DEPUTY COMMISSIONER OF INCOME-TAX vs. THE JAWAHARLAL NEHRU PORT TRUST,, RAIGAD

The assessee had filed an application for registration u/s 12AA of the Act on 10.02.2006 which was rejected by the CIT-II, Thane. Aggrieved by the order of CIT-II, Thane rejecting the application for registration u/s 12AA, the assessee had filed an appeal before the Tribunal who vide order dated 28.06.2007 allowed the appeal of the assessee. The department filed an appeal before the Hon’ble Bombay High Court which was still pending at the time of passing of the assessment order.

The Assessing Officer accordingly issued and served notices u/s 143(2) and 142(1) of the Act in response to which the assessee attended before the Assessing Officer from time to time and produced the details as called for. During the course of assessment proceedings the Assessing Officer asked the assessee to explain as to why its claim of exemption u/s 11 should not be disallowed since as per law for claiming the exemption u/s 11, one should file its return of income within the time limit prescribed as per the Act and claim exemption in its return of income. Since the assessee had not filed its return of income and not claimed the exemption u/s 11 within the prescribed time limit as per Income Tax Act, 1961, therefore, the Assessing Officer, rejecting the various explanations given by the assessee, disallowed the benefit of exemption u/s 11.

The Assessing Officer noted that since the interest accrued / paid by the assessee on loans pertains to the period upto 31.03.2002 where the assessee’s income was exempt from tax, therefore, the provisions of section 14A are applicable in respect of the said interest expenditure and therefore, such expenses are not allowable. He further held that any claim made by the assessee otherwise than by way of filing a return cannot be accepted. Since the assessee in the present case had made a claim by way of revised computation, therefore, he disallowed the additional claim of Rs.892 crores made by the assessee during the year on account of accrued interest on loan taken from Mumbai Port Trust / Kandla Port Trust which were not paid in earlier years and not debited in the Profit & Loss Account. He further disallowed the interest of Rs.157.34 crores actually paid by the assessee during the year as deduction on the ground that it pertains to the earlier period during which the assessee’s income was exempt from tax.

In appeal, the Ld. CIT(A) considering the submission of the assessee, the facts of the case, findings of the AO in the assessment order, provision of the section and CBDT's Instruction no 1/1148, dated February 9, 1978, held that the assessee is entitled to exemption u/s 11 of the I.T. Act, 1961. While doing so he noted that in the above CBDT instruction, it is stated that in cases where for reasons beyond the control of the assessee, some delay has occurred in filing the report, the exemption as available to such trust under sections 11 and 12 may not be denied merely on account of delay in furnishing the auditor's report and the Income-tax Officer should record reasons for accepting a belated audit report. Therefore one has to examine whether the delay in furnishing the audit report was due to reasons beyond the control of the assessee. He observed that in the instant case the delay in filing of the audit report was due to circumstances beyond the control of the assessee and this case is squarely covered under the exceptions provided in CBDT's Instruction No. 1/1148, dated February 9, 1978. He, therefore, held that the assessee is entitled to exemption u/s 11 of the Act.

On the issue of deduction of Rs.43,678/- as pointed out by the Special Auditor u/s 142(2A) of the Act, the Ld. CIT(A) found the contention of the assessee to be correct and directed the AO to allow the deduction and accordingly allowed the appeal of the assessee.

The appellant crave to consider each of the above grounds of appeal without prejudice to each other and craves to add, alter, delete or modify all or any of the above grounds of appeal.

Ground of appeal No.1 by the Revenue relates to the order of the Ld. CIT(A) allowing the claim of exemption u/s 11 of the Act.

Referring to the decision of the Hon'ble Bombay High Court in the case of CIT vs. Agricultural Produce and Market Committee reported in [2007] 163 TAXMAN 359 (BOM.), he submitted that the Hon’ble Bombay High Court has observed that to avail benefits u/s 11 and 12 of the Act, not only trusts/institutions must be registered under u/s 12A/12AA of the Act but they must also comply with the conditions set out in such provisions and that the trusts/institutions will not get the benefits if such conditions are not fulfilled. Moreover, mere grant of registration does not preclude the Assessing Officer to come to his own conclusion regarding claim of exemption.

The Ld. Counsel for the assessee on the other hand while supporting the order of the Ld. CIT(A) submitted that the Revenue in its ground of appeal has basically challenged the order of the Ld. CIT(A) allowing claim of exemption u/s 11 of the Act since (a) the assessee has not claimed any such exemption in any of its return of income (b) the assessee has failed to get its accounts audited as required u/s 12A(b) of the Act and (c) the department has not accepted and filed an appeal before High Court against the order of the Tribunal dated 23.10.2013 passed in for assessment year 2008-09 directing the CIT to grant registration u/s 12AA.

The Ld. Counsel for the assessee further submitted that though the Tribunal had rejected the submission of the Revenue, however, the Assessing Officer has denied the claim of the assessee on the very same procedural grounds i.e. not claiming exemption u/s 11 in the return of income and non-filing of audit report along with the return. He submitted that the said procedural grounds were already taken by the Ld. CIT(A) while denying the claim of the assessee in the original proceedings and the said decision was reversed by the Tribunal while directing the Assessing Officer to allow the claim on merits. Further, the decision of the Tribunal has not been challenged by the Revenue and therefore, the finding of the Tribunal has become final. Therefore, the finding of the Assessing Officer to deny the claim of the assessee on procedural grounds is clearly beyond the scope of his jurisdiction which was circumscribed by the decision of the Tribunal. He further submitted that no doubt on the merits of the claim and objects of the assessee has been raised by the Assessing Officer in the assessment order. This is also supported by the fact that the Assessing Officer has allowed the claim of exemption u/s 11 to the assessee in subsequent years i.e. assessment years 2006-07 to 2008-09 wherein the said claim was claimed in the return of income. He accordingly submitted that the action of the Assessing Officer in denying the claim of the assessee on procedural ground is in violation of the order of the Tribunal and accordingly the said findings are required to be rejected.

Without prejudice to the above, the Ld. Counsel for the assessee drew the attention of the Bench to the order of the Ld. CIT(A) wherein he has elaborately discussed the facts of the assessee and has allowed the claim of exemption u/s 11. He submitted that it is the settled position of law that once the trust is duly registered under 12A, late filing of audit report would not disentitle the assessee trust from availing the benefits of section 11 of the Act. For the above proposition he relied on the decision of Hon'ble Bombay High Court in the case of CIT vs. Mumbai Metropolitan Regional Iron & Steel Market Committee reported in 58 taxmann.com 253 wherein, dealing with identical facts, the claim of the assessee was allowed. He submitted that similar view has been taken by the Indore Bench of the Tribunal in the case of Akshay Academy vs. ITO reported in 167 taxmann.com 382.

The Ld. Counsel for the assessee submitted that as per the provision of section 11 prevailing at that time, filling of Audit report was directory in nature and not mandatory. For the above proposition, he relied on the decision of Hon'ble Punjab & Haryana High Court in the case of CIT vs. Shahzadanand Charity Trust reported in 228 ITR 292 (P&H). He submitted that similar view has been taken by the Hon’ble Andhra Pradesh High Court in the case of CIT vs. Andhra Pradesh State Road Transport Corporation reported in 285 ITR 147, the Bangalore Bench of the Tribunal in the case of Sindhi Youth Association Ladies Wing vs ITO reported in (1994) 48 ITD 6, Jabalpur Bench of the Tribunal in the case of Shri Namiyun Parswanath Jain Swetamber Manidhari Trust vs. ITO reported in 203 ITD 433 and the Delhi Bench of the Tribunal in the case of United Educational Society vs. JCIT reported in 107 taxmann.com 127. He submitted that there is no dispute to the fact that the return of income along with the audit report were filed during the set aside proceedings and the same were available with the Assessing Officer. Therefore, rejecting the same on procedural grounds is not correct. He accordingly submitted that the order of the Ld. CIT(A) being in accordance with law should be upheld and the grounds raised by the Revenue on this issue be dismissed.

We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and the Ld. CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the assessee in the instant case filed its return of income as local authority without claiming any exemption under section 10(20) of the Act on 01.11.2004 declaring total loss at Rs.203.32 Crs. The assessee is a local authority notified as a Major Port by the Central Government and the entire income of the assessee was exempt under the provisions of section 10(20) of the Act upto and including assessment year 2002-03. The term "Local Authority" was given a restrictive meaning by insertion of an Explanation in section10(20) with effect from assessment year 2003-04. Hence, the assessee was no longer eligible for exemption under section 10(20). In November, 2005, the Government clarified that restoration would not be made in the case of assessee and accordingly, the assessee deemed it fit to apply for registration u/s 12A since it was engaged in activity of general public utility. We find the Assessing Officer in the order passed u/s 143(3) of the Act on 31.03.2006 determined the total loss at Rs.877.10 crores. Subsequently the said order was set aside by the Ld. CIT u/s 263 of the Act on 02.11.2006 and de novo assessment was directed. Pursuant to the said 263 order, we find the Assessing Officer passed the assessment order u/s 143(3) r.w.s. 263 of the Act on 27.12.2007 assessing the total income of the assessee at Rs.583.06 crores. Against the said order the assessee filed an appeal before the Ld. CIT(A) on 25.01.2008. In the meantime the assessee had filed an application for registration under section 12AA before CIT-II, Thane on 10.02.2006, which was rejected by the Ld. CIT vide order dated 31.08.2006. We find, in appeal, the Mumbai Bench of the Tribunal vide order dated 28.06.2007 allowed the appeal of assessee by observing as under: “8. We have considered the submissions made by both sides, material on record and orders of authorities below. Admittedly, the assessee is registered as Major Port within the provisions of Section Indian Ports Trust Act, 1908 r.w. Major Port Trust Act 1963. All the assets and liabilities of Central Government existing at the time of creation of Trust have been vested in the Trust. It is further noted that the assessee is entitled to carry on only those activities which are permitted under the provisions of Major Port Trust Act, 1963. We have also gone through the various judicial decisions relied on by the assessee and are of the view that the issue raised in this appeal is squarely covered in favour of the assessee by these decisions. Accordingly, we conclude that the activities carried on by the assessee are of charitable nature and come within the definition of charitable purpose as defined in Section 2(15) of the Act. Thus, the decision of the learned CIT on this issue is reversed. Having stated so, we are of the view that the issue of condonation of delay for grant of registration with retrospective effect, requires fresh adjudication in view of material placed before us, hence, in the interests of justice, we set aside the order of C.I.T. and restore the issue to his file for consideration of condonation of delay in granting registration, who shall adjudicate the issue afresh after giving an adequate opportunity of hearing to the assessee. Thus, ground No.6 stands allowed for statistical purposes.”

We find the Ld. CIT granted registration u/s 12A only from the date of the application i.e. 10.02.2006 vide order dated 05.09.2007. The relevant observations of the Ld. CIT read as under: “In view of ITAT’s order holding that activities of the assessee are charitable in nature, registration u/s 12AA is granted to the assessee w.e.f. 10.02.2006 i.e. F.Y. 2005-06.”

