Per K.G. Bansal, Accountant Member: This appeal of assessee arises out of order of CIT (Appeals)- III, Pune, passed on 17-3-2003. corresponding assessment order was passed by Assistant Commissioner of Income-tax, Circle-8, Pune, on 10-7- 2002, under provisions of section 143(3) of Income-tax Act, 1961 (for short 'Act'). other appeals in this case were sought to be consolidated on 10-8-2006 by obtaining order of Senior Member. However, learned counsel for assessee made statement at Bar that he had informed Senior Member that this appeal may be heard independent of other appeals. Therefore, we proceed to decide this appeal. 2. Ground No. 1 is against findings of learned CIT (Appeals) that assessee was not entitled to deduct sum of Rs. 4.25 lakh in computing income, being contribution made to Alfa Laval Education Trust, in view of provisions contained in section 40A(9) of Act. It was mentioned that he erred in not following decision of Hon'ble Andhra Pradesh High Court in case of CIT v. Wazir Sultan Tobacco Co. Ltd. [1988] 169 ITR 139 and that of CIT (Appeals) in assessee's own case for assessment years 1987-88 to 1998- 99. In course of hearing before us, learned counsel for assessee fairly conceded that this issue has been decided against assessee in earlier years by Hon'ble ITAT, Mumbai Bench 'F', Mumbai, in ITA Nos. 3211 and 3212/Mum./2000 for assessment years 1997-98 and 1998-99, copy of which was placed in paper book on pages 6 to 11. Paragraph 14 of order deals with this issue, wherein it is mentioned that this very issue was considered by Tribunal in case of assessee for assessment year 1995-96. In that order it was held that deduction is not permissible in view of provision contained in section 40A(9) of Act and, consequently, appeals of revenue for assessment years 1997-98 and 1998-99 were allowed. Respectfully following that decision, this ground is dismissed. 3. Ground No. 2 is against finding of learned CIT(A) that assessee was not entitled to deduct sum of Rs. 26,06,513, being ESI dues in respect of earlier years on ground that same were prior-period expenses and aforesaid liability did not accrue in previous year relevant to assessment year 2000-01. It was mentioned that liability accrued in financial year 1999-2000. liability accrued because of failure of various contractors engaged by assessee in depositing ESI dues with relevant authority, thereby, resulting in devolution of liability on assessee as principal employer. Therefore, impugned amount was allowable under provisions of section 37(1) of Act. 3.1 In course of hearing before us, learned counsel pointed out that assessee had employed contractor for carrying out repairs. contractor failed to discharge its liability in respect of ESI dues. In view thereof, enquiry was instituted in case of assessee on 14-10-1999 by ESI authorities. Based upon intimation received from authorities about institution of inquiry, assessee made provision in its accounts for liability in financial year 1999-2000. After completing enquiry, Deputy Director, Employees' State Insurance Corporation, passed order on 29-5-2000 in which assessee was fastened with liability of Rs. 15,95,438 and interest amounting to Rs. 5,90,740. assessee, being one of principal employers, was ordered to pay aforesaid amount along with interest at rate of 15 per cent for each day of further default from date of order till date of payment within period of 15 days from date of order. In pursuance of this order, sum of Rs. 22,06,513 was paid by assessee on 29-6-2000. 3.2 Assessing Officer referred to tax audit report filed along with return of income, in which it was mentioned that expenditure of Rs. 26,06,513, being ESI dues in respect of earlier years, has been incurred and same has not been added back in statement of total income. It was represented before him that liability was incurred in this year and even otherwise same is admissible on payment basis under provisions of section 43B of Act. Assessing Officer did not accept aforesaid contention on ground that relevant demand notices were dated 29-5- 2 0 0 1 and 16-6-2000, dates falling in previous years relevant to assessment years 2001-02 and 2002-03 respectively. expenses had been recognized as previous years' expenses in audit report. Therefore, expenses were held not to be deductible in computation of income of this year. Before learned CIT (Appeals) it was represented that Inspector made enquiry and inspection in financial year 1999-2000 and demand was paid in sub-sequent financial year. Therefore, it was contended that if liability was not deductible in this year, it may be, without prejudice to claim of assessee for this year, allowed in next financial year. learned CIT (Appeals) furnished details of liabilities in paragraph 3.3 of his order. It was pointed out that liability pertained to years 1993-94, 1994-95 and 1995-96, aggregating to Rs. 15,95,438. Interest of Rs. 6,11,075 was also charged. assessee had not made any provision in accounts for liabilities of assessment years 1996-97 and 1997-98. provision aggregating t o Rs. 4 lakh was made in accounts of this year for these liabilities on estimated basis. He held that as order was made by Deputy Director on 29-5-2000, and notice of demand for liabilities of assessment years 1996-97 and 1997-98 was issued on 29-5-2001, liability did not accrue in financial year 1999-2000. Therefore, he came to conclusion that liabilities were not in respect of this year but earlier years and, accordingly, order of Assessing Officer was confirmed. 