INCOME TAX APPELLATE TRIBUNAL DELHI BENCH C: NEW DELHI BEFORE SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA No.1165/Del/2012 (Assessment Year: 2004-05) Housing & Urban Development DCIT, Corporation Ltd., Hudco Circle-12(1), Bhawan, Lodhi Road, New Delhi, Vs. New Delhi PAN:AAACH0632A (Appellant) (Respondent) Assessee by : Sh. Gagan Kumar, Adv Revenue by: Sh. A. K. Saroha, CIT DR Date of Hearing 15/07/2016 Date of pronouncement 07/10/2016 ORDER PER PRASHANT MAHARISHI, A. M. 1. assessee files this appeal against order dated 11.01.2012 for Assessment Year 2004-05 passed by LD CIT (A)-XXVIII, New Delhi on appeal against order of Assessing Officer u/s 143(3) read with Section 263 of Income Tax Act. 2. brief history of case is that appellant company is Govt of India undertaking providing finance and consultancy for housing and infrastructure projects. Assessee filed its return of income for Rs.3087302381/- on 29.10.2004 which was assessed u/s 143(3) of Act on 26.12.2006 on total income of Rs. 3395815115/-. Assuming jurisdiction u/s 263 of Income Tax Act, LD CIT passed order on 26.03.2009 setting aside assessment on some issues to file of Assessing Officer Page 2 of 15 holding that original assessment u/s 143(3) of Act was erroneous and prejudicial to interest of revenue. Assessee did not contest order under section 263 of act. Consequently Ld. assessing officer passed order under section 143 (3) read with section 263 of income tax act on 17/11/2009 making three disallowances/additions as under: a. disallowance of Rs. 7.14 crores on account of prior period expenses b. addition of Rs. 1.20 crores on account of loans pending reconsideration of excess or additional interest c. disallowance of Rs. 1 5678 6815/-on account of financial charges paid for issue of bonds etc held as capital expenditure 3. Against this order of Ld. assessing officer assessee preferred appeal before Ld. CIT appeal who dismissed appeal of assessee on disallowance at serial number (a) and (b) above and partially confirmed disallowance in serial number (c). Therefore, assessee is in appeal before us. 4. assessee has raised following grounds of appeal:- 1. Ld. CIT (A) has erred in fact and in law by not deleting addition made by Ld. Assessing Officer amount of Rs. 7.14 Crores on account of Prior Period Expenditure as interest paid to Govt. 2. Ld, CIT (A) has erred in fact and in law by not deleting addition made by Ld. Assessing Officer amount of Rs 1.20 Crores being amount of deduction from Loan pending reconciliation of excess/additional interest. 3. Ld. CIT (A) has erred in fact and in law by not deleting addition made by Ld. Assessing Officer amount of Rs. 15.68 Crores on account of Financial Charges written off. 5. Ground No. 1 of appeal is against order of Ld. CIT appeal in confirming addition made by Ld. assessing officer amount of Rs. 7.14 interest paid to government of Page 3 of 15 India on unspent subsidy is prior parade expenditure. brief facts of this ground is that during year assessee has made payment of Rs. 7.14 crores towards interest to settle issue of audit objection raised by C & AG for year ended March 2000. matter was taken by Ministry and it was decided that appellant should pay interest of Rs. 7.14 crore to government. This liability of interest is arising on appellant on surplus amount of subsidy. government of India initially raised this demand in June 1997. Subsequently audit party raised objection in this regard whereas public accounts committee also raised similar question for payment of interest on unspent amount of subsidy which has been received by appellant. Ultimately, Ministry vide letter dated 07/10/2003 has decided that appellant should refund whatever interest it has earned on fund released by Ministry remaining un-spent on various schemes as subsidy. Subsequently vide meeting of Board of Directors of appellant held on 17/11/2003 decided that payment of interest at rate of 6% p.a. amounting to Rs. 7.14 crores to government of India on unspent subsidy was to be paid. This amount has been paid on 21/11/2003. appellant claimed this expenditure which was disallowed by learned assessing officer holding that this expenditure is prior period expenses in nature and not allowable. appellant carried matter before Ld. CIT appeal who agreed with contention of Ld. assessing officer and confirmed disallowance. 6. Before us Ld. authorized representative submitted that claim of interest expenditure is not prior period expenditure as it has been accepted for payment during year by virtue of board resolution. He submitted that liability has crystallized Page 4 of 15 during year. He referred to background of claim of assessee and various notes thereon. He submitted that liability according to Mercantile system of accounting has been admitted by appellant during year and therefore it is accrued during year and hence it is allowable during year only. He relied upon decision of Hon ble Supreme Court of India in case of Non such Tea Estate P Ltd versus Commissioner of Income Tax 98 ITR 189 (SC). 