Aggrieved by the order of the Ld. CIT, the assessee again approached the Tribunal to grant the registration from 01.04.2002. We find, the Tribunal, after considering the plea of the assessee, vide order dated 15.04.2008 condoned the delay in filing the application and directed to grant registration u/s 12AA with retrospective effect from 01.04.2002 by observing as under:

We find pursuant to this registration u/s 12AA, the assessee filed its return of income for the subject assessment year on 26.09.2008 claiming exemption u/s 11 before the Assessing Officer. Simultaneously, since the appeals for assessment years 2003-04 to 2005-06 were pending at first appellate level, the assessee also took additional ground before Ld. CIT(A)-I, Thane for grant of exemption u/s 11 of the Act. We find the Ld. CIT(A)-1, Thane vide order dated 23.12.2008 rejected the plea of the assessee on the ground that the said exemption was not claimed in the return of income and that audit report was not filed within time prescribed under the Act. We find when the assessee preferred an appeal before the Mumbai Bench of the Tribunal against the order of the Ld. CIT(A)-1, Thane, the Tribunal, vide its order dated 30.09.2010, allowed the assessee's appeal holding that the finding of the CIT(A)-1, Thane was not sustainable in law, thereby vacating the orders of the authorities below and remitting the matter to the file of the Assessing Officer for framing the assessment de novo with the directions that while doing so, the Assessing Officer would take into account the registration granted to the assessee u/s 12AA we.f. 1st April, 2003 and audit reports, as also other documents filed by the assessee in support of its claim of benefit under section 11 of the Act. The relevant observations of the Tribunal read as under: “8. We find that a large number of assesses, who were covered by the wider definition of the expression ‘local authority’ before the scope of Section 10(22) was narrowed down with effect from 1st April 2003, have faced the same problem. These were the cases in which registration under section 12A was never sought earlier because the assessees were exempt from tax anyway under section 10(22), and by the time the registration under section 12AA was obtained, due to the necessity caused by this change in law, the assessees had already filed the income tax returns without complying with the procedural requirements necessary to avail benefit of tax exemption under section 11 by the virtue of registration under section 12AA. As to what should be done in such situations, we find guidance from Hon’ble Supreme Court’s judgment in the case of CIT Vs UP Forest Corporation (230 ITR 945). On materially similar set of facts, Their Lordships, inter alia, observed that “Inasmuch as the respondent cannot, in our opinion, be regarded as a local authority, interest of justice would demand that the question as to whether its income is liable to be exempted under section 11(1) of the Act should be investigated and examined by a proper forum under the Act”. In our view, therefore, the prayer of the assessee is quite in harmony with the ‘interest of justice’ as viewed by Hon’ble Supreme Court.

We find the Assessing Officer in the set aside order passed on 22.12.2011 again denied the exemption u/s 11 of the Act on the same ground that the assessee has not claimed the exemption in the return of income and that the audit report required for claiming exemption has not been filed within the time prescribed in the Act. We find the Ld. CIT(A) held that reasons for delay in filling the audit report and not claiming the same in the return of income was beyond the control of the assessee. He further held that the exemption u/s 11 & 12 may not be denied merely on account of delay in furnishing auditor's report. We find the Ld. CIT(A) further stated that assessee's case is squarely covered under the exceptions provided in CBDT's Instruction No.1/1148, dated February 9, 1978 which prescribes condonation of delay in case where the delay was beyond the control of the assessee.

We do not find any infirmity in the order of the Ld. CIT(A) on this issue. We find the Assessing Officer in the instant case passed the order u/s 143(3) r.w.s. 254 of the Act on 22.12.2011 pursuant to the specific directions of the Tribunal vide order dated 30.09.2010 wherein the Tribunal at para 3 of the order has observed that the Ld. CIT(A) has denied the claim of exemption of the assessee on procedural grounds i.e. (1) claim not made in the return of income filed and (ii) audit report not filed along with the return. We find the Tribunal has reversed the finding of the CIT(A) and held that the alleged procedural defects would not justify denying the claim of exemption under section 11 of the Act. The Tribunal directed the Assessing Officer to examine the claim on merits after considering the return and audit report filed by the assessee. The Tribunal has also noted that CBDT representative have already commented in the proceedings before Committee of Disputes that such claim of the assessee may also be allowed by way of rectification request. The relevant observations of the Tribunal have already been reproduced in the preceding paragraphs.

We find although the Tribunal had rejected the submission of the Revenue, however, the Assessing Officer has denied the claim of the assessee on the very same procedural grounds i.e. not claiming exemption u/s 11 in the return of income and non-filing of audit report along with the return. Therefore, once the Ld. CIT(A) after considering the decision of the Tribunal in assessee’s own case has directed the Assessing Officer to allow the claim on merits, the Revenue in our opinion should not have any grievance. Further, the submissions of the Ld. Counsel for the assessee that the decision of the Tribunal has not been challenged by the Revenue and therefore, the finding of the Tribunal has become final could not be controverted by the Ld. DR. We, therefore, find merit in the arguments of the Ld. Counsel for the assessee that the finding of the Assessing Officer to deny the claim of the assessee on procedural grounds is clearly beyond the scope of his jurisdiction which was circumscribed by the decision of the Tribunal. We further find the Assessing Officer in assessee’s own case for assessment years 2006-07 to 2008-09 has allowed the claim of exemption u/s 11 of the Act. We, therefore, do not find any infirmity in the order of the Ld. CIT(A) allowing the claim of exemption u/s 11 of the Act.

Further once the trust is duly registered under 12A, late filing of audit report in our opinion would not disentitle the assessee trust from availing the benefits of section 11 of the Act. We find the Hon'ble Bombay High Court in the case of CIT vs. Mumbai Metropolitan Regional Iron & Steel Market Committee (supra) while dealing an identical issue has allowed the claim of the assessee by observing as under: "4. We are unable to agree with Mr. Suresh Kumar. The Tribunal has found that in the light of these admitted facts, there is substance in the assessee's arguments. The Tribunal perused its own order for the assessment year 2005-06 restoring the matter to file of the Assessing Officer and to make a de novo assessment. It held that at that time the Form 10 audit reports and documents were already on record of the Assessing Officer. If the assessee was required to file Form 10 and other documents before the completion of the assessment and in this case there is only a technical plea raised by the Revenue, then, that should not take away a benefit accruing to the assessee in law. The Tribunal has neither disregarded the judgment of the Hon’ble Supreme Court nor has misapplied it. It found that the case of the assessee is peculiar. It was not the assessee's fault inasmuch as it got into a legal tangle. Upto assessment year 2002-03, it was enjoying a benefit under section 10(20) of the IT Act by a local authority. Later on it decided to avail of the benefit of section 11 and applied for registration. The chequered history of the case pertaining to registration has been noted by us. It is that which enabled the Tribunal to conclude that the rigors of the section have been somewhat diluted by the Revenue's understanding and the issuance of a circular. Thus, the circular contemplates condonation of delay in filing the above documents and which would enable the assessee to avail of the benefit. Filing of Form No.10 is not dispensed with. The Commissioner is only vested with powers to accept it after the specified period. This circular No.273 dated 3rd June, 1980 which has been relied upon to hold that the assessee's claim for benefit of exemption under section 11 of the Act deserved acceptance. It is in these circumstances and when the objects of the trust were found to be genuine that the Assessing Officer was directed to carry out a denovo assessment in terms of the Tribunal's observations. We do not find such conclusion to be perverse orvitiated by any error of law apparent on the face of the record. No larger question or wider controversy needs to be decided."

Similar view has been taken by the Hon’ble Andhra Pradesh High Court in the case of CIT vs. Andhra Pradesh State Road Transport Corporation reported in 285 ITR 147 wherein the Hon’ble High Court has held that the provisions contained in section 12A(b) were only directory in nature and not mandatory. The relevant observations of the Hon’ble High Court read as under: “8. Coming to the first argument that Section 12A(b) is mandatory, learned Counsel appearing for the assessee relies on a judgment of the Bombay High Court in CIT v. Nagpur Hotel Owners Association . One of the questions, which was before the Bombay High Court was:

We find the Hon'ble Punjab & Haryana High Court in the case of CIT vs. Shahzadanand Charity Trust reported in 228 ITR 292 (P&H) has also held that as

“7. Under Section 11, subject to certain provisions of the Act, and on fulfilling of certain conditions provided under Section 12A, income from property held for charitable or religious purpose has been exempted from payment of tax. Section 12A provides that the provisions of Sections 11 and 12 shall not apply in relation to the income of any trust or institution unless the two conditions provided in Clauses (a) and (b) of this section are fulfilled. Clause (b) of Section 12A which is relevant and as it existed at the relevant time reads : "12A. The provisions of Section 11 and Section 12 shall not apply in relation to the income of any trust or institution unless the following conditions are fulfilled, namely : - (a)****** (b) where the total income of the trust or institution as computed under this Act without giving effect to the provisions of Section 11 and Section 12 exceeds twenty-five thousand rupees in any previous year, the accounts of the trust or institution for that year have been audited by an accountant as defined in the Explanation below Sub-section (2) of Section 288 and the person in receipt of the income furnishes along with the return of income for the relevant assessment year the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed."

Rule 17B of the Income-tax Rules, 1962 (hereinafter referred to as "the Rules"), provides that the report of audit of the accounts of a trust or institution which is required to be furnished under Clause (b) of Section 12A, shall be in Form No. 10B. In Form No. 10B, the chartered accountant has to certify that he has examined the balance-sheet of the trust and the profit and loss account for the year ended which are in agreement with the books of account maintained by the said trust. It has to be further certified that in the opinion and to the best of the knowledge of the chartered accountant, the said accounts give a true and fair view of the accounts. The particulars (which have been prescribed) have to be annexed along with the auditor's report.

Counsel appearing for the Revenue argued that furnishing of the audit report in the prescribed form duly signed and verified by the chartered accountant with the furnishing of the return is mandatory. Failure to do so is fatal disentitling the assessee to claim the benefit of exemption from tax. The audit report could not be produced at any subsequent time either before the Income-tax Officer or the appellate authority. Reliance for this was placed upon a judgment of this court in CIT v. Jaideep Industries [1989] 180 ITR 81.

10. Counsel for the assessee has controverted the argument raised by counsel for the Revenue. It has been contended by him that furnishing of report along with the filing of the return was directory in nature in view of the circular of the Central Board of Direct Taxes issued on February 9, 1978, which provides as under : " Charitable trust-Requirement of filing audit report in Form 10B- 12A(b). Instructions regarding--The Board have considered whether the requirement under Section 12A(b) of filing audit report 'along with the return of income' is mandatory so as to disentitle the trust from claiming exemption under Sections 11 and 12 in case of omission to furnish such report in the prescribed form along with the return. Normally, it should be possible for a charitable or religious trust or institution to file the auditor's report along with the return of total income, where such trust or institution claims exemption under Sections 11 and 12. However, in cases where for reasons beyond the control of the assessee some delay has occurred in filing the said report the exemption as available to such trust under Sections 11 and 12 may not be denied merely on account of delay in furnishing the auditor's report and the Income-tax Officer should record reasons for accepting a belated audit report. (1/1148-CBDT F. No. 267/482/77-IT(Part), dated February 9, 1978-CBDT Bulletin Tech. XXIII/582.)"

Counsel appearing, for the Revenue then argued that as per this circular, the auditor's report could only be furnished up to the stage of framing of assessment as the power to condone the delay for 'accepting the auditor's report at a later date has only been given to the Income-tax Officer and not thereafter, i.e., at the appellate stage. We find no merit in this submission. The Central Board of Direct Taxes by issuing the circular dated February 9, 1978, has treated the provisions regarding furnishing of the auditor's report along with the return to be procedural and, therefore, directory in nature. By showing sufficient cause, the auditor's report could be produced at any later stage either before the Income-tax Officer or before the appellate authority.

In view of the Board's circular dated February 9, 1978, the requirement of filing the auditor's report in Form No. 10B as provided in Section 12A(b) read with Rule 17B of the Rules, the ratio of the law laid down by this court in CIT v. Jaideep Industries [1989] 180 ITR 81 would not apply to the present case.

For the reasons recorded above, the question referred to us is answered in the affirmative, i.e., against the Revenue and in favour of the assessee. No costs.”

The various other decisions relied on by the Ld. Counsel for the assessee also support his case to the proposition that filing of the audit report in Form No.10B is directory in nature and not mandatory and therefore, the delay in filing of the audit report cannot be a ground to deny the claim of exemption u/s 11 and 12 of the Act.

