ACIT, NEW DELHI vs. M/S. HOUSING & URBAN DEVELOPMENT CORPORATION LTD., NEW DELHI

These two cross appeals are filed against the order dated 28.08.2014 of Learned Commissioner of Income Tax (Appeals)-XV New Delhi for Assessment Year 2007-08.

The grounds of the two appeals vide filed by Assessee and vide Fit for Publication ITA Nos.-5705 & 6151/Del/2014. Sd/- (AM) Sd/- (JM) Housing & Urban Development Corporation Ltd. Assessee, are as under:-

ITA No.-5705/Del/2014

“i. The Ld. CIT(A) has erred in fact and in law by not deleting the addition made by Ld. Assessing Officer an amount of Rs. 1,60,00,000/- on account of Addition of disallowance of ad-hoc provision of salary. ii. The Ld. CIT(A) has erred in facts and in law by not deleting the addition made by Ld. Assessing Officer an amount of Rs. 1,28,00,000/- on account of Addition of denial of change in the accounting policy. iii. That the appellant craves to add, delete or modify any grounds of appeal at the time of hearing.” (ITA No.-6151/Del/2014) i. Whether Ld. CIT(A) is correct in incorporating incorrect fact in his order that the Ld. CIT(A) XXVIII had allowed the assessee’s ground of appeal had allowed the assessee’s ground of appeal in his order, dated 11.01.2012 against the disallowance of Rs. 5406554/- u/s 14A whereas the Ld. CIT(A) XXVIII had in fact, confirmed the above noted addition & had dismissed the assessee’s ground of appeal. ii. Whether the order of the Ld. CIT(A)XV is not perverse on account of the incorrect facts incorporated in his order, as stated in ground (1) above. iii. The appellant craves leave, to add, alter or amend any ground of appeal raised above at the time of hearing.”

(1.1) In this order, the following abbreviations have been used:

Assessing Officer as AO Commissioner of Income Tax as CIT Commissioner of Income Tax (Appeals) as CIT(A) Commissioner of Income Tax (Departmental Representative) as CIT (DR) Departmental Representative as DR Dated as dtd. Income Tax Act as I.T. Act Income Tax Appellate Tribunal as ITAT Learned as Ld. Under Section as U/s Fit for Publication ITA Nos.-5705 & 6151/Del/2014. Sd/- (AM) Sd/- (JM) Housing & Urban Development Corporation Ltd. (2) Return of income was filed by Assessee on 30.10.2007 declaring total income of Rs. 3,51,93,26,019, which was further revised vide revised return dated 24.10.2008 declaring income of Rs. 3,31,58,74,360. Subsequently, vide the assessment order under Section 143(3), the income was assessed at Rs. 3,55,28,96,515. Against this, appeal was filed before Ld. CIT(A)-XXVIII. This appeal was disposed off by the Ld.

CIT(A)-XVIIII vide order dated 11.01.2012. Meanwhile, the issue was examined by the Ld. CIT-IV also, who observed that the disallowance by the AO under Rule 8D of an amount of Rs. 54,06,554 under Section 14A was erroneous and prejudicial to the interest of revenue. Further, it was also observed by him that the appellant had made an ad hoc provision of Rs. 1.60 crores on account of revision of pay consequent upon 6th Pay Commission recommendations debited to P&L A/c, which, in his observation, was not an ascertained liability and the AO’s order allowing the same was prejudicial to the interests of revenue. Thirdly, the CIT-IV also observed that the AO had erroneously assessed lower profits by 1.28 crores, by not examining the effect of change of accounting policy effected by the appellant by which revenue in respect of application fees, processing fees, front end fees, administration fees and processing fees was recognized on realization basis instead of accrual basis. Based on the above observations, the Ld. CIT-IV initiated proceedings under Section 263 vide issue of notice dated 04.02.2011. Later, while passing order under Section 263 dated 24.02.2012, on examination of plea of the appellant, the Ld. CIT-IV held that even though the appellant had worked out the disallowance under Section 14A read with Rule 8D at Rs. 42,69,731, the AO failed to examine whether the exempt income included income on investments in long term Page 3 of 39 Fit for Publication ITA Nos.-5705 & 6151/Del/2014. Sd/- (AM) Sd/- (JM) Housing & Urban Development Corporation Ltd. equity shares and bonds and accordingly set aside the issue for the examination in accordance with the provisions of the Act. Similarly, regarding the revision of pay of Rs. 1.60 crores, the CIT-IV held that as the report of the 6th Central Pay Commission was received only in September, 2008, though it was made effective from 01.01.2006, therefore, the provision made in respect thereof in the Previous Year

2006-07 was in the nature of an unascertained liability at that point of time. As this issue was not examined by the AO, the Ld. CIT-IV again set aside this issue to the AO. Lastly, the issue regarding under-statement of profit to the tune of Rs. 1.28 crores, which was recognized on actual realization basis than on mercantile basis, was also set aside to the AO. The AO subsequently issued notice to the appellant and after allowing due opportunity to the appellant, held that the contentions of the appellant with regard to the non-applicability of Rule 8D in the current year was not acceptable on the grounds that the appellant had not maintained separate accounts for investments and other business activities and the claim of the appellant that investments were made out of own surplus fund, was not supported by the figures shown by the appellant. The Ld. AO held that subsequent to the decision of Bombay

High Court the case of Godrej and Boyce Mfg. Co. Ltd. Vs CIT 328 ITR 81 (Bom), and even prior to introduction of section 14A(2) and (3), the AO was duty bound to enforce the provisions of Section 14A(1) on a reasonable basis consistent with all the relevant facts and circumstances. Accordingly, by invoking the provisions of Rule

8D, the Ld. AO estimated disallowance under Section 14A at Rs. 1,90,27,57,705 and made addition of Rs. 1,89,73,51,151 by giving allowance for disallowance of Rs.

