ACIT, CIRCLE-18(2), NOIDA vs. NOIDA TOLL BRIDGE CO. LTD., NOIDA

PER N.K. BILLAIYA, ACCOUNTANT MEMBER:-

ITA No. 4410/DEL/2018 [A.Y 2006-07] [Assessee’s appeal] [A.Y 2007-08] [Assessee’s Appeal] ITA No. 4412/DEL/2018 [A.Y 2008-09] [Assessee ’s Appeal]

2. Challenge of the assessee is three-fold:

(i) Reopening of the assessment;

(ii) Enhancement by the ld. CIT(A); and (iii) Merits of the Addition.

4. Vide notice dated 28.03.2013 issued u/s 148 of the Income-tax Act, 1961 [the Act, for short], the Assessing Officer initiated reassessment proceedings after recording reasons which read as under:

5. A perusal of the aforementioned reasons shows that the reassessment proceedings were initiated only to disallow amortization interest on zero coupon bonds.

6. Facts on record show that the original assessment was framed u/s 143(3) of the Act vide order dated 31.12.2008. Therefore, the notice issued u/s 148 of the Act is beyond four years. Therefore, the provisions of the 1st proviso to section 147 of the Act squarely apply wherein it has been provided that there has to be a failure on the part of the assessee to disclose truly and fully all material facts necessary for assessment and reasons recorded by the Assessing Officer should specifically record such failure based on a tangible material and non recording of the same would render the entire reassessment null and void.

7. Our view is fortified by the decision of the Hon'ble Jurisdictional High Court of Delhi in the case of Haryana Acylic Manufacturing Company 308 ITR 38 wherein the Hon'ble High Court has held as under:

“20. In the reasons supplied to the petitioner, there is no whisper, what to speak of any allegation, that the petitioner had failed to disclose fully and truly all material facts necessary for assessment and that because of this failure there has been an escapement of income chargeable to tax. Merely having a reason to believe that income had escaped assessment, is not sufficient to reopen assessments beyond the four year period indicated above. The escapement of income from assessment must also be occasioned by the failure on the part of the assessee to disclose material facts, fully and truly. This is a necessary condition for overcoming the bar set up by the proviso to section 147. If this condition is not satisfied, the bar would operate and no action under section 147 could be taken. We have already mentioned above that the reasons supplied to the petitioner does not contain any such allegation. Consequently, one of the conditions precedent for removing the bar against taking action after the said four year period remains unfulfilled. In our recent decision in Wel Intertrade (P.) Ltd.’s we had agreed with the view taken by the Punjab and Haryana High Court in the case of Duli Chand Singhania that, in the absence of an allegation in the reasons recorded that the escapement of income had occurred by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment, any action taken by the Assessing Officer under section 147 beyond the four year period would be wholly without jurisdiction. Reiterating our viewpoint, we hold that the notice dated 29-3-2004 under section 148 based on the recorded reasons as supplied to the petitioner as well as the consequent order dated 2-3-2005 are without jurisdiction as no action under section 147 could be taken beyond the four year period in the circumstances narrated above.”

8. In light of the decision of the Hon'ble High Court of Delhi [supra], we are of the considered view that the Assessing Officer has grossly erred in not pointing out the failure on the part of the assessee to disclose truly and fully all material facts necessary for assessment framed vide order dated 31.12.2008 u/s 143(3) of the Act. This, in itself, is sufficient to quash the reopening of the assessment.

Therefore, it can be safely concluded that the deletion has attained finality and, therefore, the ratio laid down by the Hon'ble High Court of Delhi in the case of Adhunik Niryat Ispat Ltd [supra] squarely apply.

13. Ironically, we are somewhat shocked by the observations of the ld. CIT(A) that he does not have power to adjudicate on the validity of reassessment proceedings and that the Hon'ble Supreme Court in the case of G.K. Drive Shaft 259 ITR 19 held that reassessment proceedings can be challenged only by way of a writ petition.

“125. In view of the above, the contention of the appellant that the assumption of jurisdiction u/s. 147 by Id. AO. and issuance of notice u/s. 148 of I.T. Act, 1961 was not proper & had therefore, vitiated the entire reassessment proceedings is neither correct nor maintainable before this office. Once the procedure laid down by the Hon'ble Apex Court to deal with the objections of the appellant to the assumption of jurisdiction stood dealt with by the Ld. AO. in the manner prescribed & appellant joined the reassessment proceedings waiving its right to challenge the same before the Constitutional Courts under writ jurisdiction; the objections of the appellant to assumption of jurisdiction by the Ld. AO. had become infructuous & needs to be given quietus. The challenge posed by the appellant to the assumption of jurisdiction by the Id. AO. u/s. 147 of I.T. Act, 1961 is, therefore, not maintainable in law and the ground taken by it is, therefore, rejected,

notice u/s 148 of I.T Act, 1961 assessee is entitled to get a copy of the satisfaction recorded by the assessing officer for re-opening the assessment and after the same is provided by the A.O., the assessee can represent to the assessing officer regarding the correctness of the same and which the assessing officer must dispose off by passing a speaking order.

for with impugned assessment orders on this issue. There is no merit in the ground taken by the appellant company that this office had the jurisdiction to adjudicate the correctness of the initiation of proceedings u/s 147 of I.T. Act, 1961 by the Ld. A.O. beyond the mandate of Hon'ble Supreme Court in the case of "GKN Driveshaft (India) Ltd. Vs. I~03) 2591TR 19 SC & the same is rejected.”

15. Such observations/findings of the ld. CIT(A) are nothing short of travesty of justice and can be termed as “harassment” to the tax payer.

17. For the sake of completeness, we will address the issues on merits of the case.

18. The ld. CIT(A) has enhanced the assessment in respect of the following incomes:

(i) Arrear of designated return - Rs. 179.87 crores (ii Lease of land treated as revenue subsidy - Rs. 1730.08 crores (iii) Disallowance of depreciation claimed on toll bridge - Rs. 15.97 crores

19. Before embarking upon the merits of each issue, it would be pertinent to understand the powers of enhancement conferred upon the ld. CIT(A) by provisions of Section 251 of the Act. The relevant provisions of section 251(1a) read as under:

“In disposing of the appeals, the Commissioner (Appeals) shall have the following powers:

In appeal against order of assessment, he may confirm/reduce, enhance or annul the assessment.”

20. In our understanding, the ld. CIT(A) can enhance the assessment only when the Assessing Officer has assessed something, which means, if the Assessing Officer has not assessed any income, the ld. CIT(A) cannot make enhancement by exploring new source of income. A perusal of the assessment order shows that the Assessing Officer has never considered the three issues mentioned hereinabove on which the ld. CIT(A) has made enhancement, nor they were part of the return of income. Therefore, in our considered opinion, enhancement is bad in law.

21. The Full Bench of the Hon'ble High Court of Delhi in the case of Sardari Lal and Company 251 ITR 864 had the occasion to consider an identical issue on the following facts:

“The question of first appellate authority's power to take into account a new source of income was referred for fresh adjudication.

The revenue contended that proceedings before the first appellate authority cannot b restricted to only the matters considered and decided by the assessing authority. It has the power to enhance income which Assessing Officer had failed and neglected to consider certain aspects and it has the power to adjudicate and decide everything necessary to ascertain the true and correct income of the assessee.

On the other hand, the assessee contended that if such a view was taken, the provisions for reopening in assessment available under section 147/148 and/or setting aside of the order on the ground that it was prejudicial to the interest of the revenue as available to the Commissioner under section 263 could be meaningless and purposeless.”

22. And held as under:

Having considered various decisions of the High Courts, as well as the Supreme Court, it is inevitable that whenever the question of taxability of income from a new source of income is concerned which had not been considered by the Assessing Officer, the jurisdiction to deal with the same in appropriate cases may be dealt with under section 147/148 and section 263, if requisite conditions are fulfilled. It is inconceivable that in the presence of such specific provisions a similar power is available to the first appellate authority.

Accordingly the matter was disposed of.”

23. The Hon'ble Supreme Court in the case of Shapoorji Pallonji Mistry 44 ITR 891 held as under:

“The question which arises in this appeal may be formulated thus: whether in an appeal filed by an assessee, the Appellate Assistant Commissioner can find a new source of income not considered by the Income-tax Officer and assess it under his powers granted by section 31 of the Income-tax Act? Section 31 reads as follows:

“31.(1) The Appellate Assistant Commissioner shall fix a day and place for the hearing of the appeal, and may from time to time adjourn the hearing.

