M/S G V K JAIPUR-KISHANGRAH EXPRE vs. ADDL.COMMISSIONER OF I T JAIPUR

By way of these appeals, the assessee as well as the department has preferred appeal against the judgment and order

This Court while admitting the matter framed following questions of law:- In DBITA No. 622/2009 “1) Whether on the facts and in totality of circumstances, the work by EPC contractors having been executed by 31.3.2005, bills for the works having been received on 3.3.05, the work so executed have being put to use and income earned therefrom, the quantum claim by the EPC contractors being highly excessive, and unreasonable finally settled on 12.9.06 and paid accordingly, the system of accounting being mercantile, the learned Tribunal grossly erred in holding the amount of Rs. 57,07,62,552/- as a ‘provision and a contingent liability’, which accrued by 31.3.2005 and should have been considered for capitalization on 1.4.2005. 2) Whether on the facts and in totality of circumstances and the appellant having suffered loss, the ld. Tribunal was right in law in holding that there is liability to charge of interest u/s 234B and 234C of the Act. 3) Whether on the facts and in totality of circumstances cheque for Rs. 14 lacs having been given to the (**) Foundation on 31.3.2006 having been cleared and collected by the Foundation after 1.4.06, receipt having been issued on 31.3.2006, the appellant was not entitled to deduction u/s 80G of the Act though debited to Profit and loss account and shown under the head ‘provision/liability in its balance sheet. 4) Whether the ld. Tribunal was right in law on correct interpretation of sec. 40a(ia) of Act, to disallow Rs. 13,50,000/- during the year under appeal. 5) Whether the ld. Tribunal was right in law in holding the sum of Rs. 6,33,803/- on account of leave encashment as a contingent liability and non-allowable. 6) Whether on the facts and in totality of circumstances, the ld. Tribunal was right in law in not allowing expenditure of Rs. 5,45,264/- on police stations, because the appellant company itself disallowed this amount in its computation of (3 of 55) [ITA-622/2009]

The brief facts of the case are that the assessee-company M/s GVK Jaipur Kishangarh Expressway Pvt. Ltd. was incorporated on 1st April, 2002 by a two member consortium led by one of the constituent of the consortium namely M/s GVK International NV. The consortium participated in the bid invited by the National Highway Authority of India (NHAI) working under the Ministry of (4 of 55) [ITA-622/2009]

Counsel for the appellant Mr. N.M. Ranka, Senior Counsel has taken us to the order of the AO as well as the order passed by the CIT(A) and the Tribunal and contended that the Tribunal has (7 of 55) [ITA-622/2009]

Since he was not ascertained, he accepted that the matter was referred for arbitration hence, under the provision his liability for accounts was to be considered. However, he contended that the audit report has specifically mentioned the amount referred.

Counsel for the appellant has relied upon the decision of Delhi High Court in case of Jagdish Prasad Gupta vs. Commissioner of Income Tax reported in [2017] 397 ITR 578 (Delhi) wherein it has been held as under:- “39. The Court proposes to first examine the central issue that arises in the present appeal viz., is the liability of the Assessee to pay enhanced licence fee an accrued or a contingent liability?

To begin with, it is necessary to examine the basic concepts of 'accrued liability' and 'contingent liability'. This Court, in Aggarwal and (8 of 55) [ITA-622/2009]

The question as to when a liability can be said to be ascertained one has arisen in the context of both a statutory liability and a contractual liability. An example of a statutory liability is the case of Kedarnath Jute Manufacturing Co. Ltd. (supra). There the Assessee followed the mercantile system of accounting. The relevant AY was 1955-56. The Assessee had in the calendar year 1954, i.e., the relevant previous year, incurred a liability of Rs. 1,49,776/- on account of sales tax determined as payable by the Sales Tax Authorities on the sales made by it. The sales tax demand had already been raised. The Assessee had contested the sales tax liability by filing an appeal. It had also not made any provision in its books as regards payment of the said amount. On these two grounds, the AO rejected the Assessee's claim for deduction. Holding for the Assessee, the Supreme Court held that although the sales tax liability could not be enforced till the quantification was effected in the assessment proceedings, since the Assessee had followed the mercantile system of accounting it was entitled to deduct from the profits and gains of the business such liability which had accrued during the period for which the profits and gains were being computed. It was held that the liability did not cease to be a liability only because the Assessee had challenged it in the higher forum. Also the fact that the Assessee had failed to debit the liability in its books of accounts did not prevent it to claim the said sum as deduction either under Section 10(1) or under Section 10(2)(xv) of the Income Tax Act, 1922. It was held "whether the Assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the Assessee might take of his rights; nor can the existence or absence of entries in his books of account be decisive or conclusive

This was in line with the earlier decision in Calcutta Co. Ltd. v. Commissioner of Income Tax, West Bengal MANU/SC/0098/1959 : (1959) 37 ITR 1 (SC) where the Supreme Court explained that an Assessee following the mercantile system of accounting could claim a deduction of an estimated expenditure towards development of plots purchased by it even before actually incurring the expenditure. This was not a statutory liability but a contractual one. The Assessee in that case was a developer dealing in land and property. The Supreme Court noted that the relevant clauses of the sale deed spelt out the undertaking of the Assessee "to carry out the developments within six months from the date of the sale." It was noted that although the entire sale consideration was not received during the relevant AY, the Assessee had nevertheless entered it into the credit side of its books of accounts. Likewise it debited the estimated sum of expenditure towards development although "no part of that amount represented any expenditure actually made during that year." Explaining the mercantile system of accounting, the Court referred to an earlier decision in Keshav Mills Ltd. v. Commissioner of Income Tax, Bombay MANU/SC/0038/1953 : (1953) 23 ITR 230 (SC) in which it was described as under: "That system brings into credit what is due, immediately it becomes legally due and before it is actually received and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed."