54,06,554 made earlier in the original assessment record. Secondly, the Ld. AO also Page 4 of 39 Fit for Publication ITA Nos.-5705 & 6151/Del/2014. Sd/- (AM) Sd/- (JM) Housing & Urban Development Corporation Ltd. held that the provision of Rs. 1.60 crores made towards pay revision subsequent to the recommendations of the 6th pay commission was in the nature of an unascertained liability in the current year as the decision to pay 60% arrears was taken by the Central Govt. in F.Y. 2008-09. Accordingly, an addition on identical ground was made to the total income. The Ld. AO on perusal of an internal note of the company marked as “Provision against pay revision of Executives” held that the language of the same showed that the provision was an ad hoc provision and the liability for such provision had not crystallized before 31.03.2007. Regarding the third issue relating to under-statement of profit of Rs. 1.28 crores as reported in clause 11(d) of Form No. 3CD report, the Ld. AO observed that for approving the change in Accounting Policies, a Board meeting was held on 27.09.2007, which was beyond the previous year and hence he held that such a liability had not even crystallized during the current year. Accordingly, addition of Rs. 1.28 crores was also made. The Ld. CIT(A) in his impugned order dated 28.2.2014 confirmed the aforesaid additions of Rs. 1,60,00,000 and Rs. 1,28,00,000 but he deleted the disallowance made U/s 14A of I.T. Act. The present two appeals before us have been filed by Assessee and by Revenue against the aforesaid order of Ld. CIT(A) dated 28.8.2014. (2.1) In the Assessee’s appeal vide the 1st ground of appeal is related to Assessee’s claim for deduction on account of ad hoc provision of salary amounting to Rs. 1,60,00,000. This deduction was claimed by the Assessee on account of provision for revision of pay in the books of accounts. This claim for deduction was made by the Assessee in the light of Pay Revision Committee Page 5 of 39 Fit for Publication ITA Nos.-5705 & 6151/Del/2014. Sd/- (AM) Sd/- (JM) Housing & Urban Development Corporation Ltd. appointed by Govt. of India, the report of which was pending. The AO disallowed this claim, holding that the expenditure was purely a provision against unascertained liability and that this provision could not be claimed as expenditure for AY 2007-08.

In the words of the AO, “Neither, the said liability accrued nor crystallized during the year under consideration. As per the recommendations of the central Sixth Pay

Commission/Ministry of Finance etc. it was decided that 60% of arrears worked out on the implementation of Sixth Central Pay Commission was ordered by the Central govt. to be paid in Financial Year 2008-09 relevant to A.Y. 2009-10 and balance

40% was ordered to be paid in F.Y. 2009-10 relevant to A.Y. 2010-11. Accordingly, the assessee could have claimed the expenditure on account of revision of pay in the A.Y. 2009-10 and the balance amount of expenditure w.e.f. 1-4-2008 to the implementation of Sixth Pay commission should have been claimed in A.Y. 2010-11.

Even the Ld. CIT-IV after careful consideration of the issue in question, has observed that the liability on account of revision of pay in consequence of report of Sixth Central Pay Commission has not accrued and crystallized during the F.Y. 2..6-

07 relevant to A.Y. 2007-08 because the implementation of the said report in respect of public sector undertaking and State Govt. Employees has been carried out only after September, 2008 beyond the close of the instant financial year relevant to A.Y. 2007-08 and accordingly, the provision of such revision of pay amounting to Rs.

1,60,00,000/- is unascertained liability which is not eligible for deduction for the year under consideration.

Even from the documents filed during fresh proceedings along with its reply dated

30.11.2012 in the form of a note marked as annexure-III and further marked as Page 6 of 39 Fit for Publication ITA Nos.-5705 & 6151/Del/2014. Sd/- (AM) Sd/- (JM) Housing & Urban Development Corporation Ltd. “Finance Wing” with the subject: Provision against pay revision of Executives, clearly states that “during discussions regarding Annual Account for the year 2006-07 on 10.10.2007 in CMD’s Chamber when DF was also present, it was decided that suitable provision on account of pay revision of Executives w.e.f. 01.01.2007 should also be made in the Annual accounts for the year 2006-07. Accordingly, an adhoc provision of Rs. 1.60 crores is proposed to be made in the accounts for the period of three months for executives only from 01.01.2007 to 31.3.2007. On the back side of the said note it is mentioned as under:-

Note No. Existing Note Suggested Note II(b) The Pay Revision of Public The pay revision of Public Sector Sector executive was due w.e.f. executives was due w.e.f.

01.01.2007 and a pay revision 01.01.2007 and a pay revision committee has been appointed committee has been appointed by by Govt. of India, the report of Govt. of India, the report of which which is pending. In view of this is pending. Adhoc provision of Rs. no provision for revised pay has 1.60 crores has been made in the been made in account of 2006- accounts for the financial year

Submitted for approval please. Sd/- ACF(S) 13.10.2007” This note was finally approved on 15.10.2007.

Fit for Publication ITA Nos.-5705 & 6151/Del/2014. Sd/- (AM) Sd/- (JM) Housing & Urban Development Corporation Ltd. The accounts for the year under consideration are from 1.4.2006 to 31.3.2007 and are closed on 31.3.2007. That the deduction claimed is on account of creation of provision. Additionally, the “Provision” is an “an adhoc provision”. Neither the liability for revision of pay accrued during the year before 31.3.2007 nor crystallized before

31.3.2007. Additionally, no payment of the same was made before 31.3.2007. All proposals were made in the month of October 2007 after the close of the accounting year. As per the recommendations of the Central Sixth Pay Commission the assessee should have claimed such expenses of revised pay of its employees only in the assessment year 2009-10 and 2010-11. Hence, the provision, rather adhoc provision of Rs. 1,60,00,000/- is hereby disallowed.