So far as the denial of claim of exemption u/s 11 of the Act by the Assessing Officer on the ground that the exemption has not been claimed in the return filed u/s 139(4A) of the Act within the time limit is concerned, we find merit in the arguments of the Ld. Counsel for the assessee that till the assessment year 2017-18 there was no requirement of furnishing the return within the time limit u/s 12A(b) which only required that the return was to be filed u/s 139(4A). However, no time limit was provided. It was only through the amendment made by the Finance Act, 2017 that a new clause (ba) has been inserted in section 12A to put a further condition w.e.f 01.04.2018 of furnishing return within time allowed under section 139(4A) which has been made applicable from assessment year 2018-19. However, prior to it, no time limit has been prescribed in section 12A(b) for furnishing of such return and audit report in the Act. Therefore, we find merit in the arguments of the Ld. Counsel for the assessee that once the said return and audit report in required form has been submitted before the Assessing Officer in the reassessment proceedings, the same is sufficient for the purpose of section 12A(b) of the Act. For the above proposition, we rely on the decision of the Delhi Bench of the Tribunal in the case of United Educational Society vs. JCIT reported in 107 taxmann.com 127, wherein the Delhi Bench of the Tribunal has held that failure to file the return u/s 139(4A) cannot be interpreted to mean that income cannot be computed in case of a charitable trust u/s 11 of the Act. It has been held that a new clause (ba) has been inserted in section 12A by the Finance Act, 2017 to put a further condition w.e.f. 01.04.2018 of furnishing return within time allowed u/s 139(4A) applicable from assessment year 2018-19. The relevant observations of the Tribunal read as under: “19. We have heard the rival submissions and perused the relevant findings given in the impugned order. The core issues here is, whether the computation of income of the assessee society should be in accordance with section 11 or not; and whether, the filing of audit report alongwith the return filed in response to notice u/s 148 will entitle the assessee for benefit of computation of section 11. The AO has denied to compute the income in accordance with the provisions of section 11 of the Act on the reasoning that assessee has not filed the return under section 139 (4A) reads with section 12A (b) of the Act. Thus, what we have to adjudicate is, whether assessing officer was right in not applying the provisions of section 11 while computing income of the assessee. It is an admitted fact that the assessee is a society, who has been granted registration under section 12A of the Act by CIT looking to its objects of charitable purpose, i.e., it is engaged in imparting education and running various educational institutions. Thus, the registration u/s 12A is fait accompli and consequently the computation of income has to be in accordance with sections 11 to 13 of the Act. The assessee society had not filed its return of income and it was only in response to notice issued by the Assessing Officer under section 148, the assessee has filed its return of income alongwith the audited Balance Sheet and Profit & Loss Account. Now, whether the income of the assessee society is to be computed in accordance with the provisions of section 11 of the Act, as it has not filed the return as required under section 139(4A) of the Act, but has filed return in response to notice under section 148.

Section 139 falls under Chapter XIV-‘Procedure for assessment’ which provides procedures and conditions for filing of return of income. Section 139(1) mandates every person having income exceeding the maximum amount not chargeable to tax to file return of income. Similarly, section 139(1) (4A) mandates that every person in receipt of income derived from property held under trust, i.e., charitable trust, etc., to file its return of income in case its total income exceeds the maximum amount not chargeable to tax without giving effect to the provisions of section 11 & 12 of the Act. In case of failure to file such return of income under this section 139, penalty has been prescribed. In case of failure to file return by any person under section 139(1) penalty has been prescribed under section 271F. Similarly, in case of failure to file return by charitable society under section 139 (4A) penalty has been prescribed under section 272A (2)(e). On a plain reading of the relevant provisions, in our opinion, failure to file the return under section 139(4A) cannot be interpreted to mean that income cannot to be computed in the case of a charitable trust under section 11 of the Act. During the relevant assessment years impugned in these appeals, there is no such provision in the Act that in case return is not filed by charitable society under section 139(4A), then its income cannot to be computed in accordance with the provision of the Act.

Further, on going through the provisions of section 148, we further note that once the return has been filed in response to the notice issued under section 148, the provisions of this Act shall apply as if such return were a return required to be furnished under section 139. Thus, return filed under section 148 is treated as return filed under section 139, which will include sub section (4A) of section 139. Once, such return is treated as return filed under section 139, then all the provisions of Act shall apply which will, include section 11 of the Act. The phrase “so far as may be” in section 148, has to be interpreted in the manner that wherever conditions of applicability of any procedure prescribed in any section of the Act is required, then same has to be applied. If a return has been filed under section 148, then the relevant provisions of section 139 has to be applied and also the procedure of assessment and computation of income; and it cannot be interpreted in a restrictive manner to exclude any procedure. The Hon’ble Apex Court, way back in the case of R Dalmia & Anr vs. CIT, reported in (1999) 236 ITR 480, has clarified the interpretation of the phrase “so far as may be” used in section 148 in the following manner:- “13. By reason of s. 148, after a notice thereunder has been served on the assessee containing the requirements which must be included in a notice under s. 139(2), "the provisions of this Act shall so far as may be applied accordingly as if the notice were a notice issued under that sub-section". What this implies is, in our view, clear. Even after a notice is issued under s. 148, if the ITO proposes to make a variation in the income returned pursuant to such notice which is prejudicial to the assessee and the amount of such variation exceeds the amount fixed by the Board, the ITO must forward a draft of the proposed order of the assessment to the assessee. The assessee is entitled to forward objections to such variation. If he does not do so, the ITO may complete the assessment or reassessment on the basis of the draft order. If, however, the assessee does raise objections, the ITO must forward the draft order together with the objections to the IAC and the IAC must, after considering the draft order, the objections and the record, issue such directions as he thinks fit for the guidance of ITO to enable him to complete the assessment or reassessment, but no directions which are prejudicial to the assessee may be issued before an opportunity is given to the assessee to be heard. The directions issued by the IAC are binding on the ITO.

It was submitted on behalf of the assessee that the provisions of s. 144B were not applicable to assessments and reassessments under s. 147 because s. 144B stated that it applied only to "an assessment to be made under sub- s. (3) of s. 143". The submission cannot be accepted because the words we have quoted from s. 148 cannot be ignored. A notice having been issued under s. 148, the procedure set out in the sections subsequent to s. 139 has to be followed "so far as may be". Sec. 144B is a procedural provision. It fits into the procedural scheme as hereinbefore noted and, therefore, it cannot be excluded by reason of the use of the words "so far as may be". Nor is there any other good reason to exclude it from the procedure to be followed subsequent to a notice under s. 148.”

Thus, we are of the view that, whether it is a case of a regular assessment or it is a case of an assessment consequent to issue of notice under section 148, not only the procedure of return as given in section 139 has to be applied, but also such the income has to be computed on the basis of such return in accordance with the provision of the Act, which of course will be subject to any specific provision in the Act which itself bars a claim or an exemption. Thus, section 148 provides that all the provision of the Act has to apply on such return furnished in response to notice under section 148. The Ld. CIT DR has referred to the words ‘so far as may be’ to canvass the proposition that all the provision will not apply. This contention of the Ld. DR is not correct in view of our reasoning given above. The meaning of these words ‘so far as may be’ will not mean to exclude provision of section 11 of the Act. It is only such provision which are inconsistent with the provision of section 148 as compared to section 139 regarding procedure for assessment will not be applicable so far as may be. As regards the reliance placed by the Ld. DR on the judgment in the case of Commissioner of Incometax v. Sun Engineering Works (P.) Ltd. 198 ITR 297 (SC), we are not in agreement with the contention of the Ld. DR that in the reassessment proceedings under section 148, no deduction can be allowed in respect of the income which has escaped assessment. In reassessment proceedings even the income which has escaped assessment has to be computed in accordance with the provisions of the Act which will include section 11 as is in the present case. It will not be correct to say that while computing income under section 148 the entire gross receipts are to be taxed. Further, it is not the case of the assessee that it is reagitating or seeking review of the issue or the deduction for which determination has already taken place. The case of the assessee is that while computing income which has escaped assessment, the computation has to be done in accordance with the provision of the Act which include section 11 of the Act. It is a case of a determination of correct escaped income as per the provision of the Act.

The judgment relied upon by the CIT (A) and the Ld. DR in the case of Director of Income Tax vs. Spic Educational Foundation 257 ITR 46 (Mad), in our opinion is not applicable. In this case the issue was of not filing of audit report in Form No.10B along with the return of income for claiming exemption under section 11 and 12 of the Income Tax Act. In that case the Hon’ble Madras High Court after taking note of the provisions of section 12A (b) and 139(9) has observed that return has to be accompanied by audit report. In this case the return was filed but audit report was not filed with the return. This audit report was also not filed later on. That is why, the High Court observed that, there is nothing on record to show that assessee had filed the audit report at any point of time and hence the exemption cannot be granted in the absence of audit report. Thus, it was a case of complete failure to file the audit report which is not the case here. In the present case the assessee society has filed the return of income and has also filed audited accounts with the audit report in response to the notice under section 148 on the basis of which AO has completed the assessment under section 148/143(3). Thus, the audit report was before the AO.

Our above view gets further supported from the amendment made by the Finance Act, 2017 whereby a further clause (ba) has been inserted imposing a further condition that such return of income is to be furnished in terms of section 139(4A), within the time allowed under that section. Firstly, this requirement was not there before this amendment; and secondly, this insertion of additional clause clearly shows that such condition was not there in existing clause (b) of section 12A. Had such condition being there in clause (b) itself, then there was no need to insert a further clause (ba) by the Legislature for denying benefit of section 11 & 12 in case return is not filed in time as per provision of section 139 (4A) of the Act. It is relevant to note that clause (b) has not been amended, but a new clause (ba) which has been inserted to put a further condition w.e.f 1.04.2018, which was not there for the assessment years under consideration. It is also important to note that this condition of furnishing the return within the time allowed under section 139(4A) has been made applicable from A.Y. 2018-19 as has been specifically stated in the Finance Act, 2017 and not for the A.Y. under consideration. We are also not in agreement with the contention of the Ld. DR that this amendment is clarificatory in nature. As rightly pointed out by the Ld. Counsel that this amendment has been made by the Finance Act, 2017 effective from A.Y. 2018-19, meaning thereby that this clause has not been made applicable even for the A.Y. 2017-18, the return of which were still to be filed. Thus, the Legislature has thought fit to make this amendment applicable from next assessment years onwards and not even to the current A.Y. 2017-18.

In view of the above, we hold that AO was not justified in denying the benefit of the exemption undersection 11 of the Act and we direct the AO to compute the income in accordance with the provision of section 11 of the Act. Ground no.6 is accordingly allowed.”

In view of the above discussion and considering the fact that the return of income along with the audit report were filed during the set aside proceedings, therefore, rejecting the same on procedural grounds in our opinion is not correct. We, therefore, uphold the order of the Ld. CIT(A) and the ground raised by the Revenue on this issue is dismissed.

Ground No.2 raised by the Revenue relates to the order of the Ld. CIT(A) allowing the status of ‘local authority’ to the assessee.

The Ld. Special Counsel for the Revenue submitted that the Ld. CIT(A) in para 14 of the order erroneously held that the assessee is a ‘local authority’ without appreciating and considering the fact that the said status had already ceased by insertion of Explanation to section 10(20) of the Act w.e.f. assessment year 2003- 04 and consequently the income of the assessee became chargeable to tax from assessment year 2003-04 onwards. Moreover, the assessee filed its return of income as a 'Local Authority' without claiming any exemption u/s 10(20) of the Act for the relevant Assessment Year. He, accordingly, submitted that after the insertion of the Explanation to Section 10(20), the status of the assessee ceased to operate as a 'Local Authority'. Further, after the insertion of Explanation to Section 10(20), the assessee could not have been treated as a 'Local Authority’ especially when the Parliament advisedly intended to give exemption under Section 10(20) only to the four named categories of the Local Authorities and not to categories wherein the assessee falls. He accordingly submitted that the order of the Ld. CIT(A) be reversed on this issue.

The Ld. Counsel for the assessee on the other hand submitted that the assessee is a local authority within the meaning of Article 12 of the Constitution of India by virtue of section 3(31) of General Clauses Act, 1897 read with article 367 of the Constitution. The major ports were constituted by the Government of India under the provisions of Major Port Trust Act, 1963. It is a local authority functioning under the control of Ministry of Shipping, Road Transport & Highways of the Government of India. Referring to the Circular No.93 of 1972 issued by the CBDT, he submitted that it has been held that 'Port Trusts' are Local Authority. Referring to the following decisions, he submitted that it has been held that the Major Port Trusts constituted under the Major Port Trust Act, 1962 are ‘Local Authorities’ within the meaning of section 3(31) of General Clauses Act, 1897:

He submitted that the Ld. CIT(A) after considering the above decisions, has allowed the appeal of the assessee and therefore the same is in accordance with law.

