income by adopting the income as per original return of income, which was based on the profit and loss account drawn in accordance with the books of accounts regularly maintained and audited. The Assessing Officer did not find any defects in the audited accounts. Consequently, he had no reason nor gave an reason to disallow the provision made in the accounts towards an estimated cost of site development for an aggregate sum of Rs. 1,48,45,500/- as debited in the P&L account (though the Assessing Officer added only Rs. 1,48,45,000/-.)
c) In this regard it is submitted that this estimated cost is provided on a realistic basis @ Rs. 250/- per sq.yard sold, with reference to actual number of sites sold and registered during the year under consideration. These all are expenditure committed to be incurred in terms of the sale agreements, besides the regulations prescribed by the local authorities. Consequently, this expenditure - partly actually incurred and partly to be incurred. Consequently, there is no reason for disallowing this expenditure either on facts or in law.
As quoted above in para 5 of the statement of facts, the decision of the Supreme Court in (2009) 314 ITR 62 in the case of Rotork Controls India(P) Ltd. Vs. CIT is relevant in this regard. Indeed, the Apex Court held in that case that 'A provision is recognized when an enterprise has a present obligation as a result of past event, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made for the amount of obligation. It is applicable on all fours to the facts of this case. It is not a mere provision. It is a liability in praesenti.
Liability on accrual basis has to be recognized when the appellant is following the mercantile system of accounting, in accordance with Accounting Standard-1, which is recognized in section 145 of the Income-tax Act, 1961. In the absence of any defects found by the AO in the accounts of the appellant, rejection of only one item from the P&L a/c has no basis. Similarly, the AO could not ignore the revised return filed validly.
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d) Significantly, as extracted by the AO on page 2 of the assessment order, revised returns filed for the assessment years 2005-06 and 2006-07 declaring higher income, computed @8% on the turnover have been accepted in scrutiny assessments by his predecessors."
4. After considering the submissions of the assessee, the CIT(A) observed that consequent to the survey action, the assessee filed a revised return offering an additional income of Rs. 30,04,317/- as per the commitment given by the Executive Director in his sworn statement. He further observed that the revised return filed on 10/03/2008 is a valid return. He noted that the assessee is accounting the sale of plots at the time of registration and against this sale, the cost of the plot is shown in the profit & loss account which also includes the component of cost of site development. He further noted that the expenditure towards site development may have been incurred during the relevant period or is yet to be incurred. The CIT(A) observed that it is the claim of the assessee that the future expenditure for the development of the total layout is based on the commitment given in respect of the amenities promised in the sales brocuhers and the specifications laid down by the statutory authorities. He noted that only the proportionate site development expenditure relatable to the area of plots sold and registered during the year is claimed as an admissible expenditure for the year, while, the total area of saleable land is 1,13,721 sq.yds, only 59,328 sq.yds have been sold during the relevant period. He further noted that the average sale price works out to Rs. 1089/- sq.yds is quantified by adopting an average rate of Rs. 250/- per sq.yd. which works out to Rs. 1,48,45,500/- and the total cost of plots sold works out to Rs. 777/- per sq.yd. which is inclusive of the future expenditure on site development of Rs. 250/- per sq.yd.
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5. The CIT(A) observed that there can be no dispute over the fact that the assessee is under an obligation to develop the site as per the statutory approvals from the authorities and such an exercise would necessarily result in outflow of resources to meet the obligation. Therefore, a reasonable and reliable estimate of the obligation to develop the site has been made by the assessee by adopting an average rate of Rs. 250/- per sq.yd for the proposed expenditure. The CIT(A) further observed that as seen from the assessment order, the Assessee had demonstrated before the AO that whenever the amounts have been spent, appropriate adjustments had been made in the books of account to establish the fact that the assessee has been honoring the commitment made to its clients. The CIT(A) found from assessment order that the AO has not taken cognizance of the revised return filed and that no reasons have been advanced for rejecting the detailed explanation offered by the assessee. The CIT(A) pointed out that the revised returns for the earlier assessment years 2005-06 & 2006-07, filed consequent to the survey action declaring higher income at 8% on the turnover, have been accepted by the department and the assessee has followed the same method of accounting while claiming the expenditure on site development in these returns of income. It was observed that such a practice has been prevalent even prior to the survey action as is evident from the returns filed prior to the date of survey.
6. The CIT(A) following the decision of the Hon'ble Supreme Court in the case of Rotork Controls India Pvt. Ltd. Vs. CIT 314 ITR 62 (2009), held that the provisional cost of site development debited to the P&L A/c is to be treated as an admissible expenditure as the cost of site development is held to be an ascertained liability and, therefore, the addition of Rs.
6 ITA NO. 830/Hyd/11M/s Goodwill Homes (P) Ltd.
1,48,45,000/- made in the assessment order is liable to be deleted. He, However, held that the revised return filed on 10/03/2008 being valid, the income of the assessee for the AY 2007-08 is to be adopted at Rs. 51,69,667/- as per the revised return.