The Assessee filed appeal before Ld. CIT(A), who dismissed Assessee’s appeal on this issue vide impugned order dated 28.8.2014. The relevant portion of the impugned order of Ld. CIT(A) is reproduced as under:

“6.8 Regarding the Ground No.3 of the appeal relating to addition of Rs.1.60 crores on account of disallowance of ‘Provision of revision of pay’, I find that in the current Financial Year, no decision of the Central Govt. was available, which may have a bearing on revision of pay of executives of the appellant company, therefore, it cannot be held that such liability had crystallized in the current year. For the Central Govt. Ministries and Departments, the recommendations of the 6th Central Pay Commission were announced in F.Y. 2008-09. Subsequently, it was decided that 60% of the arrears will be paid in 2008-09 while the balance 40% will be paid in 2009-10. Therefore, in the absence of happening of any germane event during the F.Y.2006-07, there was no ground to hold that liability for making revised pay to the executives of the company had crystallized during the current year. I, however hold that the amount of provision created by the Page 8 of 39 Fit for Publication ITA Nos.-5705 & 6151/Del/2014. Sd/- (AM) Sd/- (JM) Housing & Urban Development Corporation Ltd. company, as a result of the decision of the Board of the company dated 15.08.2007, which was based on the calculation of the salary of the executives of the company, was computed on a scientific basis, though erroneously termed as ‘ad hoc provision’ in the Board Resolution. However, as held by me above, since the liability in respect of such expenses had not crystallized during the current year, there was no justification on the part of the appellant company to have made a provision in the current year, when such a liability would have been actually allowable in the subsequent A.Yrs i.e. A.Y. 2009-10 and A.Y. 2010-11. Accordingly, addition made on this ground is upheld.”

(2.2) In the course of hearing before us, the Ld. Counsel for Assessee submitted that the Assessee Company is a Public Sector Undertaking (“PSU” for short) under Government of India. He further submitted that a Pay Revision Committee (“PRC” for short) was constituted by Ministry of Heavy Industries and Public Enterprises vide Resolution No. 2(10)/06/DPE-WC dated 30.11.2006. The relevant portion of the Resolution is reproduced as under: New Delhi, the 30th November, 2006 No. 2(10)/06/DPE-WC.---The Government of India have been considering for some time past the changes that have taken place in the structure of emoluments of Public sector executives over the years. Conditions have also changed in several respects since the last pay revision made with effect from 1- 1-1997. 2.1 The competent authority has decided to appoint the Pay Revision Committee which comprises of the following: Chairman Mr. Justice M.J. Rao (Retired Judge, Supreme Court of India) Members (1) Dr. Nitish Sen Gupta Fit for Publication ITA Nos.-5705 & 6151/Del/2014. Sd/- (AM) Sd/- (JM) Housing & Urban Development Corporation Ltd. (Economist & Former Member Secretary, Planning Commission, Government of India) (2) Shri P.C. Parakh (Former Secretary, Department of Coal, Government of India) (3) Shri R.S.S.L.N. Bhaskaradu (Former Managing Director, Maruti Udyog Ltd. & Ex-Chairman, Public Enterprises Selection Board) Ex-Officio Member (4) Secretary, Department of Public Enterprises, Government of India Secretary Joint Secretary, Department of Public Enterprises, Government of India 2.2 The Terms of Reference of the Committee will be as follows. 2.2.1 The Committee will examine the principles that should govern present structure of pay, allowances, perquisites, and benefits for the following categories of Central Government Public Sector Enterprises (CPSEs) executives, taking into account the total package of benefits available to them including non-monetary ones, and suggest changes therein which may be desirable and feasible: (i) Board level functionaries (ii) Below Board level executives (iii) Non-unionized supervisory staff 2.2.2 The Committee will make recommendations so as to transform the CPSEs into modern, professional, citizen-friendly and successful commercial entities that are also dedicated to the service of the people. 2.2.3 The Committee will work out a comprehensive pay package for the categories of employees of CPSEs mentioned at sub-para 2.2.1 that is suitably linked to promoting efficiency, productivity and economy through rationalization of structures, organizations, systems and processes as well Page 10 of 39 Fit for Publication ITA Nos.-5705 & 6151/Del/2014. Sd/- (AM) Sd/- (JM) Housing & Urban Development Corporation Ltd. as promoting functional and operational autonomy within the Public Sector Enterprises with a view to leveraging economy, responsibility, transparency, discipline, accountability, assimilation of technology and research and development. The existing patterns of scales based on Central Dearness Allowance (CDA) pattern or Industrial Dearness Allowance (IDA) pattern, categorization of CPSEs such as Schedule ‘A’, ‘B’, ‘C', ‘D’. Miniratna, Navratna, loss, profit making CPSEs and CPSEs referred to BIFR or BRPSE may also be taken into account while evolving suitable pay packages. The Committee will also examine the issue concerning separate pay revision guidelines in respect of Navratna CPSEs. 2.2.4 The Committee will make recommendations to harmonize the functioning of the CPSEs with the demands of the emerging national and global economic scenario. This would also take into account, among other relevant factors, the totality of benefits available to the employees, need of rationalization and simplification thereof, the prevailing pay structure and retirement benefits available under the Central Public Sector Enterprises, the economic conditions in the country, the need to observe financial prudence in the management of the CPSEs, the resources of the CPSEs and the demands thereon on account of economic and social development and the global economic scenario and competitive environment. 2.2.5 The Committee will examine and make recommendations with respect to the general principles, financial parameters and conditions which should govern the desirability, feasibility and continuation/modification of the Productivity Linked Incentives Scheme and Performance Related Payments. 2.2.6 While finalizing its report, the Committee will also take into account the report of the Sixth Pay Commission.

