Case Number: ITA 107/DEL/2021
Appellant: ACIT Circle-58(1), Delhi
Respondent: Dwarika Balaji, Delhi
Assessment Year: 2016-17
Date of Order: 2023-09-25
The case involves a dispute over the provision of Rs.45,65,51,338 for development expenses claimed by Dwarika Balaji, a real estate development AOP. The provision was made for estimated costs to complete a large-scale township project, which the Assessing Officer initially disallowed, citing that the provision did not adhere to standard accounting principles and was not allowable under Section 37 of the Income Tax Act.
The appellant contended that the provisions were necessary for the completion of the project and were directly tied to the project’s ongoing costs, impacting the value of closing inventory of unsold plots. The CIT(A) reversed the addition after considering recommendations from a grievance committee, which found the initial assessment to be high-pitched. The committee noted that while provisions for development expenses were substantial, they were appropriately reflected in the increased inventory valuation, neutralizing their impact on reported profits.
The Tribunal acknowledged the complexity of accounting for large-scale real estate projects involving provisions for future expenses. It recognized the need to balance between actual expenses incurred and provisions made for future development costs. However, it also noted the necessity of verifying the propriety of expenses related to sold inventory within the fiscal year, which was not adequately scrutinized by the lower authorities. Consequently, the Tribunal partially allowed the appeal, directing a more detailed examination of the specific expenses charged to the profit and loss account related to plots sold during the year.
The decision underscores the importance of accurate financial reporting and provision for expenses in real estate projects, ensuring that such provisions do not distort the financial outcomes reported to tax authorities. It also highlights the procedural aspects where both taxpayer and tax authority must align on the accounting of projected versus actual costs.
Order pronounced by:
Ms. Astha Chandra, Judicial Member, and Shri Pradip Kumar Kedia, Accountant Member
Date of Pronouncement: 2023-09-25
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