(2) The Appellate Assistant Commissioner may, before disposing of any appeal, make such further inquiry as he thinks fit, or cause further inquiry to be made by the Income-tax Officer………..

(3) In disposing of an appeal the Appellate Assistant Commissioner may, in the case of an order of assessment, - (a) confirm, reduce, enhance-or annul the assessment, or (b) set aside the assessment and direct the Income-tax Officer to make a fresh assessment after making such further inquiry as the Income-tax Officer thinks fit or the Appellate Assistant Commissioner may direct, and the Income-tax Officer shall thereupon proceed to make such fresh assessment and determine where necessary the amount of tax payable on the basis of such fresh assessment...

There is no doubt that the Appellate Assistant Commissioner can "enhance the assessment". It is admitted also by the assessee that within the four corners of the sources processed by the Income-tax Officer, the Appellate Assistant Commissioner can enhance the assessment. This power must, at least, fall within the words "enhance the assessment", if they are not to be rendered wholly nugatory. The controversy in this case is about his discovering new sources, not mentioned in the return and not considered by the Income-tax Officer. The High Court held following its earlier view in Narrondas Manordass v. Commissioner of Income-tax [1195] 31 ITR 909, that the Appellate Assistant Commissioner has revisional powers, but that they are confined to what was before the Income-tax Officer and considered by the latter.”

“The AAC has no jurisdiction, under s. 31(3) of the Act, to assess a source of income which has not been processed by the Income tax Officer and which is not disclosed either in the returns filed by the assessee or in the assessment order, and therefore. the Appellate Assistant Commissioner cannot travel beyond the subject matter of the assessment. In other words, the power of enhancement under s. 31 (3) of the Act is restricted to the subject-matter of assessment or the sources of income which have been considered expressly or by clear implication by the Income-tax Officer from the point of view of the taxability of the assessee.

In instant case, it is true that the ITO had referred to the remittance from the Calcutta brunch, but the ITO considered the dispatch of this amount only with a view to test the genuineness of the entries relating to the Forbesgang branch. It was manifest that the ITO did not consider the remittance of Rs. 5,85,000 in the process of assessment from the point of view of its taxability. It was also manifest that the AMC had considered the amount of remittance from a different aspect, namely, the point of view of its taxability. But since the ITO had not applied his mind to the question of taxability or non-taxability of the amount, the AAC had no jurisdiction in the circumstances of the instant case to enhance the taxable income of the assessee on the basis of this amount or of any portion thereof. It is not open to the AAC to travel outside the record, i.e., the return made by the assessee or the assessment order of the ITO with a view to find out new sources of income and the power of enhancement under section 31(3) of the 1922 Act is restricted to the sources of income which have been the subject-matter of consideration by the ITO from the point of view of taxability. In this context ‘consideration’ does not mean ‘incidental’ or ‘collateral’ examination of any matter by the ITO in the process of assessment. There must be something in the assessment order to show that the ITO applied his mind to the particular subject-matter or the particular source of income with a view to its taxability or to its non-taxability and not to any incidental connection. In the instant case, it was manifest that the ITO had not considered the entry from the point view of its taxability and, therefore, the AAC had no jurisdiction, in an appeal under section 31 of the 1922 Act, to enhance the assessment.”

“6. A similar question has been examined by the Apex Court as noted above, on several occasions. We do not think it necessary and appropriate to proliferate this judgment by making reference to all the decisions. A few of the important ones need to be noticed. One of the earliest decisions on the point was in CIT v. Shapoorji Pallonji Mistry (1962) 44 ITR 891 (SC). The matter related to the corresponding provisions of the Indian Income Tax Act, 1922 (hereinafter referred to as "the old Act"). It was held, inter alia, that in an appeal filed by the assessed, the Appellate Assistant Commissioner has no power to enhance the assessment by discovering a new source of income not considered by the Income Tax Officer in the order appealed against. A similar view was expressed in CIT v. Rai Bahadur Hardutroy Motilal Chamaria (1967) 66 ITR 443 (SC). That also related to a case under section 31(3) of the old Act. It was held that the power of enhancement under section 31(3) of the old Act was restricted to the subject-matter of the assessment or the source of income, which had been considered expressly or by clear implication by the assessing officer from the point of view of taxability and that the Appellate Assistant Commissioner had no power to assess the source of income, which had not been taken into consideration by the assessing officer. It is to be noted that strong reliance was placed by learned counsel for the revenue on the decision of the Apex Court in CIT v. Nirbheram Daluram (1997) 224 ITR 610. It was submitted that a different view was expressed about the scope and ambit of the power of the first appellate authority vis-a-vis the sources considered by the assessing officer and even if the action of the first appellate authority related to a new source of income not considered by the assessing officer, it was not impermissible. It is to be noted that in Union Tyres' case (supra), this decision was also considered by this court in the background of what had been stated in Daluram's case (supra) and it was observed that there was really no difference from the view expressed earlier in Shapoorji's case (supra) and Chamaria's case (supra).

Corporation's case (supra) were also considered and it was observed by the Apex Court that the appellate powers conferred on the first appellate authority under section 251 of the Act were not confined to the matter, which had been considered by the Income Tax Officer, as the first appellate authority is vested with all the wide powers of the assessing officer may have while making the assessment, but the issue whether these wide powers also include the power to discover a new source of income was not commented upon. Consequently, the view expressed in Shapoorji's case (supra) and Chamaria's case (supra) still holds the field. It may be noted that the issue was considered in CIT v. McMillan and Co. (1958) 33 ITR 182 (SC). Referring to a decision of the Bombay High Court in Narondas Manohar Dass v. CIT (1957) 31 ITR 909 (Bom), it was held that the language used in section 31 of the old Act is wide enough to enable the first appellate authority to correct the Income Tax Officer not only with regard to a matter which has been raised by the assessed but also with regard to a matter which has been considered by the assessing officer and determined in the course of the assessment. It is also relevant to note that in the Jute Corporation's case (supra), the Apex Court, inter alia, observed as follows :

"The Appellate Assistant Commissioner, on an appeal preferred by the assessed, had jurisdiction to invoke, for the first time, the provisions of rule 33 of the Indian Income Tax Rules, 1922 (hereinafter referred to as 'the Rules'), for the purpose of computing the income of a non-resident even if the Income Tax Officer had not done so in the assessment proceedings. But, in Shapoorji

Pallonji Mistry's case (supra), this court, while considering the extent of the power of the Appellate Assistant Commissioner, referred to a number of cases decided by various High Courts including the Bombay High Court judgment in Narrondas' case (supra) and also the decision of this court in McMillan and Co.'s case (supra) and held that, in an appeal filed by the assessed, the Appellate Assistant Commissioner has no power to enhance the assessment by discovering new sources of income not considered by the Income Tax Officer in the order appealed against. It was urged on behalf of the revenue that the words 'enhance the assessment' occurring in section 31 were not confined to the assessment reached through a particular process but the amount which ought to have been computed if the true total income had been found. The court observed that there was no doubt that this view was also possible, but having regard to the provisions of sections 34 and 33B, which made provision for assessment of escaped income from new sources, the interpretation suggested on behalf of the revenue would be against the view which had held the field for nearly 37 years." (Emphasis, here italicised in print, supplied).

may be dealt with under section 147/148 of the Act and section 263 of the Act, if requisite conditions are fulfillled. It is inconceivable that in the presence of such specific provisions, a similar power is available to the first appellate authority. That being the position, the decision in Union Tyres' case (supra) of this court expresses the correct view and does not need reconsideration. This reference is accordingly disposed of.”

ADDTION ON ARREAR OF DESIGNATED RETURN Rs. 179.87 CRORES

Mr. Harish Mathur Chief Executive Officer Noida Toll Bridge Company Limited, Toll Plaza, DND Flyway, Opposite Sector-15A,

Noida-201301 Uttar Pradesh

Certification (revised) of the Statement of Computation of 'Return in Arrears as on 31 March 2013 in pursuance of the Concession Agreement Dear Sir,

3. The Statement is to be read in conjunction with Notes 3, 4 and 5, which form part of the Statement These notes provide the break-up of various heads comprised in the Statement and explain the management rationale for including or excluding certain items, which we have been informed, is consistent with the past practices.