3.3 Coming to legal issue, learned counsel relied upon decision of Hon'ble Gujarat High Court in case of Saurashtra Cement & Chemical Industries Ltd. v. CIT [1995] 213 ITR 523. One of questions before Hon'ble Court was whether on facts and in circumstances of case, Tribunal was justified in law in holding that expenditure of Rs. 39,823 was not allowable in year in question on ground that liability had arisen in years 1968-69 to 1973-74? From statement of case and order of Tribunal, it appeared that contention of assessee was that expenditure in dispute was incurred in year under consideration because it was quantified in relevant previous year and CIT (Appeals) merely stated that when expenses related to earlier accounting years, how expenses could be quantified in year under consideration. Tribunal affirmed disallowance by observing that books were maintained on mercantile basis and, therefore, there was no justification in claiming expenses in year under appeal. However, Hon'ble Court pointed out that if any liability, though relating to earlier year, depends upon making demand and its acceptance by assessee and such liability had actually been claimed and paid in later previous years, it cannot be disallowed as deduction merely on ground that accounts were maintained on mercantile method. ratio of decision is that in case where accrual of liability depends upon making demand and its acceptance, then, it can be allowed in year of acceptance provided that demand is paid in that year. Such is not case here. No doubt, assessee was liable to pay dues. liability arose partly on account of failure of contract and partly because of failure of assessee to deposit dues in relevant years. past liability was fastened on assessee as principal employer and it depended upon its acceptance by assessee. demand was made on 29-5-2000 and paid on 29-6-2000. Both these dates do not fall in year under consideration. rest of liability was demanded in financial year 2002-03 and paid in that year. Therefore, ratio of aforesaid case does not advance case of assessee, but goes against assessee. 3.4 Further, learned counsel relied on decision of Hon'ble Bombay High Court in case of CIT v. United Motors (India) Ltd. [1990] 181 ITR 347. question in that case was whether on facts and in circumstances of case, amount of Rs. 76,680 was deductible as expenditure in assessment for accounting period relevant to assessment year 1972-73? terms and conditions of service of workmen employed by assessee were governed by award. Trade Unions gave notice to assessee terminating award with effect from two months thereafter. This fact was taken notice of and provision of Rs. 1 lakh was made in books for impending liability. negotiations between employer and union resulted in settlements on 2-5-1972 and 6-10-1972. In pursuance thereof, sum of Rs. 28,600 was paid to workmen in May and June, 1972 as salaries. Later on ad hoc payments were made amounting to Rs. 48,000 pursuant to said settlements. These amounts were claimed as deductible in computing income. ITO rejected claim that payment was made after close of concerned accounting year, as liability was not ascertained during year. AAC confirmed order of ITO. ITAT took contrary view. It w s pointed out that impugned payments were made as salaries and dearness allowances pertained to year under consideration and, therefore, expenditure was deductible. Hon'ble Court pointed out that award that governed terms and conditions of service of assessee's workmen was terminated, fact of which notice was taken of by directors and provision of Rs. 1 lakh was made in accounts for impending liability. At that stage, it was difficult to quantify liability on exact basis as negotiations were going on. provision was not allowed. Instead quantified liability of Rs.76,680, though it was discharged subsequent to close of previous year, must be allowed as deduction. In other words, ratio of decision is difficulty in estimation of liability does not convert accrued liability into contingent liability, and it is allowable in year in which it accrued. Having considered this case, we are of view that ratio propounded by Hon'ble Bombay High Court is not applicable to facts of case. liability in question was partly liability of contractor. liability could accrue to assessee on its acceptance by assessee and as pointed out by Hon'ble Gujarat High Court in case of Saurashtra Cement & Chemical Industries Ltd. (supra), such liability could have been allowed only in year of its acceptance and payments. liability for assessment years 1996-97 and 1997- 98 also did not accrue in this year as demand notices were received much later. Therefore, in terms of aforesaid decision, aforesaid liabilities could be allowed in respective years or year or years in which it was quantified. 