Referring to Circular No.1 of 2009 issued by CBDT, he submitted that it has been held that no surcharge shall be levied in case of Local Authorities. He submitted that the Department has been continuously assessing the assessee as “Local authority”. Referring to assessment orders for the impugned assessment years i.e. assessment years 2003-04 to 2005-06, he submitted that the Assessing Officer in the orders passed u/s 143(3) has assessed the assessee as "Local Authority” status. The same status has also been accepted in the assessment orders passed for the subsequent years.

Referring to the order for assessment year 2020-21 dated 26.09.2022, he submitted that the assessee has been assessed in the status as ‘local authority’.

So far as the contention of the Revenue that the assessee has been excluded from the definition ‘local authority’ in view of the amendment in section 10(20) of the Act by insertion of Explanation by the Finance Act, 2002 w.e.f. 1st April, 2003 is concerned, he submitted that such contention is misplaced. He submitted that the amendment in 10(20) by insertion of the Explanation, which defines the ‘local authority’ to mean Panchayat, Municipality, Municipal Committee & Cantonment Board, is for the limited purpose of interpreting the said term as referred to in section 10(20) of the Act. He submitted that the Explanation starts with "For the purpose of this section" and, therefore, it is clear that the definition is applicable for interpreting section 10(20) of the Act. He submitted that if the intention of the said definition was to apply to the whole Act, then the definition would have been inserted in section 2 which is the general definition section of the Act. He accordingly submitted that for the limited purpose of section 10(20), the status of the assessee as ‘local authority’ was excluded. However, the assessee continues to be local authority for all other provisions of the Act.

So far as the reliance placed upon by the Ld. Special Counsel for the Revenue on the decision of Hon'ble Andhra Pradesh High Court in the case of CIT vs. Agriculture Market Committee (reported in 20 taxmann.com 421) in order to support the stand of the department is concerned, he submitted that the question before the Hon'ble High Court was whether the provision of section 10(26AAB) of the Act, which was inserted by the Finance Act, 2008 with effect from April 1, 2009 and which exempts income of agricultural market committees from the levy of income tax under the Act, is retrospective in operation. The Hon'ble High Court in its decision has held that the provision of this section is not retrospective in nature. He submitted that the issue which has been dealt by the Hon'ble High Court in this case is different from the present case and therefore, the said decision is not applicable to the facts of the present case. He accordingly submitted that the ground raised by the Revenue on this issue be dismissed.

We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and the Ld. CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Assessing Officer in the instant case passed the order treating the assessee as a trust as against ‘local authority’ claimed by the assessee. This resulted in leavy of surcharge at a higher rate. We find the Ld. CIT(A), following the decision in the case of Workman of Mangalore Port Trust vs. Mangalore Port trust and others (1973) ILR KAR 272 and the decision of Hon'ble Bombay High Court in W.P. No. 1090 of 1983 with CA No. 1560 of 1983 in the case of Ram Ugrah Singh Girjar Singh & others vs. Board of trustees of Port of Bombay and further relying on CBDT Circular dated 26.09.1972 held that the assessee is a ‘Local Authority’.

We do not find any infirmity in the order of the Ld. CIT(A) on this issue. A perusal of the assessment order for assessment year 2003-04 order dated 27.12.2007 shows that the Assessing Officer has treated the assessee as ‘local authority’, the details of which are as under:

Similarly for assessment year 2020-21 the Assessing Officer in the order passed u/s 143(3) r.w.s. 144B of the Act has treated the assessee as ‘local authority’, the details of which are as under:

Further we find merit in the arguments of the Ld. Counsel for the assessee that the assessee is a ‘local authority’ within the meaning of Article 12 of the Constitution of India by virtue of section 3(31) of General Clauses Act, 1897 read with article 367 of the Constitution. Major ports were constituted by the Government of India under the provisions of Major Port Trust Act, 1963. It is a local authority functioning under the control of Ministry of Shipping, Road Transport & Highways of the Government of India. Further, in the Circular No.93 of 1972 issued by the Board, it was held that "Port Trusts” are “Local Authorities”.

We further find in the order passed u/s 263 for assessment year 2003-04 that the status of the assessee has been shown as ‘local authority’. Since in the instant case the Ld. CIT(A), following CBDT Circular No.93 of 1972, the order passed u/s 263 for assessment year 2003-04, section 3(31) of the General Clauses Act, 1897, the decision of Hon’ble Karnataka High Court in the case of Workman of Mangalore Port Trust Vs Mangalore Port Trust and others (1973) ILR 1973 KAR 272, the decision of Bombay High Court in W.P.No. 1090 of 1983 with C.A. No. 1560 of 1983 in the case of Ram Ugrah Singh Girjar Singh & others Vs. Board of Trustees of Port of Bombay has held that the assessee is a ‘local authority’, therefore, in absence of any distinguishable features brought on record by the Ld. Special Counsel for the Revenue, we do not find any infirmity in the order of the Ld. CIT(A) on this issue.

So far as the decision of Hon’ble Andhra Pradesh High Court in the case of CIT vs. Agriculture Market Committee (2011) 337 ITR 299 (AP) relied on by the Ld. Special Counsel for the Revenue is concerned, we find the question before the Hon’ble High Court was whether the provisions of section 10(26AAB) of the Act which was inserted by the Finance Act, 2008 with effect from April 1, 2009 and which exempts income of agricultural market committees from the levy of income tax under the Act is retrospective in operation. The Hon’ble High Court in its decision has held that the provisions of this section are not retrospective in nature. Since the issue has been dealt with by the Hon’ble High Court which is relied on by the Revenue is different from the present case in hand, therefore, the decision relied on by the Ld. Special Counsel for the Revenue in our opinion is not applicable to the facts of the present case. In view of the above discussion, the order of Ld. CIT(A) on this issue is upheld and the ground of appeal No.2 raised by the Revenue is dismissed.

The Ld. Special Counsel for the Revenue submitted that the ground raised by the Revenue is merely consequential to the first ground as the Ld. CIT(A) has treated the capital expenditure as 'application of income’ for the purposes of objects of the Trust in view of the exemption allowed u/s 11 of the Act by the Ld. CIT(A). Therefore, if the first ground is answered in favour of the Revenue, the present ground would have a consequential effect and the said expenditure would have to be treated to be capital expenditure.

The Ld. Counsel for the assessee submitted that the ground raised by the Revenue is incorrect since the Ld. CIT(A) has nowhere allowed the expenditure as Revenue. At para 20 the Ld. CIT(A) has only allowed the capital expenditure as an application of income which is duly allowable while computing the income u/s 11 of the Act. He accordingly submitted that the ground raised by the Revenue is infructuous and deserves to be dismissed.

We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and the Ld. CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. Since in the preceding paragraphs we have held that the assessee is entitled for exemption u/s 11, therefore, the capital expenditure incurred by the assessee has to be treated as application of income. Therefore, the third ground raised by the Revenue becomes infructuous and accordingly the same is dismissed.

Ground No.4 raised by the Revenue relates to the order of the Ld. CIT(A) allowing the deduction on account of contribution towards Superannuation Funds and Gratuity Funds on the ground that the same are expenses of earlier years and further, the assessee has not debited any such expenses in the accounts in the year under consideration.

So far as the deletion of Rs.20.39 crores on account of superannuation fund is concerned, the facts in brief, are that the Assessing Officer during the course of assessment proceedings noted that the assessee has paid a sum of Rs.25.05 crores to the LIC on account of employees' superannuation fund due from the date of assessee's incorporation upto 31.03.2003. According to the Assessing Officer the actual liability for assessment year 2003-04 was Rs.4.65 crores and therefore, the assessee had made an additional claim of deduction of Rs.20.40 crores by taking the shelter of section 43B of the Act. He similarly noted that the assessee had also made payment of Rs.6.40 crores to LIC on account of employees’ gratuity fund from the date of its incorporation till 31.03.2003 whereas the expenses for the year was only Rs.1.10 crores. Thus the assessee has made additional claim of Rs.5.30crores. According to the Assessing Officer since the services of the employees were utilized in earning the income of earlier period which were exempt from tax, therefore, the expenses of employees’ premium for superannuation fund and gratuity fund for earlier year cannot be an allowable expenditure in the current year u/s 14A of the Act. He accordingly made addition of Rs.20.39 crores and Rs.5.30 crores respectively.

In appeal the Ld. CIT(A) deleted the above addition made by the Assessing Officer. While doing so, he referred to Rules 87 & 88 of the Income tax Rules 1962. He further held that initial contribution to the fund is allowable irrespective of the period and it is allowable u/s 36(1)(v) of the Act.

Aggrieved with such order of the Ld. CIT(A) the Revenue is in appeal before the Tribunal.

The Ld. Special Counsel for the Revenue submitted that the Ld. CIT(A) did not take into consideration the fact that the assessee has claimed an additional deductions against its taxable income of the year by taking shelter u/s 43B of the Act for an amount which were expenses pertaining to earlier years when its income was also exempt under u/s 10(20) of the Act. These expenses should have been debited in the books of accounts of those years and the same could not have been allowed in the relevant assessment year 2003-04. He accordingly submitted that the Assessing Officer was correct in disallowing the expenses relating to Superannuation and Gratuity Funds, pertaining to earlier years. Therefore, the order of the Ld. CIT(A) be reversed on this issue.

The Ld. Counsel for the assessee on the other hand while supporting the order of the Ld. CIT(A) submitted that the assessee has claimed the entire amount of Rs.25.05 crores paid towards employees' superannuation fund as expenses while computing its expenses for the year under consideration. He submitted that this fund was first formed and approved during the previous year relevant to assessment year 2003-04 by the CIT, Thane. Accordingly the assessee paid an amount of Rs.20.39 crores as initial contribution based on actuarial valuation and debited the same directly to the reserves and surplus. The assessee also paid an amount of Rs.4.65 crores after the annual contribution to the superannuation fund and debited the same in the Profit & Loss Account. The assessee claimed the entire amount of Rs.25.05 crores as expenses while computing its total income for the year under consideration. He submitted that the Ld. CIT(A) after correctly appreciating the position that such amount is allowable u/s 36(1)(iv) which prescribes that any sum paid to approved fund shall be allowed as a deduction. He submitted that sum as specified in section 36(1)(iv) of the Act includes every sum i.e. even those which are not in the nature of annual contribution made by the assessee. The Ld. Counsel for the assessee referred to the following decisions for the above proposition: i) CIT vs. Sirpur Paper Mills reported in 103 Taxman 352 ii) CIT vs. Mafatlal Fine Spg. & Mfg. Co. Ltd. reported in 138 Taxman 143. iii) UOI vs. Exide Industries Ltd. reported in 116 taxmann.com 378. iv) CIT vs. Hindustan Latex Ltd. reported in 22 taxman.com 332

He submitted that the Assessing Officer has wrongly invoked provisions of sec 14A because it would be applicable only in such cases where the expenditure has a direct nexus to an income which has been claimed as exempt in that particular year. He submitted that the current expense are not related to the previous year since it was never allowable in the earlier period on account of non- payment. He submitted that the Act clearly specifies that such expenses cannot be allowed on provisioning basis and can be allowed only on payment basis. Since, the expenses have been claimed only on payment basis, therefore, the question of its relation with any earlier period cannot arise. In any case he submitted that if the income of the assessee is computed u/s 11 on a commercial sense, the above outflow needs to be allowed as an application of income. He submitted that similar arguments are also applicable to the gratuity fund of Rs.5.30 crores.