The Supreme Court in Calcutta Co. Ltd. v. Commissioner of Income Tax, West Bengal (supra) proceeded to hold as under: "Inasmuch as the liability which had thus accrued during the accounting year was to be discharged at a future date the amount to be expended in the discharge of that liability would have to be estimated in order that under the mercantile system of accounting the amount could be debited before it was actually disbursed. The difficulty in the estimation thereof again

The Supreme Court Calcutta Co. Ltd. v. Commissioner of Income Tax, West Bengal (supra) also explained that since the Assessee was being assessed in respect of the profits and gains of its business, the same could not be determined "unless and until the expenses of the obligations which have been incurred are set off against the receipts." It was observed as under: "The expression profits and gains has to be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure which is necessary for the purpose of earning the receipts is deducted therefrom-whether the expenditure is actually incurred or the liability in respect thereof has accrued even though it may have to be discharged at some future date. As was observed by Lord Herschell in Bussel v. Town and County Bank, Ltd. (1888) 13 App. Cas. 418: "The duty is to be charged upon 'a sum not less than the full amount of the balance of the profits or gains of the trade, manufacture, adventure, or concern'; and it appears to me that that language implies that for the purpose of arriving at the balance of profits all that expenditure which is necessary for the purposes of earning the receipts must be deducted, otherwise you do not arrive at the balance of profits, indeed, otherwise you do not ascertain, and' cannot ascertain, whether there is such a thing as profit or not. The profit of a trade or business is the surplus by which the receipts from the trade or business exceed the expenditure necessary for the purpose of earning those receipts. That seems to me to be the meaning of the word "profits" in relation to any trade or business. Unless and until you have ascertained that there is such a balance, nothing exists to which the name 'profits' can properly be applied."

In Bharat Earth Movers v. Commission of Income Tax (supra), the Supreme Court had an occasion to explain the distinction between accrued and contingent liability. There the (11 of 55) [ITA-622/2009]

The Supreme Court referred to an earlier decision in Metal Box Company of India Ltd. v. Their Workmen MANU/SC/0120/1968 : (1969) 73 ITR 53 (SC) in which inter alia it was explained

The Supreme Court in Bharat Earth Movers v. Commission of Income Tax (supra) held that the provision made by the Assessee for meeting its liability under the leave encashment scheme would entitle it to deduction since it was not a contingent

The above dictum was followed by this Court in R.C. Gupta v. Commissioner of Income Tax (supra). In that case the AO on scrutiny of the Assessee's trading account noticed that a sum of Rs. 50,761/- stood debited to the raw material account. The Assessee explained that this was payable to Hindustan Steel Limited (HSL) for purchases made on 22nd October, 1975 but in respect of which the Assessee had disputed its liability. A suit for recovery had been filed by the HSL against the Assessee. The AO disallowed the claim on the ground that the amount did not relate to any purchases made during the previous year relevant to the AY in question. While the CIT(A) allowed the Assessee's appeal holding that the liability had accrued during the accounting year ending 31st March, 1979, the ITAT reversed the CIT(A). Allowing the Assessee's appeal this Court explained that the (13 of 55) [ITA-622/2009]

A conspectus of the above decisions reveals that whether a liability is ascertained or contingent is dependent on the facts of each case. Merely because a liability may be contractual or non-statutory would not make it incapable of being ascertained. Where an Assessee follows the mercantile system of accounting it is not necessary that the liability must have actually been incurred during the AY in question to enable the Assessee to claim it as an expense or deduction as the case may be. The crux of the matter is the reasonable certainty with which the liability can be ascertained."

He has also relied upon the decision of Delhi High Court in Township P. Ltd. reported in [2015] 377 ITR 635 (Delhi) wherein it has been held as under:- “9. It is seen that the second proviso to Section 40(a)(ia) was inserted by the Finance Act 2012 with effect from 1st April 2013. The effect of the said proviso is to introduce a legal fiction where an Assessee fails to deduct tax in accordance with the provisions of Chapter XVII B. Where such Assessee is deemed not to be an assessee in default in terms of the first proviso to sub-Section (1) of Section 201 of the Act, then, in such event, "it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso".

The first proviso to Section 210(1) of the Act has been inserted to benefit the Assessee. It also states that where a person fails to deduct tax at source on the sum paid to a resident or on the sum credited to the account of a resident such person shall not be deemed to be an assessee in default in respect of such tax if such resident has (14 of 55) [ITA-622/2009]

Relevant to the case in hand, what is common to both the provisos to Section 40(a)(ia) and Section 210(1) of the Act is that the as long as the payee/resident (which in this case is ALIP) has Chettiar 1989 SCC (4) 527 wherein it has been held as under:- “It is contended before us on behalf of the appellant that the cheque for Rs. 6,02,000/- was tendered in Court on 29 May, 1980 and that it was duly honoured by the Bank and money was realised under the cheque, and therefore it must be taken that payment had been effected by the appellant on 29 May, 1980 within the time stipulated by this Court in its order dated 29 November, 1979. In Commissioner of Income Tax, Bombay South,