7. Aggrieved by the order of the CIT(A), the revenue is in appeal before us raising the following grounds of appeal:-
"1. The CIT(A) erred in facts and in law in ignoring the fact that the assessee had not produced any evidence to substantiate the provisional site development expenditure of Rs. 1,48,45,000/-.
2. The CIT(A) erred in facts and in law in ignoring the fact that the assessee had shown Rs. 2.60 crores as outstanding liability as on 31/03/2007 relating to provisional site development expenditure which would mean that such expenditure has not disbursed i.e. expenditure being predominantly labor.
3. The CIT(A) erred in facts and in law ignoring that the assessee builder had stated details of site development expenditure at Rs. 28.85 lakhs.
4. The CIT(A) erred in facts and in law ignoring the fact that the assessee had characterized the site development expenditure as provisional."
8. We have heard the arguments of both the parties and perused the record as well as gone through the orders of the authorities below. The AO made an addition of Rs. 1,48,45,000/- towards provisional cost of site development rejecting the submission of the assessee that the cost of plots sold included the provision for site development expenditure which was in proportion to the corresponding sales figures and the future expenditure being provisional cost of site development claimed by the assessee in its profit and loss account was submitted to be an admissible expenditure u/s 37(1) of the Act. The CIT(A), following 7 ITA NO. 830/Hyd/11 M/s Goodwill Homes (P) Ltd.
the decision of Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd. (supra), on which reliance placed by the assessee, held that the provisional cost of site development debited to the P&L a/c is to be treated as an admissible expenditure as the cost of site development is held to be an ascertained liability. He, however, held that the revised return filed by the assessee being valid, the income of the assessee for the AY 2007-08 is to be adopted at Rs. 51,69,667/- as per the revised return. The Hon'ble Supreme Court in the case of Rotork Controls India(P) Ltd. (supra) held that "a provision is recognized when an enterprise has a present obligation as a result of past event, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made for the amount of obligation". It was explained that whenever the amounts are actually spent, appropriate reversal entries are made for adjustment in the provision for site development account. The issue for consideration is whether this expenditure is a crystalised or a contingent liability. We are of the opinion that liability on accrual basis has to be recognized when the assessee is following the mercantile method of account in accordance with AS-I, which is recognized in section 145 of the IT Act. The expenditure committed to be incurred in terms of sale agreement besides the regulations prescribed by the local authorities are expenditures, which are partly actually incurred and partly to be incurred. It is not a mere provision but liability in praesenti.
9. The decision of the Apex Court in the case of Calcutta Co. Ltd., 37 ITR 1 supports the view taken by us.
10. The expenditure in-question is partly a provision and of course ascertained one. Some provisions are allowable only in view of the cited judgment read with another judgment of the 8 ITA NO. 830/Hyd/11 M/s Goodwill Homes (P) Ltd.
Hon'ble Supreme Court in the case of Bharat Earth Movers Ltd, 245 ITR 428(SC). However, there are certain requirements to be met before such provisions are allowed and they revolve around reasonable estimations. In that sense, the revenue's objection on the quantification of the same is definitely justified. The said judgments concur with each other in allowing such liabilities, as long as such liabilities are capable of being estimated with reasonable certainty. Till these requirements are satisfied, the liability is not a contingent one, as held in the case of Bharat Earth Movers Ltd. (supra).
11. In that sense, the assessee is under obligation to explain to Assessing Officer the mode and manner of arriving at the figure of Rs. 250/- per unit towards the site development expenses to be incurred in future. It is not the requirement of the law that the assessee can debit the said expenditure on actually incurring the same. Therefore, in principle, we agree with the views of the CIT(A). However, the same is subjected to the assessee's endeavour to explain and justify the quantification issue in the light of the said judgments of the Hon'ble Supreme Court. For this limited purpose, we set aside the core issue to the file of the Assessing Officer. Accordingly, the appeal of the revenue is allowed for statistical purpose.
12. In the result, appeal of the revenue is allowed for statistical purposes.
Pronounced in the open court on 07/09/2012.
Sd/- Sd/-
(D. KARUNAKARA RAO) (ASHA VIJAYARAGHAVAN)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, Dated: 7 th September, 2012.
9 ITA NO. 830/Hyd/11
M/s Goodwill Homes (P) Ltd.
kv
Copy to:-
1) ITO, Ward-2(2), 8 th Floor, "C" Block, IT Towers, AC
Guards, Hyderabad,
2) M/s Goodwill Homes (P) ltd., 6-2-30/B, Flat No. 202,
2 nd Floor, Above Mercedez Benz Show Room, Empress Court, Khairatabad, Hyderabad.
3) CIT(A), Vijayawada.
4) CIT(A)-II, Hyderabad
5) The Departmental Representative, I.T.A.T., Hyderabad.