• As explained by the management in Note 1 of the Statement, Project Cost of INR 3,259,934,174 was incurred till the date of commissioning of the project, which represented the provisional cost incurred upto that date, determined in accordance with Article 83 of the Concession Agreement by the Project Engineer. The same was certified by AF. Ferguson & Co, previous auditors, vide their certificate dated 23 April 2001. The return in arrear was being certified on the basis of this provisional cost (pending finalization by the Independent Engineer as per Article 8.1(c) read with Article 10.2) wherein the costs incurred post commissioning date were not being considered. The last such certification (on the basis of provisional cost) was done for the year ending 31 March 2013.

The management has now updated the project cost incurred upto the year ended 31 March 2013 by including the actual costs incurred, year- wise and re-computing the return in arrear an that basis. Accordingly, the Return in Arrears as at 31 March 2013 has been recompute on the basis of the updated cost.

Further, the Independent Engineer has certified the project cost incurred up to 31 March 2013 vide his certificate dated 15 November 2013

The interest and other finance charges amounting to INR $30.01 million incurred till 31 March 2013, and included in the total project cost as mentioned above have not been considered for the purposes of computing the Return in Arrears in accordance with the formula mentioned in the Concession Agreement.

5. This certificate has been provided solely for the purpose stated in paragraph 1 above and may not be suitable for any other purpose. This certificate is not intended for general circulation or publication and is not to be reproduced or used for any purpose other than for the purpose stated above without our prior written consent.

“The returns of the Total Cost of Project recoverable by the Concessionaire from the effective date at a rate of 20% per annum, as defined in Section 14.2 of the Agreement”.

“Section 2.1 Grant of Concession

(a) NOIDA hereby weakly grants to the concessionare the exclusive right and authority during the Concession Period to develop, establish, finance, design, construct, operate and maintain the Noida Bridge as an Infrastructure Facility for the benefit of the residents, and industries, and for the development of commence in Noida and permits it to enter into the Ashram Flyover Construction Agreement and the Concessionaire hereby accepts the Concession granted to it by NOIDA and further agrees to implement the Project, in accordance with the terms and conditions of this Agreement.

(b) NOIDA further grants to the Concessionaire the exclusive right and authority during the concession Period to in accordance with the terms and conditions at this Agreement :

(i) develop, establish, finance, design, construct, own, operate, maintain use and regulate the use by third parties of the Noida Bridge; (ii) Enjoy complete and uninterrupted possession and control of the lands identified as constituting the Bridge Site; (iii) Own all or any part of the Project Assets; (iv) determine, demand, collect, retain and appropriate a Fee from the Users of the Noida Bridge and apply the same in order to recover the Total Cost of Project and the Returns thereon; (v) restrict the use of the Noida Bridge in motorized vehicles, bicycles and pedestrians and to dehar animal drawn vehicles, cycle-rickshaws and cattle from the Noida Bridge; (vi) enforce the collection of Fee from delinquent Users of the Noida Bridge and impound the vehicles and goods of any such delinquent User for the purpose of enforcing collection; (vii) develop establish, finance, design, construct, operate, maintain and use any facilities to generate Development Income arising out of the Development Rights that may be granted in accordance with the provisions of Article 4 herein; (viii) enter into private contracts with the Users for any use or any special use of Noida Bridge and to sell, distribute or issue, at various outlets as may be determined by the Concessionaire, coupons or tokens against payment of Fee in advance, thus providing the Users with ready access to Noida Bridge without the necessity of paying fee on each incidental use of the Noida Bridge; and (ix) appoint subcontractors or agents on its behalf to assist it in falling its obligation under this Agreement

Development Rights

Section 4.1 Grant of Development Rights

(a) In the event that the Independent Auditor, upon reference by the Concessionaire, determines that the Project is not generating sufficient revenue for the Concessionaire to recover the Total Cost of Project and the Returns thereon, or the Independent Engineer in its decision under Section 3.5(a) determines that the Concessionaire must be granted such development Rights as may be specified, the concessionaire may requires that NOIDA grant or cause GOUP or DG, as the case may be, to grant to it, Development Rights within their respective jurisdiction for the purpose of generating Development Income. Upon receiving such a request from the Concessionaire, NOIDA in consultation with the Independent Authority, may in its role decretion, grant to the concessionaire Development Rights for the generation of Development Income. (b) The Development Rights shall be granted under a separate agreement and shall be governed by the terms of agreement under which they are granted (c) The Concessionaire shall make use of all Development Rights granted to it in such a manner so as not to repair the general integrity of the Project and with full regard for the safety of all Users and shall implement the Development Rights so as to avoid danger to any such persons.

“Section 5.1 Lease by Noida

(a) NOIDA shall, pursuant to the Project Site Lease Agreement, lease to Concessionaire the Bridge Site in form reasonably satisfactory to the Concessionaire in order to enable to construction and maintenance of the Facilities and enjoyment of Development Rights, as and when granted to the Concessionaire under Section 4.1 hereinabove, without limiting the generality of this Section 5.1(a), the terms of the Delhi Land Lease Agreement, delhi Land Sub-Lease Agreement and Noida Site Lease Agreement shall be in the form and substance so as to further enable procurement of funds from Lenders for implementation of the Project. The said Project Site Lease Agreement shall be duly executed and registered with the Competent Authority as soon as practicable, but in any case within six months of the State hereof. (a) The Project Site Lease Agreement shall initially be for a period of 31 years and shall be co-terminus with the Concession Agreement and shall be extended or earlier terminated to coincide with the Concession Period. (b) In consideration of the lease of the Bridge Site, the Concessionaire shall pay to NOIDA as a sum of Rupee 1.00 per annum, which amount shall be paid as an advance lease rental in one lump sum of Rupee 50,00 (in consideration of a possible extension of the Concession Period) on or prior to the date upon which the Project Site Lease Agreements is executed. All lease rental amounts payable pursuant to this subsection(e) shall be considered as part of the Project Cost. Any excess lease rental payments shall be refunded to the Concessionaire on the Transfer Date, NOIDA shall not increase the lease rental amounts payable in accordance with this Section 5.1(e). (c) All costs, expenses or charges incurred in making available the Bridge Site, including any compensation required to be paid for acquisition thereof or for the rehabilitation or resettlement of Persons in connection therewith or for the removal of structures, both above and underground, shall be borne and paid for by NOIDA or by the Concessionaire, upon written request in this regard by NOIDA, which request may be agreed to by the Concessionaire at its sole discretion. In the event that the said costs and expenses are completely or partially borne by the Concessionaire, they shall be included as part of the Project Cost. NOIDA shall bold the Concessionaire harmless from any costs or claims relating to any such acquisition and removal of such structures and all costs, expenses of charges incurred in relocating, rehabilitating or resettling persons in connection with making available the Bridge Site shall be borne and paid for by the Concessionaire and shall be included as pan of the Project Cost.

(d) Each of the agreements constituting the Project Site Lease Agreements are independent of each other, The termination of Delhi Land Sub Lease Agreement or any part thereof caused due to termination of the Delhi Land Lease Agreement or any part thereof shall not effect the continuation and effectiveness of the Noida Site Lease Agreement.

“The word "earned" has not been used in section 4 of the Income-tax Act. The section talks of " income, profits and gains " from whatever source derived which (a) are received by or on behalf of the assessee, or (b) accrue or arise to the assessee in the taxable territories during the chargeable accounting period. Neither the word " income " nor the words "is received," "accrues" and " arises " have been defined in the Act. The Privy Council in Commissioner of Income-tax, Bengal v. Shau Wallace & Co.(1) attempted a definition of the term income " in the words following :-

" Income, their Lordships think, in the Indian Income-tax Act, connotes a periodical monetary return ' coming in' with some sort of regularity, or expected regularity from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return excluding anything in the nature of a mere windfall."

Mukerji- J. has defined these terms in Rogers Pyatt Shellac & Co. v. Secretary of State for India(2):

" Now what is income? The -term is nowhere defined in the Act...... In the absence of a statutory definition we must take its ordinary dictionary meaning that which comes in as the periodical produce of one's work, business, lands or investments (considered in reference to its amount and commonly expressed in terms of money) ; annual or periodical receipts accruing to a person or corporation " (Oxford Dictionary). The word clearly implies the idea of receipt, actual or constructive. The policy of the\ Act is to make the amount taxable when it is paid or received either actually or constructively. i Accrues,' arises' and I is received' are three distinct terms. So far as receiving of income is concerned there can be no difficulty; it conveys a clear and definite meaning, and I can think of no expression which makes its meaning plainer than the word ' receiving' itself The words I accrue and arise also are not defined in the Act. The ordinary dictionary meanings of these words have got to be taken as the meanings attaching to them. Accruing' is synonymous with 'arising' in the sense of springing as a natural growth or result. The three Expressions accrues, I arises ' and I is received ' having been used in the section, strictly speaking 'accrues' should hot be taken as synonymous with I arises' but on the distinct sense of growing up by way of addition for increase or as an accession or advantage; while the word I arises' means comes into existence or notice or presents itself. The former connotes the idea of a growth or accumulation and the latter of the growth or accumulation with a tangible shape so as to be receivable. It is difficult to say that this distinction has been throughout maintained in the Act and perhaps the two words seem to denote the same idea or ideas very similar, and the difference only lies in this that one is more appropriate than the other when applied to particular cases. It is clear, however, as pointed out by Fry L.J. in Colquhoun v. Brooks(1), [this part of the decision not having been affected by the reversal of the decision by the House of Lords(2)] that both the words are used in contradistinction to the word " receive " and indicate a right to receive. They represent a stage anterior to the point of time when the income becomes receivable and connote a character of the income which is more or less inchoate.