He has relied upon the decision in case of Nirmala L. Mehta vs. A. Balasubramaniam, Commissioner of Income Tax & Ors. 269 ITR 1 wherein it has been held as under:- “It would be, thus, seen that the Income Tax from the prize money of Rs. 6,30,000 was deducted as per the Sikkim Income Tax Manual, 1948, and the remaining amount of the prize money was paid to the petitioner. The prize money was won by the petitioner from the lottery floated by one of the States of the Indian Union. The petitioner won the prize money within the territory of India, though in the said territory a special Income Tax law, viz., Sikkim Tax Manual, 1948, was applicable. The said prize money won by the petitioner has been charged to tax as per the law applicable in the Sikkim State where the prize money was won. The Income Tax Act, 1961, was not applicable at the relevant time in Sikkim. So long as the Income Tax Act, 1961, did not become applicable to the State of Sikkim, Income Tax Act, 1961, could not be applied to the income earned in Sikkim. In the circumstances, we have no hesitation in holding that the prize money won by the petitioner from (16 of 55) [ITA-622/2009]

The Supreme Court, thus, held that acquiescence to an illegal tax for a long time is not a ground for denying the party the relief that he is entitled to. In the instant case, therefore, it may be held that merely because the petitioner offered the prize money won in the lottery of the Sikkim Government, to tax under the Income Tax Act, 1961, that shall not take away her right in contending that the said prize money was not (17 of 55) [ITA-622/2009]

He has also relied upon the decision of Gujarat High Court in case of Commissioner of Income Tax, Gujarat-I v. Ahmedabad Keiser-E-Hind Mills Co. Ltd. reported in [1981] 128 ITR 486 wherein it has been held as under:- “However, so far as the present case is concerned, there is a circular of the Board which has been set out in the judgment of this High Court in Chokshi Metal Refinery v. CIT MANU/GJ/0010/1976 : [1977]107ITR63(Guj) of the report, the circular of the Central Board of Revenue issued in June, 1955, has been set out. The circular is to be found reproduced in volume I of Chaturvedi and Pithisaria's Book, 2nd Edn., at page 532, and the circular

He has further relied upon the decision of Gujarat High Court in case of S.R. Koshti v. Commissioner of Income Tax [2005] 276 ITR 165 wherein it has been held as under:- “The position is therefore that, regardless of whether the revised return was filed or not, once an assessee is in a position to show that the assessee has been over-assessed under the provisions of the Act, regardless of whether the over-assessment is as a result of assessee's own mistake or otherwise, the Commissioner has the power to correct such an assessment under Section 264(1) of the Act. If the Commissioner refuses to give relief to the assessee, in such circumstances, he would be acting dehors the powers under the Act and the provisions of the Act and therefore, is duty bound to give relief to an assessee, where due, in accordance with the provisions of the Act. A word of caution. The authorities under the Act are under an obligation to act in accordance with law. Tax can be collected only as provided under the Act. If an assessee, under a mistake, misconception or on not being properly instructed, is over-assessed, the authorities under the Act are required to assist him and ensure that only legitimate taxes due are collected. This Court, in an unreported decision in case of Vinay Chandulal Satia v. Shri N.O.Parekh., the Commissioner of Income Tax, Special Civil Application No. 622/1981, rendered on 20-8-1981,

For the issue of cost, he has also relied upon the decision of Single Bench of this Court in case of Chiranji Lal Tak v. Union of India [2001] 252 ITR 333 wherein it has been held as under:- “Litigation is not a luxury and/or amusement or entertainment. It is not pleasure or pleasant to come to the courts. Only when the Union or a State or its officers make it unavoidable, the litigants come up before the court for redressal of their grievances or for enforcement of their legal or fundamental rights. The litigation is heavily cost and in the matter of awarding the cost, the court should have to keep in mind this aspect in such matters. It is no use or desirable that on success of the litigant he has been given only the token cost or the cost for the sake of the cost of the litigation. The litigants spend huge amount in filing litigations. Under the Advocates Act or any other State or Central enactment, the scale of the fees to be charged by advocates to different categories of cases are not fixed. In a matter where the litigant has to file a litigation in the highest court of the State, it is not undesirable or unreasonable on his

He has also relied upon the following decisions of the Supreme Court wherein it has been held as under:-

The law may, therefore, now be taken to be well settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital

There is, in our opinion, force in the submission of Mr. Palkhivala. As stated above, arguments were (23 of 55) [ITA-622/2009]

Calcutta Company Ltd. vs. The Commissioner of Income Tax, West Bengal (12.05.1959 – SC), (1959) 37-ITR-1 (SC)

The High Court in disallowing the claim of the appellant in the present case only considered the provisions of s. 10(2)(xv) of the Act and came to the conclusion that on a strict interpretation of those provisions the sum of Rs. 24,809 was not an allowable deduction. Its attention was drawn by the learned Counsel for the appellant to the provisions of s. 10(1) of the Act also but it negatived this argument observing that under the Indian Act, the profits must be determined by the method of making the statutory deductions from the receipts and any deduction from the business receipts, if it was to be allowed, must be brought under one or the other of the deductions mentioned in s. 10(2) and that there was no scope for any preliminary deduction under general principles. It was, however, held by this Court in Badridas Daga v. The Commissioner of Income-tax [1958]34ITR10(SC) "It is to be noted that while s. 10(1) imposes a charge on the profits or gains of a trade, it does not provide how those profits are to be computed. Section 10(2) enumerates various items which are admissible as deductions, but it is well settled that they are not exhaustive of all allowances which could be made in ascertaining profits taxable under s. 10(1)."

