IN INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH C BEFORE SHRI A.K. GARODIA, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER I.T. A. No.203/Bang/2014 (Assessment Year : 2007-08) M/s. Bairavi Properties & Construction Pvt. Ltd., NO.1432, 10th Main, 6th Cross, Kodihalli, HAL 3rd Stage, Bangalore. . Appellant. Vs. Dy. Commissioner of Income Tax, Circle 11(2), Bangalore. .. Respondent. Appellant By : Shri Tata Krishna, Advocate. Respondent By : Shri S . Sundar Rajan, JCIT (D.R) Date of Hearing : 08.09.2016. Date of Pronouncement : 30.09.2016. ORDER Per Shri Vijay Pal Rao, J.M. : This appeal by assessee is directed against order dt.4.11.2013 of Commissioner of Income Tax (Appeals)-I, Bangalore for Assessment Year 2007-08. 2. assessee has raised following grounds : 2 ITA No.203/Bang/2014 3 ITA No.203/Bang/2014 3. brief facts leading to controversy are as under : 3.1. assessee-company engaged in business of real estate development. assessee filed its return of income on 18.10.2007 4 ITA No.203/Bang/2014 declaring total income of Rs.3,65,85,350. assessee was developing project Ananda Bhairavi comprising of 122 units. During year under consideration, assessee has declared income from sale of 87 units. Assessing Officer accepted total income declared by assessee while passing assessment order under Section 143(3) of Income Tax Act, 1961 (in short 'the Act') on 7.12.2009. Subsequently, CIT proposed to revise assessment by issuing notice under Section 263 of Act on issue that sum of Rs.2,07,75,951 representing provision for expenses towards cost of completion of flats has been wrongly allowed by Assessing Officer without proper application of mind to facts of case and relevant provisions of Act. Consequently, CIT set aside assessment order vide revision order dt.28.11.2011 and directed Assessing Officer to make fresh assessment after verification of relevant records and facts and giving opportunity of hearing to assessee. In pursuant to directions of CIT Assessing Officer called for necessary details and consequently disallowed said claim of Rs.2,07,75,951 on ground that provisions debited to P & L Account is not allowable claim 5 ITA No.203/Bang/2014 as per provisions of Income Tax Act. assessee challenged action of A.O. before CIT(Appeals) but could not succeed. 4. Before us, learned Authorised Representative of assessee has submitted that flats in question were sold during year under consideration however certain works were to be completed and therefore assessee has debited this expenditure on estimate basis which is not contingent in nature rather it is known and crystallised liability. He has further submitted that expenditure was to be incurred on specific work to be completed for completion of flats sold. Since bills were raised subsequently therefore, assessee had booked provision for expenditure as and when material was supplied and works were performed. He has further contended that expenditure in question relates to material and work carried out which is inevitable for completion of construction of flats sold. Thus provision was not made in assumption or on basis of any uncertainty but it is based on actual work was to be completed and further on basis of material supplied/work carried out during period relevant to assessment year under consideration. He has 6 ITA No.203/Bang/2014 referred to details of provisions of expenses and submitted that break up of expenses clearly shows that this expenditure was incurred regarding various furnishings, electric expenses, bath room fittings and tiles, etc construction material used for carrying out works, children play equipment, compound wall, railing, etc. He has referred entire details of expenditure which has been reproduced in submissions produced before authorities below. learned Authorised Representative has also referred bills of work carried out in project and submitted that since bills were raised by vendors after end of financial year therefore assessee has estimated expenditure. He has forcefully contended that entire expenditure and bills are relating to project in question and therefore expenditure incurred in connection with completion of flats sold during year is allowable expenditure on concept of matching principle as this expenditure has not been claimed and allowed in subsequent assessment year. learned Authorised Representative has filed copy of assessment order for A.Y. 2008-09 and submitted that assessee did not claim expenditure 7 ITA No.203/Bang/2014 in question for next assessment year and therefore if said expenditure is disallowed it will result double taxation of same amount. He has further contended that expenditure incurred by assessee has been disallowed by A.O. only on ground that provision is contingent