(2.2.1) The Ld. Counsel for Assessee further submitted that pay revision finally took place vide Office Memorandum dated 26.11.2008 in No.2(70)/08-DPE(WC) of Ministry of Heavy Industries & Public Enterprises, after considering the report of the aforesaid Pay Revision Committee. The Ld. Counsel for Assessee submitted that in view of the Government appointing aforesaid Pay Revision Committee, the Assessee made an ad hoc provision of Rs. 1,60,00,000 on account of anticipated pay revision in FY 2006-07 (AY 2007-08) itself, although the final decision regarding pay revision was taken in FY 2008-09 (AY 2009-10), vide the aforesaid Office Memorandum dated 26.11.2008. The Ld. Counsel for Assessee also placed reliance on Gail India Ltd. v. CIT [2016] 69 taxmann.com 50 (Delhi – Trib.)/[2015] 42 ITR(T) 265 (Delhi – Trib.); CIT v. Kerala State Financial Enterprises Ltd. [2009] 178 Taxmann 449 (Kerala)/[2008] 219 CTR 147 (Kerala) and Bharat Earth Movers v. CIT [2000] 112 Taxman 61 (SC)/[2000] 245 ITR 428 (SC)/[2000] 162 CTR 325 (SC). The Ld. Counsel for assessee also submitted that if this claim is not allowed in this year, it will cause hardship to the Assessee because the aforesaid claim of Rs. 1,60,00,000 towards ad hoc provision on account of pay revision has not been claimed by the Assessee in the subsequent years. Page 12 of 39 Fit for Publication ITA Nos.-5705 & 6151/Del/2014. Sd/- (AM) Sd/- (JM) Housing & Urban Development Corporation Ltd. (2.3) The Ld. CIT (DR) appearing for Revenue strongly relied on the Assessment Order as well as the impugned Order of the Ld. CIT(A).

(3) We have heard both sides patiently. We have also perused the materials on record carefully. We have considered the judicial precedents brought to our notice at the time of hearing before us and the judicial precedents referred to in the materials on our records. As far as the precedent in the case of Gail India Ltd. v. CIT (Supra) is concerned, we noticed that this was an order in the context of whether the assumption of jurisdiction by the Commissioner of Income Tax U/s 263 of I.T. Act was proper. It was not a case on the merits of the addition made by the AO, and instead on whether the assumption of jurisdiction by the Commissioner of Income Tax U/s 263 of I.T. Act was proper. Moreover, the case of Gail India Ltd. v. CIT (Supra) is distinguishable on facts. In the case of Gail India Ltd. v. CIT (Supra), which pertained to FY 1998-99 (AY 1999-2000) a Committee was constituted for holding discussions with the Representatives of Employees for formulating an approach of the Board of Directors, towards the pending pay revision w.e.f. 1.1.1997. The Department of Public Enterprises issued an office memo on 14.1.1999, authorizing the Public Sector Undertaking to start wage revision negotiations with the workers. It was there after on 17.8.1999, that the annual accounts of the company were certified by the Directors, wherein a provision for the above pay revision liability, was made in the accounts. Though the date of signing of the M.O.U. i.e. 24.09.2000, which is done after the approval of the Department of Public Enterprises, the negotiations were completed during the year and the liability Fit for Publication ITA Nos.-5705 & 6151/Del/2014. Sd/- (AM) Sd/- (JM) Housing & Urban Development Corporation Ltd. was known as liability accrued from the effective date of commencement. It is also to be noted that the provision for salary was not a contingent liability. It was in respect of the outcome of the decision of the DPE. Thus the provision was made by the Assessee AFTER the negotiations were completed during the year and the liability was known.

However, in the case before us, the Pay Revision Committee had not completed its deliberations before the end of the FY 2006-07 and was yet to submit its report at the time when the FY 2006-07 came to an end. In view of the foregoing, the case of Gail India Ltd. v. CIT (Supra) does not advance the case of the Assessee; and, instead, it goes against the assessee. Now, we come to the case of Bharat Earth Movers v. CIT (Supra). In this case, the Hon’ble Supreme Court, after considering Metal Box Co. of India Ltd. v. Their Workmen[1969] 73 ITR 53 (SC) and Calcutta Co. Ltd. v. CIT[1959] 37 ITR 1 (SC) stated, at Paragraph 4 of the Order, the well settled law in these words:

“The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied, the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain.” Thus, the question to be decided is whether any present liability has accrued against the Assessee during the relevant FY i.e. in 2006-07. In this context, for a fuller understanding, it is useful to refer to the decision of the Hon’ble Supreme Court in the case of Indian Molasses Co. Page 14 of 39 Fit for Publication ITA Nos.-5705 & 6151/Del/2014. Sd/- (AM) Sd/- (JM) Housing & Urban Development Corporation Ltd. Pvt. Ltd. v/s CIT 37 ITR 66 (SC) in which it was held: “Income tax law makes a distinction between the actual liability in Praesenti and a liability de futuro which for the time being, is only contingent. The former is deduction, but not the later. … a liability, not actually present but only contingent cannot bear the character of expense till the liability becomes real.” (emphasis added by us). Similar view was taken in Indian Smelting And Refining Co. Ltd. v/s CIT 248 ITR 4 (SC); Standard Mills v/s CIT 229 ITR 366 (Bombay) and CIT v/s Morarji Goculdas 243 ITR 37 (Bombay). The decisions in Standard Mills v/s CIT (Supra) and CIT v/s Morarji Goculdas (Supra) were delivered after due consideration of Kedarnath Jute Manufacturing Co. Ltd. v/s CIT [1971] 82 ITR 363 (SC) and other judicial precedents.

