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TMI Blog2020 (2) TMI 372X X X X Extracts X X X X X X X X Extracts X X X X ..... dation and on the basis of its past experience in its accounts for Financial Year 2006-07. The provision was made for the period 1st January, 2007 to 31st March, 2007 and deduction was claimed on the standpoint that appellant is under an obligation to pay revised pay to its employees with effect from 1st January, 2007, determination whereof, was a matter of time. The appellant, thus had a reasonable basis to make provision for this expenditure. nd a liability de future which, for the time being is only contingent. The former is deductible but not the latter. The question to be decided in each case is whether any present liability has accrued against the assessee. The position in the current case is that the liability had already arisen with certainty. The committee was constituted for the purpose of wage revision. That the wages would be revised was a foregone conclusion. Merely because the making of the report and implementation thereof took time, it could not be said that there was no basis for making the provision. In view of the above, we hold that the ITAT and CIT (A) have fell in error by disallowing the expenditure of ₹ 1.60 crores on account of anticipated pay revi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ein after referred to as the Act ) filed by the Housing and Urban Development Corporation Ltd - HUDCO (hereinafter referred to as the appellant ) assails the order dated 21st December, 2018 passed by Income Tax Appellate Tribunal, Delhi Bench C : New Delhi (hereinafter referred to as ITAT ) in ITA No:- 5705/Del/2014 for the Assessment Year (AY)2007-08(herein after the impugned order ). 2. On 6th November, 2019, after hearing the learned counsels for the parties, the following questions of law were framed: 1. Whether the Hon'ble ITAT erred in confirming the disallowance of the claim of provision for salary of ₹ 1,60,00,000/- on the ground that it did not accrue and the same was merely a contingent liability without appreciating the legal precedents as well the facts of the case. II. Whether the Hon'ble ITAT erred in confirming the disallowance of the claim of provision for salary of ₹ 1,60,00,000/-- without appreciating that pay revision of the employees of the Appellant being a Public Sector Enterprise is due every 10 years and with the expiry of one wage settlement or agreement, invariably, there is a time lag when another fresh wage revision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lary of ₹ 1.60 crores and addition of ₹ 1.28 crores on account of financial impact due to change in accounting policy. In the appeal, CIT (A) vide order dated 28.08.2014 upheld the order of the AO and sustained the disallowance and the addition. 5. The appellant challenged the order of the CIT (A) before the Income Tax Appellate Tribunal ( ITAT ). Revenue also filed an appeal regarding the disallowance made by AO under Section 14A of the Act read with Rule 8D of Income Tax Rules. The two cross appeals were heard and decided by way of the impugned judgment and order dated 21st December, 2018. 6. The appellant has preferred the present appeal questioning the correctness of the impugned order, inter alia on the ground that the ITAT has erred in confirming disallowance of the claim for provision of salary of ₹ 1.60 crores, and the addition of ₹ 1.28 crores on account of change in accounting policy with respect to revenue recognition for application fee, front end fees, administrative fee and processing fee of loans. QUESTION I II: 7. The appellant claimed deduction of ₹ 1.60 crores on account of the provision for revision of pay in the bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision of ₹ 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 Sector executives was due w.e.f. 01.01.2007 and a pay revision committee has been appointed by Govt. of India, the report of which is pending. In view of this no provision for revised pay has been made in account of 2006- 07. The Pay Revision of Public Sector executives was due w.e.f. 01.01.2007 and a pay revision committee has been appointed by Govt. of India, the report of which is pending. Ad hoc provision of ₹ 1.60 crores has been made in the accounts for the financial year 2006-07. Submitted for approval please. Sd/- ACF(S) 13.10.2007 This note was finally approved on 15.10.2007. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esaid 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 ₹ 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. 9. Mr. Gagan Kumar, learned counsel for the appellant has assailed the aforesaid findings and argued that the tax authorities and the Tribunal have ignored the fact that the provision of salary of ₹ 1.60 crores was an ascertained liability in light of the recommendation of PRC, appointed by Department of Public Enterprises (herein after referred to as DPE ) on 30th November, 2006. He submits that the effective date of commencement of the revised pay is important and not the date of signing of the agreement or its approval granted by DPE. In support of his submission, the learned counsel has relied upon th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ad hoc provision of ₹ 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 11(b) The Pay Revision of Public Sector executive was due w.e.f. 01.01.2007 and a pay revision committee has been appointed by Govt. of India, the report of which is pending. In view of this no provision for revised pay has been made in account of 2006-07. The Pay Revision of Public Sector executive was due w.e.f. 01.01.2007 and a pay revision committee has been appointed by Govt. of India, the report of which is pending. Adhoc provision of ₹ 1.60 crores ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal burden. These provisions also took into account factors such as price index in adjustment inflation etc. The assessee, a public sector unit, had stated that since the liability being ascertained, even the Comptroller and Auditor General had not communicated them to be contingent liabilities. The Assessing Officer, for both the relevant years, held that the provision could not be allowed and that the claim or deduction was allowable when actually the entire quantum of liability could be calculated. The order of the AO was upheld in appeal. The Tribunal relying the Supreme Court's decision in Bharat Earth Movers v. CIT [2000] 245 ITR 428/ 112 Taxman 61 allowed the assessee's claim. The Tribunal noticed as follows: - 13. In the assessee's case also, it is noticed that the provision for the wage revision is factored on the basis of past experience, interim pay commissions of govt. employees, available pay commission reports of public sector employees, union demands and other relevant factors required for a scientific computation. Obviously, when one wage agreement comes to an end and other is executed, there would be a passage of time, but the new wage agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed upon by the appellant, the Court has defined the concept of provision in the following words: What is a provision? This is the question which needs to be answered. