IN HIGH COURT OF DELHI AT NEW DELHI Reserved on: 6th November, 2019 Pronounced on: 6th February, 2020 + ITA 541/2019 HOUSING AND URBAN DEVELOPMENT CORPORATION LTD THROUGH ITS AUTHORIZED SIGNATORY Appellant Through: Mr. Gagan Kumar and Mr. Amit Kaushik, Advocates. versus ADDITIONAL COMMISSIONER OF INCOME TAX RANGE 12 NEW DELHI Respondent Through: Mr. Zoheb Hossain and Mr. Deepak Anand, Advocates. CORAM: HON BLE MR. JUSTICE VIPIN SANGHI HON BLE MR. JUSTICE SANJEEV NARULA JUDGMENT SANJEEV NARULA, J 1. This appeal under Section 260A of Income Tax Act, 1961 (herein after referred to as Act) filed by Housing and Urban Development Corporation Ltd - HUDCO (hereinafter referred to as appellant ) assails 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 Assessment Year (AY) 2007-08 (herein after impugned order). ITA 541/2019 Page 1 of 33 2. On 6th November, 2019, after hearing learned counsels for parties, following questions of law were framed: 1. Whether Hon'ble ITAT erred in confirming disallowance of claim of provision for salary of Rs. 1,60,00,000/- on ground that it did not accrue and same was merely contingent liability without appreciating legal precedents as well facts of case. II. Whether Hon'ble ITAT erred in confirming disallowance of claim of provision for salary of Rs. 1,60,00,000/- without appreciating that pay revision of employees of Appellant being Public Sector Enterprise is due every 10 years and with expiry of one wage settlement or agreement, invariably, there is time lag when another fresh wage revision agreement is negotiated and entered and this Hon'ble Court in case of in case of CIT v. Bharat Heavy Electricals Ltd. 352 ITR 88 (Del) while dealing with similar provision made on account of wage revision, held, that deduction claimed for that period cannot 'be termed as contingent because wage and probable revision or rates of revision would be within fair estimation of employer. III. Whether Hon'ble ITAT erred in confirming addition of Rs. 1,28,00,000/- on account of change in accounting policy of revenue recognition for application fee, front end fees, administrative fee and processing fee of loans from date of signing of loan agreement to date of realization on ground that same was not in accordance with provisions of Act without appreciating legal precedents as well facts of case. ITA 541/2019 Page 2 of 33 3. factual background of case giving rise to present appeal is that appellant, Public Sector Undertaking (PSU), filed its return of income for AY 2007-08 on 30th October, 2007 declaring income of Rs. 351,93,26,019/-. same was revised on 24th October, 2008 wherein income of Rs. 331,58,74,360/- was declared. Appellant s case was selected for scrutiny and assessment order under Section 143(3) of Act was passed on 30th December, 2009, assessing total income of appellant as Rs. 355,28,96,515/-. Commissioner of Income Tax [herein after referred to as CIT (A) ] examined records and vide order dated 24th February, 2012 exercised his jurisdiction under Section 263 of Act, directing Respondent to reframe assessment inter alia on ground that Assessing Officer (AO) had not disallowed provision for salary of Rs. 1.60 crores and has erred in not making addition of Rs. 1.28 crores on account of financial impact due to change in accounting policy with respect to revenue recognition for application fee, front end fees, administrative fee and processing fee of loans from date of signing of loan agreement to date of realization. 4. Pursuant to aforesaid directions, AO framed assessment order dated 28th March, 2013 under Section 263/143(3) of Act, and made certain additions/disallowances which inter alia includes disallowance of claim for provision of salary of Rs.1.60 crores and addition of Rs. 1.28 crores on account of financial impact due to change in accounting policy. In appeal, CIT (A) vide order dated 28.08.2014 upheld order of AO and sustained disallowance and addition. 5. appellant challenged order of CIT (A) before Income ITA 541/2019 Page 3 of 33 Tax Appellate Tribunal (ITAT). Revenue also filed appeal regarding disallowance made by AO under Section 14A of Act read with Rule 8D of Income Tax Rules. two cross appeals were heard and decided by way of impugned judgment and order dated 21st December, 2018. 6. appellant has preferred present appeal questioning correctness of impugned order, inter alia on ground that ITAT has erred in confirming disallowance of claim for provision of salary of Rs. 1.60 crores, and addition of Rs. 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. appellant claimed deduction of Rs. 1.60 crores on account of provision for revision of pay in books of account. deduction was made in light of Pay Revision Committee (hereinafter referred to as PRC) appointed by Government of India. AO disallowed claim, holding that expenditure was purely provision against unascertained liability and could not be claimed as expenditure for Assessment Year 2007-08. relevant findings of AO on this issue are as under: 'Neither, said liability accrued nor crystallized during year under consideration. As per recommendations of central Sixth Pay Commission/Ministry of Finance etc. It was decided that 60% of arrears worked out on implementation of Sixth Central Pay Commission was ordered by Central govt. ITA 541/2019 Page 4 of 33 to be paid in Financial Year 2008-09 relevant to A.Y. 2009-10 and balance 40% was ordered to be paid in F. Y. 2009-10 relevant to A.Y. 2010-11. Accordingly, assessee could have claimed expenditure on account of revision of pay in A.Y. 2009-10 and balance amount of expenditure w.e.f. 1-4-2008 to implementation of Sixth Pay commission should have been claimed in A.Y. 2010-1.1. Even Ld CIT-IV after careful consideration of issue in question, has observed that liability on account of revision of pay in consequence of report of Sixth Central Pay Commission has not accrued and crystallized during F. Y. 2..6-07 relevant to A.Y. 2007-08 because implementation of said report in respect of public sector undertaking and State Govt. Employees has been carried out only after September, 2008 beyond close of instant financial year relevant to A.Y. 2007-08 and accordingly, provision of such revision of