liability which is not allowable. learned Authorised Representative has contended that revenue has been recognized when sale of 87 units during year under consideration then cost of construction of these 87 units is allowable expenditure as per matching concept. In support of his contention he has relied upon following decisions : a) Rotork Controls India (P.) Ltd. Vs. CIT (2009) 180 Taxman 422 (SC) b) Calcutta Co. LTd. Vs. CIT (1959) 37 ITR 1 (SC) c) CIT Vs. Triveni Engg. & Industries Ltd. (2011) 336 ITR 374 (Del) d) ACIT Vs. Krishna Grameena Bank 2016-TIOL-945-ITAT-BANG. He has further contended that deduction is also permissible under Income Tax Act even if actual payment is not made but if liability is incurred. Therefore when assessee is following Mercantile System of Accounting then expenditure which is already 8 ITA No.203/Bang/2014 incurred and corresponding income has been offered to tax then same is allowable deduction under IT Act. In support of his contention, he has relied upon following decisions : a) CIT Vs. Vodafone Essar South Ltd. 2014-TIOL-2045-HC-DEL-IT b) CIT Vs. Excel Industries Ltd. (2013) 358 ITR 295 (SC) c) Dumraon Textile Ltd. Vs. DCIT 2016-TIOL-1489-HC-KOL-IT ld. AR then submitted that since assessee has not claimed this expenditure in subsequent assessment year therefore this is revenue neutral claim as assessee is being taxed at maximum rates. In support of his contention, he has relied upon following decision CIT Vs. Nagri Mills Co. Ltd. (1958) 33 ITR 681 (Bom.) ld. AR has referred to details of total expenditure on completion of project in next year and submitted that provision of expenditure claimed during year under consideration is almost equivalent to expenditure to be apportioned on basis of ratio of saleable area of total project and area of 87 units sold during year. ld. AR has forcefully argued that expenditure in question was determined on actual expenditure 9 ITA No.203/Bang/2014 incurred by assessee and therefore it cannot be regarded as contingent in nature. Referring to decisions relied upon above, ld. AR has submitted that Hon'ble Supreme Court has time and again held that estimated expenditure which has to be incurred by assessee in discharging liability which it had already undertaken is eligible for deduction. expenditure pertains to liability which occurred during accounting year relevant to assessment year under consideration though it was to be discharged at future date when parties have raised bills. Thus liability was required to be estimated under Mercantile System of Accounting and has to be debited against corresponding income. Liability arises within accounting period is allowable deduction though it may be quantified and discharged at future date. Therefore provision for liability is amenable to deduction if there is element of certainty. impugned provision relates to supply of material and execution of work already taken place although bills were raised by supplier in subsequent year. He has contended that mere fact that expenditure was not quantified during impugned assessment year 10 ITA No.203/Bang/2014 due to bills which were raised by supplier in subsequent year would not alter fact and hence it is allowable expenditure. ld. AR has then referred to CBDT Notification dt.25.1.1996 and submitted that accounting standard and policies adopted by assessee should be such so as to represent true and fair view of state of affairs of business in financial statements prepared and presented on basis of such accounting policies. accounting treatment and presentation in that financial statement should be governed by their substance and not merely by legal form. Accruals refers to estimation that revenue and costs i.e. recognized as they are earned and incurred and not as money received and paid as per concept of consistent accounting policies from one period to another. Therefore assessee s claim of expenditure is based on principle of prudence which is akin to Doctrine of Conservation in Accounting which has been consistently followed by assessee. Thus it is not claimed on basis of actual payment or quantification but on basis of accrual. As per principle of matching concept when assessee has offered income from sale of 87 flats out of 122 units then expenditure which is 11 ITA No.203/Bang/2014 allocated as per percentage of area sold during year is allowable expenditure. 5. On other hand, ld. DR has submitted that despite directions of CIT (Appeals) under Section 263, assessee failed to produce relevant details before Assessing Officer to substantiate its claim that it is not contingent liability. Further assessee has failed to prove that expenditure in question was in respect of 87 units sold during year. Therefore assessee failed to establish that claim of provisions of expenditure is directly related to flats sold during year. He has referred to paras 8, 9 & 11 of CIT (Appeals) and submitted that assessee has not produced sale agreement to show that flats sold during year were incomplete and work was yet to be completed. He has relied upon orders of authorities below. 