We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and the Ld. CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Assessing Officer in the instant case disallowed an amount of Rs.20.39 crores paid by the assessee to employees’ superannuation fund and an amount of Rs.5.30 crores paid by the assessee to LIC towards to the approved gratuity fund on the ground that the assessee had made additional claims by taking the shelter of section 43B of the Act. According to him, the services of the employees were utilized in earning the income of earlier period which were exempt from tax and therefore, employees’ premium for Superannuation Fund and Gratuity Fund for earlier years cannot be an allowable expenditure in the current year u/s 14A of the Act. We find the Ld. CIT(A) following the provisions of section 36(1)(iv) and 36(1)(v) allowed the claim of the assessee. We do not find any infirmity in the order of the Ld. CIT(A) on this issue. The provisions of section 36(1)(iv) and 36(1)(v) of the Act read as under: Other deductions. 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28— (i)…. (ii)… (iii)… (iv) any sum paid by the assessee as an employer by way of contribution towards a recognised provident fund or an approved superannuation fund,

Similarly we find Rules 103 and 104 of the Income Tax Rules, 1962 read as under: “Ordinary annual contributions. 103. The ordinary annual contribution by the employer to a fund shall be made on a reasonable basis as may be approved by the Chief Commissioner or Commissioner having regard to the length of service of each employee concerned so, however, that such contribution shall not exceed 8 1/3 per cent of the salary of each employee during each year. Initial contributions. "104. The amount to be allowed as a deduction on account of an initial contribution which an employer may make in respect of the past services of an employee admitted to the benefits of a fund shall not exceed 8 1/3 per cent of the employee's salary for each year of his past service with the employer.”

We find the Hon’ble Supreme Court in the case of CIT vs. Sirpur Paper Mills reported in 237 ITR 41 (SC) has held that the deduction in respect of contribution made to approved superannuation fund within limit prescribed will be fully allowed in the assessment year relating to the previous year in which the payment was made and amplitude deduction permitted by section cannot be cut down under the guise of imposing a condition. The relevant observations of Hon’ble Supreme Court from para 8 onwards read as under:

The last condition imposed by the said notification is that the deduction shall be spread out equally over a period of five years commencing with the assessment year relating to the previous year in which the amount as paid. This too is no condition but a provision super-added to the section which does not contemplate any such distribution of the deduction. Under the section the deduction is available in the assessment year relating to previous year in which the payment was made and it must be so granted.”

In view of the above discussion and relying on the decision of Hon’ble Supreme Court in the case of CIT vs. Sirpur Paper Mills (supra), we do not find any infirmity in the order of the Ld. CIT(A) on this issue.

In any case, we also find merit in the arguments of the Ld. Counsel for the assessee that if the assessee is granted the benefit of section 11 exemption, then the expenditure on account of gratuity fund and superannuation fund has to be allowed as an application of income. Since in the preceding paragraphs we have allowed the claim of exemption u/s 11, therefore, the contribution towards gratuity fund and superannuation fund is allowable as an application of income. In this view of the matter, the grounds raised by the Revenue are dismissed.

Grounds raised by the assessee are as under:

Ground Nos.1, 2, 3 & 4 raised by the assessee relates to the order of the Ld. CIT(A) confirming the disallowance of accrued interest of Rs.734 crores made by the Assessing Officer on account of change in method of accounting and disallowance of interest expenses of Rs.157.34 crores claimed on payment basis.

Facts of the case, in brief, are that the assessee up to the assessment year 2002-03 was following the mixed system of accounting wherein all expenses except interest payable on loans were being accounted for on mercantile system of accounting whereas interest paid/payable was being accounted on cash system of accounting. The reason for following cash basis with respect to the interest expenses according to the assessee was due to the fact that the assessee has filed restructuring proposal before the lenders including waiver of the interest in light of its weak financial position. Thereafter, from the assessment year 2003-04, the assessee changed the method of accounting and adopted mercantile system of accounting even for interest expenditure. As a result of change in the method of accounting during the year, there is additional charge of Rs.892 crores during the year on account of accrued interest on loans taken from Mumbai Port Trust, Kandla Port Trust, Government of India & World Bank which were not paid in the earlier years and, hence, not debited in the profit and loss account of the earlier years. The additional charge of Rs.892 crores in respect of above interest, due to change in the method of accounting has been directly debited to the Reserves and Surplus for the year under consideration. The said claim was made by the assessee during the assessment proceedings by way of notes forming part of computation of income. It was submitted that out of interest of Rs.892 crores, the assessee has actually paid a sum of Rs.157 crores during the previous year under consideration i.e. AY 2003-04.

However, the Assessing Officer was of the opinion that interest accrued / paid on loan pertains to period upto 31.03.2002 where the assessee's income was exempt from taxation. He accordingly held that the provisions of section 14A are applicable in respect of the said interest expenditure and such expenses are not allowable. The Assessing Officer did not accept the claim made in the revised return by the assessee by way of revised computation. He, therefore, disallowed the entire expenses of Rs.892 crore. He further noted that the interest of Rs.157.34 crore actually paid by the assesse will also not be allowed as deduction as it pertains to earlier period during which the assessee was exempt from taxation.

In appeal, the Ld. CIT(A) upheld the action of the Assessing Officer. While doing so, he held that the interest pertains to prior period and accordingly, provisions of section 14A are applicable in this case and therefore, such interest cannot be allowed. He also rejected that assessee's claim for allowability of interest expenditure paid during the year by stating that section 43B allows for a deduction of any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a state financial corporation or in respect of a term loan from a schedule bank in previous year in which the sum is actually paid. In the instant case, the assessee has taken loan from Govt. of India, Mumbai Port Trust etc. These institutions do not fall under the category of a scheduled bank or public financial institutions etc, hence, the provisions of section 43B will not be applicable to the assessee. He further held that the provisions of section 36(1)(xii) of the Act are also not applicable to the assessee as the same are applicable in case of Corporation or Body Corporate.

Aggrieved with such order of the Ld. CIT(A) the assessee is in appeal before the Tribunal.

The Ld. Counsel for the assessee submitted that for the assessment year under consideration i.e. 2003-04 the assessee had exercised the option of choosing the mercantile system of accounting which is in accordance with the provisions of section 145 of the Act and the Mercantile system of accounting is one of the recognised method of accounting. He submitted that prior to the assessment year 2003-04, the assessee has neither accounted for nor claimed the interest expenditure as it was following the cash system of accounting in respect of its interest expenses. He further submitted that in the year under consideration, after opting for Mercantile system of accounting, the assesses claimed interest expenditure and the entire interest of Rs.892 crores was quantified during the assessment year 2003-2004 due to change in method of accounting followed. Accordingly, the same was claimed as deduction in assessment year 2003-04.

He submitted that it is the settled position of law that the claim on account of change in method of accounting would be allowable once it is held that such change is (i) bonafide, (ii) as per the provision of section 145 of the Act and (iii) the change has been followed consistently in subsequent years. He submitted that in the present case, the change in the method of accounting is bona fide as the Assessing Officer has not doubted the veracity of the accrued interest and change in the method of accounting and has specifically mentioned the same at para 6.3 of the assessment order. He further submitted that the interest has been charged during the year to ensure compliance with section 145 of the Act. Further, the change in method has been consistently followed in the subsequent accounting years. The said fact has nowhere been disputed by the Assessing Officer in the impugned assessment order. He submitted that once the above three conditions are satisfied, it can be safely presumed that the change in the method of accounting is valid and lawful. Further, having accepted the change in the method of accounting, the Assessing Officer should have also given impact arising as a result of change in the method of accounting. It can be reasonably expected that as a result of change in the method of accounting, a distortion may arise in the year of change/diversion. Such change has to be accepted by the Assessing Officer. In the present case, the Assessing Officer accepted the assessee’s act of change in the method of accounting, however, he had arbitrarily refused to give the effect arising as a result of change in the method accounting, which is not justified on the part of Assessing Officer. He submitted that the Hon'ble Courts in the various decisions has duly confirmed that in the year of change of method, the effect of such change shall be allowed as expenditure or income for that particular year. For the above proposition, he relied on the following decisions:

The Ld. Counsel for the assessee on a without prejudice basis submitted that the payment made on account of interest of Rs.157 crore should be allowed following the commercial principle. He further submitted that once the assessee succeeds on the legal ground of exemption u/s 11 of the Act, then in that case, since the books of accounts of the assessee are to be prepared in a commercial basis, such expenses outflow has to be allowed as application of income. For the above proposition, he placed reliance on the following decisions (i) CIT vs. Jayshree Charity Trust reported in 159 ITR 280 (1986) (Cal) (ii) CIT vs. Rao Bahadur Calavala Cunnan Chetty Charities (1982) 135 ITR 485 (Mad) (iii) Saint Ursula vs. DCIT (2023) 150 taxmann.com 25 (Pune-Trib.)

He accordingly submitted that the claim of the assessee of interest paid of Rs.157 crores should be allowed as application of income and only after the correct income can be calculated as per the commercial principles.

The Ld. DR on the other hand heavily relied on the orders of the Assessing Officer and the Ld. CIT(A) on this issue.

We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and the Ld. CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find, the Assessing Officer, in the instant case disallowed the accrued interest of Rs.734 crores claimed by the assessee on change in method of accounting and also disallowed interest expenses of Rs.157.34 crores claimed on payment basis which has been paid by the assessee during the year, both totaling to Rs.891.34 crores on the ground that such interest accrued / paid on loans pertains to the period upto 31.03.2002 where the assessee’s income was exempt from taxation. Therefore, the provisions of section 14A of the Act are applicable in respect of the said interest expenses and therefore, such expenses are not allowable. Since the claim was made by the assessee by way of revised computation instead of making the claim in the return of income, the Assessing Officer also rejected such claim of the assessee on the ground that the same cannot be allowed otherwise than by way of revised return. He further noted that the interest of Rs.157.34 crores which has been actually paid by the assessee also cannot be allowed as deduction as it pertains to the earlier period during which the assessee’s income was exempt from taxation. We find the Ld. CIT(A) upheld the action of the Assessing Officer. While doing so, he further noted that the provisions of section 43B of the Act allows for a deduction on any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a State financial corporation or in respect of the term loan from a scheduled bank in previous year in which the same is actually paid. He noted that the assessee in the instant case has taken loan from the Govt. of India, Mumbai Port Trust, etc which do not fall under the category of any scheduled bank or public financial institution etc., therefore, the provisions of section 43B of the Act will not be applicable to the assessee. He further noted that the provisions of section 36(1)(xii) of the Act are also not applicable to the assessee as the same are applicable in case of corporation or body corporate.

It is the submission of the Ld. Counsel for the assessee that the assessee had exercised the option of choosing the mercantile system of accounting which is in accordance with the provisions of section 145 of the Act. Since the assessee in the year under consideration, after opting for the mercantile system of accounting has claimed interest expenditure, therefore, the same qualifies for deduction during the assessment year 2003-04 due to change in method of accounting. It is also his submission that the claim on account of change in method of accounting would be allowable when such change is (a) bonafide; (b) as per the provisions of section 145; and (c) the change has been consistently followed in subsequent years. It is his submission that since the change in method of accounting is bonafide and since the Assessing Officer has not doubted the veracity of accrued interest and the assessee is following this method consistently in subsequent assessment years and the interest has been changed during the year to ensure compliance with the provisions of section 145 of the Act, therefore, such disallowance made by the Assessing Officer and sustained by the Ld. CIT(A) is not justified.

We find some force in the above arguments of the Ld. Counsel for the assessee. It has been held in various decisions that when the assessee changes his method of accounting from cash system of accounting to mercantile system of account in the year to comply with the provisions of section 145 of the Act and such change in method is consistently followed in subsequent assessment years and the Assessing Officer has not doubted about the bonafideness of such change, then no disallowance is called for.