4. As against aforesaid, case of learned D.R. was that contractor in this case was connected concern, namely, M/s. Sakanson Pvt. Ltd., as borne out by order of Deputy Director on page 2. Therefore, it was pointed out that it cannot be said that assessee was totally unaware of non-payment by sister concern. assessee had not made provisions in earlier years, as borne out by order of learned CIT (Appeals) in paragraph 3.3. Therefore, it was his case that either these liabilities were deductible in years in which provisions ought to have been made, namely, assessment years 1996-97 and 1997-98 or in year in which liability was actually fastened on assessee, namely, assessment years 2001- 02 and 2002-03. 5. We have considered facts of case and rival submissions. It is matter of fact that impugned liability was partly that of M/s. Sakanson Pvt. Ltd., sister concern and partly that of assessee. In absence of discharge of liabilities, enquiries were conducted and finally order was passed on 29-5- 2000. liability as per that order was to be paid within 15 days, but was actually paid by assessee on 29-6-2000. It is no doubt true that assessee made provision in accounts for year 1999-2000 on basis of enquiry letter received from competent authority of ESIC, yet, it cannot be said that liability was quantified or paid by assessee in that year. To our mind, facts of Saurashtra Cement & Chemical Industries Ltd.'s case (supra) are nearer to facts of instant case, in which it was held that earlier years' expenses could be allowed in mercantile method of accounting in year in which liability is accepted and paid. According to us, that year is not assessment year 2000-01. Same is case in respect of liability of assessment years 1996-97 and 1997-98. Therefore, we are of view that learned CIT (Appeals) was right in holding that impugned liability was not deductible in computation of income of this year. Insofar as deducibility of expenditure in subsequent assessment year 2001-02 (sic) is concerned, issue is not before us in this appeal. assessee may take up matter in appeal of appropriate year(s). In result, this ground is dismissed. 6. Ground No. 3 is against finding of learned CIT(Appeals) that amount of Rs. 24,04,066, received under Special Capital Incentive Scheme, has to be reduced from written down value of plant and machinery, in view of provision contained in Explanation 10 to section 43(1) of Act. It is mentioned that he erred in not appreciating that aforesaid Explanation is prospective in nature, applicable only in respect of grants which become due and receivable from financial year 1998-99, while in assessee's case incentive accrued in financial year 1995-96, though it was disbursed in financial year 1999-2000. 6.1 In course of hearing before us, learned counsel relied upon order of Hon'ble ITAT, Pune Bench 'B', Pune, in case of Kolhapur Zilla Sahakari Dudh Utpadak Sangh Ltd. v. Asstt. CIT [IT Appeal Nos. 401 to 405 (Pune) of 2005] for assessment years 1996-97 to 2000-01, copy of which was filed before us. It may be mentioned here that undersigned was party to that order and present ld. counsel had represented that assessee before us. Paragraphs 16.1 to 16.8 on pages 42 to 47 of that order deal with similar issue, raised in that case. For sake of ready reference, these paragraphs are reproduced below:- '16.1 grounds of appeal for this year are also similar to grounds of appeal in appeal No. 401/PN/05 except for change in amounts under different points of addition. assessee has also taken up new ground that learned CIT(A) erred in confirming disallowance of depreciation of Rs. 20,05,480 on buildings and Rs. 1,44,44,830 on machinery, totalling to Rs. 1,64,50,310, in relation to capital subsidy, allegedly pertaining to buildings and machinery on basis of assumed bifurcation made by Assessing Officer. This issue has been discussed by learned CIT(A) in paragraphs 16 to 18 of his order. It is mentioned that assessee signed agreement with National Dairy Development Board (hereinafter called NDDB) on 20-4-1994, for loan to be used for expansion and addition to chilling center. Simultaneously, NDDB