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M/s. Solanki Developers, Nirmal House, Temhi Naka, Thane 400 601. Vs. The D.C.I.T, Thane.
March, 11th 2015
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                    ITA NO.1854/MUM/2011(A.Y. 2006-07)

M/s. Solanki Developers,                          The D.C.I.T,
Nirmal House, Temhi Naka,                         Thane.
Thane 400 601.                           Vs.      (Respondent)
(Appellant )

            Appellant by            : Shri M.Subramanian
            Respondent by            : Shri Akhilendra Yadav
             Date of hearing         : 09/03/2015
            Date of pronouncement    : 09/03/2015



      This is an appeal filed by the assessee and is directed against order passed
by Ld. CIT(A)-1, Thane dated 31/12/2010 for assessment year 2006-07. Grounds
of appeal read as under:

      1. On the facts and in the circumstances of the case & in law, the learned
      AO, Dy. CIT, Cir.3, Thane erred in disallowing Balance work expenses of
      Rs.75,000/- on adhoc basis, without having any authority to do so under the
      provisions of Income Tax Act, 1961.

      2 On the facts and in the circumstances of the case & in law the learned
      CIT (A) - I, Thane erred in disallowing entire Balance work expenses of Rs
      7,50,000/- though these are fully allowable.
                                        2                 ITA NO.1854/MUM/2011(A.Y. 2006-07)

      3 On the facts and in the circumstances of the case & in law, the learned
      CIT (A) -l erred in dismissing the appeal without giving fully and properly
      appreciating the facts and circumstances of the case.

      4 On the facts and in the circumstances of the case & in law, the learned
      CIT (A) - I erred in dismissing the appeal without taking into consideration
      fully and properly the written submissions submitted during the course of
      hearing proceedings.

2.    The assessee is a builder and developer. During the year the assessee has
developed one project namely "Jai Santoshi Ma Tower", situated at Pipeline Road,
Louisewadi, Thane (W). During the year under consideration its gross receipts are
Rs.1,46,04,963/- as against previous year gross receipts of Rs.4,54,62,864/- and
gross profit has been declared at 32.18% as against 9.68% of the earlier year.
These facts are mentioned in the assessment order in para -3. While examining
P&L Account of the assessee the AO observed that it has claimed a sum of
Rs.7,50,000/- under the head "balance work expenses" and after going through the
details he observed that some of the expenses were made in cash and were
accounted through self made bills and vouchers.      Thus, AO has arrived at a
conclusion that details are not fully authenticated and AO disallowed a sum of
Rs.75,000/- on adhoc basis. The disallowance was agitated in appeal filed before
Ld. CIT(A). It was submitted that the assessee is following mercantile system of
accounting and as the project was almost complete and assessee had to discharge
certain obligations and for that purpose a sum of Rs.7,50,000/- was kept apart
under the head "balance work expenses". It was claimed that the disallowance of
Rs.75,000/- was not justified.
                                         3                 ITA NO.1854/MUM/2011(A.Y. 2006-07)

2.1   Ld. CIT(A) has examined such contention of the assessee and also referred
to the written submissions submitted by the assessee. From the P&L Account he
observed that the debit made by the assessee of Rs.7,50,000/- was in fact in the
nature of provisions for future expenses. He found that assessee has incurred
expenses of Rs.37,224/-, Rs.5,76,158/- and Rs.1,36,618/-     during the subsequent
assessment years 2007-08, 2008-09 and 2011-12 respectively. According to Ld.
CIT(A) such expenses which were not actually incurred during the year could not
be claimed as expenditure and expenditure to be incurred in future could not be
allowed in the year under consideration. He issued notice of enhancement under
section 251(2) of the Income Tax Act, 1961 (the Act) requiring the assessee to
explain as to why the disallowance should not be made of the whole amount
instead of only a sum of Rs.75,000/-.        The submissions made earlier were
reiterated and it was submitted that the assessee had to incur expenses regarding
society formation, repairs, boundary wall painting etc. which were incurred in
subsequent years.     Thus, these expenses are provided for in the year under
consideration to arrive at the true profit of the project. It was submitted that
assessee is following project completion method and all expenses of the project till
final completion and handing over of the project to the members of the society are
to be provided in the current year to arrive at the true profit. Reliance was placed
on the decision of Hon'ble Supreme Court in the case of Calcutta Company Ltd.
CIT, 37 ITR 1(SC) and Metal Box Co. Ltd. vs. Workmen, 73 ITR 53(SC) and it
was submitted that where the assessee is maintaining         mercantile system of
accounting, a liability already accrued, though to be discharged at a future date
would be a proper deduction while working out the profit and loss account of the
project.   However, Ld. CIT(A) has rejected such contention of the assessee on
the ground that the assessee has provided for expenses on an adhoc basis and
written off the same in the subsequent years. According to the findings recorded
                                         4                 ITA NO.1854/MUM/2011(A.Y. 2006-07)

by the AO the vouchers for expenses are unverifiable. After scrutiny of the
details, Ld. CIT(A) has found that during the assessment year 2007-08 a total
payment of Rs.36,224/- has been made towards security services. During the year
relevant to assessment year 2008-09, the total expenditure of Rs.5,76,158/- is
incurred which include purchases and contract charges and thus, Ld. CIT(A) has
observed that the claim of the assessee could not be allowed as under section 37
of the Act and the expenditure which could be allowed are expenditure which
have been incurred in the year under consideration. It is further observed by Ld.
CIT(A) that the case law relied upon by assessee are distinguishable and in this
manner Ld. CIT(A) has arrived at a conclusion that entire disallowance was called
for and the same has been held to be not allowable. The assessee is aggrieved,
hence, has filed aforementioned grounds of appeal.