7. Ld. Departmental representative submitted that interest payable by assessee is pertaining to earlier years and not of this year as this outstanding subsidy was lying in books of accounts of assessee for several past years and claim of government was also placed several years, before year in which it is accounted for. Therefore, his submission was that merely because year liability has been admitted it does not become pertaining to this year and allowable. He therefore supported order of lower authorities. He therefore referred to decision of Hon ble Supreme Court of India in Non-such Tea Estate Ltd versus Commissioner of income tax 98 ITR 189 (SC). He further supported orders of lower authority. 8. We have carefully considered rival contentions. appellant has received subsidy from government of India under Nehru Rojgar Yojna for shelter upgradation and training component. It started from year 1989-90 wherein Central subsidy was to be dispersed through appellant along with soft loan. first time Ministry asked for interest on unspent Central subsidy vide its letter dated 6th of June 1997. matter was thereafter further reviewed and unspent subsidy has already been refunded to Ministry by appellant, therefore according to Page 5 of 15 appellant as on date there is no unspent subsidy lying with appellant from Ministry. However, appellant provided loan assistance under scheme at subsidized interest rates ranging from 6% to 10% as compared to average borrowing rate of appellant from 11% to 14% and government provided interest subsidy of 48.96 crores on loan assistance provided by it to various agencies under scheme. Therefore there are chances that there may be unspent grant lying with assessee which is set off interest liability of assessee. Therefore government has requested for payment of interest which appellant has earned by deploying unspent subsidy. Further by letter dated 09/07/2002 claim of government of India on payment of interest on unutilized subsidy was not accepted by appellant and it was requested to government that there was no such stipulation at time of release of funds that Gov government of India will demand payment of interest by appellant. Further vide letter dated 07/10/2003 demand of interest was further raised reconsidering request of appellant and claim of government was now that it has now been decided that appellant should refund whatever interest it has earned on funds released by these Ministry to appellant under particular scheme. Subsequently vide item No. 350.33 it was agreed by board of directors of appellant that interest at rate of 6% may be paid to government and therefore such liability was admitted and quantified by appellant during year, though interest is pertaining to period from 01/06/1997 till subsidy was paid. Consequently on 19/11/2003 interest on subsidy was debited by appellant of Rs. 71473600/-and claimed same as Page 6 of 15 expenditure. Ld. Assessing officer was of view that it is prior period expenditure and therefore it is disallowable. Hon ble Gujarat High Court in case of Saurashtra cement s versus CIT in 213 ITR 527 has held as under:- From statement of case and order of Tribunal it appears that contention of assessee was that expenditure in dispute was incurred in year under consideration because they were quantified in previous year concerned and Commissioner of Income-tax (Appeals) rest contented by saying that when expenses related to earlier accounting years how each of these expenses could be quantified in year of consideration. Tribunal affirmed disallowance by observing that there is no dispute that assessee-company maintained its books of account on mercantile basis. It was observed that if that is so there was no justification in claiming these expenses for assessment year under appeal. Having considered material on record, we do not find any justification for disallowance of claim of assessee on such abstract proposition. Merely because expense relates to transaction of earlier year it does not become liability payable in earlier year unless it can be said that liability was determined and crystallized in year in question on basis of maintaining accounts on mercantile basis. In each case where accounts are maintained on mercantile basis it has to be found in respect of any claim, whether such liability was crystallized and quantified during previous year so as to be required to be adjusted in books of account of that previous year. If any liability, though relating to earlier year, depends upon making demand and its acceptance by assessee and such liability has been actually claimed and paid in later previous years it cannot be disallowed as deduction Page 7 of 15 merely on basis accounts are maintained on mercantile basis