Metal Box Company of India Ltd. vs. Their Workmen (20.08.1968 – SC), (1969) 73-ITR-53

There remains now the question regarding computation of direct taxes. Section 6(c) of the Act provides : "subject to the provisions of section 7, any direct tax which the employer is liable to pay for the accounting year in respect of his income, profits and gains during that year..."

Section 7, inter alia, provides : "For the purpose of clause (c) of section 6, any direct tax payable by the employer for any accounting year shall, subject to the following provision, be calculated at the rates applicable to the income of the employer for that year,......"

Coming now to clause (c) of section 6, is it the actual taxable income, the direct tax on which is prior charge, which is to be worked out, or the tax on the estimated balance of gross profits after deducting depreciation and development charges but without deducting the bonus payable during the year ? In other words, when the Tribunal reaches the stage of clause (c), does it have to assess the taxable income in accordance with the various provisions of the Income-tax Act just as an Income-tax Officer would do and assess the liability of income tax on such taxable income according to the rates applicable during the particular accounting year, or should it compute the balance of gross profits as stated above and apply the said rates and estimate the amount of direct taxes and deduct them from the remaining gross profits ? Bonus being payable within eight months after the close of the accounting year in cases where there is no dispute pending before an authority under section 22 of the Act as provided by section 19, it is hardly possible, except in rare cases, that assessment under the Income-tax Act and other such Acts would be completed by the time bonus has to be paid. Therefore, the Tribunal would not have before it the taxable income assessed by the Income- tax Officer and other such officers. If the unions' contention were to be right, there would be two or more parallel authorities working under this Act and the Income-tax Act and other such Acts who would have to assess taxable income and the tax payable thereon, before all of whom the employer would have to prove his taxable income. Prima facie, it would seem that the Bonus Act could not intend an enquiry into the actual taxable income worked out under all the elaborate provisions relating to deductions, allowances, reliefs, rebates, etc., provided by the Income-tax Act and other such Acts. This is particularly so as in each bonus dispute the Tribunal not equipped with the detailed knowledge of all such Acts would have to undertake an enquiry into the various deductions, rebates, reliefs, etc., claimable by the employer under those Acts. The fact that payment of bonus cannot brook delay without causing hardship to labour would seem to militate against the possibility of such prolonged enquiries.

The key to the words in section 6(c), namely, "is liable to pay" emphasised on behalf of the unions and some of the interveners lies in the opening words "subject to the provisions of section 7" in clause (c). These words are used, whether the tax liability is to (26 of 55) [ITA-622/2009]

The law is settled if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in present though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain.

In Metal Box Company of India Ltd. v. Their Workmen (1969)ILLJ785SC the appellant company 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. The company had worked out on an actuarial valuation its estimated liability and made provision for such liability not all at once but spread over a number of years. The practice followed by the company was that every year the company worked 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 service - the exact time of occurrence

So is the view taken in Calcutta Co. Ltd. v. Commissioner of Income-Tax, West Bengal [1959]37ITR1(SC) wherein this Court has held that the liability on the assessee having been imported, the liability would be an accrued liability and would not convert into a conditional one merely because the liability was to be discharged at a future date. There may be some difficulty in the estimation there of but that would not convert the accrued liability into a conditional one; it was always open to the tax authorities concerned to arrive at a proper estimate of the liability having regard to all the circumstances of the case.

Applying the above said settled principles to the facts of the case at hand we are satisfied that provision made by the appellant company for meeting the liability incurred by it under the leave

M/s. Madras Industrial Investment Income Tax, Tamil Nadu-I, Madras (04.04.1997 – SC), 225-ITR-802 The department disallowed this expenditure. Upholding the claim of the assessee to deduction, this Court said that the undertaking given by the assessee imported a liability on the assessee which accrued on the dates of the deeds of sale though that liability was to be discharged at a future date. It was thus an accrued liability and the estimated expenditure which would be incurred in discharging the same could be deducted from the profits and gains of business. The difficulty in the estimation of liability did not convert the accrued liability into a conditional one. This Court said that the expression 'profits or gains' in Section 10(1) of the Income-tax Act, 1922 had to be understood in its commercial sense; and there could be no computation of such profits and gains until the expenditure which is necessary for the purpose of earning the receipt is deducted therefrom, whether the expenditure is actually incurred or the liability in respect thereof has accrued even though it may have to be discharged at some future date.

Thus "expenditure" is not necessarily confined to [ITA-622/2009]

Taparia Tools Ltd. vs. Joint Commissioner

In the judgment of the Bombay High Court in Taparia Tools Ltd. (supra) it has been held that in every case of substitution of one method by another method, the burden is on the Department to prove that the method in vogue is not correct and it distorts the profits of a particular year. Under the mercantile system of accounting based on the concept of accrual, the method of accounting followed by the assessees is relevant. In the present case, there is no finding recorded by the AO that the completed contract method distorts the profits of a particular year. Moreover, as held in various judgments, the Chit Scheme is one integrated scheme spread over a period of time, sometimes exceeding 12 months. We have examined computation of tax effect in these cases and we find that the entire exercise is revenue

As stated above, we are concerned with assessment years 1991-1992 to 1997-1998. In the past, the Department had accepted the completed contract method and because of such acceptance, the assessees, in these cases, have followed the same method of accounting, particularly in the context of chit discount. Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profits, the Department can insist on substitution of the existing method. Further, in the present cases, we find from the various statements produced before us, that the entire exercise, arising out of change of method from completed contract method to deferred revenue expenditure, is revenue neutral. Therefore, we do not wish to interfere with the impugned judgment of the High Court.