granted subsidy by way of agreement signed on 20-4-1994 of amount of Rs. 16.62 crore. assessee received subsidy amount of Rs. 7,78,34,115 up to 31-3-1999, as close of relevant previous year. As per agreement of subsidy, it was given for machinery required for project. On perusal of accounts, it was found that assets of value of Rs. 33,18,20,381 were transferred to fixed asset account in this year. In course of assessment proceedings, it was informed to Assessing Officer that aforesaid fixed assets of Rs. 33,18,20,391 included subsidy component of Rs. 7,78,34,115. However, bifurcation of impugned amount of subsidy in terms of buildings and machinery was not provided. Assessing Officer made such allocation on pro rata basis and issued show cause notice as to why such allocated amounts should not be reduced from cost for purpose of deduction of depreciation. assessee relied on decision of ITAT, Pune Bench, Pune, apparently in its own case for assessment year 1989-90, to effect that subsidy could not be reduced from cost. assessee also placed reliance on judgments of Gujarat, Bombay and Madhya Pradesh High placed reliance on judgments of Gujarat, Bombay and Madhya Pradesh High Courts in cases reported at 258 ITR 780, 122 TAXMAN 335 and 177 CTR 16. Assessing Officer, after considering these cases, reduced allocated amounts from cost of building and machinery in view of Explanation 10 to section 43(1). This resulted in disallowance of depreciation of Rs. 1,64,50,310 and Rs. 97,49,656 for assessment years 1999-2000 and 2001-02 respectively. 16.2 It was represented before learned CIT(A) that impugned subsidy was received towards acquisition of fixed assets and dispute pertains only to appropriation of subsidy towards cost of building and cost o f machinery. Reliance was placed on various cases referred to before Assessing Officer and also on case of CIT v. P.J. Chemicals Ltd. 210 ITR 830 (SC). 16.3 leaned CIT(A) considered these matters. It was pointed by him that impugned subsidy was received from NDDB for acquisition of building n d machinery till financial year 1998-99. assessee did not submit any bifurcation or allocation of subsidy towards cost of building and machinery or plant either before Assessing Officer or before him, which ought to have been done as information was within specific knowledge of assessee. In view thereof, he held that pro rata allocation made by Assessing Officer was reasonable. He further mentioned that pro rata allocation of subsidy has to be reduced from cost in terms of statutory provisions contained in Explanation 10 below section 43(1) of Act. According to him, this Explanation, inserted by Finance (No. 2) Act, 1998, with effect from 1-4- 1999, supersedes judgment relied upon by assessee. This Explanation provides that where portion of cost of asset acquired by assessee has been met directly or indirectly by Central Government or State Government or any authority established under any law or by any other person, i n form of subsidy or grant or reimbursement, by whatever name called, then, so much of cost as is relatable to such subsidy, grant or reimbursement will not be included in actual cost of asset to assessee. Thus, it was only that cost, which was actually paid or payable by assessee, that forms cost under section 43(1) and consequently, cost for purpose of deduction of depreciation. Accordingly, he upheld order of Assessing Officer in this behalf. 16.4 Before us, learned counsel of assessee posed question whether Explanation 10 to section 43(1) was applicable prospectively or retrospectively. It was his view that if it operates prospectively, then, decision has to go in favour of assessee. He posed another question whether cost of asset can change from time to time. It was his case that subsidy received after 1- 4-1999 only can be deducted from cost (emphasis supplied). However, if subsidy has been received earlier, then, cost of asset cannot be reduced in proceedings of assessment year 1999-2000. In this connection, he referred to paragraph 10.5 of Assessing Officer's letter dated 30-8-2004, addressed to learned CIT(A), in which it is stated that assessee received subsidy from NDDB. As per balance sheet of assessee, subsidy of Rs. 5,29,25,342, Rs. 2,35,60,296, Rs. 13,94,089 and Rs. 9,527 was received in financial years 1995-96, 1996-97, 1997-98 and 1998-99 respectively. As per agreement dated 20-4-1987, project grant was to be provided in form of money to purchase specific machinery or equipment required for project. case of learned counsel was that if provisions of aforesaid Explanation 10 are prospective in nature, then, subsidy cannot be reduced from actual cost. As against aforesaid, learned DR did not make any specific argument. He merely relied on order of learned CIT(A). 