One other matter need be referred to in connection with the section. What is sought to be taxed must be income and it cannot be taxed unless it has arrived at a stage when it can be called 'income'."

The observations of Lord Justice Fry quoted above by Mukerji J. were made in Colquhoun v. Brooks(1) while construing the provisions of 16 and 17 Victoria Chapter 34 section 2 schedule 'D'. The words to be construed there were' profits or gains, arising or accruing' and it was observed by Lord Justice Fry at page 59:

" In the first place, I would observe that the tax is in respect of 'profits or gains arising or accruing.' I cannot read those words as meaning I received by.' If the enactment were limited to profits and gains 'received by' the person to be charged, that limitation would apply as much to all Her Majesty's subjects as to foreigners residing in this country. The result' would be that no income-tax would be payable upon profits 'which accrued but which were not actually received, although profits might have been earned in the kingdom and might have accrued in the kingdom. I think, therefore, that the words I arising or accruing are general words descriptive of a right to receive profits."

To the same effect are the observations of Satyanarayana Rao J. in Commissioner of Income-tax, Madras v. Anamallais Timber Trust Ltd.(1) and Mukherjea J. in Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai & Co., Bombay(2) where this passage from the judgment of Mukerji J. in Roqers Pyatt Shellac & Co. v. Secretary of State for India(3), is approved and adopted. It is clear therefore that income may accrue to an assesee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise expressed debitum in presenti, solvendum in futuro; See W. S. Try Ltd. v. Johnson (Inspector of Taxes)(4), and Webb v. Stenton and Others,

Garnishees(5). Unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him.

The word "earned" even though it does not appear in section 4 of the Act has been very often used in the course of the judgments by learned Judges both in the High Courts as well as the Supreme Court. (Vide Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai & Co., Bombay(6), and Commissioner of Income-tax, Madras v. K. R. M. T. T. Thiagaraja Chetty & Co.(7). It has also been used by the Judicial Committee of the Privy Council in Commissioners of Taxation v. Kirk(1). The concept however cannot be divorced from that of income accruing to the assessee. If income has accrured to the assessee it is certainly earned by him in the sense that he has contributed to its production or the parenthood of the income can be traced to him. But in order that the income can be said to have accrued to or earned by the assessee it is not only necessary that the assessee must have contributed to its accruing or arising by rendering services or otherwise but he must have created a debt in his favour. A debt must have come into existence and he must have acquired a right to receive the payment. Unless and until his contribution or parenthood is effective in bringing into existence a debt or a right to receive the payment or in other words a debitum in presenti, solvendum in futuro it cannot be said that any income has accrued to him. The mere expression "earned" in the sense of rendering the services etc., by itself is of no avail.

If therefore on the construction of the Managing Agency Agreements we cannot come to the conclusion that the Sassoons had created any debt in their favour or had acquired a right to receive the payments from the Companies as at the date of the transfers of the Managing Agencies -in favour of the transferees no income can be said to have accrued to them. They had no doubt rendered services as Managing Agents of the Companies for the broken periods. But unless and until they completed their performance, viz., the completion of the definite period of service of a year which was a condition precedent to their being entitled to receive the remuneration or commission stipulated thereunder, no debt payable by the Companies was created in their favour and they had no right to receive any payment from the Companies. No remuneration or commission could therefore be said to have accrued to them at the dates of the respective transfers.

It was however urged that even though no income can be said to have accrued to the Sassoons at the date of the respective transfers which could be the (1) [1900] A. C. 588 at p. 592, subject-matter of any assignment by them in favour of the transferees, the moment the remuneration or commission was ascertained at the end of the calendar year and became a debt due to the Managing Agents under the terms of the Managing Agency Agreements it could be referred back to the period in which it was earned and the portions of the remuneration or commission which were earned by the Sassoons during the broken period could certainly then be said to be the income which had accrued to them during the chargeable accounting period.

Reliance was placed is support of this position on Commissioners of Inland Revenue v. Gardner Mountain & D' Ambrumenil, Ltd. (1). The assessee in that case carried on inter alia the business of underwriting Agents, and entered into Agreements with certain underwriters at Lloyds under which it was entitled to -receive as remuneration for its services in conducting the Agency, commissions on the net profits of each year's underwriting. The Agreements provided that " accounts should be kept for the period ending 31st December in each year and that each such account shall be made up and balanced at the end of the second clear year from the expiration of the period or year to which it relates and the amount then remaining to the credit of the account shall be taken to represent the amount of the net profit of the period or year to which it relates and the commission payable to the Company shall be calculated and paid thereon." The accounts for the underwriting done in the calendar year 1936 were made up at the end of 1938 and the question that arose was whether the assessee was liable to additional assessment in respect of the commission on under writer's profits from the policies underwritten in the calendar year 1936 in the year in which the policies were underwritten or in the year when the accounts were thus made up. The assessee contended that the contracts into which it entered were executory contracts, under which its services were not completed or paid for, as regards commission, until the conclusion of the relevant account; that the profit in the form of commission was not ascertainable or earned, and did not arise, until that time and that the additional assessment which was made in the year in which the policies were underwritten should accordingly be discharged. The Special Commissioner allowed the assessee's contention and, discharged the additional assessment. The decision of the Special Commissioners was confirmed on appeal by Macnaghten J. in the King's Bench Division of the High Court. The Court of Appeal however reversed this decision and a further appeal was taken by the assessee to the House of Lords. The House of Lords held that on the true construction of the Agreements, the commissions in question were earned by the assessee in the year in which the policies were underwritten, and must be brought into account accordingly and confirmed the decision of the Court of Appeal. It may be noted that the charge was on profits arising in each chargeable accounting period and the profits were to be taken to be the actual profits arising in the chargeable accounting period. The ratio of the decision was that the commission paid was remuneration for services completely performed in the particular year, that, the assessee had at the end of the year done everything it had to do to earn it and that it was remuneration for work done and completely done in the particular year though it was ascertained and paid two years later. Viscount Simon in his speech at page 93 stated that the assessee had acquired a legal right to be paid in futuro and that the principle was to refer back to the year in which it was earned so far as possible remuneration subsequently received even though it could only be precisely calculated. afterwards. Lord Wright in his speech at page 94 said that it was necessary to determine in what year the Commission was earned, or in the language of the Act, in what year the assessee's profits arose and observed at page 96 : -

"I agree with the Court of Appeal in thinking that the necessary conclusion from that must be that the right to the commission is treated as a vested right which has accrued at the time when the risk was underwritten, It has then been earned, though the profits resulting from the insurance cannot be then ascertained, but in practice are not ascertained until the end of two years beyond the date of underwriting. The right is vested, though its valuation is postponed,' and is not merely postponed but depends on all the contingencies which, are inevitable in any insurance risk, losses which may or may not happen, returns of premium, premiums to be arranged for additional risks, reinsurance, and the whole catalogue of uncertain future factors. All these have to be brought into account according to ordinary commercial practice and understanding. But the delays and difficulties which there may be in any particular case, however they may affect the profit, do not affect the right for what it eventually proves to be worth."

Lord Simonds in his speech at page 110 stated:

" It is clear to me that the commission is wholly earned in year 1 in respect of the profits of that year's underwriting. If so, I should have thought that it was not arguable that that commission did not accrue for income-tax- purposes in that same year though it was not ascertainable until later."

The fact that the account of the commission could not be made up until later did not make any difference to the position that the commission had been wholly earned during the chargeable accounting period and the income had accrued to the assessee during that period.