3.    After narrating the facts the Ld. AR relied upon the aforementioned
decisions and the decision of Hon'ble Supreme Court in the case of Bharat Earth
Movers vs. CIT, 245 ITR 428. It was submitted by Ld.AR that project of the
assessee was complete and assessee had to incur the expenditure which were
debited to P&L Account. It was submitted that these expenditure have not been
claimed in subsequent years and according to the aforementioned decisions the
claim of the assessee was allowable and Ld. CIT(A) has committed an error in
making the disallowance in its entirety. It was submitted that even AO did not
disallow the entire amount. Thus, it was pleaded by Ld. AR that order passed by
Ld. CIT(A) should be set aside and disallowance should be deleted in its entirety.

4.    On the other hand, Ld. DR relied upon the order passed by Ld. CIT(A).
                                           5                  ITA NO.1854/MUM/2011(A.Y. 2006-07)

5.    We have heard both the parties and their contentions have carefully been
considered. The law relating to allowability of business liability in a particular
year is settled by the decision of Hon'ble Supreme Court in the case of Metal Box
Company Ltd.(supra). In the said case assessee company had estimated its liability
under two gratuity schemes framed by the company and the amount of liability was
deducted from the gross receipts in the P&L Account. On the basis of actuarial
valuation, the company estimated its liability and made provision for such liability
not all at once but spread over a number of years. Such practice was followed by
the company year to year for working out the additional liability incurred by it on
the employees putting in every additional year of service.            The gratuity was
payable on the termination of an employee's service either due to retirement, death
or termination of services ­ the exacts time occurrence of the latter two events
being not determinable before hand, in such circumstances their Lordships of
Hon'ble Supreme Court laid down following principles:              (i) For an assessee
maintaining his accounts on mercantile system, a liability already accrued, though
to be discharged at a future date, would be a proper deduction while working out
the profits and gains of his business, regard being had to the accepted principles of
commercial practice and accountancy. It is not as if such deduction is permissible
only in case of amounts actually expended or paid ;(ii) Just as receipts, though not
actual receipts but accrued due are brought in for income-tax assessment, so also
liabilities accrued due would be taken into account while working out the profits
and gains of the business; (iii) A condition subsequent, the fulfillment of which
may result in the reduction or even extinction of the liability, would not have the
effect of converting that liability into a contingent liability; (iv) A trader computing
his taxable profits for a particular year may properly deduct not only the payments
actually made to his employees but also the present value of any payments in
                                          6                 ITA NO.1854/MUM/2011(A.Y. 2006-07)

respect of their services in that year to be made in a subsequent year if it can be
satisfactorily estimated.

5.1   Looking into the above principles, the first requirement would be that
liability which is being claimed should arise in the accounting year itself. The said
liability may be quantified or discharged at future date. It should also be capable
of being estimated with reasonable certainty though the actual quantification may
not be possible. If these requirements are satisfied, then the liability cannot be
said to be contingent liability. If case of the assessee is examined from              view
point of first and foremost condition, it would be seen that there is no material on
record placed by the assessee to say that the liability on account of which a sum of
Rs.7,50,000/- was set apart had definitely arisen in the year under consideration.
The liability was to be established with the positive material that without incurring
these expenditure the assessee would not be able to fulfill the obligation cast upon
the assessee. Though it has been stated that project was complete but major part of
the expenses have been incurred during the financial year 2007-08, relevant to A.Y
2008-09. In financial year 2006-07 i.e. immediate proceeding year a sum of
Rs.36,224/- is made only towards security services. No material has been brought
on record to     suggest that payment made for security services was part of
obligation of the assessee without which it could not be said that project of the
assessee was complete. Similar is the position with subsequent expenditure which
include purchases and contract charges. No material has been brought on record
to show that these were the expenditure incurred by the assesse in relation to
project with regard to which income was shown during the                     year under
consideration,   more particularly the material to show that without incurring these
expenditure the assessee would be held to be not discharged its obligation towards
its customers. Keeping in view all these facts and circumstances of the case we are
                                          7                  ITA NO.1854/MUM/2011(A.Y. 2006-07)

of the opinion that the decision relied upon by Ld. AR have no application to the
facts of the case as the assessee has not been able to place material on record to
justify the liability of sum of Rs.7,50,000/- which has been claimed in the P&L
account of the current year. We decline to interfere in the disallowance made by
Ld. CIT(A) and the appeal filed by the assessee is dismissed.

6.    In the result, the appeal filed by the assessee is dismissed.
      Order pronounced in the open court on 09/03/2015
             Û  09/03/2015    

                Sd/-                                            Sd/-
(.. [ /R.C.SHARMA )                            (..  / I.P. BANSAL)
  /ACCOUNTANT MEMBER                          Û  / JUDICIAL MEMBER
 Mumbai;           Dated 09/03/2015
         /Copy of the Order forwarded to :
1.    / The Appellant
2.   × / The Respondent.
3.    () / The CIT(A)-
4.     / CIT
5.    ,   , 
     / DR, ITAT, Mumbai
6.   [  / Guard file.

                                                           / BY ORDER,
×  //True Copy//

                                       /  (Dy./Asstt. Registrar)
                                  ,  / ITAT, Mumbai
.../Vm, Sr. PS
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