pay amounting to Rs. 1,60,00,000;- is unascertained liability which is not eligible for deduction for year under consideration. Even from documents filed during fresh proceedings along with its reply dated 30.11.2012 in form of note marked as annexure-III and further marked as ''Finance Wing;" with subject: Provision against pay revision of Executives, clearly states that ''during discussions regarding Annual Account for 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 Annual accounts for year 2006-07. Accordingly, ad hoc provision of Rs. 1.60 crores is proposed to be made in accounts for period of three months for executives only from 01.01.2007 to 31.3.2007. On back side of said note it is mentioned as under:- ITA 541/2019 Page 5 of 33 Note Existing Note Suggested Note No. II (b) Pay Revision of Pay Revision of Public Sector executives Public Sector executives was due w.e.f. was due w.e.f. 01.01.2007 and pay 01.01.2007 and pay revision committee has revision committee has been appointed by Govt. been appointed by Govt. of India, report of of India, report of which is pending. In which is pending. Ad view of this no provision hoc provision of Rs.1.60 for revised pay has been crores has been made in made in account of accounts for 2006- 07. financial year 2006-07. Submitted for approval please. Sd/- ACF(S) 13.10.2007 This note was finally approved on 15.10.2007. accounts for year under consideration are from 1.4.2006 to 31.3.2007 and are closed on 31.3.2007. That deduction claimed is on account of creation of provision. Additionally, ''Provision'' is ''an ad hoc provision". Neither liability for revision of pay accrued during year before 31.3.2007 nor crystallized before 31.3.2007. Additionally, no payment of same was made before 31.3.2007. All proposals were made in month of October 2007 after close of accounting year. As per recommendations of Central Sixth Pay Commission assessee should have claimed such expenses of revised pay of its employees only in assessment year 2009-10 and 2010-11. Hence, provision rather ad hoc provision of Rs. 1,60,00,000/- is hereby disallowed . [Emphasis Supplied] ITA 541/2019 Page 6 of 33 8. CIT (A) while dismissing appeal of assessee, held that there was no decision of Central Government in current financial year (2006- 07) which may have bearing on revision of pay of executives of appellant Company and therefore it cannot be held that such liability had crystallized during Financial Year 2006-07. In absence of finality, there was no justification on part of appellant company to have made provision in current year. relevant portion of order of ITAT relating to aforesaid disallowance reads as under: (3.1) In facts of case before us, we have already noticed that that Pay Revision Committee had not completed its deliberations before end of FY 2006-07 and was yet to submit its report at time when FY 2006-07 came to end; and furthermore, that pay revision was finally implemented in pursuance of aforesaid Office Memorandum dated 26.11.2008 in No.2(70)/08-DPE(WC) of Ministry of Heavy Industries & Public Enterprises. Under these facts and circumstances, we conclude that liability for Rs. 1,60,00,000 deduction for which was claimed by Assessee on account of ad hoc provision for pay revision, had not accrued during relevant FY i.e., 2006-07 (AY 2007-08). Merely because Pay Revision Committee was constituted during year, it cannot be said that liability towards pay revision had accrued during year, when we consider facts that Pay Revision Committee had not completed its deliberations before end of FY 2006-07 and was yet to submit its report at time when FY 2006-07 came to end; and furthermore, that pay revision was finally implemented in pursuance of aforesaid Office Memorandum dated 26.11.2008 in No.2(70)/08-DPE(WC) of Ministry of Heavy Industries & Public Enterprises. During FY 2006-07 (AY 2007-08), there was neither any statutory liability nor any legally enforceable liability against Assessee in respect of Assessee's claim for Rs. 1,60,00,000 deduction for which was claimed by Assessee on account of ad hoc provision for pay revision. In ITA 541/2019 Page 7 of 33 fact, there was no such liability at all. Even if there was liability, it was purely contingent liability which is not deductible for income tax purposes. 9. Mr. Gagan Kumar, learned counsel for appellant has assailed aforesaid findings and argued that tax authorities and Tribunal have ignored fact that provision of salary of Rs.1.60 crores was ascertained liability in light of recommendation of PRC, appointed by Department of Public Enterprises (herein after referred to as DPE ) on 30th November, 2006. He submits that effective date of commencement of revised pay is important and not date of signing of agreement or its approval granted by DPE. In support of his submission, learned counsel has relied upon judgment of this Court in Commissioner of Income-tax vs. Bharat Heavy Electrical, Limited 352 ITR 88 (Delhi);Bharat Earth Movers vs. Commissioner of Income-tax, 245 ITR 428 (SC). Besides, learned counsel also relied upon DPE - guidelines relating to wage policies and related matters. 10. Mr. Zoheb Hossain, senior standing counsel for Revenue along with Mr. Deepak Anand on other hand supported decision of ITAT and argued that provision for salary was not finally ascertained and determined, and thus appellant could not have made deduction for same on ad hoc basis. They relied upon judgments in Commissioner of Income-Tax, Bombay vs. M/S Morarji Goculdas Spinning and Weaving Co. Ltd., Bombay, 2000(2) Mh.L.J.; Nonsuch Estate Ltd. vs. Commissioner of Income Tax, Madras, (1975) 3 SCC 443 and Indian ITA 541/2019 Page 8 of 33 Molasses Co. (Private) Ltd vs Commissioner of Income Tax, West Bengal, AIR 1959 SC 1049. 