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when: (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized. 17. It is a well settled principle of law that an assessee, following the mercantile system of accounting, is not entitled to claim deduction until the liability for which deduction is claimed has accrued. The Act makes a distinction between actual liability in praesenti and a liability de future which, for the time being is only contingent. The former is deductible but not the latter. The question to be decided in each case is whether any present liability has accrued against the assessee. In light of the facts noted above, the case laws relied upon by the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20. The next question pertains to addition of ₹ 1.28 crores on account of financial impact due to change in accounting policy in respect of revenue recognition of application fee, front end fees, administrative fee and processing fee of loans (hereinafter collectively referred as fees ) from the date of signing of the loan agreement to the date of realization. The background of the aforesaid addition is that the appellant was following accrual/mercantile system of accounting and was accounting the fees as its revenue from the date of signing of the loan agreement. The amount was finally deducted/ realized from the loan amount, when it was actually disbursed to the borrower. There were instances when the loan agreement was signed and the borrower would not take the disbursement and, accordingly, fees would not be realized. The CAG objected to the same on the ground that the accounting treatment was not in accordance with Accounting Standards (hereinafter referred as AS-9 ), issued by ICAI which provides guidance for determination of income on accrual basis. Appellant, vide letter dated 6th November, 2006, assured the CAG that the accounting policy shall be reviewed for FY ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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. [Emphasis Supplied] 22. The ITAT upheld the addition holding as under: (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 Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions/ 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 ₹ 1.28crores 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 ₹ 1.28 crores. In view of the foregoing discussion and unambiguous position in law; and the clear error of law and fact on the part of the Assessee, we uphold the addition of aforesaid amount of ₹ 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 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the courts on this issue. The appellant has relied upon the judgment of the Supreme Court in Excel Industries Limited (supra).The observations made in Paragraph Nos. 18 and 19 of the said case are of relevance, and the same read as under: 17. First of all, it is now well settled that income tax cannot be levied on hypothetical income. In CIT v. Shoorji Vallabhdas Co. [1962] 46 ITR 144 (SC) it was held as follows:- Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a hypothetical income , which does not materialize. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual not receipt of income, even though an entry to that effect might, in certain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant, the following observations are essential to note: 4. The assessee had submitted that in respect of overdue charges, the assessee-company, keeping in line with the norms of the Reserve Bank of India as well as the credit rating agency, has been recognizing income by way of overdue charges only to the extent of actual collection i.e., the assessee is admitting income only on cash basis. The assessee-company has also placed reliance upon the Accounting Standard 9 of ICAI which lays down that when uncertainties exist regarding determination of the amount or its collectability, the revenue shall not be treated as accrued and hence shall not be recognised until collection. 5. The recognition of revenue on accrual basis presupposes the satisfaction of two conditions viz., the revenue is measurable and that the revenue is collectable without any uncertainty. Taking into account these standards also, the assessee submitted that the overdue on financial charges on hire purchase and lease had been admitted only on cash basis. Rejecting the said submission, the Assessing Officer passed the assessment order. XXXX In the instant case, learned counsel for the Revenue is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e charges and when the installment itself is overdue and not collected/ realised, there is no basis for making out a case that the additional overdue charges payable by the parties would be collectable with certainty. Similarly, the Supreme Court in its decision in Commissioner of Income Tax vs. Virtual Soft System Limited (supra), considered the question as to whether the deduction on account of lease equalization charges from the leasing rental income can be allowed under Income Tax Act on the basis of guidance note issued by the ICAI. Answering this question, it was held that the Court may take help of external aids such as the ICAI guidelines and standards if the Act is silent, and there exists no internal aid for the interpretation of the same. The relevant portion of the decision reads as under: 16. The method of accounting followed, as derived from the ICAI's Guidance Note, is a valid method of capturing real income based on the substance of finance lease transaction. The rule of substance over form is a fundamental principle of accounting, and is in fact, incorporated in the ICAI's Accounting Standards on Disclosure of Accounting Policies being accounting s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, a conjoint reading of Section 145 of the IT Act read with Section 211 (unamended) of the Companies Act makes it clear that the respondent is entitled to do such bifurcation and in our view there is no illegality in such bifurcation as it is according to the principles of law. Moreover, the rule of interpretation says that when internal aid is not available then for the proper interpretation of the statute, the court may take the help of external aid. If a term is not defined in a statute then its meaning can be taken as is prevalent in ordinary or commercial parlance. Hence, we do not find any force in the contentions of the Revenue that the accounting standards prescribed by the Guidance Note cannot be used to bifurcate the lease rental to reach the real income for the purpose of tax under the IT Act. 20. To sum up, we are of the view that the respondent is entitled for bifurcation of lease rental as per the accounting standards prescribed by the ICAI. Moreover, there is no express bar in the IT Act regarding the application of such accounting standards. [Emphasis Supplied] 29. The Supreme Court has held that accounting process is to ensure the real income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the loan was disbursed, as the fee was to be collected at that stage. It cannot be said that on the date of signing, the income accrued in conformity with the mercantile system and AS-9 adopted by the appellant. The contention of the Appellant is in line with the settled position of law as laid down by the Supreme Court and other High Courts as well as the AS-9. There was no reasonable certainty of the realization of the amount of ₹ 1.28 crores, and that since it follows the mercantile system of accounting, the same can be treated as an income only if it had convincingly accrued. The amount here is not determinable and there is no certainty about the same, since it remains uncertain whether the borrower -who has signed the loan agreement, would, eventually, avail of the loan, or not. Merely because the appellant may have signed the agreement with the borrower, that, by itself, does not lead to the certainty of income accruing to the Appellant, so as to bring it within the ambit of income . Here, the addition has resulted on account of change in accounting policy by recognizing the realised revenue, instead of the assumed revenue on the date of signing of loan agreement. T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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