and that it related to transaction of previous year. true profits and gains of previous year are required to be computed for purpose of determining tax liability. basis of taxing income is accrual of income as well as actual receipt. If for want of necessary material crystallizing expenditure is not in existence in respect of which such income or expenses relate, mercantile system does not call for adjustment in books of account on estimate basis. It is actually known income or expenses, right to receive or liability to pay which has come to be crystallized, which is to be taken into account under mercantile system of maintaining books of account. estimated income or liability, which is yet to be crystallized, can only be adjusted as contingency item but not as accrued income or liability of that year. To illustrate, we find from details of expenses that certain expenses related to fees paid to experts, out-of-pocket expenses incurred by consultation firm and discharge of liability on account of demurrage claimed by port authorities. Such items without investigation into facts about crystallization of such dues cannot be disallowed merely on ground that they relate to transactions pertaining to earlier accounting year. In this connection, it is useful to refer to decision of Gauhati High Court in case of CIT v. Nathmal Tolaram [1973] 88 ITR 234 which was case arising under Indian Income-tax Act, 1922, as to interpretation of section 10(2)(xv) which is corresponding to section 37(1) of 1961 Act. question related to claim of deduction on account of sales tax liability paid during year 1957-58, whereas liability related to accounting year 1949-50. Division Bench in that case observed as under (at page 238) : Page 8 of 15 " Under section 4 of Income-tax Act, income that accrues or arises during any previous year alone is to be taken note of. There is, therefore, bar to include any income that accrues or arises outside previous year subject to deeming provisions in Act. There is, however, no express bar in law, nor one by necessary implication, restricting power of Income-tax Officer to exclude expenditure laid out or expended under section 10(2)(xv) of Act. We are, therefore, unable to accede to submission of learned counsel for Department. Section 10(2)(xv), shorn of other details for our purpose, provides for making allowances of any expenditure 'laid out' or 'expended'. words 'laid out' are with reference to mercantile system while word 'expended' is with regard to cash system. Once there was sales tax demand in this case, which was enforceable liability and as such real expenditure, for which assessee laid out amount by debiting his account in accounting year which was also year of demand of Department, deduction can be legitimately claimed under section 10(2)(xv). Here is case where there is no doubt about genuineness of expenditure. There is also compulsiveness in sales tax demand which can be ignored only at peril of assessee. This expenditure had never been taken note of in earlier years for one reason or other. In absence of any legal bar in way of assessee claiming this expenditure in year of demand for which provision has already been made in his accounting year, deduction under section 10(2)(xv) is permissible in law and has been rightly allowed by Tribunal. " Echoing similar voice, Hon ble Delhi High Court also in case of Jet Lite India private limited versus CIT 379 ITR 185 has held that according to mercantile system of accounting, bills Page 9 of 15 received by assessee in respect of advertisement services pertaining to previous year and continued during year were booked only when liability crystallized. Merely because expenditure related to earlier year, it did not become liability payable in earlier year unless liability was determined and crystallized in year in question on basis of maintaining accounts on mercantile basis. assessee further relied on decision of Hon ble Allahabad High Court in case of CIT versus Shivam motors private limited 272 CTR 277 wherein it has been held that where liability to pay interest as stipulated in initial agreement was disputed and liability was crystallized only on execution of supplementary agreement in current year deduction of interest liability of assessee would be allowed in current year. In present case also in original disbursement of subsidy by government of India there was no stipulation of interest however later on demand was raised by government of India which was initially resisted by appellant but subsequently agreed upon in current year for payment of interest. Therefore deduction of interest liability is not pertaining to earlier years but is part of current year and it is allowable as deduction to appellant in current year. In present case liability is admitted and crystallized during year when appellant has admitted this liability. Undisputedly liability is admitted