11. We have given our due consideration to submissions advanced by both learned counsels on aforesaid issue. Before expressing our views, it is essential to briefly note history of provision relating to deduction on account of pay revision. appellant is PSU under Government of India. PRC was constituted by Ministry of Heavy Industries and Public Enterprises, under Chairmanship of Honble (Retd.) Justice M. Jagannadha Rao, Supreme Court of India, vide resolution dated 30th November, 2006. pay revision fell due during Assessment Year 2007-08, with effect from 1st January, 2007. committee held total of 39 meetings out of which 4 meetings were held during Assessment Year 2007-08, and it furnished its final report on 26th November, 2008. Pursuant to recommendations of PRC, appellant declared expenditure of Rs.1.60 crores on account of provision for revision of pay in books of account from 1st January 2007, since effective date of implementation was not known. report of PRC was implemented later in September, 2008; nevertheless, this would not render expenditure to become unascertained liability , making it ineligible for deduction for year under consideration i.e. 2007-08. appellant has placed on record note of Finance Wing relating to aforesaid provision which reads as under: Finance Wing with subject: Provision against pay revision of Executives, clearly states that during discussions regarding Annual Account for year 2006-07 on 10.10.2007 in CMD s Chamber when DF was also present, it was decided ITA 541/2019 Page 9 of 33 that suitable provision on account of pay revision of Executives w.e.f. 01.01.2007 should also be made in Annual accounts for year 2006-07. Accordingly, ad hoc provision of Rs.1.60 crores is proposed to be made in accounts for period of three months for executives only from 01.01.2007 to 31.3.2007. On back side of said note it is mentioned as under:- Note Existing Note Suggested Note No. 11(b) Pay Revision of Pay Revision of Public Sector executive Public Sector executive was due w.e.f. was due w.e.f. 01.01.2007 and pay 01.01.2007 and pay revision committee has revision committee has been appointed by been appointed by Govt. of India, Govt. of India, report of which is report of which is pending. In view of this pending. Adhoc no provision for revised provision of Rs.1.60 pay has been made in crores has been made account of 2006-07. in accounts for financial year 2006-07. Submitted for approval please. Sd/- ACF(S) 13.10.2007 12. pay revision of employees of appellant, PSU is due every ten years with expiry of one wage settlement or agreement. Invariably, there is time lag between expiry of wage revision and negotiation of fresh wage revision. appellant had made provision of Rs.1.60 crores on scientific foundation and on basis of its past experience in its accounts for Financial Year 2006-07. provision was made for period 1st ITA 541/2019 Page 10 of 33 January, 2007 to 31st March, 2007 and deduction was claimed on standpoint that appellant is under obligation to pay revised pay to its employees with effect from 1st January, 2007, determination whereof, was matter of time. appellant, thus had reasonable basis to make provision for this expenditure. Similar provisions were also made in subsequent years in following manner. Financial Year Amount (Rs. in crores) Cumulative Amount (Rs. in Crores) 2006-07 1.60 1.60 2007-08 6.61 8.21 2008-09 15.79 24.00 13. Having noted facts of case, we now turn to judgments relied upon by parties. Appellant has relied upon Bharat Heavy Electrical Limited (supra), which is squarely applicable to facts of present case. relevant paragraph is reproduced as under: Question No.1 - Whether provisions made claiming deduction for wage revision, allowed by Tribunal was justified in circumstances of case? assessee, BHEL, had during relevant assessment years 1988-89 and 1998-99 claimed, in its schedule in balance sheet, addition of its liability on account of wage revision. Accordingly, provision for wage revision was factored. assessee submitted that even though wage revision proposals had been submitted to competent bodies or authorities, liability was certain and ascertained on basis of its past experience and after taking into consideration previous Pay Commission's reports, union demands and ability of employer to bear additional burden. These provisions also took into account factors such as ITA 541/2019 Page 11 of 33 price index in adjustment inflation etc. assessee, public sector unit, had stated that since liability being ascertained, even Comptroller and Auditor General had not communicated them to be contingent liabilities. Assessing Officer, for both relevant years, held that provision could not be allowed and that claim or deduction was allowable when actually entire quantum of liability could be calculated. order of AO was upheld in appeal. Tribunal relying Supreme Court's decision in Bharat Earth Movers v. CIT [2000] 245 ITR 428/ 112 Taxman 61 allowed assessee's claim. Tribunal noticed as follows: - "13. In assessee's case also, it is noticed that provision for wage revision is factored on 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 scientific computation. Obviously, when one wage agreement comes to end and other is executed, there would be passage of time, but new wage agreement would come into effect from end of earlier wage agreement. This being so, liability is certain in assessee's case though quantum of such liability is variable and it is further noticed that assessee has categorically admitted that provision as done is invariable short of final agreement and difference as ultimately emerging are always booked as expenses in year in which payment is made. This being so, we are of view that provisions made on account of wage revision is not contingent liability and is allowable in year of making such provisions made. In circumstances, this issue is held in favour of assessee and addition on this account stands deleted." [Emphasis Supplied] ITA 541/2019 Page 12 of 33 14. In Bharat Earth Movers (supra), Supreme Court has held that it is not date of signing of agreement or grant of approval by Government, but effective date of commencement of wage revision under agreement that is of relevance. relevant portion of said judgment reads as under: law is settled: if business liability has definitely arisen in accounting year, deduction should be allowed although liability may have to be quantified and discharged at future date. What should be certain is incurring of liability. It should also be capable of being estimated with reasonable certainty though actual quantification may not be possible. If these requirements are satisfied, liability is not contingent one. liability is in praesenti though it will be discharged at future date. It does not make any difference if future date on which liability shall have to be discharged is not certain. 