(3.1) In the facts of the case before us, we have already noticed that that the Pay Revision Committee had not completed its deliberations before the end of the FY 2006- 07 and was yet to submit its report at the time when the FY 2006-07 came to an end; and furthermore, that the pay revision was finally implemented in pursuance of aforesaid Office Memorandum dated 26.11.2008 in No.2(70)/08-DPE(WC) of Ministry of Heavy Industries & Public Enterprises. Under these facts and circumstances, we conclude that the liability for Rs. 1,60,00,000 deduction for which was claimed by the Assessee on account of ad hoc provision for pay revision, had not accrued during the relevant FY i.e. 2006-07 (AY 2007-08). Merely because Pay Revision Committee was constituted during the year, it cannot be said that liability towards pay revision had accrued during the year, when we consider the facts that the Pay Revision Committee Fit for Publication ITA Nos.-5705 & 6151/Del/2014. Sd/- (AM) Sd/- (JM) Housing & Urban Development Corporation Ltd. had not completed its deliberations before the end of the FY 2006-07 and was yet to submit its report at the time when the FY 2006-07 came to an end; and furthermore, that the pay revision was finally implemented in pursuance of aforesaid Office Memorandum dated 26.11.2008 in No.2(70)/08-DPE(WC) of Ministry of Heavy Industries & Public Enterprises. During FY 2006-07 (AY 2007-08), there was neither any statutory liability nor any legally enforceable liability against the Assessee in respect of the Assessee’s claim for Rs. 1,60,00,000 deduction for which was claimed by the Assessee on account of ad hoc provision for pay revision. In fact, there was no such liability at all. Even if there was a liability, it was purely a contingent liability which is not deductible for income tax purposes.

(3.2) We have given anxious consideration to the submission made by the Ld. AR of the Assessee that if this claim is not allowed in this year, it will cause hardship to the Assessee because the aforesaid claim of Rs. 1,60,00,000 towards ad hoc provision on account of pay revision has not been claimed by the Assessee in the subsequent years.

However, in view of Kikabhai Premchand v/s CIT 24 ITR 506 (SC), ITO v/s Murlidhar Bhagwan Das [1964] 52 ITR 335 (SC), CIT v/s British Paints India Ltd. 188 ITR 44 (SC) and CIT v/s Basant Rai Takht Singh 1 ITR 197 (SC), it is well settled that each year is separate and self-contained period, Income Tax is annual in its structure and organization. Thus, each previous year is a distinct unit of time for the purposes of assessment. The profits made; and the liabilities or losses made before or after the relevant previous year are immaterial in assessing income of a particular year; unless in accordance with proviso to Fit for Publication ITA Nos.-5705 & 6151/Del/2014. Sd/- (AM) Sd/- (JM) Housing & Urban Development Corporation Ltd. Section 4(1) of I.T. Act, there is statutory provision to the contrary. Moreover, it was held in CIT v/s Kasturi 237 ITR 24(SC); Fed of APCCI v/s State of AP 247 ITR 36(SC); CIT v/s Trivedi 183 ITR 420; Greatway v/s CIT 199 ITR 391; BM Parmar v/s CIT 235 ITR 679; Modipon v/s CIT 247 ITR 40; CIT v/s Rajan 252 ITR 126; CWT v/s Tulsi Dass 256 ITR 73; Vivek Jain v/s ACIT 337 ITR 74 that the courts or the Tribunal cannot extend relief when the legislative intent is otherwise. It was held in Tarulata Shyam v/s CIT (1977) 108 ITR 345, 357 (SC) that once it is shown that the case of the assessee comes within the letter of the law, he must be taxed, however, great the hardship may appear to the judicial mind. Moreover, it was held in State Bank of Travancore v/s CIT (1986) 158 ITR 102 (SC) that considerations of hardship, injustice or anomalies do not play any useful role in construing taxing statutes unless there be some real ambiguity. Also, the observation that “In a taxing Act one has to look merely at what is clearly said.

There is no room for any intendment. There is no equity about a tax. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied.” was approved by Hon’ble Supreme Court in CIT v/s Ajax Products Ltd. (1965) 55 ITR 741, 747 (SC) and CIT v/s Shahzada Nand & Sons (1966) 60 ITR 392, 400 (SC). In view of the foregoing, the contention of the Assessee; that if this claim is not allowed in this year, it will cause hardship to the Assessee because the aforesaid claim of Rs. 1,60,00,000 towards ad hoc provision on account of pay revision has not been claimed by the Assessee in the subsequent years; does not merit any favourable consideration. A claim wrongly made by an Assessee in an earlier year cannot be allowed in that year, merely because the Assessee did not make the claim Page 17 of 39 Fit for Publication ITA Nos.-5705 & 6151/Del/2014. Sd/- (AM) Sd/- (JM) Housing & Urban Development Corporation Ltd. correctly in a subsequent year. During the pendency of a dispute as to the year in which a claim of the Assessee is to be allowed; a prudent Assessee can make the claim in other year(s), on protective basis, subject to final outcome of such a dispute, by explaining such a protective claim in other year(s). The Assessee, having failed to make protective claim in subsequent year(s) in which it was lawfully allowable, cannot force the claim in an earlier year in which it was not lawfully allowable. However, the Assessee is free to exercise its legal options in respect of the subsequent year(s) in which the claim was lawfully allowable; such as U/s 264 of I.T. ACT with particular reference to Proviso to Section 264(3) of I.T. Act. As the present appeal before us pertains to AY 2007-08; by way of abundant caution, we clarify, however, that we presently decline to give any directions to Revenue for any subsequent year; and that all questions of law, fact, and mixed questions are left open in case the Assessee exercises.

(3.3) Therefore, in the facts and circumstances of this case, as discussed earlier; and respectfully following Bharat Earth Movers v. CIT (Supra), Indian Molasses Co.

Pvt. Ltd. v/s CIT (Supra), Indian Smelting And Refining Co. Ltd. v/s CIT (Supra), Standard Mills v/s CIT (Supra) and CIT v/s Morarji Goculdas (Supra); and moreover, in view of the foregoing discussion, we dismiss the first ground of appeal filed by the Assessee (in and confirm the impugned order of the Ld. CIT(A) on this issue, sustaining the disallowance of Rs. 1,60,00,000 on account of ad hoc provision for pay revision.