by assessee vide its board meetings dated 17/11/2003 which is falling into assessment year 2004- 2005. Therefore liability according to accrual system of accounting which is mandatory for appellant to be followed liability accrued during year. We have also perused decision of Hon ble Supreme Court of India in case of Non such Tea Estate P Ltd versus Page 10 of 15 Commissioner of income tax (supra), which is relied up on by both parties , however, according to us facts of that case was with respect to approval of government of India with respect to payment made to managing agent according to companies act 1956. Hon ble Supreme Court held that when appointment of managing agent is prohibited by companies act, it comes into operation only when approval of Central government is received and not earlier. Therefore such remuneration payable to managing agent accrues only at time of approval granted by government of India. However in present case issue is not of any approval to be obtained from government authorities but it is commercial transaction between government of India and assessee about payment of interest to government of India. moment liability is admitted in present case it accrues as expenditure and therefore in year of accrual liability is required to be recorded for in books of accounts and is liable in year in which it is recorded therefore according to us it is not prior period expenditure but expenditure pertaining to current year as it crystallized during year. Looking from different angle, there was no stipulation originally for payment of any interest however assessee and government of India agreed on certain terms and condition for compensation to government of India based on unspent subsidy lying with appellant, resultant expenditure which is compensation of earning made by assessee on account of funds of government of India being used by assessee for intermittent period, becomes expenditure which is allowable under section 37 (1) of assessee during current year as it is incurred wholly and exclusively for purposes of business. In view Page 11 of 15 of this, we reverse finding of ld. Commissioner of income tax (A) disallowing sum of Rs. 7.14 crores on account of interest paid by appellant to government of India on unspent subsidy received by it. In result ground No. 1 of appeal of assessee is allowed. 9. Ground No. 2 of appeal of assessee is against disallowance of Rs. 1.20 crores being amount of deduction from loan pending reconsideration of excess/additional interest. During year assessee has shown deduction of Rs. 1.20 crore from loan pending reconsideration of excess/additional interest as amount was actually not paid. This deduction according to assessee was that income is accounted for on mercantile system of accounting and amount of excess interest received is shown as liability till time it is adjusted against subsequent dues. Ld. assessing officer did not accept contention of assessee and disallowed this sum. On appeal before Ld. CIT appeal he concurred with views of assessing officer. Therefore appellant has contested this disallowance in ground No. 2. 10. Ld. authorized representative submitted before us that various agencies have taken loan from company , they deposit amount of interest and installment as per terms of agreement on or before due dates. However interest is being charged on basis of actual amount due as per loan disbursed and repayment received from those agencies on particular date. In view of this amount of interest remitted by party sometimes becomes more than amount actually due because of early remittance of funds by agencies and therefore amount of excess so received is adjusted against next dues as per terms of agreement. income is Page 12 of 15 accounted for on mercantile system of accounting and amount of excess interest received is shown as liability till time it is adjusted against subsequent date when it becomes due. In view of this he submitted that this sum is not income of appellant he further stated that this system is consistently followed by assessee and accepted by revenue in past years. In view of this he submitted that disallowance made by Ld. assessing officer and confirmed by Ld. CIT appeal is erroneous. 11. Ld. departmental representative relied upon order of Ld. assessing officer and Ld. CIT appeal and stated that when amount of interest which is actually received by assessee may not be due during current year but it should be treated as income because it is not required to be repaid by assessee to borrowers. 