15. similar view was also expressed by Kerala High Court in case of Commissioner of Income-tax vs. Kerala State Financial Enterprises Ltd.[2009] 178 Taxman 449 (Ker), where, while dealing with similar provision made on account of wage revision, High Court followed decision of Supreme Court in case of Bharat Earth Movers (supra). 16. Pertinently, CIT (A)has also categorically held that provision had been computed on scientific basis and it was erroneously mentioned as ad hoc provision. In Rotork Controls India (P.) Ltd. vs. Commissioner of Income-Tax 314 ITR 62, judgment relied upon by appellant, Court has defined concept of provision in following words: ITA 541/2019 Page 13 of 33 What is provision? This is question which needs to be answered. provision is liability which can be measured only by using substantial degree of estimation. provision is recognized when: (a) enterprise has present obligation as result of past event; (b) it is probable that outflow of resources will be required to settle obligation; and (c) reliable estimate can be made of amount of obligation. If these conditions are not met, no provision can be recognized. 17. It is well settled principle of law that assessee, following mercantile system of accounting, is not entitled to claim deduction until liability for which deduction is claimed has accrued. Act makes distinction between actual liability in praesenti and liability de future which, for time being is only contingent. former is deductible but not latter. question to be decided in each case is whether any present liability has accrued against assessee. In light of facts noted above, case laws relied upon by appellant are squarely applicable to facts and circumstances of present case. 18. Per contra, judgments relied upon by counsels for respondents are distinguishable on facts. In Morarji Goculdas Spinning and Weaving Co. Ltd. (Supra), court while considering whether deduction could be claimed on account of excise duty based on show cause notices, rejected claim of assessee on ground that there was no demand by Excise department and liability of assessee was merely contingent, which would not constitute expenditure for taxation purposes. In Nonsuch Estate Ltd.(Supra), court while deciding question of ITA 541/2019 Page 14 of 33 deduction on account of managing agency remuneration , held that assessee is not entitled to same until liability for sum for which deduction is claimed has actually accrued. court observed that liability would not accrue unless Central Government conveyed its approval as mandated as per Section 326 of Companies Act. In Indian Molasses Co. (Private) Ltd (Supra), court considered whether payments made to trustees to create life insurance in name of retiring Managaing Director of assessee company would constitute expenditure so as to claim deduction. It was held that liability was contingent and expenditure which is deductible for income tax purposes is one which is towards liability actually existing at time. Merely putting aside money which may become expenditure on happening of event in future is not expenditure that is deductible. 19. position in current case is that liability had already arisen with certainty. committee was constituted for purpose of wage revision. That wages would be revised was foregone conclusion. Merely because making of report and implementation thereof took time, it could not be said that there was no basis for making provision. In view of above, we hold that ITAT and CIT (A) have fell in error by disallowing expenditure of Rs.1.60 crores on account of anticipated pay revision in Assessment Year 2007-08. first and second questions of law are thus answered in favour of appellant. Accordingly, it is directed that revenue shall now pass consequential orders accepting deduction of Rs. 1.60 crores. ITA 541/2019 Page 15 of 33 QUESTION III: 20. next question pertains to addition of Rs.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 date of signing of loan agreement to date of realization. background of aforesaid addition is that appellant was following accrual/mercantile system of accounting and was accounting fees as its revenue from date of signing of loan agreement. amount was finally deducted/ realized from loan amount, when it was actually disbursed to borrower. There were instances when loan agreement was signed and borrower would not take disbursement and, accordingly, fees would not be realized. CAG objected to same on ground that 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 CAG that accounting policy shall be reviewed for FY 2006-07 and, accordingly, Board approved change in accounting policy in its meeting held on 27th September, 2007. revised accounting policy recognized aforementioned fees as on date of its realization, instead of date of signing of loan agreement. AO made addition of Rs. 1.28 crores on ground that change had resulted in under-statement of profits and also because change was introduced after closing of financial year. ITA 541/2019 Page 16 of 33 21. CIT (A) confirmed addition holding that change in accounting policy was not in accordance with provisions of Act. relevant finding of CIT (A) on this issue is as under: ''Regarding Ground No.2 of appeal relating to disallowance of Rs.l.28 crores on account of under- statement of profit due to change in accounting policy of revenue recognition in respect of processing fees of loans etc., I find that appellant was regularly following accounting practice upto 31.03.2007 by which such incomes were accounted for on accrual basis. Subsequently, in view of its Board's decision in meeting dated 27.09.2007, appellant company revised its accounts in light of advice from statutory auditors and thereby changed accounting policy and recognized revenue in respect thereof on receipt basis. I find that CAG audit party had raised observation that accounting of such receipts at time of signing of loan agreement was not in conformity with Accounting Standard 