Fit for Publication ITA Nos.-5705 & 6151/Del/2014. Sd/- (AM) Sd/- (JM) Housing & Urban Development Corporation Ltd. (4) The second ground of appeal, in appeal filed by the Assessee in is related to the addition made by the AO, amounting to Rs. 1,28,00,000 on account of denial of change in accounting policy. The relevant portion of the Assessment Order is reproduced as under:

“Upto the close of the accounting year i.e. 31.3.2007, the policy of accounting the “Application fees, Front End Fees, Administrative Fees and processing fees” was being accounted for on accrual basis. But in the revised policy such receipts have been proposed and approved to be accounted for on receipt basis. This has the effect of lowering the profit by Rs.1.28 crores. Even at page 8 of the said “Accounting Policy note” it is mentioned that the Statutory Auditors have been qualifying this policy in their Audit Report stating that this accounting policy is not in compliance of Accounting Standard-9 on revenue recognition issued by ICAI. Moreover, the changes have been made after the closing of the accounting year, which were approved in the Board/COD meeting held on 27.9.2007. Hence, the amount of Rs.1,28,00,000/- is added to the income of the assessee.”

(4.1) The Assessee appealed before the Ld. CIT(A) against the aforesaid addition. The Ld. CIT(A), in impugned order dated 28.8.2014 dismissed Assessee’s appeal on this issue. The relevant portion of the impugned order of the Ld. CIT(A) is as under:

“Regarding the Ground No.2 of the appeal relating to disallowance of Rs.1.28 crores on account of under-statement of profit due to change in accounting policy of revenue recognition in respect of processing fees of loans etc., I find that the appellant was regularly following the accounting practice upto 31.03.2007 by which such incomes were accounted for on accrual basis. Subsequently, in view of its Board's decision in the meeting dated 27.09.2007, the appellant company revised its accounts in the light of the advice from the statutory auditors and thereby changed the accounting policy and recognized the Fit for Publication ITA Nos.-5705 & 6151/Del/2014. Sd/- (AM) Sd/- (JM) Housing & Urban Development Corporation Ltd. revenue in respect thereof on receipt basis. I find that the CAG audit party had raised the observation that accounting of such receipts at the time of signing of loan agreement was not in conformity with the Accounting Standard 9 to which the appellant company had assured vide letter dated 06.11.2006 that the accounting policy shall be reviewed in F.Y.2006-07. Subsequently, in the Board meeting of the appellant company of September, 2007, the following resolution was passed:

"Resolved that the changes in accounting policy from the year 2006-07 be and are hereby approved as detailed in the agenda item"

The detailed note for comparing existing policy and the revised policy shows that the Board of the company took this decision by assuming that there was no financial impact and there was only change in language. However, the very basis of this decision that there was no financial impact was incorrect, as the proposed change had resulted in reduction in the taxable profit under the Income Tax Act, 1961. Further, AO’s observation that the decision was taken only after the F.Y. is over was also note-worthy, even though such decision was taken with retrospective effect.

Evidently, the appellant is a company incorporated under Companies Act 1956. As per Accounting Standards, it follows mercantile system of accounting. Therefore, even though the company may have changed the accounting policy, which as mentioned was on a faulty premise that it did not have financial impact, in line with the Accounting Standards as per Section 145 A of the Act, it could have added back the amount of Rs.1.28 crores on account of such receipts in the computation of income. This would have ensured compliance with the CAG objections as also compliance with the provisions of the Act. Moreover, the decision of the Company's Board cannot override the provisions of the statute. Keeping in view the above, the addition made on this ground is upheld and this ground is accordingly dismissed.”

Fit for Publication ITA Nos.-5705 & 6151/Del/2014. Sd/- (AM) Sd/- (JM) Housing & Urban Development Corporation Ltd. (4.1.1) The Assessee is now in appeal against the aforesaid order dated 28.8.2014 of the Ld. CIT(A). At the time of hearing before us, the Ld. AR of the Assessee submitted that the change in the Accounting Policy was made in order to comply with objection/observation of the Audit Party of Comptroller & Auditor General. The Ld. CIT (DR) relied on the orders of the AO and the Ld. CIT(A).

(4.2) The position in law is unambiguous. U/s 145(1) of I.T. Act, it is provided that income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. The Assessee is not permitted to follow cash system of accounting for some of the items while following mercantile system of accounting for rest of the items in computation of income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” as the mixed system of accounting has lost statutory mandate w.e.f.

AY 1989-90 in view of the amendment to Section 145 of I.T. Act. Thus, the Assessee was in clear error of law in changing the method of accounting to selectively adopt cash system of accounting for certain items, while following mercantile system of accounting for rest of the items. Even if the accounting policy was changed in pursuance of observation of Audit Party of Comptroller & Auditor General (“CAG” for short), even then, statutory provisions under I.T. Act will prevail over any observation/objection/remark of Audit Party of CAG. Moreover, despite having changed the accounting policy, in pursuance of Fit for Publication ITA Nos.-5705 & 6151/Del/2014. Sd/- (AM) Sd/- (JM) Housing & Urban Development Corporation Ltd. observation of Audit Party & CAG, the Assessee would have added back the aforesaid amount of Rs. 1.28 crores in the computation of Total Income for Income Tax purposes. That would have ensured compliance with statutory provisions under I.T. Act, as well as with observation of Audit Party & CAG. The Assessee is a company incorporated under the Companies Act, 1956 and follows mercantile system of accounting. An Assessee company registered under the Companies Act, 1956 is required to maintain accounts in accordance with provisions of The Companies Act, 1956. However, the profits computed in this manner need not necessarily be the same as Total Income for the purposes of I.T. Act. The computation of Total Income for the purposes of Income Tax Act requires giving effect to statutory provisions under I.T. Act, by making necessary adjustments/modifications/alterations/variations to profits compounded in accordance with provisions of the Companies Act, 1956. In view of this, the Assessee was in clear error of law by not adding back the aforesaid amount of Rs. 1.28 crores in the computation of Total Income for the purposes of I.T. Act. This error of law is further aggravated by the error of fact, in that the change of accounting policy was based on faulty premise (i.e. error of fact) that there was no financial impact. The fact is, there was financial impact to the extent of aforesaid amount of Rs. 1.28 crores. In view of the foregoing discussion and unambiguous position in law; and the clear errors of law and fact on the part of the Assessee, we uphold the addition of aforesaid amount of Rs. 1.28 crores. The Ld. AR of the Assessee failed to bring to our notice any specific provisions of law or any judicial precedents to support this ground of appeal