12. We have carefully considered rival contentions. According to method of accounting followed by assessee interest becomes due according to terms of agreement entered into by assessee with respect to various borrowers. It may happen during course of business that some of parties are remitting money in advance that is before due date of interest and installment becomes payable and it may happen that interest is not due as on that particular date or arise on date of closing of year therefore such amount received by assessee is shown as excess interest received which is subsequently adjusted during next year when interest becomes due. According to us it is advance interest received from borrower by appellant before interest becomes due . It is simple instance of receipt of income prior to it becoming due as income. appellant has submitted Page 13 of 15 complete list of such excess interest received from page No. 49 to page No. 64 of paper book submitted. According to that statement assessee has shown that what is amount of interest due and what is amount of interest received if amount of interest received is higher than amount of interest due it is transferred to excess interest received account and it is accounted for as income as and when that particular interest becomes due. Such exercise may fall into next financial year. It is not case of revenue that excess interest shown by assessee has not been shown as income in subsequent years when it has become due. In view of this we are of opinion that amount of excess interest received by assessee which has become due in subsequent year and in subsequent year that assessee has recorded it as its income there is no reason that why this income should be chargeable to tax in this year when it has not become due. Further it is not been denied by revenue that this method of accounting is followed by assessee from year to year and revenue has accepted this method in past years and not disturbed returned income of assessee on this account. In view of this we reverse finding of Ld. CIT appeal confirming addition of Rs. 1.20 crores as income on account of excess interest received reduced from debtors subject to reconciliation. 13. 3rd ground of appeal of assessee is against disallowance of Rs. 15678 6815 on account of financial charges for differing expenditure on issue of bonds, PDS and term loan holding same to be capital expenditure. Before assessing officer it was submitted that these expenditure has never been claimed by assessee is expenditure but it is claimed as expenditure in Page 14 of 15 year in which it is incurred and deferred revenue expenditure written off in books of accounts has been disallowed. It was submitted that according to computation of total income and according to method of claiming of deduction of assessee it is shown in miscellaneous expenditure to that amount that additional financial charges paid on bonds during year is required to be added and same is claimed as deduction in competition of taxable income whereas financial charges written off are added back in computation of taxable income. He referred to page No. 67 of paper book wherein claim of assessee is demonstrated. On appeal before learned CIT appeal he sustained disallowance of Rs. 92398164 relying on order of Ld. CIT appeal for assessment year 2004 -2005. 14. Before us Ld. authorized representative submitted that identical issue has been decided by coordinate bench vide para No. 8 of decision dated 09/02/2016. He specifically referred to para No. 8.2 of that decision where tribunal has set aside issue back to file of assessing officer following decision of tribunal in assessment year 2002 2003. He therefore submitted that issue may be restored back to file of assessing officer for fresh adjudication in accordance with law. 15. Ld. departmental representative submitted that issue has already been decided by coordinate bench in case of assessee for earlier years wherein issue has been sent back to file of learned assessing officer and therefore he does not have any objection if matter is sent back to assessing officer following decision of coordinate bench. Page 15 of 15 16. We have carefully considered rival contentions and we have also perused relevant paragraph of decision of coordinate bench wherein they have sent back issue to file of assessing officer for fresh adjudication in accordance with law in terms of decision of tribunal for assessment year 2002 03 in ITA No. 686/del 2006 and paragraph 10 of that order for assessment year 2003 04 in ITA No. 687/del/2006 in assessee s own case. Therefore following consistency in decision of tribunal , ground No. 3 of appeal of assessee is set aside back to file of assessing officer with direction to adjudicate matter afresh in accordance with law after granting assessee appropriate opportunity of hearing. In result ground No. 3 of appeal of assessee is allowed accordingly. 17. In result appeal of assessee is allowed for statistical purposes. Order pronounced in open court on 07/10/2016. -Sd/- -Sd/- (SUDHANSHU SRIVASTAVA) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 07/10/2016 K Keot Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi Housing & Urban Development Corporation Ltd. v. DCIT, Circle-12(1), New Delhi