9 to which appellant company had assured vide letter dated 06.11.2006 that accounting policy shall be reviewed in F. Y.2006-07. Subsequently, in Board meeting of appellant company of September, 2007, following resolution was passed: "Resolved that changes in accounting policy from year 2006-07 be and are hereby approved as detailed in agenda item" detailed note for comparing existing policy and revised policy shows that Board of company took this decision by assuming that there was no financial impact and there was only change in language. However, very basis of this decision that ITA 541/2019 Page 17 of 33 there was no financial impact was incorrect, as proposed change had resulted in reduction in taxable profit under Income Tax Act, 1961. Further, AO s observation that decision was taken only after F. Y. is over was also note-worthy, even though such decision was taken with retrospective effect. Evidently, appellant is company incorporated under Companies Act 1956. As per Accounting Standards, it follows mercantile system of accounting. Therefore, even though company may have changed accounting policy, which as mentioned was on faulty premise that it did not have financial impact; in line with Accounting Standards as per Section 145 of Act, it could have added back amount of Rs.1.28 crores on account of such receipts in computation of income. This would have ensured compliance with CAG objections as also compliance with provisions of Act. Moreover, decision of Company's Board cannot override provisions of statute. Keeping in view above, addition made on this ground is upheld and this ground is accordingly dismissed. [Emphasis Supplied] 22. ITAT upheld addition holding as under: (4.1.1) Assessee is now in appeal against aforesaid order dated 28.8.2014 of Ld. CIT(A). At time of hearing before us, Ld. AR of Assessee submitted that change in Accounting Policy was made in order to comply with objection/observation of Audit Party of Comptroller & Auditor General. Ld. CIT(DR) relied on orders of AO and Ld. CIT(A). ITA 541/2019 Page 18 of 33 (4.2) position in law is unambiguous. U/s 145(1) of I.T. Act, it is provided that income chargeable under head "Profits and gains of business or profession" or" Income from other sources" shall, subject to provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by assessee. Assessee is not permitted to follow cash system of accounting for some of items while following mercantile system of accounting for rest of items in computation of income chargeable under head "Profits and gains of business or profession" or "Income from other sources" as mixed system of accounting has lost statutory mandate w.e.f. AY 1989- 90 in view of amendment to Section 145 of I.T. Act. Thus, Assessee was in clear error of law in changing method of accounting to selectively adopt cash system of accounting for certain items, while following mercantile system of accounting for rest of items. Even if accounting policy was changed in pursuance of observation of Audit Party of Comptroller& Auditor General ("CAG" for short), even then, statutory provisions under I.T. Act will prevail over any observation/objection/remark of Audit Party of CAG. Moreover, despite having changed accounting policy, in pursuance of observation of Audit Party & CAG, Assessee would have added back aforesaid amount of Rs. 1.28 crores in computation of Total Income for Income Tax purposes. That would have ensured compliance with statutory provisions under I.T. Act, as well as with observation of Audit Party & CAG. Assessee is company incorporated under Companies Act, 1956 and follows mercantile system of accounting. Assessee company registered under Companies Act, 1956 is required to maintain accounts in accordance with provisions of Companies Act, 1956. However, profits computed in ITA 541/2019 Page 19 of 33 this manner need not necessarily be same as Total Income for purposes of I.T. Act. computation of Total Income for purposes of Income Tax Act requires giving effect to statutory provisions under I.T. Act, by making necessary adjustments/ modifications /alterations/ variations to profits compounded in accordance with provisions of Companies Act, 1956. In view of this, Assessee was in clear error of law by not adding back aforesaid amount of Rs. 1.28crores in computation of Total Income for purposes of I.T. Act. This error of law is further aggravated by error of fact, in that change of accounting policy was based on faulty premise (i.e, error of fact) that there was no financial impact. fact is, there was financial impact to extent of aforesaid amount of Rs. 1.28 crores. In view of foregoing discussion and unambiguous position in law; and clear error of law and fact on part of Assessee, we uphold addition of aforesaid amount of Rs. 1.28 crores. Ld. AR of 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 order of Ld. CIT(A) is well reasoned and in accordance with law in facts and circumstances of this case. Assessee has failed to make any case for inference with impugned order of Ld. CIT(A) on this issue. Therefore, second ground of appeal in appeal filed by Assessee in ITA No. 5705/Del/2014 is dismissed and impugned order of Ld. CIT(A) on this issue, sustaining aforesaid addition of Rs. 1,28,00,000. [Emphasis Supplied] 23. Learned counsel for appellant has argued that appellant follows mercantile system of accounting and under said system of accounting, unless there is reasonable certainty of its realization, income cannot be ITA 541/2019 Page 20 of 33 said to have accrued. Tribunal erred in confirming addition without appreciating AS-9, issued by ICAI which provides for recognition of income on accrual basis only when there is certainty of its realization. change in accounting policy had been duly reflected in detailed note for comparing existing and revised policy and financial impact due to said change was shown in Schedule T of financial statements. It was also urged that change is revenue neutral and there is no loss to Department as same has been realized in Financial year 2008-09, and has been offered to tax in AY 2009-10. In support of his submission, counsel has relied upon decisions in Commissioner of Income-Tax, Chennai vs. Shriram Investments Ltd.