We find Hon’ble Bombay High Court in the case of Molmould Corporation vs. CIT reported in (1993) 202 ITR 789 (Bom) has observed as under: “Under section 145 the assessee can adopt a method of valuation which is to be followed by it regularly. It is an accepted principle of accountancy that value of the stock can be determined at cost price or market price, whichever is lower. In the present case, the assessee has adopted the cost price as a basis for valuing its closing stock. For the earlier previous years, however, the assessee determined cost price by adding overheads to the cost of the stock, while in the relevant assessment year, it decided to change this method by determining cost price without taking into account overheads. The decision of the Tribunal was on the footing that since the closing stock was valued by adopting a certain method, the same method should be adopted in valuing the opening stock. In other words, according to the Tribunal, the change in the method of valuation should commence with valuing the opening stock of any previous year by the new method which was to be adopted for valuing the closing stock as well. The assumption so made by the Tribunal appeared to be contrary to the normally accepted accounting principles as laid down in the booklet called Valuation of Stock and Work-in-progress - Normally Accepted Accounting Principles’ - brought by Indian Merchants' Chamber Economic Research & Training Foundation. According to the booklet, the two principles applicable with regard to the valuation of stock are that the assessee is entitled to value the closing stock either at cost price or market value, whichever is lower, and the closing stock must be the value of the opening stock in the succeeding year. It is, thus, clear that irrespective of the basis adopted for valuation in the earlier years, the assessee has the option to change the method of valuation of the closing stock at cost or market price, whichever is lower, provided the change is bona fide and followed regularly thereafter. Thus, the value of the closing stock of the previous year must be the value of the opening stock of the next year. The change, therefore, has to be effected by adopting the new method for valuing the closing stock which will, in its turn, become the value of the opening stock of the next year. If instead, a procedure is adopted for changing the value of the opening stock, it will lead to a chain reaction of changes in the sense that the closing value of the stock of the year preceding will also have to be changed, and, correspondingly, the value of opening stock of that year and so on. Whenever there is a change in the method of valuation, there is bound to be some distortion in the calculation of profit in the year in which the change takes place. But if the change is brought about bona fide and is in accordance with the normally accepted accounting practice, there is no reason why such a change should not be permitted. The Tribunal was, therefore, not justified in giving direction to revise and determine the value of the opening stock also by excluding all overhead expenses.”

We find Hon’ble Bombay High Court in the case of Bajaj Auto Ltd. vs. CIT reported in (2016) 389 ITR 259 (Bom) has held that where the assessee-company changed method of valuation of its closing stock from 'lowest price during year' method to 'weighted average cost method’, as changed method accords with international standards and more scientific and same was followed regularly, such change was justified. The relevant observations of the Hon’ble High Court read as under: “9. In the light of the above statement of law, what one needs to consider whilst accepting or rejecting a new accounting method proposed by the assessee is, whether the new method is adopted bona fide and whether the assessee imends to make this new method his regular method of accounting. As for the bona fides of the adoption of this new method by the assessee in the present case, the assessee's case has been that the new method was adopted in the face of the Manufacturing and Other Companies (Auditor's Report) Order, 1975. The Order applies to every company, which is engaged inter alia in manufacturing, mining or processing. The order requires that in the case of manufacturing, mining or processing companies, the auditor's report on the accounts must include a statement whether the company is maintaining proper records to show full particulars including quantitative details and situation of fixed assets, whether these fixed assets have been specifically verified by the management, and whether the same have been properly dealt with in the books of accounts. The auditor must further certify his satisfaction that the valuation of the stocks is fair and proper and in accordance with the normally accepted accounting principles. It is the assessee's case that at the relevant time, methods of accounting for measurement of inventories ordinarily adopted by companies were based on accounting standards followed internationally. These required the historical cost of inventories to be accounted by using the First-in-First-out (FIFO) formula of the "Weighted Average Cost" formula. The weighted average cost formula adopted by the assessee, thus, accorded with the international standards and. was a more scientific formula or method than the earlier used "lowest cost of purchase in the year" formula. In fact, both the Assessing Officer as well as the CIT (A) came to an express finding that the formula adopted by the assessee was more scientific than the one which was adopted earlier. The adoption of the new method by the assessee is accordingly clearly bona fide.

As for the requirement of regular employment of the method of accounting, it is pertinent to note that the Tribunal does not dispute that the new system of accounting was followed by the assessee in the subsequent assessment years as well. This clearly supports the assessee's case that the method was meant to be adopted as a regular method for the future. The Tribunal appears to have been swayed by the fact that by means of this new method of determining the cost, the assessee was having the benefit of taking the cost of items remaining in the closing stock on the basis of the lowest purchase price during the year with further reduction in the cost by following the weighted average cost formula. The method of determining the cost of items remaining in the closing stock is a part of a system of valuation of closing stock and if this method is changed, it would automatically lead to a change in the valuation of the closing stock. This is inevitable for the first year of change. What we need to consider in every such case is whether the exercise carried by the assessee is bona fide and is a permanent arrangement which is to be followed year after year, and not what immediate benefit accrues to the assessee for the particular year in which the change is introduced.

A Division Bench of our Court in the case of Melmould Corp. v. CIT (1993) 202 ITR 789/71 Taxman 47 was concerned with the valuation of closing stock at cost price. Our Court referred to the decision of Karnataka High Court in CIT v Corp. Bank Ltd [1988] 174 ITR 616/41 Taxman 16l and quoted following observations of the Karnataka High Court in that case: "The change was a bona fide one and was a permanent arrangement which was to be followed year after year, the change would have to be accepted notwithstanding the fact that during the assessment year in question, which was the first year when the change of method was brought about, a prejudice or detriment might be caused to the revenue, because the opening stock was valued at total cost while closing stock was valued at direct cost.

The foregoing discussion makes it clear that so long as the change made by the assessee in his method of accounting is bona fide and amounts to a permanent arrangement to be followed, the Revenue has no cause to complain. The conclusion drawn by the Tribunal that the change in the method of valuation adopted by the assessee, namely, from "lowest price during the year" to the "weighted average cost formula was not justified, is without any merit. We accordingly, answer questions (a) and (b) in the negative, i.e. in favour of the assessee and against the Revenue.

We find the Chennai Bench of the Tribunal in the case of DCIT vs. Hinduja Leyland Finance Ltd. reported in (2021) 191 ITD 529 (Chennai-Trib.) has held that the Assessing Officer cannot deny deductions for legitimate expenses incurred in course of business of the assessee, if such expenses are otherwise allowable under the Act, for the simple reason that the assessee has changed its method of accounting, more particularly when the assessee has explained reasons for change in method of accounting. The relevant observations at paras 10 and 11 of the order of the Tribunal read as under: “10. We further noted that it is well settled principle of law by decisions of various courts that any change in method of accounting is to bound to make some change in the taxable income more particularly in the year of change . However, merely because by virtue of change in method of accounting employed by assessee its taxable income stands reduced in a particular year can by no stretch of imagination be treated as a factor that said action was undertaken by with an intent to deliberately reduce the tax burden. In our considered view, the assessee is entitled to change its method of accounting as long as said change in method of accounting is bonafide. Section 145 of the Act, nowhere provides if assessee follows one method of accounting for many years, it cannot change the same in subsequent year. The assessee can very well change method of accounting to give better treatment to various income and expenses in books of account to give true and correct income, but such change should be disclosed in notes to account and effects on taxable income for the year on account of change of method of accounting. In this case, the assessee has changed its method of accounting to give better treatment to prepaid expenses shown in the financial statement upto assessment year 2015-16 and such change is supported by the decision of the Hon'ble Supreme Court, where it was categorically held that once an expenditure is incurred and made payment and claim of the assessee is in accordance with the provisions of the Act, the same needs to be allowed to the assesse, irrespective of treatment given in books of account. The Hon'ble Supreme Court in the case of M/s.Kedarnath Jute Manufacturing Co.Ltd. (supra) held that entries in books of account are not determinative and or conclusive and the matter is to be examined on the touchstone of provisions contained in the Income Tax Act. The relevant findings of the Hon'ble Supreme Court in the case of M/s. Taparia Tools Ltd. (supra) and the decision in the case of M/s.Kedarnath Jute Manufacturing Co.Ltd (supra) are as under:- “ Taparia Tools Ltd. Vs.JCIT (2015) 372 ITR 605(SC): Section 36(1)(iii) of Income Tax Act, 1961 – Interest on borrowed capital (Upfront interest charges) – assessment year 1996-97 – Assessee company issued debentures for a period of 5 ears – Apart from option of half yearly periodical interest, debenture holders were given another option to accept one time upfront discounted interest payment – assessee was following mercantile system of accounting – It filed its return claiming deduction of Upfront interest charges paid during relevant year – However, said amount was shown as deferred revenue expenditure in the books of account to be written off over a period of five years – Assessing Officer thus allowed only 1/5th of payment as deduction. Whether since assessee made actual payment and course of action adopted by assessee was in consonance with provisions of Act, merely because a different treatment was given in books of account could not be a factor which would deprive assessee from claiming entire expenditure as a deduction - Held Yes [para 19][ in favour of assessee ]. Kedarnath Jute Mfg. Co, Ltd. v. CIT (1971) (82 ITR 363 (SC) S. 37(1) of the Income Tax Act, 1961: Business expenditure – Allowablity of - assessment year 1955-56 – assessee company claimed deduction on account of sales tax determined by sales tax authorities to be payable on sales made by assessee during relevant assessment year – ITO disallowed claim on the ground that assessee had denied its liability to pay that amount and had made no provision in its books with regard to payment of that amount. – Whether when liability had even been quantified and a demand created by notice of notice during pendency of assessment proceedings before ITO and before finalization of assessment said liability remained intact even after assessee had taken appeals to higher authorities or courts which failed – Held, Yes – Whether therefore assessee maintaining accounts on mercantile system was fully justified in claiming deduction of sales tax amount which it was liable under law to pay during relevant assessment year – Held Yes.”

We find the Hon’ble Gujarat High Court in the case of CIT vs. Ganga Charity Trust Fund reported in 29 Taxman 413 has held that where the change in the method of accounting was bonafide the assessee could be allowed to switch over to cash system of accounting to avoid paying income tax on notional income.

We find the Hon'ble Andhra Pradesh High in the case of CIT vs. Andhra Pradesh Industrial Infrastructure Corporation reported in 236 ITR 648 has held that the assessee was entitled to change the system of accounting from one system to another system as long as the change is bonafide. By changing the system of accounting from mercantile to cash system, he would be making an entry in the account books as and when interest was actually paid and received by him. Interest thus received would be subject to tax on the date on which it was actually paid. It also found that the Tribunal has observed that the assessee was adopting the change in the method consistently and the said change in the accounting system was bonafide. Accordingly the order of the Tribunal was upheld and the appeal filed by the Revenue was dismissed.

In view of the above decisions, we find merit in the arguments of the Ld. Counsel for the assessee that the effects are to be allowed in the year of change of method of accounting and therefore, the question of relating the same to any particular period would be against the provisions of law.

So far as the decision of the Hon’ble Bombay High Court in the case of ACE Real Estate & Developers vs. ACIT reported in 110 taxmann.com 228 (Bom) relied on by the Ld. Special Counsel for the Revenue is concerned, we find the facts in the said case are distinguishable and are not applicable to the facts of the present case. In that case the assessee was following mercantile system of accounting for all its project except for one of the projects wherein it was following cash system of accounting. The Hon'ble High Court held that the assessee cannot choose to follow mercantile system of accounting for all other project and make a departure only for one of the projects by following cash system of accounting. However, in the present case the assessee was following cash system of accounting and subsequently from the year under consideration, the assessee opted for mercantile system of accounting for all its entries. Further the Assessing Officer has also not doubted the change in the method of accounting. Therefore, the decision relied on by the Ld. Special Counsel for the Revenue, in our opinion, is not applicable to the facts of the present case.

So far as the contention of the Assessing Officer that the interest expenses as claimed by the assessee are not allowable as per the provision of section 14A of the Act is concerned, we find the above findings given by the Assessing Officer are misplaced. In our opinion, the provisions of section 14A are applicable when a particular income is exempt on gross basis such as dividend, interest, etc. However, the income exempt u/s section 11 or section 80IA are exempt on net basis. The provisions of section 11 or section 80IA do not allow any particular receipt to be exempted on outright basis but only the net income resulting is exempted, provided that the other conditions are fulfilled. Therefore, the action of the Assessing Officer holding that the interest expenses are not allowable as per the provisions of section 14A is incorrect.