Before concluding, we may point out that under Section 211(2) of the Companies Act, Accounting Standards ("AS") enacted by the Institute of Chartered Accountants have now been adopted [see: judgment of this Court in J.K. Industries case (supra)]. Shri Tripathi, learned Counsel for the Department, has placed reliance on AS 22 as the basis of his argument that the completed contract method should be substituted by deferred revenue expenditure (spreading the said expenditure on proportionate basis over a period of time). He also relied upon the concept of timing difference introduced by AS 22. It may be stated that all these developments are of recent origin. It is open to the Department to consider these new accounting standards and concepts in future cases of chit transactions. We express no opinion in that regard. Suffice it to state that, these new concepts and accounting standards have not been invoked by the Department in the present batch of civil appeals.

Subject to above, we see no reason to interfere with the impugned judgment of the High Court and accordingly the civil appeals are dismissed with no order as to costs.

Exide Industries Limited and Anr. vs. Union of India (UOI) and Ors. (27.06.2007 – CALHC), 292-ITR-1

The objects and reasons as disclosed by the Finance Act, 1983, for enacting Section 43B are quoted below:

Under the IT Act, profits and gains of business and profession are computed in accordance with the method of accounting regularly employed by the assessee. Broadly stated, under the mercantile system of accounting, income and outgo are accounted for on the basis of accrual and not on the basis of actual disbursements or receipts. For the purposes of computation of profits and gains of business and profession, the IT Act defines the word 'paid' to mean 'actually paid or incurred' according to the method of accounting on the basis of which the profits or gains are computed.

Several cases have come to notice where taxpayers do not discharge their statutory liability such as in respect of excise duty, employer's contribution to provident fund, Employees State Insurance Scheme, etc., for long periods of time, extending sometimes to several years. For the purpose of their Income Tax assessments, they claim the liability as deduction on the ground that they maintain accounts on mercantile or accrual basis. On the other hand, they dispute the liability and do not discharge the same. For some reason or the other undisputed liabilities also are not paid. To curb this practice, it is proposed to provide that deduction for any sum payable by the assessee by way of tax or duty under any law for the time being in force (irrespective of whether such tax or duty is disputed or not) or any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees shall be allowed only in computing the income of that previous year in which such sum is actually paid by him. On perusal of the said object it would appear that the legislature

The said section had undergone several changes from time to time and on each and every occasion the legislature came out with the objects and reasons disclosed therefor. In 1990 deduction on account of unpaid loan to any public financial institution or a State financial institution was roped in. By a further amendment in 1996 unpaid loan of scheduled bank was also incorporated. On each such occasion objects and reasons were disclosed. While inserting Clause (f) no special reasons were disclosed. His Lordship held that such disclosure was not mandatory. We do not have any reason for disagreement on such issue provided the subject amendment could be termed as in furtherance to widen the scope of the original section on the identical objects and reasons as disclosed at the time of enacting the original provision. As we find, the original section was incorporated to plug in deductions claimed by not discharging statutory liabilities. We also find that provision was subsequently made to restrict deductions on account of unpaid loan to the financial institutions. Leave encashment is neither statutory liability nor a contingent liability. It was a provision to be made for the entitlement of an employee achieved in a particular financial year. An employee earns certain amount by not taking leave which he or she is otherwise entitled to in that particular year. Hence, the employer is obliged to make appropriate provision for the said amount. Once the employee retires he or she has to be paid such sum on cumulative basis which the employee earns throughout his or her service career unless he or she avails the leave earned by him or her. That, in our view, could not have any nexus with the original enactment. An employer is entitled to deduction for the expenditure he incurs for running his business which includes payment of salary and other perquisites to his employees. Hence, it is a trading liability. As such he is otherwise entitled to have deduction of such amount by showing the same as a provisional expenditure in his accounts. The legislature by way of amendment restricts such deduction in case of leave encashment unless it is actually paid in that particular financial year. The legislature is free to do so after they disclose reasons

In this regard the observation of the apex Court in the case of Bharat Earth Movers (supra) is quoted below: The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain.... Applying the abovesaid settled principles to the facts of the case at hand we are satisfied that the provision made by the appellant company for meeting the liability incurred by it under the leave encashment scheme proportionate with the entitlement earned by employees of the company, inclusive of the officers

With deepest regard we have for his Lordship, we are unable to agree with his Lordship on this issue.

The appeal succeeds and is allowed. Section 43B(f) is struck down being arbitrary, unconscionable and de hors the apex Court decision in the case of Bharat Earth Movers (supra).