[2015] 62 Taxman 298 (Madras); Commissioner of Income-tax vs. Bharat Aluminium Co. Ltd.[2010] 187 Taxman 111(Delhi); Commissioner of Income-tax-VI vs. Virtual Soft Systems Ltd.[2018] 92 taxman.com 370 (SC);Commissioner of Income- tax vs. Woodward Governor India (P.) Ltd.[2007] 162 Taxman 60 (Delhi)and Commissioner of Income Tax vs. Excel Industries Limited, 358 ITR 295 (SC). 24. Mr. Zoheb Hossain and Mr. Deepak Anand, learned counsels for revenue, on other hand urged that assessee was required to make book of accounts in accordance with provisions of Companies Act, 1956. However, profits computed as per provisions of Companies Act need not necessarily be same as Total Income for purposes of Income Tax Act. computation of total income requires giving effect to statutory provisions under Act by making necessary adjustments. Appellant has erred by not adding back amount of Rs. 1.28 crores and ITA 541/2019 Page 21 of 33 therefore, findings of tax authorities are in consonance with provisions of Act and judicial pronouncements on this issue. 25. We will first reflect on decisions and viewpoints expressed by courts on this issue. appellant has relied upon judgment of Supreme Court in Excel Industries Limited (supra).The observations made in Paragraph Nos. 18 and 19 of said case are of relevance, and 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 levy on income. No doubt, Income-tax Act takes into account two points of time at which liability to tax is attracted, viz., accrual of income or its receipt; but substance of matter is income. If income does not result at all, there cannot be tax, even though in book-keeping, entry is made about hypothetical income , which does not materialize. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains income of recipient, even though given up, tax may be payable. Where, however, income can be said not to have resulted at all, there is obviously neither accrual not receipt of income, even though entry to that effect might, in certain circumstances, have been made in books of account. ITA 541/2019 Page 22 of 33 18. above passage was cited with approval in Morvi Industries Ltd. v. CIT (Central), [1971] 82 ITR 835 (SC) in which this Court also considered dictionary meaning of word accrue and held that income can be said to accrue when it becomes due. It was then observed that: ..the date of payment does not affect accrual of income. moment income accrues, assessee get vested with right to claim that amount even though it may not be immediately. 19. This court further held, and in our opinion more importantly, that income accrues when there arises corresponding liability of other party from whom income becomes due to pay that amount. 20. It follows from these decisions that income accrues when it becomes due but it must also be accompanied by corresponding liability of other party to pay amount. Only then can it be said that for purposes of taxability that income is not hypothetical and it has really accrued to assessee. 21. In so far as present case is concerned, even if it is assumed that assessee was entitled to benefits under advance licenses as well as under duty entitlement pass book, there was no corresponding liability on customs authorities to pass on benefit of duty free imports to assessee until goods are actually imported and made available for clearance. benefits represent, at best, hypothetical income which may or may not ITA 541/2019 Page 23 of 33 materialize and its money value is therefore not income of assessee. [Emphasis Supplied] 26. factual situation in said case is quite similar to case in hand. In aforenoted case, question was with respect to assessee s entitlement to benefits under advance license as well as under duty entitlement passbook . Court observed that there was no corresponding liability on customs authority to pass benefit of duty-free imports to assessee until goods are actually imported and made available for clearance; benefits represent hypothetical income which may or may not materialize and its money value is not income of assessee. 27. In Commissioner of Income-Tax, Coimbatore vs. Annamalai Finance Ltd,[2009] 319 ITR 196 (Madras), judgment relied upon by appellant, following observations are essential to note: 4. assessee had submitted that in respect of overdue charges, assessee-company, keeping in line with norms of Reserve Bank of India as well as credit rating agency, has been recognizing income by way of overdue charges only to extent of actual collection i.e., assessee is admitting income only on cash basis. assessee-company has also placed reliance upon Accounting Standard 9 of ICAI which lays down that when uncertainties exist regarding determination of amount or its collectability, revenue shall not be treated as accrued and hence shall not be recognised until collection. ITA 541/2019 Page 24 of 33 5. recognition of revenue on accrual basis presupposes satisfaction of two conditions viz., revenue is measurable and that revenue is collectable without any uncertainty. Taking into account these standards also, assessee submitted that overdue on financial charges on hire purchase and lease had been admitted only on cash basis. Rejecting said submission, Assessing Officer passed assessment order. XXXX In instant case, learned counsel for Revenue is not in position to demonstrate or satisfy us that due to change of accounting method adopted by respondent/assessee, which is permissible in law as per ratio laid down in (i) CIT v. Matchwell Electricals (I.) Ltd.