Learned counsel for the transferees also relied upon the decisions in Bangalore Woollen, Cotton and Silk Mills Co., Ltd. v. Commissioner of Income tax, Madras(1), and Turner Morrison and Co., Ltd. v. Commissioner of Income-tax, West Bengal(2), to show that as and when the sale proceeds were received by the Company the profits made by the Company were embedded in those sale proceeds and if that was so the percentage of the net profits which was payable by the Companies to the Managing Agents as and by way of commission was similarly embedded in those sale proceeds. If the profits thus accrued to the Company. during the chargeable accounting period the commission payable to the Managing Agents also could be said to have accrued to them during that period.

It is no doubt true that the accrual of income does not depend upon its ascertainment or the accounts cast by assessee. The accounts may be made up at a much later date. That depends upon the convenience - of the assessee and also upon the exigencies of the situation. The amount of the income, profits or gains may thus be ascertained later on the accounts being made up. But when the accounts are thus made up the income, profits or gains ascertained as the result of the account are referred back to the chargeable accounting period during which they have accrued or arisen and the assessee is liable to tax in respect of the same during that chargeable accounting period. "The computation of the profits whenever it may take place cannot possibly be allowed to suspend their accrual..:... ................. ". "The quantification of the commission is not a condition precedent to' its accrual." (Per Ghulam Hassan J., in Commissioner of Income-tax, Madras v. K. B. M. T. T. Thiagaraja Chetty and Co.(1). See also Isaac Holden and Sons,

Ltd. v. Commissioners of Inland Revenue(2), and Commissioners of Inland Revenue, v. Newcastle Breweries Ltd.(3). What has however got to be determined is whether the income, profits or gains accrued to the assessee and in order that the same may accrue to him it is necessary that he must have acquired a right to receive the same or that a right to the income, profits or gains has become vested in him though its valuation may be postponed or though its materialisation. may depend on the contingency that the making up of the accounts would show income, profits or gains. The argument that the income, profits or gains are embedded in the sale proceeds as and when received by the Company also does not help the transferees, because the Managing Agents have no share or interest in the sale proceeds received as such. They are not co-sharers with the Company and no part of the sale proceeds belongs to them. Nor is there any ground for saying that the Company are the trustees for the business or any of the assets for the Managing Agents. The Managing Agents cannot therefore be said to have acquired a right to receive any commission unless and until the accounts are made up at the end of the year, the net profits ascertained and the amount of commission due by the Company to the Managing Agents thus determined. (See Commissioners of Inland Revenue v. Lebus(1) ).

It is cleat therefore that no part of the Managing Agency commission had accrued to the Sasoons at the dates of the respecxtive tranasfers of the agencies to eth transferees.”

LEASE OF LAND TREATED AS REVENUE SUBSIDY – Rs. 1730.08 CRORES

The lands were given on lease and, therefore, there is no question of ownership being transferred to the assessee and, therefore, there is no question of any addition on this account. The same is directed to be deleted.

DISALLOWANCE OF DEPRECIATION CLAIMED ON TOLL BRIDGE Rs. 15.97 CRORES

The same is deleted.

During the year, the assessee debited such interest to the tune of Rs. 14.41 crores to the Profit and Loss account whereas it had paid Rs. 12.70 crores

[Revenue’s Appeals] A.Y 2006-07 ITA No. 4969/DEL/2018 A.Y 2007-08 ITA No. 4970/DEL/2018 A.Y 2008-09

21. Whether on the facts and circumstances of the case, the Ld. CIT(A) is legally justified in allowing expenses of Rs. 10056437/- on appeal of 'amortization of expenses incurred in respect of restructuring of loans against the findings of the Assessing Officer (herein after referred as "the AO) that the expenses incurred by the assessee

company under this head were for raising the capital and so cannot be treated as revenue expenses?

22. Whether on the facts and circumstances of the case, the Ld CIT(A) is legally justified in the deleting the disallowance of Rs. 10056437/- on account of "amortization of expenses incurred in respect of restructuring of loans without appreciating the fact that the expenses were incurred to confer enduring benefits beyond the assessment year under consideration and, therefore, these cannot be termed as revenue expenses?

Prayer for condonation of delay:

23. It is prayed that condonation of delay in filing of appeal may be granted since it took some time to know the current status of the decision of the Hon'ble Allahabad High Court in this case.

24. That the appellant craves leave to add, amend, alter or forgo any ground/(s) of appeal either before or at the time of hearing of the appeal.”

“9. Regarding 2nd issue as contained in ground No.4, the challenge of the assessee is with regard to treating a sum of Rs.,3,51,07,840/- being amortization of zero coupon bonds (series B) issued to lenders as a part of the package of relief and concessions granted by CDR empowered group of the Corporate Debt Restructuring Cell (CDR) of the banks and financial institutions, as capital expenditure whereas the assessee claimed it as revenue expenditure pertains to disallowance of Rs.3,51,07,840/- being the amortization of zero coupon bonds (Series B) issued to leaders as a part of the package of relief and concessions granted by the CDR empowered group of the corporate debt restructuring cell (CDR) of the banks and financial institutions as capital expenditure as against the assessee’s claim that it was a revenue expenditure. The A.O. was of the view that it was a capital expenditure. For the sake of convenience, the relevant findings of the A.O. are reproduced as under:

‘The submissions made by the assessee company year considered. As admitted by the assessee company itself in its submissions that thee bonds, which would be redeemed not later than March 31, 2014, were issued to the lenders towards compensation for the loss of interest they have suffered from the documented rate. Thus, such amortization is not an expenditure of revenue in nature. Accordingly, the expenditure claimed towards amortization of zero coupon bonds amounting to Rs.3,51,07,840/- (Rs.5,16,01,434 – Rs.1,64,93,594/-) is disallowed being capital in nature and added to the total income of the assessee company.’

XXXXXXX

12. Still aggrieved, the assessee has come up in further appeal and while reiterating the submissions as made before the A.O. and Ld. CIT(A), has pleaded for deletion of the addition made by the A.O. confirmed by Ld. CIT(A). It has been submitted that zero coupon bonds and amortization is nothing but revenue expenditure amounting to Rs.5,16,01,434/- as zero coupon bonds (Series B) and zero coupon bonds issued to the lender as compensation towards the prevent value of loss of interest from the documents related as the part of relief. Concession granted by CDR empowered group of the Corporate Debt Restructuring Cell (CDR) of the banks and financial institutions vide their approval letter No.CDR/421 dated 6.1.2003 and letter No.CDR/461 dated 16.1.2003. As per the scheme, the assessee had issued Series B Zero Coupon Bonds of Rs.100 each to Banks, Financial Institutions and others which could be redeemed not later than March 31, 2014 towards the net present value of the sacrifice made by them by way of reduction of interest rates from the contracted terms. The zero coupon bond is issued in order to compensate the loss of interest payable to them and accordingly amortization of zero coupon bond is nothing but the payment of interest to them and it is deductible expenditure as per Section 37(1) of the it act being revenue in nature. The assessee had created the provision on a year to year basis on the principle of sinking fund by applying the weighted average interest rate on outstanding borrowing prior to restructuring as the discount rate and thereby arrive at the amount of the yearly charge. The assessee has obtained confirmation from professional experts with respect to appropriateness of the sinking fund method as well as the adequacy of the charge on a year to year basis to for the liability towards the ZCBs in the books. Accordingly, the P & L account was debited with Rs.5,16,01,434/- being the required amount of provision and the corresponding liability was recognized under the said secured loan. As this was expenditure pertaining to the period under consideration and it was claimed as revenue expenditure which liability to be allowed by making reference to various details as submitted before Ld. CIT(A) and incorporated in his order and by relying upon the decision of Hon’ble Delhi High Court in case of CIT Vs Gujarat Guardian Ltd. as reported in 222 CTR 526 (Del.), it was pleaded for deletion of addition made by the A.O. and confirmed by Ld. CIT(A).

13. Ld. D.R. relied upon the orders of authorities below and pleaded for its confirmation. When specifically asked whether the case of the assessee covered by decision cited by Ld. Counsel for the assessee, he could not be able to give any denial.

14. After haring both the sides and considering the material on record as well as the precedent relied upon by the Ld. counsel for the assessee, we are of the view that addition made by the A.O. and confirmed by Ld. CIT(A) could not be made in view of the facts and circumstances of the case in the light of the precedent relied upon by Ld. counsel for the assessee. We, therefore, while considering the entire facts and circumstances and material on record and the ratio of the decision relied upon by Ld. counsel for the assessee and not controverted by Ld. D.R., direct to delete the impugned addition made by the A.O. and confirmed by Ld. CIT(A).”