. We find that the order of the Ld. CIT(A) is well reasoned and in accordance with law in the facts Page 22 of 39. Fit for Publication ITA Nos.-5705 & 6151/Del/2014. Sd/- (AM) Sd/- (JM) Housing & Urban Development Corporation Ltd. and circumstances of this case. The Assessee has failed to make any case for inference with the impugned order of the Ld. CIT(A) on this issue. Therefore, the second ground of appeal in the appeal filed by the Assessee in the is dismissed and the impugned order of the Ld. CIT(A) on this issue, sustaining the aforesaid addition of Rs. 1,28,00,000.

(5) Now, we come to the appeal filed by Revenue vide . The only issue in this appeal is regarding the disallowance made by the AO U/s 14A of I.T.

Act read with Rule 8D of I.T. Rules. The relevant portions from the Order of the AO and the impugned order of the Ld. CIT(A) are as under:

Relevant portions of Assessment Order:

“A) DISALLOWANCE U/S 14A/RULE 8D

After perusal of the reply filed by the assessee, it is noticed that in regard to disallowance u/s 14A, the assessee has stated that the Investment in Bonds has not been taken into account while working out average value of investments for the purpose of disallowance u/s 14A/Rule8D because interest income on bonds is a taxable income and the same is already offered to tax purposes i.e. already form the part of total income of the assessee. However, details of such Bonds and income offered on the same was not filed with the reply.

Accordingly, vide this office questionnaire/notice u/s 142(1) dated 6.2.2013 tie assessee was apprised that "vide S.No.2 of this office questionnaire dated 22.11.2012 you were asked to file complete details of exempt income giving the name of the Investment and the amount of exempt income or taxable income earned from the investments in long term/short term equity of giving the said details, you have simply stated that interest income on bonds is taxable income Fit for Publication ITA Nos.-5705 & 6151/Del/2014. Sd/- (AM) Sd/- (JM) Housing & Urban Development Corporation Ltd. and the same is already officered to tax purposes i.e. already form the part of total income of the assessee. ” Hence, the assessee was asked to give complete details of exempt income giving name of the Investments and the amount of exempt income or taxable income earned from the investments in long term/short term equity shares or bonds. The assessee sought adjournment. A further opportunity was provided to the assessee vide this office questionnaire dated 28.2.2013.

The assessee filed the details in a tabular form showing the interest income of Rs.242,&3,41,868/- on Investments in Bonds of 14 Entities and tax free j dividend income of Rs. 1,20,000/- has been shown on Investments in equity shares of Tamilnadu Urban Finance & Inf. Dev. Corpon. Ltd.

As regards the contention of the assessee that no disallowance is called for and rule 8D is applicable from assessment year 2008-09, the same is not acceptable because of the following factual and legal position:- a) As per Balance-sheet the total investments have been shown at Rs.24,50,49,75,000/- (which also includes Investments of Rs.24,(16,14,50,000/- in Various Bonds, interest income from which has been shown at Rs.2,42,83,41,868/-). b) The assessee has nowhere stated that it has maintained separate accounts for Investments and for other business activities carried on by the assessee. There is common pool of funds for making investments and other business activities. c) The contention of the assessee that Investments were made out of its own surplus funds demonstrating tie figures as per annexure-II(a) of its reply showing the details in a tabular form for the year 1989-90 to 1994-95 and for the year 2005-06 to 2007-08. In this tabular form the assessee has only shown the figures of Investments made, opening Reserves, Net profit during the year, increase in equity and Net profit and corresponding Increase in Equity. The Page 24 of 39 Fit for Publication ITA Nos.-5705 & 6151/Del/2014. Sd/- (AM) Sd/- (JM) Housing & Urban Development Corporation Ltd. assessee has not taken into account the amount of secured and unsecured loans raised from the very beginning (on which huge amount of interest is being paid from year to year)) when these investments were made. Nor it has given the details of loans and advances given on year to year basis on which huge interest is being received. e) Besides, the interest expenditure, other expenses are also to be considered for disallowance u/s 14A.

The fact that diversified investment in mutual funds, Bonds, shares have been made and it clearly suggest that considerable time, efforts, application of skills, technical knowledge, expertise etc. have gone towards such investments and that the company has a lot at stake.