[2003] 263 ITR 227 (Bom.) and (ii) Hela Holdings (P.) Ltd. v. CIT[2003] 263 ITR 129 (Cal.),the Revenue suffered any loss or such change of methodology attracts tax evasion. Concededly, there is no finding to that effect in assessment order or in order of Commissioner of Income-tax (Appeals). change of method of accounting of overdue charges from mercantile basis to cash system, method of accounting, as followed by assessee, does not create any income; but method of accounting only recognizes income. Therefore, either to apply accrual system or cash system, recognition of income is paramount factor. In present case, disputed amount is overdue charges receivable by assessee from various parties on basis of hire- purchase and lease agreements. As per terms of agreements, overdue charges are payable by parties concerned to assessee when they make defaults in paying installments as per schedule of payments. When installment itself is overdue is not collected, ITA 541/2019 Page 25 of 33 there is no basis for making out case that additional overdue charges payable by parties would be collectible with certainty. terms of agreements which enable assessee-company to demand overdue charges is only enabling provision and that enabling provision does not guarantee collection of overdue charges. It only gives cause of action to assessee. In such cases it is very difficult to recognize income against overdue charges. We are, therefore, of considered opinion that Tribunal has rightly deleted additions made towards overdue charges, acknowledging change of method of accounting of overdue interest alone on cash basis. [Emphasis Supplied] 28. Court in above noted case was considering question regarding overdue charges payable by parties concerned to assessee when they make defaults in paying installment as per schedule of payments. It was held that Clause in agreement which allows assessee to demand such charges is only enabling Clause, and does not guarantee collection of overdue charges and when installment itself is overdue and not collected/ realised, there is no basis for making out case that additional overdue charges payable by parties would be collectable with certainty. Similarly, Supreme Court in its decision in Commissioner of Income Tax vs. Virtual Soft System Limited (supra), considered question as to whether deduction on account of lease equalization charges from leasing rental income can be allowed under Income Tax Act on basis of guidance note issued by ICAI. Answering this question, it was held that Court may take help of external ITA 541/2019 Page 26 of 33 aids such as ICAI guidelines and standards if Act is silent, and there exists no internal aid for interpretation of same. relevant portion of decision reads as under: 16. method of accounting followed, as derived from ICAI's Guidance Note, is valid method of capturing real income based on substance of finance lease transaction. rule of substance over form is fundamental principle of accounting, and is in fact, incorporated in ICAI's Accounting Standards on Disclosure of Accounting Policies being accounting standards which is kind of guidelines for accounting periods starting from 1-4-1991. It is cardinal principle of law that difference between capital recovery and interest or finance income is essential for accounting for such transaction with reference to its substance. If same was not carried out, respondent would be assessed for income tax not merely on revenue receipts but also on non-revenue items which is completely contrary to principles of IT Act and to its scheme and spirit. 18. Without doubt, in catena of cases, this Court has discussed relevancy of Guidance Note. While dealing with one of such matters, this Court, in CIT v. Punjab Stainless Steel Industries [CIT v. Punjab Stainless Steel Industries, (2014) 15 SCC 129] held as under: (SCC p. 134, para 17) 17. So as to be more accurate about word turnover , one can either refer to dictionaries or to material which are published by bodies of accountants. Institute of Chartered Accountants of India (hereinafter referred to as ICAI ) has published some material under head Guidance Note on Tax Audit under Section 44-B of Income Tax Act . said ITA 541/2019 Page 27 of 33 material has been published so as to guide members of ICAI. In our opinion, when recognised body of Accountants, after due deliberation and consideration publishes certain materials for its members, one can rely upon same. 19. In present case, relevant assessment year is 1999-2000. main contention of Revenue is that respondent cannot be allowed to claim deduction regarding lease equalisation charges since as such there is no express provision regarding such deduction in IT Act. However, it is apt to note here that respondent can be charged only on real income which can be calculated only after applying prescribed method. IT Act is silent on such deduction. For such calculation, it is obvious that respondent has to take course of Guidance Note prescribed by ICAI if it is available. Only after applying such method which is prescribed in Guidance Note, respondent can show fair and real income which is liable to tax under IT Act. Therefore, it is wrong to say that respondent claimed deduction by virtue of Guidance Note rather it only applied method of bifurcation as prescribed by expert team of ICAI. Further, conjoint reading of Section 145 of IT Act read with Section 211 (unamended) of Companies Act makes it clear that respondent is entitled to do such bifurcation and in our view there is no illegality in such bifurcation as it is according to principles of law. Moreover, rule of interpretation says that when internal aid is not available then for proper interpretation of statute, court may take help of external aid. If term is not defined in statute then its meaning can be taken as is prevalent in ordinary or commercial parlance. Hence, we do not find any force in contentions of Revenue that accounting standards prescribed by Guidance Note cannot be used to bifurcate lease rental to reach real income for purpose of tax under IT Act. 20. To sum up, we are of view that respondent is entitled for bifurcation of lease rental as per accounting standards ITA 541/2019 Page 28 of 33 prescribed by ICAI. Moreover, there is no express bar in IT Act regarding application of such accounting standards. [Emphasis Supplied] 29. Supreme Court has held that accounting process is to ensure real income from transactions in form of revenue receipts is accounted for purpose of income tax. application of accounting standard is to show fair and real income which is liable to tax under Act. accounting standards of ICAI lays down that when uncertainties exist regarding determination of amount in its collectability, revenue shall not be treated as accrued and shall not be recognized until collection. It would be apposite to extract relevant portion of AS-9, issued by ICAI with regards to effect of uncertainties on revenue recognition. same reads as under: 9.1 Recognition of revenue requires that revenue is measurable and that at time of sale or rendering of service it would not be unreasonable to expect ultimate collection. 