XXXXX

5) Loss of interest to institutions/banks due to reduction in rate of interest from document rate, a agreed above, shall be compensated by issue of Zero Coupon Discount Bond and the same shall be redeemed by March 31,2014.

Therefore, the decision laid down therein is not applicable for the year under consideration.

Clause (e) Debt Restructuring reads as under:

Debt Restructuring:

Pursuant to the approved Debt Restructuring package, the Company has issued Zero Coupon Bonds (ZCBs) (Series A) of face value of Rs. 100 each aggregating to Rs. 51.385 crores to Financial Institutions and others towards conversion of Term Loan. ZCBs aggregating to Rs. 25.693 Crores were repaid on March 31,2005 and the balance have been repaid on March 31, 2006 as per terms of Restructuring.

Zero Coupon Bonds (Series B) of face value of Rs. 100 each aggregating to Rs. 55.5422 crores to Banks, Financial Institutions and others repayable no later than March 31,2014 towards the Net Present Value of the sacrifice made by them by way of reduction of interest rates from the contracted terms. The Company is creating provision on a year to year basis on the principle of Sinking Fund by applying the weighted average interest rate on outstanding borrowings prior to restructuring as the discount rate and thereby arrive at the amount of the yearly charge. The Company has obtained confirmation from professional experts with respect to appropriateness of the Sinking Fund Method as well as the adequacy of the charge on a year to year basis to account for the liability towards the ZCBs in the books. Accordingly, the Profit and Loss account has been debited with Rs. 32,664,127 (Previous Year Rs.

29,615,900 ) being the required amount towards provision and the corresponding liability has been created under the head Secured Loans. The company has redeemed ZCBs (Series B) aggregating to Rs. 27,771,1001- during the year 2003-04 and the same has been adjusted against the face value of the Zero Coupon Bonds (Series B) issued by the Company.

• The Company has repaid Terms Loans to the Banks aggregating to Rs. 48.9111 Crores in the two Financial Years ending March 31,2005 and 2006 as per terms of restructuring.”

“43B(d). Any sum payable by the assessee as interest on any loan or borrowing from any public financial institutions [or a state financial corporation or a state industrial investment corporation], in accordance with the terms and conditions of the agreement governing such loan or borrowing [or] XXXX

43B(e) any sum payable by the assessee as interest on any [loan or advances] from a scheduled bank [or a cooperative bank other than a primary agricultural credit society or a primary cooperative agricultural and rural development bank] in accordance with the terms and conditions of the agreement governing such loan [ or advances].

“For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable u/s (d) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or borrowing [or debentures or any other instrument by which the liability to pay is deferred to a future date] shall not be deemed to have been actually paid.”

“18. As has been pointed out hereinabove, the Finance Act, 2006 inserted Explanation 3C w.e.f. 1st April, 1989. The scope and effect of this provision was explained by the Board in Circular No.14/2006 dated 23rd December, 2006, as follows:

“16.2 It has come to notice that certain assessees were claiming deduction under section 43B on account of conversion of interest payable on an existing loan into a fresh loan on the ground that such conversion was a constructive discharge of interest liability and, therefore, amounted to actual payment. Claim of deduction against conversion of interest into a fresh loan is a case of misuse of the provisions of section 43B. A new Explanation 3C has, therefore, been inserted to clarify that if any sum payable by the assessee as interest on any loan or borrowing, referred to in clause (d) of section 43B, is converted into a loan or borrowing, the interest so converted, shall not be deemed to be actual payment.

16.3 This amendment takes effect retrospectively from 1st April, 1989 i.e. the date from which clause (d) was inserted in section 43B and applies in relation to the assessment year 1989-90 and subsequent years.”

19. The object of Section 43B, as originally enacted, is to allow certain deductions only on actual payment. This is made clear by the non- obstante clause contained in the beginning of the provision, coupled with the deduction being allowed irrespective of the previous years in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by it. In short, a mercantile system of accounting cannot be looked at when a deduction is claimed under this Section, making it clear that incurring of liability cannot allow for a deduction, but only “actual payment”, as contrasted with incurring of a liability, can allow for a deduction. Interestingly, the ‘sum payable’ referred to in Section 43B(d), with which we are concerned, does not refer to the mode of payment, unlike Proviso 2 to the said Section, which was omitted by the Finance Act, 2003 w.e.f. 1st April, 2004. The said Proviso reads as follows:

"Provided further that no deduction shall, in respect of any sum referred to in clause (b), be allowed unless such sum has actually been paid in cash or by issue of a cheque or draft or by any other mode on or before the due date as defined in the Explanation below clause (va) of sub- section (1) of section 36, and where such payment has been made otherwise than in cash, the sum has been realised within fifteen days from the due date."

at the heart of the introduction of Explanation 3C is misuse of the provisions of Section 43B by not actually paying interest, but converting such interest into a fresh loan. On the facts found in the present case, the issue of debentures by the assessee was, under a rehabilitation plan, to extinguish the liability of interest altogether. No misuse of the provision of Section 43B was found as a matter of fact by either the CIT or the ITAT. Explanation 3C, which was meant to plug a loophole, cannot therefore be brought to the aid of Revenue on the facts of this case. Indeed, if there be any ambiguity in the retrospectively added Explanation 3C, at least three well established canons of interpretation come to the rescue of the assessee in this case. First, since Explanation 3C was added in 2006 with the object of plugging a loophole – i.e. misusing Section 43B by not actually paying interest but converting interest into a fresh loan, bona fide transactions of actual payments are not meant to be affected. In similar circumstances, in K.P. Varghese v. ITO, (1981) 4 SCC 173, this Court construed Section 52 of the Income Tax Act as applying only to cases where ‘understatement’ is be found – an ‘understatement’ is not to be found in the literal language of Section 52, but was introduced by this Court to streamline the provision in the light of the object sought to be achieved by the said provision. This Court, therefore, held:

xxx xxx xxx

actually received by the assessee. That would in most cases be difficult, if not impossible, to show and hence sub-section (2) relieves the Revenue of all burden of proof regarding the extent of understatement or concealment and provides a statutory measure of the consideration received in respect of the transfer. It does not create any fictional receipt. It does not deem as receipt something which is not in fact received. It merely provides a statutory best judgment assessment of the consideration actually received by the assessee and brings to tax capital gains on the footing that the fair market value of the capital asset represents the actual consideration received by the assessee as against the consideration untruly declared or disclosed by him. This approach in construction of sub-section (2) falls in line with the scheme of the provisions relating to tax on capital gains. It may be noted that Section 52 is not a charging section but is a computation section. It has to be read along with Section 48 which provides the mode of computation and under which the starting point of computation is “the full value of the consideration received or accruing”. What in fact never accrued or was never received cannot be computed as capital gains under Section 48. Therefore sub-section (2) cannot be construed as bringing within the computation of capital gains an amount which, by no stretch of imagination, can be said to have accrued to the assessee or been received by him and it must be confined to cases where the actual consideration received for the transfer is understated and since in such cases it is very difficult, if not impossible, to determine and prove the exact quantum of the suppressed consideration, sub-section (2) provides the statutory measure for determining the consideration actually received by the assessee and permits the Revenue to take the fair market value of the capital asset as the full value of the consideration received in respect of the transfer.

ITA No. 4413/DEL/2018 [A.Y 2009-10] [ASSESSEE’s Appeal] [A.Y 2010-11] [ASSESSEE’s Appeal] ITA No. 4415/DEL/2018 [A.Y 2010-11] [ASSESSEE’s Appeal]

(i) Reopening of the assessment;

(ii) Enhancement by the ld. CIT(A); and (iii) Merits of the Addition.

77, The reopening was challenged before the ld. CIT(A) and the ld. CIT(A) has not adjudicated this ground for the reasons discussed by us in detail while deciding the appeal for A.Y 2006-07 vide Para 16 above.

Therefore, there was no new tangible material available with the Assessing Officer to invoke the provisions of section 147 of the Act. It is the say of the ld. counsel for the assessee that reopening is bad in law.

“The Independent Auditors of the Project appointed in terms of the Concession Agreement have ascertained the cost of the Delhi Noida Link Bridge incurred till March 31, 2001 on provisional basis pending certain payments, which would be effected on submission of the final bills by the contractor as per terms of the contract and clearance of the same by the Project Engineer designated under the Concession Agreement. The Independent Auditors have determined the amount to be recovered including 2()% return as designated under the Concession Agreement and due to the company till March 31, 2008 as Rs 12,841.30 million, The total amount to be recovered up to March 31, 2009 aggregates to Rs. 14,85.32 million as calculated by the Management and is subject to verification by the Independent Auditor”.