16.5 We have considered facts of case and submissions made before us. Explanation 10 below section 43(1) was inserted by Finance (No. 2) Act, 1998, with effect from 1-4-1999. Explanation was inserted to nullify partly effect of judicial pronouncements that nature of subsidy has to be looked into before holding it to be of revenue or capital in nature and even capital subsidies do not go to reduce cost of asset. It provided that where portion of cost of asset acquired by assessee has been met directly or indirectly by Central Government, State Government, any authority established under law, or any other person in form of subsidy or grant or reimbursement, then, so much of cost is relatable to subsidy or grant or reimbursement shall not be included in actual cost of asset of assessee. impact of this statutory amendment is that while calculating cost, subsidy, grant or reimbursement received shall not be included in actual cost of asset of reimbursement received shall not be included in actual cost of asset of assessee. 16.6 first question posed by learned counsel was whether amendment is substantive in nature or procedural in nature. substantive provision affects rights and liabilities of person by increasing or decreasing his liability. application of Explanation 10 leads to reduction in cost of asset to assessee, resulting in lowering amount of deduction by way of depreciation in computation of his income. It is not merely procedural in nature. Therefore, we are of view that Explanation 10 is substantive in nature and contents. impact of this decision is that it operates prospectively unless otherwise provided in Act. Act provides that this provision shall come into force with effect from 1-4-1999, which means that it is applicable to assessment for assessment year 1999-2000 and onwards. 16.7 second question posed by learned counsel was whether cost of asset can change from time to time. We have statutory provision in section 43A of Act regarding consequence of change in rate of exchange on cost of asset in respect of foreign exchange denominated asset. section provides that cost shall be increased or decreased depending upon increase or decrease in liability on account of fluctuation in rate or rates of foreign exchange. By now law is well settled that such change should be reckoned from year to year, depending upon rate of exchange at close of previous year. Therefore, in view of this statutory provision, we are of view that cost of asset can change to year to year depending upon circumstances of case. However, question before us is whether subsidy received before 1-4-1998, which was not taken into account in earlier years for purpose of cost, in absence of Explanation 10, has to be taken into account for determining cost in assessment year 1999-2000. provision came into effect from 1-4-1999. There is no mention in Explanation that it shall be applicable in respect of subsidy etc., received after 31-4-1998. According to us, plain meaning of effective date is that it is applicable to proceedings of assessment year 1999-2000. authorities below are of further view that cost of asset may change in assessment year 1999- 2000, even if subsidy had been received prior to 1-4-1998. 16.8 We have considered submissions made before us. We find that Explanation 9 was also inserted in Act by Finance (No. 2) Act, with effect from 1-4-1994. Thus, this Explanation was made operative retrospectively. Such retrospective operation was made in specific manner. Explanation uses words 'For removal of doubts, it is hereby declared'. Further, Explanation 8 was inserted in Act by Finance Act, 1986, with effect from 1-4-1974. Thus, this Explanation was made operative retrospectively. This Explanation also uses expressions 'For removal of doubts, it is hereby declared' and 'shall be deemed never to have been included'. Such or similar words or expressions are not found in Explanation 10. We may also examine contents of Board Circular No. 772, dated 23-12-1998, being Explanatory Notes on direct taxes provisions contained in Finance (No. 2) Act, 1998, (1999) 235 ITR 35 (Statutes). It has been explained that Explanation 9 is applicable in respect of asset acquired on or after 1-3-1994. No such explanation is not furnished in respect of Explanation 10. It is also clarified that Explanation 9 will apply retrospectively in relation to assessment year 1994-95 and subsequent years; and Explanation 10 will apply in relation to assessment year 1999-2000 and subsequent years. We find that both Explanations were inserted by same Finance Act, but they are quite different in contents. Thus, we are of view that Explanation 10 does not operate retrospectively. It is applicable to assessment year 1999-2000. Thus, subsidy received in previous year relevant to assessment year 1999- 2000 only is not to be included in actual cost (emphasis supplied). Thus, result of this discussion is that this ground of appeal is partly allowed.' 