Commissioner of Income Tax vs. Siwakami Mills Ltd. (04.02.1997 - SC)

The question is regarding the deduction of interest on deferred payment and guarantee commission paid to the bank. The High Court followed its earlier decision in Sivakami Mills Ltd. v. CIT : [1979]120ITR211(Mad) and answered the question in favour of the assessee. "we may observe that the various decisions bearing on capitalisation of business expenditure have arisen in the different contexts of determining what the actual cost to any given assessee was of items of depreciable machinery, plant, etc., acquired by him. Such expenditure considered for capitalisation might itself be expenditure of a capital nature or it might be expenditure of a revenue nature. In either case, it would be subject to the principles enunciated in the decisions aforesaid. But those principles have no direct bearing on the question of a claim for a straightforward allowance as an expenditure of a revenue nature in the computation of business profits. Nor is it the law that only those expenses which cannot be capitalised can come in for straight deduction as revenue expenditure, for, as we have earlier seen, the accountancy principles, relating to capitalization are themselves not hard and fast rules, but are to be adopted only at (37 of 55) [ITA-622/2009]

The expenditure incurred for the purchase of the machinery was undoubtedly capital expenditure, for it brought in an asset of enduring advantage. But the guarantee commission stands on a different footing. By itself, it does not bring into existence any asset of an enduring nature ; nor did it bring in any other advantage of an enduring benefit. The acquisition of the machinery on instalment terms was only a business exigency. If interest paid on a credit purchase of machinery could be held to be revenue expenditure, we fail to see how guarantee commission paid to a bank for obtaining easy terms for acquisition of the machinery could be regarded as capital payments". (RAJHC),2006, 281-ITR-408

The AO has not applied the test of expenses incurred wholly and exclusively correctly for the purpose of assessee's business by referring to the expenses incurred by the assessee and the benefit derived by the spender in exclusivity. The motivation which led the assessee to spend the amount on bus and handing over it to the school by CIT(A) in assessee's own language reads as under : "As per facts of the case this expense is allowable under Section 37(1) because the bus has been given to the school to remove the difficulty of staff/workmen's children in going to the school as the bus available with school was not sufficient to accommodate the children of workmen and as the children of workmen of company were placed at different destination, they entered the bus after others at nearer destination, hence mill-staff children could not get place in the bus and the bus took more time to collect and drop the mill children. Hence to solve these problems of staff children at the request of school, the bus was given to school by the (38 of 55) [ITA-622/2009]

The motivation of expenditure incurred for acquiring the bus and surrendering it to school has not been found to be other than what has been stated by the assessee i.e., to say the expenses were incurred for the benefit of welfare of the children of staff/workmen of the company as a part of employees' welfare expenses incurred for the purpose of securing healthy services for staff members. Applying the test indicated by this Court in the order referred to above, it is not difficult to reach to the conclusion that the Tribunal was right in holding the expenses to be incurred wholly and exclusively for the purpose of assessee's business and since the assessee has not acquired any asset, it is not capital expenditure either and, therefore, the assessee is entitled to claim deduction in full under Section 37(1). It is not being contended by the learned counsel for the appellant that the allowance of expenditure is otherwise not provided under any provision of the Act. Consequently, the principle of law was correctly enunciated and application of law has been correctly made by the " Tribunal.

In our opinion, no substantial question of law arises in examining the issue again about the test of applicability of allowable expenses claimed by the assessee and the benefits derived from it so far as the present case is concerned.

Commissioner of Income Tax - IV vs. Hindustan Coca Cola Beverages Pvt. Ltd. (2011 – DELHC), 331-ITR-192

It is worth noting that the meaning of business or commercial rights of similar nature has to be understood in the backdrop of Section 32(1)(ii) of the Act. Commercial rights are such rights which are obtained for effectively carrying on the business and commerce, and commerce, as is understood, is a wider term which encompasses in its fold many a facet. Studied in this background, any right which is obtained for carrying on the business with effectiveness is likely to fall or come within the sweep of meaning of intangible asset. The dictionary clause clearly stipulates that business or commercial rights should be of similar nature as know-how, patents, copyrights, trademarks, licences, franchises, etc. and all these assets which are not manufactured or produced overnight but are brought into existence by experience and reputation. They gain significance in the commercial world as they represent a particular benefit or advantage or reputation built over a certain span of time and the customers associate with such assets. Goodwill, when appositely understood, does convey a positive reputation built by a person / company / business concern over a period of time. Regard being had to the wider expansion of the definition after the amendment of Section 32 by the Finance Act (2) 1998 and the auditor's report and the explanation offered before the assessing officer, we are of the considered opinion that the tribunal is justified in holding that if two views were possible and when the assessing officer had accepted one view which is a plausible one, it was not appropriate on the part of the Commissioner to exercise his power under Section 263 solely on the ground that in the books of accounts it was mentioned as "goodwill" and nothing else. As has been held by the Apex Court in Malabar Industrial Co. Ltd. (supra), Max India Ltd. (supra) and Commissioner of Income Tax v. Vimgi Investment P. Ltd. : [2007] 290 ITR 505 (Delhi) once a plausible view is taken, it is not open to the Commissioner to exercise the power under Section 263 of the Act.

Counsel for the respondent Mr. Sameer Jain while arguing the own appeal of the department has pointed out that while

However, there being no dispute on the acquisition of assets and its usage, the assessee would be entitled to depreciation on this amount as per law in the year when the assessee has taken this asset in the financial records i.e. in its balance sheet etc. Thus, this ground no. 5 of appeal is accordingly rejected. Ground No. 11:

In this ground the assessee has agitated the action of the lower authorities in not allowing deduction u/s 80G on donation of Rs. 14 lacs.

We have considered the arguments of both the parties. From the perusal of the record it is seen that assessee has made the payment of Rs. 14 lacs by tendering a cheque dated 31.03.2006 and obtained receipt of even date however, the cheque was encashed later on. Further the assessee company itself had shown the amount under the head “Provision/Liability” as on 31.03.2006 in its Balance Sheet which clearly establish that the payment has not been recognized by the assessee company. Considering these facts we are not inclined to interfere in the order of the lower authorities, who have rightly disallowed the claim of the assessee. Thus the ground no. 11 of the appeal is rejected.” Ground No. 13:

In this ground the assessee has agitated the disallowance made of Rs. 13,50,000/- u/s 40(a)(ia) for delayed payment of TDS.