"Whether the Income Tax Appellate Tribunal was correct in law in allowing depreciation of Rs 16,47,417/- in computation of book profits under Section 115J, even though it was not debited in the profit and loss account, although mentioned in the notes to the account?"

“4.5 There is no dispute that the assessee has prepared the profit and loss account in the form prescribed i.e. Part II and III of Schedule VI to the Companies Act, as also that, the assessee has not charged depreciation in the profit and loss account and instead, has disclosed this fact alongwith the quantum of current year depreciation computed in accordance Section 205(2) of the Companies Act, as per the requirement of clause 3(iv) of Part II of Schedule VI of the Companies Act, by way of a note to the accounts. The said note as appearing in the profit and loss account and in so far as it is relevant is extracted hereinbelow:-

SAIN PROCESSING & WEAVING MILLS (P) LTD: DELHI

CONTINGENT LIABILITIES & NOTES ON ACCOUNTS

Annexed to the forming part of the accounts for the year ending on 31st March, 1990

Current yr. Previous yr.

Figures Period

1 to 3 ***** 4. No provision for depreciation has been made due to inadequacy of profit. The unabsorbed amount of depreciation as Per Section 205(2)(b) of the Companies Act, 1956.

Depreciation for the year 1647417/- , 894275/- Unabsorbed depreciation carried 81,56,588/- 65,09,171/- Forward

4.6 The requirement of disclosure on failure to provide for depreciation, in the profit and loss account, as also, the quantum of such arrears, flows from Section 211, read with, clause 3(iv) of Part II of Schedule VI of the Companies Act. The reason being; that there is, an obligation cast, on the company to present a true and fair view of its state of affairs to those who rely on its accounts. The provisions of Section 211 and clause 3(iv) of Part II of Schedule VI of the Companies Act, in so far, as they are relevant for the purposes of the present appeal are extracted below:-

"Section 211 (1) Every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall, subject to the provisions of this section, be in the form set out in Part I of Schedule VI, or as near thereto as circumstances admit or in such other form as may be approved by the Central government either generally or in any particular case and in preparing the balance sheet due regard shall be had, as far as may be, to the general instructions for preparation of balance sheet under the heading „Notes‟ at the end of that part:

Provided that nothing contained in this sub-section shall apply to any insurance or banking company or any company engaged in the generation or supply of electricity or to any other class of company for which a form of balance sheet has been specified in or under the Act governing such class of company.

(2) Every profit and loss account of a company shall give a true and fair view of the profit or loss of the company for the financial year and shall, subject as aforesaid, comply with the requirement of part II of Schedule VI, so far as they are applicable thereto.

(6) For the purpose of this section, except where the context otherwise requires any reference to a balance sheet or profit and loss account shall include any notes thereon or documents annexed thereto, giving information required by this Act and allowed by this Act to be given in the form of such notes or documents." xxxx xxxx xxxx xxxx "Part II REQUIREMENTS AS TO PROFIT AND LOSS ACCOUNT 1. xxxxxx 2. xxxxxx

3. The profit and loss account shall set out the various items relating to the income and expenditure of the company arranged under the most convenient heads; and in particular, shall disclose the following information in respect of the period covered by the account:

I. xxxxxx II. xxxxxx III. xxxxxx

IV. The amount provided for depreciation, renewals or diminution in value of fixed assets. If such provision is not made by means of a depreciation computed in accordance with Section 205(2) of the Act shall be disclosed by way of a note."

4.7 Thus disclosure, according to us, in the notes to the account is obligatory by virtue of the provision of sub-section (1A) of Section 115J of the Act which requires that every assessee shall prepare profit and loss account in accordance with the provision of Parts II and III of Schedule VI of the Companies Act, 1956.

4.8 Having said that, the issue still remains as to whether notes to accounts form part of the accounts, and whether the fact that the current year depreciation which has not been debited to the profit and loss account would in any way deprive the assessee of its claim for the deduction from the „net profit‟ in arriving at the figure of "book profit" for the purposes of Section 115J of the Act.

4.9 The answer to this poser is found in sub-section (6) of Section 211 of the Companies Act, which provides that except where the context otherwise requires any reference to a balance sheet or profit and loss account shall include the notes thereon or documents annexed thereto, giving information required to be given and/or allowed to be given in the form of notes or documents by the Companies Act. As already noted it is obligatory under clause 3(iv) of Part II of Schedule VI to Companies Act to give information with regard to depreciation, which has not been provided for alongwith the quantum of arrears. According to us, once this information is disclosed in the notes to the account it would clearly fall within the ambit of the explanation to Section 115J of the Act which defines "book profit" to mean „net profit‟ as „shown‟ in the profit and loss account for the relevant assessment year.

4.10 To our minds, as long as the depreciation which is not charged to profit and loss account but is otherwise disclosed in the notes of the accounts, it would come within the ambit of the expression „shown‟ in the profit and loss account, as notes to the account, form part of the profit and loss account by virtue of a sub-section (6) of Section 211 of the Companies Act, 1956. This is quite evident if the provisions of sub- section (6) of the Section 211 of the Companies Act, are read in conjunction with, sub-section (1A), as well as, the explanation to Section 115J of the Act.

4.11 Another important aspect of the matter is that the expression used by legislature is „net profit‟ in contra distinction to the well known accounting term „cash profit‟. The net profit of a company cannot be determined till all items of income and expenses as recognized, as well as, depreciation are taken into account. Depreciation is nothing but loss of value of an asset arising from its use, efflux of time or obsolescence over a period of its useful life. Depreciation, undoubtedly has a major impact in determination of the financial position of a company/enterprise.

4.12 To our minds the use of the expression „net profit‟ makes it clear that depreciation not debited to the profit and loss account will have to be taken into while determining "book profit‟ under Section 115J of the Act, as long as it forms part of the prescribed accounts. 4.13 This Bench, in the case of CIT Vs.

Khaitan Chemicals Fertilizers Ltd; being in its judgment dated 27.09.2008 dealt with a similar situation. In that case the issue which arose for consideration of the Court was whether prior period expenses/extraordinary items were required to be reduced from „net profit‟ as shown in profit and loss account in arriving at „book profits‟ for the purposes of Section 115JA of the Act. The assessee in that case had shown prior period expenses/extraordinary items in the profit and loss account after the figure of net profit had been struck in the profit and loss account. In other words, prior period expenses/extraordinary items had been shown in the profit and loss account though separately from the figure of net profit, in consonance with the provisions of Accounting Standard 5 issued by the Council for the Chartered Accountants of India. The Revenue had submitted that no adjustment to the figure of „net profit‟ could be made as the only deductions which could be made from the figure of net profit were those which were covered in Clause (i) to (ix) of Section 115JA (2) of the Act. It was contended that since prior period expenses/extraordinary items did not find mention in any of the clauses, referred to above, no adjustment could be made to the „net profit‟ figure, as disclosed in the profit and loss account for arriving at the „book profit‟ for the purpose of Section 115JA. We rejected the submission made by the Revenue and held that there was a fundamental flaw in the Assessing Officer‟s approach, in as much as, he was under the impression that the assessee was claiming a deduction in the net profit in terms of Clause (i) to (ix) of the explanation to Section 115JA (2). It was observed that assessee all along contended that the net profit was to be computed on the basis of the profit and loss account which, in turn, was required to be in accordance with the provisions of Parts II and III of Schedule VI of the Companies Act. It was further observed that the computation of net profit in view of the prescribed Accounting Standard (AS-5) required prior period expenses/extraordinary items to be shown separately and the fact that these items were shown separately did not mean that they would not constitute part of the net profit. 4.14 The court also observed that the normal approach is to include prior period items in the determination of net profit or loss for the current period; however, the alternative approach was to show such items in the statement of profit and loss account after determination of current net profit or loss so as to indicate the effect of such items on the current profit and loss.

4.15 In our view, the ratio of the said judgment would apply notwithstanding the fact that there is no debit to the profit and loss account, in view of our discussion above that net profit cannot be determined without taking into account the information disclosed in the notes appended to the accounts which as observed by us hereinabove, form part of the accounts of the company/assessee.