So far as the contention of the Assessing Officer that interest expenses are prior period expenses and therefore, the provisions of section 14A are applicable as income of the assessee was exempt in the earlier years is concerned, the same is also in our opinion is incorrect. In our opinion, to determine whether a particular income/expense is related to prior period, the accounting policy of the period when such income/expense is accounted has to be seen. In the present case the interest expenses were never accounted for by the assesseee in the earlier period (upto 31.03.2002) owing to the fact that the assessee was following cash system. This fact has nowhere been contravened by the Assessing Officer in the assessment order. Therefore, once interest expenses were not accounted for in the earlier period on account of the accounting policy followed at that time, such interest expenses cannot be considered as prior period expenses. The Assessing Officer in the assessment order has nowhere doubted the veracity of the interest expenses which were otherwise allowable.

Even otherwise also, in the preceding paragraphs we have already upheld the allowability of exemption u/s 11 of the Act. Once the assessee’s income is held as exempt u/s 11 of the Act and the books of account of the assessee are to be prepared on commercial bases, then such expenses outflow has to be allowed as application of income.

We find the Hon’ble Calcutta High Court in the case of CIT vs. Jayshree Charity Trust reported in 159 ITR 280 (1986) has held that the immunity from taxation that has been granted by section 11 cannot be denied to the assessee on the ground that the notional income remains unspent or unaccumulated for the purpose of charity. The CBDT Circular No. 5-P (LXX-6) dated 19.05.1968 makes it clear that the word 'income' in section 11(1)(a) must be understood in a commercial sense. The contention of the Assessing Officer that the claim cannot be allowed on account of non-filing of revised return is concerned, it is the settled legal position that the assessee can make an additional claim by way of revised computation in the light of the decision of the Hon’ble Bombay High Court in the case of CIT vs. Pruthvi Brokers and Shareholders Pvt. Ltd. (2012) 23 taxmann.com 23 (Bom).

In view of the above discussion, we are of the considered opinion that the Ld. CIT(A) was not justified in rejecting the claim of the assessee of Rs.892 crores on account of change in method of account being accrued interest on loans taken from Mumbai Port Trust, Kandla Port Trust, World Bank etc which were not paid in the earlier years for which these were not debited to the Profit & Loss Account of the earlier years. The grounds of appeal No.1 to 4 raised by the assessee are accordingly allowed.

Grounds of appeal No.5 to 7 raised by the assessee relate to the order of the Ld. CIT(A) upholding the action of the Assessing Officer in treating revenue expenditure of Rs.20.91 lakhs as capital expenditure.

The Ld. Counsel for the assessee submitted that the above income has been shown in the P&L account for assessment year 2005-06 since the same were crystallized in that year. He submitted that the assesses, being a Government entity, has to follow definite procedures for approval and sanction of the bills. Such procedures often delay the booking of the income in the books of accounts since the same are crystallized only after their approvals. He further submitted that there is no dispute to the fact that assessee has been following mercantile system of accounting for this assessment year. Going by this mercantile system, since actual right to receive this income was not crystalized in this year, therefore the same should not be considered as income of this year. He further submitted that the assessee has offered this income in assessment year 2005-06 and hence, there is no tax loss to the department and such exercise is futile.

Without prejudice basis, he submitted that since assessee has already offered this income in assessment year 2005-06, and if it is proposed to tax this income in the current year itself, then a direction may be given to the Assessing Officer to reduce this income in assessment year 2005-06.

The Ld. DR on the other hand heavily relied on the orders of the Assessing Officer and the Ld. CIT(A).

We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and the Ld. CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Assessing Officer during the course of assessment proceedings noted that the service for Wharfage was provided during the previous year relevant to assessment year 2003-04, however, the income for the same was offered in assessment year 2005-06. He, therefore, held that the income is taxable in assessment year 2003-04 itself and not in assessment year 2005-06. We find the Ld. CIT(A) upheld the action of the Assessing Officer holding that the assessee had changed its method of accounting and is following the mercantile system of accounting from assessment year 2003-04. Accordingly, the assessee has to account for its income as soon as they accrue or arise. He held that the Wharfage income has accrued and arisen during the previous year relevant to assessment year 2003-04, accordingly the same should be taxable in assessment year 2003-04 itself. We do not find any infirmity in the order of the Ld. CIT(A) on this issue. Since the assessee is following mercantile system of accounting, therefore, the assessee cannot choose to defer the accrued income to assessment year 2005-06 instead of showing in assessment year 2003-04. We, therefore, uphold the order of Ld. CIT(A) on this issue.

So far as the contention of the assessee that a direction may be given to the Assessing Officer to reduce this income from assessment year 2005-06 is concerned, the assessee may approach the Assessing Officer to do the needful as per law. This ground is accordingly dismissed.

Ground No.9 raised in assessee’s appeal relates to the order of the Ld. CIT(A) confirming the addition made on account of environment monitoring charges amounting to Rs.10.24 lakhs.

The Ld. Counsel for the assessee submitted that this income has been shown in the P&L account for A.Y. 2005-06 since the same was crystallized in that year. He submitted that the assessee, being a Government entity has to follow definite procedures for approval and sanction of the bills. Such procedures often delay the booking of the income in the books of accounts since the same are crystallized only after their approvals. He submitted that there is no dispute to the fact that the assessee has been following mercantile system of accounting for this assessment year. Going by this mercantile system, since actual right to receive this income was not crystalized in this year, therefore the same should not be considered as income of this year. He further submitted that the assessee has offered this income in AY 2005-06 and hence, there is no tax loss to the department and such exercise is futile.

On a without prejudice basis he submitted that since the assessee has already offered this income in AY 2005-06, in case it is proposed to tax this income in the current year itself, then a direction may be given to the Assessing Officer to reduce this income in AY 2005-06.

The Ld. DR on the other hand heavily relied on the orders of the Assessing Officer and the Ld. CIT(A).

We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and the Ld. CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Assessing Officer at para 10.1 of the assessment order stated that Environment Monitoring charge of Rs.10,24,800/- from NSICT has become due in assessment year 2003-04 and is therefore the income of AY 2003-04. The assessee has offered the same on receipt basis in A.Y 2005-06. The Assessing Officer was of the opinion that once the income is due, the same has to be accounted irrespective of the actual receipt of such income. Since the assessee is following mercantile system of accounting, therefore, this income has to be taxed in AY 2003-04 and not in AY 2005-06. We find the Ld. CIT(A) in para 26 of its order stated that the assessee had changed its method of accounting and is following mercantile system of accounting from A.Υ.2003-04. Since the income from environment monitoring charges has accrued and arisen during the previous year relevant to AY 2003-04 hence the same was correctly included as income of this year.

We do not find any infirmity in the order of the Ld. CIT(A) on this issue. Admittedly when the income has become due in assessment year 2003-04, therefore, the assessee, which is following mercantile system of account should have accounted for the same in this year instead of deferring the same to assessment year 2005-06.

So far as the argument of the Ld. Counsel for the assessee that since the assessee has offered this income in assessment year 2005-06 and therefore, the Assessing Officer may be directed to reduce this income in assessment year 2005- 06 is concerned, the assessee may approach the Assessing Officer to do the needful as per law. This ground is accordingly dismissed.

After hearing both sides we find the above ground is identical to the ground of appeal No.1 raised by the Revenue in for assessment year 2003-04. We have already decided the said issue in the preceding paragraphs and dismissed the ground raised by the Revenue. Following similar reasonings, we dismiss the ground raised by the Revenue. Ground No.1 raised by the Revenue is accordingly dismissed.

After hearing both the sides we find the above ground is identical to the ground of appeal No.2 raised by the Revenue in for assessment year 2003-04. We have already decided the issue in the preceding paragraphs and dismissed the ground No.2 raised by the Revenue. Following similar reasonings, we dismiss the ground raised by the Revenue. Ground No.2 raised by the Revenue is accordingly dismissed.

Facts of the case, in brief, are that the Assessing Officer in the assessment order noted that the assessee has debited a sum of Rs.3.86 crore as leave encashment due to its employees in its profit and loss account. He noted that out of this amount, a sum of Rs.3.06 crores related to the period upto 31.03.2002 as per the actuarial valuation report. This expenditure was related to the period when the income of the assessee was exempt u/s 10(20) of the Act. The Assessing Officer noted that in this case the provisions of section 14A are applicable. He accordingly made the disallowance of this amount. While doing so, he further held that the provisions of section 43B are not applicable in this case.

In appeal the Ld. CIT(A) relying on the decision of CIT vs. Hindustan latex Ltd. (209 Taxman 42) & Exide Industries Ltd. vs. UOI (292 ITR 470) held that the payment of premium towards leave encashment policy was business expenditure done purely and exclusively for business purpose and was allowable as deduction u/s 37(1) of the Act.

Aggrieved with such findings of the Ld. CIT(A) the Revenue is in appeal before the Tribunal.

The Ld. Special Counsel for the Revenue submitted that the assessee had made an additional claim of deduction amounting to Rs.3.06 Crores towards leave encashment expenses and transferred the same to LIC under a policy. He submitted that such expenses pertained to earlier years when the assessee's income was exempt from tax u/s 10(20) of the Act, therefore, the provisions of section 14A of the Act would come into play, which results in disqualification of the said expenses. Further the benefit under section 43B also cannot be claimed by the assessee. He submitted that since such expenses have not been debited in the books of accounts pertaining to those earlier years especially when the assessee is following mercantile system of accounting, the liability arises when it becomes due. Therefore, in such circumstances, the Assessing Officer was fully justified in disallowing such expenses.

The Ld. Counsel for the assessee on the other hand submitted that the assessee has made payment towards leave encashment policy maintained with LIC of Rs.3.05 crores on the basis of actuarial valuation accrued upto 31.03.2002. He submitted that the payment of leave encashment to the LIC is allowable u/s 43B(f) on the basis of actual payment. He submitted that the very insertion of the provision of section 43B(f) has been made in order to disallow the payment based merely on accounting entry without making any payment. Therefore, the contention of the Assessing Officer that the assessee has claimed leave encashment for past services is incorrect because the payment for the said services has been actually made in the current year. He submitted that the said expense would never be allowable in the earlier years due to nonpayment. He submitted that the insertion of section 43B(f) clearly shows that the period of services of employees is irrelevant since the expenses is allowable only on payment basis.

Referring to the decision of Hon'ble Supreme Court in the case of Exide Industries Ltd, reported in 425 ITR 1(2020), he submitted that the Hon’ble Supreme Court has upheld the validity of section 43B(f). therefore, the above deduction is allowable u/s 43B(f) of the Act.

The Ld. Counsel for the assessee submitted that the above expenditure is allowable u/s 37(1) of the Act in the light of Hon’ble Kerala High Court in the case of Hindustan Latex Ltd. reported in 22 taxmann.com 332 wherein the amount paid to LIC towards leave encashment was allowed as deduction. He submitted that the Revenue in the grounds of appeal have incorrectly interpreted that the said deduction is allowable only for later years and not for past years. He further submitted that the Hon’ble High Court has further held that the payment made to LIC for the leave encashment fund is an allowable expense u/s 37 irrespective of the period for which it belongs. He also referred to his argument while arguing ground No.4 of the Revenue’s appeal for AY 2003-04 according to which the provisions of section 14A are not applicable to the assessee’s case since the expenses are allowable on payment basis.