6.2 As against aforesaid, learned D.R. referred to paragraphs 4.2 and 4.3 of order of learned CIT (Appeals). It is mentioned that special capital incentive had accrued to assessee in financial year 1995-96 when eligibility certificate was issued by SICOM on 15-9-1995. amount was received in this year and, therefore, adjustment was made in book value of plant and machinery in this year. Since incentive accrued in financial year 1995-96, it was argued that provisions of aforesaid Explanation 10 were not applicable. learned CIT (Appeals) pointed out that assessee made adjustment in book value of plant and machinery on receipt basis and mercantile basis was not followed for this purpose. In view thereof, it was held that aforesaid provision was applicable to facts of this case. case of learned DR was that cost or WDV can change from year to year, depending upon date of actual receipt of subsidy, just as cost or WDV can change from year to year depending upon rate of conversion of foreign exchange on last date of previous year. 7. We have considered facts of case and rival submissions. We are o f view that issue in this case is identical with issue in case of aforesaid Kolhapur Zilla Sahakari Dudh Utpadak Sangh Ltd. (supra). This is so i n spite of additional argument taken by ld. counsel that incentive accrued in financial year 1995-96. In that order, it was held that provision contained in Explanation 10 does not operate retrospectively. It is applicable to assessment year 1999-2000 and onwards. On basis of this finding, it was further held that subsidy received in previous year relevant to assessment year 1999-2000 only is not to be included in actual cost. facts of instant case are that incentive of Rs. 24,04,066 was received in relevant previous year and book value of assets was also adjusted in this year on account of incentives. depreciation was deducted in earlier years without reckoning aforesaid incentive and W.D.Vs. were calculated accordingly from year to year. Consequently, effect of incentive on cost or W.D.V. has to be given in this year on receipt of incentive, reason being that cost has been met by other person in this year. decision in case of aforesaid Kolhapur Zilla Sahakari Dudh Utpadak Sangh Ltd. (supra) is also against assessee for assessment year 1999-2000 onwards. Respectfully following that decision, it is held that learned CIT (Appeals) was right in invoking provisions of Explanation 10 to reduce cost or WDV of asset and allowed depreciation on reduced cost or WDV, as case may be. In result, ground No. 3 is dismissed. 8. Ground No. 4, against disallowance of pro rata amortization of lump sum lease rent amounting to Rs. 25,826, was not pressed by learned counsel before us, as this issue was decided against assessee in earlier years by Tribunal. In view thereof, this ground is dismissed as not pressed. 9. Ground No. 5 is against finding of learned CIT (Appeals) in which ad hoc disallowance of Rs. 25,000 was confirmed in respect of expenditure incurred for earning dividend income of Rs. 1,05,86,142, in computation of book profit under section 115JA of Act. 9.1 Before us, learned counsel relied on decision of Hon'ble Bombay High Court in case of CIT v. General Insurance Corpn. of India (No. 1 ) [2002] 254 ITR 203. decision in that case was that no portion of expenditure incurred on account of salary paid to staff, stamp duty, transfer fee and safe custody etc., could be directly relatable to earning of dividend for purpose of computing deduction under section 80M. In view of this case, it was argued that ad hoc attributation of expenditure of Rs. 25,000 to earning of dividend income was not justified. learned D.R. did not raise any argument in this behalf. Relying on decision of Hon'ble Bombay High Court in case of General Insurance Corpn. of India (supra), it is held that no such expenditure could have been attributed to earning of exempt income by way of dividend. Thus, this ground is allowed. 10. Ground No. 6, regarding setting off of unabsorbed depreciation against profits and gains of business of current year for purpose of deduction under section 80HHC, was not pressed by learned counsel before us. In any case, under section 32 of Act, unabsorbed depreciation of earlier years partakes character of depreciation of current year and it becomes depreciation of current year. Thus, on merits also, ground is not maintainable. Thus, this ground is dismissed. 11. Ground Nos. 7 and 8 are general and residuary in nature. In absence o f any argument raised or any specific ground taken in pursuance of these grounds, no decision is required from us. Thus, these grounds are dismissed. 12. In result, appeal is partly allowed. *** ALFA LAVAL INDIA LTD. v. DEPUTY COMMISSIONER OF INCOME TAX