A company cannot earn dividend without its existence and management. Investment decisions are generally complicated requiring daily analysis of market trends, research and analysis. Decision relate to acquisition, holding period and redemption of investment at the opportune time. These decisions are generally taken in the meetings of Board of Directors, for which administrative expenses and other expenses are incurred. As held in Southern Petrochemicals Inds. Vs. DCIT (2005) 3 SOT 157 (Chennai), it is not correct to say that dividend income can be earned by incurring no or nominal expenditure. After comprehensive consideration of all the relevant aspects of the case including the provisions of law, it was held in the decision supra that investment decision are very strategic decisions in which to management is involved and therefore proportionate management expenses are required to be deducted while computing exempt income from dividend. In Harish Krishnakant Bhatt Vs. ITO (2004) 91 ITD 311 (Ahd.) the Tribunal held that dividend being exempt u/s 10(34), interest on capital borrowed for acquisition of relevant share yielding such dividend cannot be allowed deduction by operation of section 14A of the Act. In DCIT Vs. S.G. Investment and Inds. Ltd. (2004) 89 ITD 44 (Cal.), the Tribunal said that in view Fit for Publication ITA Nos.-5705 & 6151/Del/2014. Sd/- (AM) Sd/- (JM) Housing & Urban Development Corporation Ltd. of section 14|A of the Act, pro-rata expenses on account of interest relatable to investment in share for earning exempt income from dividend are to be disallowed against taxable income and only the net dividend income is to be allowed exemption after deducting the expenses. Secondly it was held that the expression "expenses incurred by the assessee in relation to income which does not form part of total income” in section 14A has to be given a wider meaning and would include both direct and indirect relationship between expenditure and exempt income. Following the decision in CIT Vs. United General Trust Ltd. 200 ITR 488 (SC), it was held in the case of S .G. Investment and Inds. Ltd. (supra) that interest paid by the assessee being attributable to the money borrowed for the purpose of making investment which yielded the dividend income and other expenses incurred in connection with or for making or earning the dividend income can be regarded as expenditure in relation to dividend income. In Ever Plus Securities and Finance Ltd. Vs. DCIT (2006) 101 ITD 151 (Delhi), it was held that merely because the assessee did not earn dividend out of investment in certain shares does not imply that the provisions of section 14A would not apply to that extent. In ACIT Vs. Premier Capital Trust (India) Ltd. (2004) 83 TTJ (Mum), it was held that the A.O. was justified in attributing a part of the financial and administrative expenditure and expenditure incurred in relation to exempt income and disallowing the same in view of the provisions of section 14A of the Act.

That without prejudice, argument of the assessee that in the absence of machinery section, the substantive provisions of section 14A could not have been invoked, is without merit. Section 14A was inserted by the Finance Act, 2001 w.e.f. 1.4.1962. 1st Proviso to Section l4A was inserted by the Finance Act, 2002 w.e.f. 11.5.2001. Hence, it was within the jurisdiction and technical competence of the A.O. to refer to the provisions of section l4A as it stood at the relevant time and disallow such expenditure incurred by the assessee in relation to income which did not form part of total income under the Act.

Fit for Publication ITA Nos.-5705 & 6151/Del/2014. Sd/- (AM) Sd/- (JM) Housing & Urban Development Corporation Ltd. Various investment decisions, both for earning taxable income as well as tax-free income are being made at its Head office and the personnel engaged in Finance and Accounts Department and the Management must have to devote some time and energy on taking decision on which schemes of mutual funds or equities of which company are to be invested in. There are various mutual funds operating in the market and each mutual fund house is running several schemes. Out of the thousands of mutual funds schemes being offered for sale, it really take some efforts, time and, energy to make a due diligence and then select right schemes which would give reasonable return in future. Therefore, some portion out of the expenditure incurred on Director’s remuneration, Senior Executives salaries and other overheads could definitely be attributed to teaming the tax free income.

The Hon'ble Supreme Court in the case of CIT Vs. Walfort Stock Brokers Pvt. Ltd. (2010) 326-ITR-l (SC) has held that u/s 14A of the Act all relatable expenses claimed u/s 30 to 37 of the I. T. Act can be subjected to disallowance. The relevant portion of the said judgment is reproduced hereunder:-

"The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income..... The basis principle of taxation is to tax the net income i.e. gross income minus the expenditure. On the same analogy the exemption is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is the purpose of Section 14A" (page 15-16)

"The theory of apportionment of /expenditure between taxable and non-taxable income has, in principle, been now widened u/s 14A of the Act. Reading section 14A in juxtaposition with section 15 to 59, it is clear that the words "expenditure incurred" in section 14A refers to expenditure on rent, taxes, salaries, interest etc. in respect of which allowances are provided for (see sections 30 to 37)". (page 17) (Emphasis mine)

Fit for Publication ITA Nos.-5705 & 6151/Del/2014. Sd/- (AM) Sd/- (JM) Housing & Urban Development Corporation Ltd. In a detailed judgement, recently delivered after considering the aforesaid judgment of Hon'ble Supreme Court, the Bombay High Court in the case of Godrej and Boycee Mfg. Co. Ltd. Vs. CIT 328 ITR 81 (Bom) has similarly held that even prior to introduction of section 14A(2) and (3) of the I. T. Act., the A.O. is duty bound to enforce the provisions of section 14A(1) and for that purpose, he must adopt a reasonable basis consistent with all the relevant facts and circumstances. The relevant portion of the said judgment is extracted as under:-

"Even prior to A.Y 2008-09, When rule 8D was not applicable, the A.O. has to enforce the provisions of section 14A(1). For that purpose, the A.O. is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. He must adopt a reasonable basis consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on record." (Page 138) (Emphasis mine) Similar views have been expressed recently by Delhi High Court in the case of Maxopp Investments Ltd. Vs. CIT (2011) 247-CTR-162 (Delhi). The Hon'ble High Court in para 42 of its order has held as under:-

"42. Thus, the fact that we have held that sub-section (2) & (3) of section 14A and Rule 8D would operate prospectively (and not retrospectively) does not mean that the assessing Officer is not to satisfy himself with the correctness of the claim of the assessee with regard to such expenditure. ….If his is satisfied on an objective analysis and for cogent reasons that the amount of such expenditure as claimed by the assessee is not correct, he is required to determine the amount of such expenditure on the basis of reasonable and acceptable method of apportionment. It would be appropriate to recall the words of the Supreme Court in Walfort Share & Stock Brokers P. Ltd (supra) to the fallowing effect:-