We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and the Ld. CIT(A) and the paper book filed on behalf of the assessee. We find the assessee in the instant case has made payment towards leave encashment policy maintained with LIC of Rs.3.05 crores on the basis of actuarial valuation accrued upto 31.03.2002. The payment of leave encashment to the LIC is allowable u/s 43B(f) on the basis of actual payment. We find the provisions of section 43B(f) of the Act read as under: “Certain deductions to be only on actual payment. 43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of— (a)… (b)…

Since the assessee in the instant case has made the payment for the said services actually in the current year, therefore, the said expenditure in our opinion is an allowable expenditure. We find the Hon’ble Kerala High Court in the case of Hindustan Latex Ltd. reported in 22 taxmann.com 332 has held that the amount paid to LIC towards leave encashment was allowable as deduction. As per the said decision the payment made to LIC for the leave encashment fund is an allowable expense u/s 37 irrespective of the period for which it belongs. In any case, since the income of the assessee needs to be computed u/s 11 on a commercial sense, therefore, we find merit in the arguments of the Ld. Counsel for the assessee that the above outflow needs to be allowed as an application of income. Accordingly, this ground raised by the Revenue is dismissed.

Ground Nos.1 to 4 raised by the assessee relate to the order of the Ld. CIT(A) in disallowance of interest expenditure of Rs.40.70 crore.

After hearing both the sides we find the above grounds are identical to the grounds of appeal Nos.1 to 4 raised by the assessee in for assessment year 2003-04. We have already decided the issue and the grounds raised by the assessee have been allowed. Following similar reasonings, the ground Nos.1 to 4 raised by the assessee are allowed.

After hearing both the sides, we find the above grounds are identical to ground of appeal No.8 raised by the assessee in for assessment year 2003-04. We have already decided the issue and dismissed the said ground. Following similar reasonings, we dismiss the ground Nos.7 and 8 raised by the assessee in assessment year 2004-05.

After hearing both the sides, we find the above ground is identical to ground of appeal No.9 raised by the assessee in for assessment year 2003-04. We have already decided the issue and dismissed the said ground. Following similar reasonings, we dismiss the ground No.9 raised by the assessee in assessment year 2004-05.

Ground No.10 raised by the assessee was not pressed by the Ld. Counsel for the assessee for which the Ld. Special Counsel for the Revenue has no objection. Accordingly, ground of appeal No.10 is dismissed as ‘not pressed’.

Facts of the case, in brief, are that during the year under consideration, the assessee has sold bulk terminal of Rs.21,79,95,720/- with the approval of government at Rs.66,90,000/- and no depreciation was ever charged by the assessee. It was accordingly argued that the entire loss should be allowable during the year sunder consideration. The Assessing Officer in para 12 of the assessment order held that the assets were transferred prior to assessment year 2003-04, therefore such loss should not be considered in assessment year 2004-05. He further held that the assets sold were depreciable assets and therefore, the sale value would be reduced from block of assets. The Ld. CIT(A) upheld the action of the Assessing Officer observing that the assets were actually sold in financial year 1999-2000 and the date of recording entries in the books of accounts are not material. He further held that till 31.03.2002 the income of the assessee was exempt, therefore no benefit of carry forward of loss can be given u/s 74. When the assets formed part of block of assets, no independent loss can be claimed as per section 43(6)(c)(B) and only the WDV of block of assets would be eligible for depreciation.

Aggrieved with such order of the Ld. CIT(A) the assessee is in appeal before the Tribunal.

The Ld. Counsel for the assessee submitted that the assets were sold in F.Y. 1999-2000 but the approval for the same was received from the Ministry in previous year relevant to A.Y. 2004-05. He submitted that though the same was shown in the fixed assets schedule, the assessee has not claimed any depreciation on the said assets for A.Y. 2004-05 or in the earlier years which is not being disputed by Assessing Officer and therefore, it doesn't form part of the block of assets. He accordingly submitted that the said loss is duly allowable against the income of the current year as no depreciation on said assets was claimed.

The Ld. Special Counsel for the Revenue heavily relied on the orders of the Assessing Officer and the Ld. CIT(A).

We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and the Ld. CIT(A) and the paper book filed on behalf of the assessee. We find the Assessing Officer in the instant case held that since the assets were transferred prior to assessment year 2003-04, therefore, such loss should not be considered in assessment year 2004-05. Further, assets sold were depreciable assets and therefore, the sale value would be reduced from block of assets. We find the Ld. CIT(A) held that since the assets were actually sold in financial year 1999-2000 and since the income of the assessee was exempt upto 31.03.2002, therefore, no benefit of carry forward of loss can be given u/s 74 of the Act. He held that the assets form part of block of assets and therefore, no independent loss can be claimed as per section 43(6)(c)(B) of the Act and the WDV of block of assets would be eligible for depreciation. It is the submission of the Ld. Counsel for the assessee that although the assets were sold in financial year 1999-2000 but the approval for the same was received from the Ministry in previous year relevant to assessment year 2004-05. Further the assessee has not claimed any depreciation on the said assets for assessment year 2004-05 or in the earlier assessment years which has not been disputed by the Assessing Officer therefore, it does not form part of the block of assets. It is his submission that the said loss is duly allowable against the income of the current year as no depreciation on said assets was claimed. We do not find any merit in the arguments of the Ld. Counsel for the assessee. In our opinion, when the assets were sold in financial year 1999-2000 the assessee cannot claim loss during the year under consideration. We, therefore, do not find any infirmity in the order of the Ld. CIT(A) rejecting the claim of the assessee.

So far as the alternate submission that a direction may be issued to allow depreciation considering the same as sale of asset belonging to block of assets, we find some force in this argument. We, therefore, deem it appropriate to restore this issue to the file of the Assessing Officer with a direction to re-compute the depreciation after reducing the amount received on the sale of assets from the block of assets. Grounds of appeal No.11 and 12 are accordingly partly allowed for statistical purposes.

After hearing both sides, we find the Assessing Officer while passing the assessment order for assessment year 2005-06 disallowed certain expenses stating that the same are prior period expenses. In appeal, the Ld. CIT(A) directed the Assessing Officer to allow these expenses in assessment year 2004-05 if the same are accrued and arise in this year. We do not find any infirmity in the order of the Ld. CIT(A) on this issue. We, therefore, dismiss the grounds of appeal No.13 & 14 raised by the assessee.

After hearing both the sides we find the above ground is identical to ground of appeal No.1 raised by the Revenue in for assessment year 2003-04. We have already decided the said issue in the preceding paragraphs and dismissed the ground No.1 raised by the Revenue. Following similar reasonings, we dismiss the ground No.1 raised by the Revenue.

After hearing both the sides we find the above ground is identical to ground of appeal No.2 raised by the Revenue in for assessment year 2003-04. We have already decided the said issue in the preceding paragraphs and dismissed the ground No.2 raised by the Revenue. Following similar reasonings, we dismiss the ground No.2 raised by the Revenue.

After hearing both sides we find the above ground is similar to the ground of appeal No.3 raised by the Revenue in for assessment year 2003-04. We have already decided the said issue in the preceding paragraphs and dismissed the ground No.3 raised by the Revenue. Following similar reasonings, we dismiss the ground No.3 raised by the Revenue.

Ground Nos.1 to 4 raised by the assessee relate to the order of the Ld. CIT(A) upholding the action of the Assessing Officer in treating the revenue expenditure of Rs.4.85 crore as capital expenditure.

After hearing both sides we find the above grounds are similar to the ground No.3 raised by the Revenue in for assessment year 2003- 04 and ground Nos.5 to 7 raised by the assessee in assessment year 2003-04. We have already decided the said issue in the preceding paragraphs and dismissed the ground No.3 raised by the Revenue and allowed the grounds raised by the assessee. Following similar reasonings, we allow the ground Nos.1 to 4 raised by the assessee.

Ground No.5 raised by the assessee relates to the order of the Ld. CIT(A) confirming the disallowance of Wharfage expenses amounting to Rs.3.63 lakhs.

After hearing both sides we find the Assessing Officer in the instant case has held that the assessee has issued credit note to BPCL for Wharfage for assessment year 2004-05. According to him this is an expenditure pertaining to earlier period, therefore, the same cannot be allowed in this year. We find in appeal the Ld. CIT(A) upheld the action of the Assessing Officer. He further held that these expenses pertain to assessment year 2004-05, therefore, he directed the Assessing Officer to allow the claim of the assessee in assessment year 2004-05. We do not find any infirmity in the order of the Ld. CIT(A) on this issue. In the preceding paragraphs we have already held that Wharfage income has to be taxed in the year in which such income has accrued and therefore, following the same principle, the expenditure pertaining to the relevant assessment year has to be allowed in that assessment year only. Ground No.5 raised by the assessee is accordingly dismissed.

Ground No.6 raised by the assessee relates to the order of the Ld. CIT(A) confirming the addition made by the Assessing Officer of Sales tax payment pertaining to earlier periods amounting to Rs.9.94 lacs.

After hearing both sides, we find the Assessing Officer noted that the assessee has debited sales tax payment of Rs.7,69,034, interest on late payment of Rs.2,10,733/- and penalty of Rs.14,596/-. He noted that the sale tax payment and the interest pertained to the years relating to assessment years 1994-95 to 2001-02. He, therefore, held that these expenses cannot be allowed in view of provision of section 14A of the Act. He further noted that penalty for statutory legal defaults cannot be allowed. He accordingly disallowed an amount of Rs.9.94 lakhs. In appeal, the CIT(A) held that the expenses crystallized during the financial year for which they have been raised and not in the year in which the demand was actually paid. Since the assessee has not bought on record any evidence to substantiate that such demands were raised in the year under consideration, therefore, the same cannot be allowed as expenditure during the year merely because the payment made in this year it cannot be said that the liability was crystalized in this year. He, therefore, upheld the addition made by the Assessing Officer. We do not find any infirmity in the order of the Ld. CIT(A) on this issue. However, the alternate submission of the Ld. Counsel for the assessee that once the exemption u/s 11 is allowed, the same amount may be allowed as application of income, may be considered by the Assessing Officer. Ground No.6 raised by the assessee is accordingly dismissed.

Ground No.7 raised by the assessee relates to the order of the Ld. CIT(A) confirming the disallowance made by the Assessing Officer u/s 40A(3) of the Act amounting Rs.17,015/-.

After hearing both sides, we find the Assessing Officer disallowed an amount of Rs.17,015 being 20% of total payment of Rs.85,074/- u/s 40A(3) on the ground that the assessee has made cash payments exceeding Rs.20,000/-. In appeal the Ld. CIT(A) upheld the action of the Assessing Officer. We do not find any infirmity in the order of the Ld. CIT(A) on this issue. However, the contention of the assessee that once the exemption is granted u/s 11 of the Act, the above amount may be allowed as application of income, may be considered by the Assessing Officer. Ground No.7 raised by the assessee is accordingly dismissed.

Ground No.8 raised by the assessee relates to the order of the Ld. CIT(A) confirming the disallowance of Prior period expenses amounting to Rs.2.53 core.

After hearing both sides we find the Assessing Officer observed from the tax audit report that the total prior period income quantified and certified is Rs.4,27,64,175/- and prior period expenses were at Rs.2,53,17,833/-. Since both the amounts are related to the prior period, therefore, the same were netted off and offered in the computation of income. The Assessing Officer, however, added the prior period income as duly certified by tax auditor at Rs.4,27,64,175/- but did not provide the benefit of prior period expenses of Rs.2,53,17,833/-. In appeal, the Ld. CIT(A) held that the prior period expenses cannot be allowed in the current year. It is the submission of the Ld. Counsel for the assessee that when the assessee has shown income as well as expenses relating to the prior period, it is natural that the same needs to be netted off and the resultant income, if any, would be offered to tax. The Assessing Officer in the assessment order has taxed the income from prior period but has not given the benefit of prior period expenses. We find some merit in the arguments of the Ld. Counsel for the assessee that once the prior period income is brought to tax during the current year, then it is natural that the expenses of such prior period also need to be set off to the extent of such income and only net income can be taxed. We, therefore, restore this issue to the file of the Assessing Officer to give the benefit of prior period expenses of Rs.2,53,17,833/- subject to verification that the prior period expenses should relate to the prior period income of that relevant year. Needless to say the Assessing Officer shall provide due opportunity of being heard to the assessee. We hold and direct accordingly. Ground No.8 raised by the assessee is accordingly allowed for statistical purposes.

In the result, all the three appeals filed by the Revenue are dismissed and all the three appeals filed by the assessee are partly allowed.