5. The matter can be looked at from another angle. Under clause (iv) of the Explanation to Section 115J, the net profit as shown in the profit and loss account is to be reduced by, the amount of loss or depreciation which would be required to be set off against profit of the relevant previous year as if the provisions of clause

(b) of the first proviso to sub- section (1) of Section 205 of the Companies Act, are applicable. In other words Section 205(1) proviso (b) of the Companies Act read with clause

(iv) of the explanation to Section 115J, permits reduction in the „net profit‟ to the extent of past losses or unabsorbed depreciation whichever is less. This makes the legislative intent clear. According to us, if unabsorbed depreciation can be reduced from „net profit‟ to arrive at book profit we see no reason why current year’s depreciation even though, not charged, to the profit and loss account though disclosed in the notes appended to the accounts cannot be deducted from the “net profit‟ in determining "book profit" for the purposes of Section 115J of the Act. In our opinion the assessee is entitled to seek deduction of current year depreciation from net profit to arrive at the „book profit‟ even though it is not charged to the profit and loss account, though disclosed in the notes appended to the accounts.

“3. As regards ground no.1, the brief facts of the case as emanating from the order of the AO are reproduced hereinbelow.

"During the assessment proceedings assessee also filed concession Agreement. Perusal of concession agreement entered between NEW OKHLA INDUSTRIAL DEVELOPMENT AUTHORITY AND INFRASTRUCTURE LEASING & FINANCIAL SERVICES LIMITED AND NOIDA TOLL BRIDGE PROJECT ITAs No.5246, 5247, 5248, 5249, 5286/Del/2012 3 COMPANY LIMITED reveals that independent Engineer is sole Authority to determine whether to issue or not issue certificate of compliance or conditional certificate of compliance contingent upon satisfaction of conditions mentioned in the concession agreement within 365 days from the date of signing of this agreement on 12.11.1997. Independent Auditor is required to give a reasoned decision on the basis of various submission made to him by the concessionaire i.e. assessee and NOIDA on non fulfillment of conditions on the certificate. Hence the above clearly shows that the work of independent Auditor was related to setting up and commissioning of the Noida Toll Bridge. He would also take decisions related to the fact that the assessee has right to terminate the concession agreement or not. His work also involves revising terms and conditions of the concessioin agreement vide which assessee was given the Right to establish and operate DND flyway. There are several other duties of independent Engineers mentioned in the concession agreement which clearly establishes that the work of independent Engineer is related to establishment, construction and commissionf of the DND Fly over and after its establishment, construction and commissioning to see whether or Noida and concessionaire i.e. assessee follow terms and conditions of the agreement or not and to alter the same as and when required. As per concessiion agreeemnt independent Auditors are required to determine the total cost of project from time to time and recovery vis a vis the project cost and give the estimated results thereof. Both independent Engineer and indepent Auditor are also requird to review cost and recovery position form time to time and be instrumental in determining whether development rights of the land around the Toll Bridge should or should not be granted to the concessionaire i.e. assessee, depending upon the recovery position. If recovery is slow Noida is required to allow assessee developmental rights of land around the flyway whereas if the recovery is fast the same is not required. When the in the same way concession agreement also mentions about retainers. All these details related to works assigned to independent Engineer, independent Auditor and, retainer is related to establishment, construction and commissioning of the DND Fly over to oversee and review position of recovery for the fly over vis-à-vis the cost involved. Hence the expense of Rs.22,55,046/- pais as Agency fee and claimed as expenditure in P & L account is not allowable since it is a capital expenditure. The same is treated as capital expenditure and the same is added back, to the income of the assessee."

4. Learned CIT(A) deleted the additions so made by the AO for the reasons mentioned in his order at pages 53 and 54 of his order.

6. Learned CIT-DR, at the outset relied upon the order of the AO and page 547 of the concession agreement.

7. Learned AR, on the other hand, relied upon the order of the learned CIT(A).

8. After perusing the record, we are of the view that learned CIT(A) has passed a reasoned order and has rightly observed that the Independent Auditor and the Independent Engineer were to be appointed by the Lenders, NOIDA and the assessee were required to be there for the entire concession period. The Concession Agreement clearly differentiated between the activities of these agents during the pre-construction, commissioning and post commissioning period. Since the project got commissioned in February, 2001, the activities of these agents during the post commissioning period is of relevance to determine their deductibility while computing the taxable income of the AY 2006-07. As per Section 85 of Article 8 of the Concession Agreement, the function of Independent Engineer, post commissioning of the project, was to monitor that the maintenance of the Noida Bridge was being carried on in conformity with the terms of the agreement and to certify the cost of such maintenance while the function of the Independent Auditor was to independently audit and certify the books of account of the assessee on a quarterly basis and also to certify the recovery position of the assessee. The' reports of these agents were to be accessible to the Lenders, NOIDA and the other promoter shareholders only. Similarly, under the terms of the inter-se Agreement. the assessee was required to appoint Trust & Retention Agent. Security Agent, etc. for the purposes of administrating the secured loans and the secured property, to coordinate the enforcement of the respective rights, powers and remedies of the Lenders etc. While the Security Agent was required to ensure that all charges created were duly registered and secure and proper asset cover is maintained by the assessee, the Trust & Retention Agent was required to create, maintain and operate a Trust and Retention Account and ensure that the funds were being utilized as per the terms on which the funding was done by the lenders and that no terms had not been violated and that the rights of the parties were protected. In view of the functions of these agents and contents of various clauses of the agreements, it is evident that the services of these agents were availed in order to ensure that the assessee has complied with the terms and conditions of the various agreements entered into by the assessee. The assessee was required to appoint these agents as a part of the agreements and in order to safeguard the interest of the stakeholders, was a business necessity for the assessee. The services were provided by these agents on a regular basis and thus were recurring in nature. The services of these agents helped the assessee in proper and efficient implementation of the agreements and thereby resulting in smooth functioning of the assessee's business. Further, the project got commissioned in February, 2001 and was fully operational during the FY 2005-06. The AO seems to have misread the Agreements to wrongly conclude that since the works assigned to independent Engineer, independent Auditor and, retainer is related to establishment, construction and commissioning of the DND Fly over and to oversee and review position

of recovery for the fly over vis-a-vis the cost involved, the expenses incurred by the assesse in this regard is capital in nature. In this context it is also worthwhile to mention the fact that the Tax authorities never questioned the deductibility of above expense (i.e. Agency Fee) while dealing with assessee's case in respect of AY 2002-03 to 2005-06 which speaks for inconsistency in the approach and also go to support the claim of the assessee that the expenses in question were allowable revenue expenditure. In view of the above, we are of the considered view that the ITAs No.5246, 5247, 5248, 5249, 5286/Del/2012 6 services performed by these agents are revenue in nature and fulfills the conditions prescribed under section 37(1) of the Act. Therefore, the agency fees incurred by the assessee during the F.Y. 2005-06 are allowed as revenue expenditure and the addition made by the Assessing Officer has rightly been deleted by the ld. CIT(A) and we find no infirmity in his order. Accordingly, Ground No.1 of Revenue is dismissed.”

(i) Addition on account of Agency Fee; (ii) Enhancement by the ld. CIT(A); and

(i) Reopening of the assessment;

(ii) Enhancement by the ld. CIT(A); and

For our detailed discussion therein, enhancement made by the ld. CIT(A) is held to be bad in law.

103. Since the appeals by the assessee have been decided, the stay applications have become infructuous.

SA No. 564/DEL/2018 - Infructuous SA No. 565/DEL/2018 - Infructuous SA No. 566/DEL/2018 - Infructuous SA No. 567/DEL/2018 - Infructuous SA No. 568/DEL/2018 - Infructuous SA No. 569/DEL/2018 - Infructuous The appeals of the assessee in :

ITA No.4410/DEL/2018 [A.Y. 2006-07] - Allowed [A.Y. 2007-08] - Allowed ITA No.4412/DEL/2018 [A.Y. 2008-09] - Allowed ITA No.4413/DEL/2018 [A.Y. 2009-10] - Allowed ITA No.4414/DEL/2018 [A.Y. 2010-11] - Allowed ITA No.4416/DEL/2018 [A.Y. 2011-12] - Allowed ITA No.4417/DEL/2018 [A.Y. 2011-12] - Allowed The appeals of the Revenue in :

ITA No. 4968/DEL/2018 [A.Y. 2006-07] - Dismissed [A.Y. 2007-08] - Dismissed ITA No. 4970/DEL/2018 [A.Y. 2008-09] - Dismissed ITA No. 4973/DEL/2018 [A.Y. 2009-10] - Dismissed [A.Y. 2010-11] - Dismissed ITA No. 4972/DEL/2018 [A.Y. 2011-12] - Dismissed

Order pronounced in the open court on 08.08.2023.