9.2 Where ability to assess ultimate collection with reasonable certainty is lacking at time of raising any claim, e.g., for escalation of price, export incentives, interest etc., revenue recognition is postponed to extent of uncertainty involved. In such cases, it may be appropriate to recognise revenue only when it is reasonably certain that ultimate collection will be made. Where there is no uncertainty as to ultimate collection, revenue is recognised at time of sale or rendering of service even though payments are made by installments. ITA 541/2019 Page 29 of 33 9.3 When uncertainty relating to collectability arises subsequent to time of sale or rendering of service, it is more appropriate to make separate provision to reflect uncertainty rather than to adjust amount of revenue originally recorded. 9.4 essential criterion for recognition of revenue is that consideration receivable for sale of goods, rendering of services or from use by others of enterprise resources is reasonably determinable. When such consideration is not determinable within reasonable limits, recognition of revenue is postponed. 9.5 When recognition of revenue is postponed due to effect of uncertainties, it is considered as revenue of period in which it is properly recognised. [Emphasis Supplied] 30. Let s now advert to facts of case, before we express our views. appellant s income on account of fees did not accrue with certainty on date of signing of loan agreement. income fell due only when loan was disbursed, as fee was to be collected at that stage. It cannot be said that on date of signing, income accrued in conformity with mercantile system and AS-9 adopted by appellant. contention of Appellant is in line with settled position of law as laid down by Supreme Court and other High Courts as well as AS-9. There was no reasonable certainty of realization of amount of Rs. 1.28 crores, and that since it follows mercantile system of accounting, same can be treated as income only if it had convincingly accrued. amount here is ITA 541/2019 Page 30 of 33 not determinable and there is no certainty about same, since it remains uncertain whether borrower -who has signed loan agreement, would, eventually, avail of loan, or not. Merely because appellant may have signed agreement with borrower, that, by itself, does not lead to certainty of income accruing to Appellant, so as to bring it within ambit of income . Here, addition has resulted on account of change in accounting policy by recognizing realised revenue, instead of assumed revenue on date of signing of loan agreement. tax authorities fell in error by laying emphasis on impressibility of change in accounting in context of section 145 of Act. conspectus of case law cited by both parties is that, even for income to be recognized under mercantile law, it is necessary that income should have accrued with certainty. It is trite law that there can be no liability to pay Income Tax on hypothetical income. regular method of accounting determines only mode of computing taxable income and particular stage at which tax liability arises. If there is no income, then merely because assessee had followed mercantile system of accounting and has in his books of account reflected certain receipt or credits or debits in particular way, it cannot be said that income has accrued. position of law on accrual of income is well settled. Income accrues only when there is right to receive such income, regardless of fact if it is actually received or not. To decide this crucial question, one would have to examine, whether, there is legal right vested in favour of assessee to claim same. This is crux of matter and tax authorities seem to have lost sight of same. tax authorities should have proceeded to determine and ascertain as to whether, income has in reality accrued to assessee, or not, ITA 541/2019 Page 31 of 33 notwithstanding change in accounting policy. If income had indeed accrued, addition would have been permissible. However, to determine this, in our opinion, treatment given in assessee s books of account would not be necessary, but would be dependent on answer to question as to whether income has indeed accrued, having regard to test as discussed hereinabove. question whether real income has materialized or not, has to be scrutinized, having regard to commercial and business certainties and realities of situation in which assessee is positioned, and not with reference to system of accounting. answer to such decision would then relate to chargeable accounting year in which such profits actually arose and assessee would be liable to tax accordingly. Applying this yardstick, we do not find that any income accrued at point of mere execution of agreement and, thus, income did not accrue in relevant AY. financial impact has since been factored in subsequent year. 31. We also find merit in submissions of appellant that change in accounting policy is result of audit objection raised by CAG on 10th October, 2006. appellant has claimed deduction in profits in computation of total income, and added it as income in subsequent assessment year, which has been accepted by AO. change is, thus, revenue neutral. reliance placed by Revenue upon decision of Supreme Court in [2000] 110 Taxman 134 (SC)/ 244 ITR 764 (SC), is misplaced. dispute in said case was with respect to interpretation of provisions of Electricity Act, and additions made in ITA 541/2019 Page 32 of 33 income as per provision of Section 41 of Act. factual scenario in said case is clearly distinguishable from facts of present case. 32. Having regard to reasoning that we have given, we have no hesitation in setting aside order of Tribunal. Accordingly, appeal is allowed. questions are answered in favour of Appellant/Assessee. SANJEEV NARULA, J VIPIN SANGHI, J FEBRUARY 06, 2020 v ITA 541/2019 Page 33 of 33 Housing And Urban Development Corporation Ltd. v. Additional Commissioner of Income-tax, Range-12, New Delhi