We have considered the arguments advanced by the parties. We find that the assessee company has made the payment of Rs. 13,50,000/- towards the guarantee commission to Novopan Industries Ltd. and deducted the tax at source in the month of January 2006 for which the due date for depositing the TDS was 07.02.2006 and since the assessee company has deposited the same on 29.06.2006, in terms of the provision of Section 40(a)(ia) the assessee would be entitled for the deduction of the expenditure in the year when the amount of TDS was actually deposited thus considering these facts we are of the view that the AO has rightly disallowed the expenditure in the year under appeal however, the assessee is entitled for claiming that deduction of the expenses incurred in the year in which payment of TDS is actually made. Thus the ground of the appeal is rejected. Ground No. 14:

In this ground the assessee has agitated the disallowance made of Rs. 6,33,803/- claimed as provision for leave encashment.

We have considered the arguments of the parties,. We find that the assessee company has made the provision of Rs. 6,33,803/- towards the leave encashment liability which was to be paid to the employees at the time of their separation with the assessee company. Since the amount apportioned towards the provision is a contingent liability which may or may not be incurred and further its incurrence may happen in future only and not in the year under appeal. Therefore, considering these facts we are of the view that the lower authorities have rightly disallowed the claim of the assessee and accordingly we are not inclined to interfere with the orders of the ld. CIT(A), on this issue. Thus the ground of the appeal is rejected. Ground No. 15:

In this ground the assessee has agitated the disallowance made of Rs. 5,45,264/- on account of expenditure incurred on the renovation of local police stations.

We have considered the arguments of both the parties. We find that the assessee company itself had disallowed this amount in its computation of income being incurred not for the purpose of the business therefore, we are not inclined to interfere with the orders of the ld. CIT(A) on this issue. Thus the ground of the appeal is rejected. Ground No. 16:

In this ground the assessee has requested for the refund of the amount of Rs. 1,72,60,105.03 recovered from bank account of the assessee company by making attachment.

We have considered the arguments of the parties. We find that the amount of Rs. 1,72,60,105.03 was recovered from the assessee. However, it appears that the amount recovered, if any, shall find its way into the computation of income with the assessing authority and any amount found payable/receivable by the assessee shall be considered under the provisions of the Income Tax Act, 1961. Hence, this ground does not call for any adjudication as the recovery/payment of tax is always subject to the finality of the orders from the appellate authorities. Thus, the ground being infructuous the same is dismissed. Ground No. 17:

In this ground the assessee has requested for awarding the exemplary cost u/s 245(2B) of the Income Tax Act, 1961.

Since no serious arguments have been put forth by the ld. Counsel of the assessee in support of this ground, therefore, the ground is rejected.

He further contended that the expenses which was done by the previous company cannot be allowed since it was prohibited under Section 35B. However, certain expenses can be exempted under Section 35D. Section 35D for ready reference is reproduced as under:- “35D. (1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, incurs, after the 31st day of March, 1970, any expenditure specified in sub-section (2),— (i) before the commencement of his business, or (ii) after the commencement of his business, in connection with the extension of his 92[***] undertaking or in connection with his setting up a new 92[***] unit, the assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount equal to one-tenth of such expenditure for each of the ten successive previous years

Therefore, he contended that it was not permissible to the original company as has been indirectly done by the assessee, therefore, this is nothing but planning of the assessee where the original company was being a foreign company could not get deducted the preliminary expenses have been sought to be taken

In that view of the matter, the view taken by the Tribunal is just and proper. No interference is called for.

He further contended that the audit report was submitted on 25th September, 2006 and so called compromise or the arbitration award between the parties ought to have been reflected under 44AB.

He has relied on the observations made in the order of AO which are reproduced as under:- “5. 3. From the details filed, audit report and the copy of correspondence and the settlement agreements, it is seen that:-

The books of the assessee had been duly audited, both for I.T. purposes as well as under (49 of 55) [ITA-622/2009]

No provision for such expenses had been made during the year, nor was any tax deducted on such amounts showing these as payable.

The actual payments had been made much later, during F.Y. 2006-07.”

Before proceeding with the matter, it will not be out of place to mention that the matter is of 2009 and for the assessment year 2006-07. A number of matters of same assessee were heard earlier and for the two issues in these two matters, we have heard independently.

On the first issue while considering the matter, counsel for the assessee has pointed out the agreement of MOU which has been entered between the company assessee and the original company. He has specifically taken us to the agreement which was part of paper book dated 1st March, 2002 and referred Clause-2 and incorporation was done on 1st April, 2002 which is part of record and the MOU which was entered between GVK Express Pvt. Ltd. and between the NOVOPAN Industreis Ltd. and invited our attention to Clause-1. 14. He has also referred the concession agreement which was entered between the NHAI and the assessee and he has taken us to the different clauses which we have gone through but we are not reproducing the same for the sake of brevity.

Taking into consideration the volume of work which was required to be done by the assessee and the dispute regarding

In view of the provision where contingent liability was made in view of the revised return filed by the assessee, the Tribunal has seriously committed an error in rejecting the claim of the present assessee for Rs. 57,07,62,552/-. Thus, the issue no. 1 is answered in favour of assessee against the department.

On the issue no. 2 regarding 234B and 234C of the Act, in our considered opinion, the Tribunal has not committed an error.