6. We have heard learned A.R. as well as learned D.R. and considered relevant material on record. assessee has declared income from sale of 87 units out of 122 units of project in question. Assessing Officer while passing assessment order in pursuant to 12 ITA No.203/Bang/2014 revision order dt.28.11.2011 passed under Section 263 of Act has disallowed claim of Rs.2,07,75,951 being provision of expenses debited to Profit & Loss Account is not allowable. assessee has contended before authorities below as well as before us that this amount of Rs.2,07,75,951 was allocated against income from sale of 87 units because this expenditure was actually incurred and crystallized during year but due to bills raised by vendor in next year same was estimated by assessee as expenditure incurred in relation to construction of these 87 units. We find that though assessee has given details of expenditure which was allocated against income declared during year on estimate basis and creating provision however, nothing has been brought on record either before authorities below or before us to show that this expenditure was actually having any direct or indirect nexus with 87 units sold during year under consideration. If said expenditure is actually incurred in relation to construction work of these 87 units then even if bills were raised by vendors in subsequent year as per principle of matching concept, it is allowable claim against 13 ITA No.203/Bang/2014 income from sale of these 87 units. Therefore there is no quarrel as far as concept of matching of expenditure against revenue however for applying that doctrine of matching concept expenditure must have direct nexus with income declared during year under consideration. We find that claim of assessee is not supported by any evidence as work order in respect of this expenditure itself was issued by assessee after end of financial year relevant to assessment year under consideration. Therefore, contention of assessee is not acceptable wherein it is claimed that expenditure was already incurred during year under consideration but since bills were raised in subsequent year therefore assessee has made provision on basis of estimation. We further note that CIT(A) has raised specific querry in para 11 of impugned order as under : 14 ITA No.203/Bang/2014 Expenditure must be towards actually existing liability, expenditure which is deductible for Income Tax purpose is one which is towards liability actually existing at time, but putting aside of money which may become expenditure on happening of event is not expenditure as held in case of - Mysore Lamp Works Ltd. Vs. CIT (1950) 185 ITR 96 (Kar.) Despite specific question raised by CIT(A) that assessee has not furnished any documentary evidence to show that flats sold during year were incomplete and were required to be completed as per agreement with buyers. assessee has not furnished any such document or sale document before us to show that these 87 flats sold 15 ITA No.203/Bang/2014 during year were incomplete and assessee was to complete incomplete work after sale of these flats. Therefore in absence of any material to establish nexus between expenditure in question and flats sold during year claim of apportionment of expenditure against income from sale of these flats cannot be allowed. 7. As regards contention of assessee that assessee has offered income from entire project in subsequent year on completion of project and therefore this claim is revenue neutral, we find that Assessing Officer has disallowed this claim of Rs.2,07,75,951 in respect of provision of expenditure whereas income offered by assessee for Assessment Year 2008-09 is only Rs.98,64,944. Therefore factually it cannot be revenue neutral as claimed by assessee. In view of facts and circumstances of case as well as above discussion, we do not find any error or illegality in orders of authorities below in disallowing provision of expenditure. 16 ITA No.203/Bang/2014 8. In result, appeal of assessee is dismissed. Order pronounced in open court on 30th Sept., 2016. Sd/- Sd/- (A.K. GARODIA) (VIJAY PAL RAO) Accountant Member Judicial Member Bangalore, Dt. 30.09.2016. *Reddy gp Copy to : 1. Appellant 2. Respondent 3. C.I.T. 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard File. By Order Asst. Registrar, ITAT, Bangalore M/s. Bairavi Properties & Construction Pvt. Ltd. v. Dy. Commissioner of Income-tax, Circle-11(2), Bangalore