2 In that view of the matter, the issue is answered in favour of the department against the assessee.

On the third issue, the payment was made on 31st March, 2006 and if the payment was taken to be made on 31st March, 2006 the person was having clear intention of paying through cheque nonetheless in the books of accounts entry was not made by the appellant, same was not reflected in Bank Account.

In that view of the matter, merely because the provision/liability was shown, rejection of claim under Section 80G, in our considered opinion, is contrary to decision referred by counsel for the assessee. In that view of the matter, the issue no. 3 is required to be answered in favour of the assessee against the department.

On the issue no. 4 whether the Tribunal was right in law on correct interpretation of Section 40a(ia) of the Act, disallowance

On the 5th issue, whether the Tribunal was right in law in holding the sum of Rs. 6,33,803/- on account of leave encashment as a contingent liability is not liability. Even this Court while deciding the matter has taken leave encashment as liability. In that view of the matter, the issue is answered in favour of the assessee against the department.

On the 6th issue whether Tribunal was right in not allowing expenditure of Rs. 5,45,264/- on police stations, in view of the judgment cited by counsel for the assessee regarding the expenses which was done for protection of the employees and the other threat from the truck owners and having other instructions which has been construed liable expenses. In that view of the matter, disallowance of expenses of Rs. 5,45,264/- for the police stations is required to be answered in favour of the assessee against the department. Hence, the 6th issue is answered in favour of the assessee.

Regarding issue no. 7 & 8 the facts which have been narrated by the assessee are required to be viewed by this court very seriously. The officer not only acted arbitrarily but has exceeded its jurisdiction and which has put an agony on assessee’s account where daily turn over or toll is required to be operated through bank therefore, the agony which has been made on 6th February, 2009 and narrated in issue no. 5 of the written submission which we have reproduced with a view to show agony which has been suffered and the conduct of the officer in spite of the High Court interference he has acted arbitrarily. In that view of the matter, the issues no. 7 & 8 are required to be viewed very seriously and the Tribunal ought to have granted cost under 254(2)(b). In that view of the matter, we are of the opinion that the issue is required to be answered in favour of the assessee against the department. Looking to the fact that the cost could have been awarded corresponding to the tax paid by the assessee which in turn comes in lacs of rupees but we do not want to put the department to heavy loss but at the same time, we want to put check on the officers not to act arbitrarily, therefore, we impose a cost of Rs. 11,000/-.

On the last issue regarding assessment order being annulled the issue is answered in favour of the assessee against the department. The assessment is not required to be cancelled on the behest of department as held in our earlier decision which has been referred hereinabove. In appeal no. 124/2010

On the first issue, in view of the fact that the amount was paid by the assessee for taking over the company therefore, the expenses which was done by the earlier company which has given it as a capital for this assessment year, the department could not have assessed such amount which has taken the whole amount against the capital gain but this company is entitled for the capital expenses as contended by counsel for the department. This could not have been allowed under the law if the assessee claim as revenue expenses but nonetheless since he has paid amount for taking over the management of the company, this would be a capital gain for the other company. The Tribunal has not committed any error in allowing the expenses. Hence, the issue is answered in favour of assessee against the department.

On the second issue regarding claim of capitalization of expenditure towards tree cutting, tampling removal of debris and everything, while considering the matter, the Tribunal has considered the expenses prior to commencement of this company has taken the management and construction activity from the previous company on the basis of MOU, all expenses done was given a capital which was shown as an expenses by the previous company.

Regarding removal of debris and everything that work which was required to be done on the war footing and the time consumed therefore, the expenses which was done by the contractor employees which can be done on Jaipur road but no doubt it has to be done on war footing therefore, expenses are (54 of 55) [ITA-622/2009]

Regarding third & fourth issue the same are covered by the earlier decision of this Court in DBITA No. 232/2016 in the case of same assessee decided on 10th October, 2017, wherein it has been held as under:- “14.1 The interpretation which has been putforward by the counsel for the department that the National Highway is not road, in that view of the matter, the same will not be governed by the Schedule of Appendix-I and they will not be entitled for the expenses under the capital account.

2 While considering the matter, we have to go by the common parlance of road where public at large has an access. The assessee was granted license for construction against which he has right to use and collect license fee to use of the land. In that view of the matter, he has right to restrict the people without non payment of toll tax.

3 In that view of the matter, if we look at the definition which is given under the Income Tax Act, even a development made while occupying the premises and development of a road was the main agreement MOU referred by us.

4 In view of written submissions submitted by Mr. Ranka, it is not only road, they have to construct toll booth and provide facilities for the staff for the purpose of their accommodation.

5 In that view of the matter, the Supreme Court judgment which is sought to be relied upon by the department will not apply and the tribunal has rightly interpreted the change in law and more particularly under the law which has been inducted after year 1983.

Thus, on the first issue, we are in complete agreement with the view taken by the tribunal.

Regarding issue no.2, the contention which has been raised that equipment which are attached with the power equipment are not entitled under item no.5 of Schedule-I, in view of the fact that note 7 will not cover complete equipment which are attached with the system but in our considered opinion the optical fibers which are used exclusively for the computer configuration and it is mandatory for the operation. It is part of computer system.

1 In that view of the matter, the view taken by the tribunal is just and proper.

Therefore, both the issues are answered in favour of the assessee against the department.

Both the appeals stand disposed of.

The application (38461/2017) is also disposed of. (VIJAY KUMAR VYAS)J. (K.S. JHAVERI)J. A.Sharma/77-78