ACIT, Chandigarh V. M/s SAB Industries Ltd., Chandigarh

ITA 138/CHANDI/2012

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 9193 (ITAT-CHANDIGARH)
• Duration Of Justice: 4 year(s) 6 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-08-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 14-03-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 03-02-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K MITTAL
• Keywords: Capital asset; Business income; Business expenditure; Question of law; Assessment record; Commercial expediency; Revised return; Revenue expenditure; Capital expenditure
• Section: 263; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER ITA NO. 1329/CHD/2010 (ASSESSMENT YEAR : 2007-08) M/S SAB INDUSTRIES LIMITED, VS. THE A.C.I.T, SCO 49-50, SECTOR 26, CIRCLE 5(1), CHANDIGARH. CHANDIGARH. PAN: AACCS5078H ITA NO. 73/CHD/2012 (ASSESSMENT YEAR : 2008-09) M/S SAB INDUSTRIES LIMITED, VS. THE ADDL.C.I.T, SCO 49-50, SECTOR 26, RANGE V, CHANDIGARH. CHANDIGARH. PAN: AACCS5078H ITA NO.138/CHD/2012 (ASSESSMENT YEAR : 2008-09) THE A.C.I.T, VS. M/S SAB INDUSTRIES LIMITED, CIRCLE 5(1), SCO 49-50, SECTOR 26, CHANDIGARTH. CHANDIGARH. PAN: AACCS5078H AND ITA NO. 381/CHD/2013 (ASSESSMENT YEAR : 2009-10) M/S SAB INDUSTRIES LIMITED, VS. THE ADDL.C.I.T, SCO 49-50, SECTOR 26, RANGE V, CHANDIGARH. CHANDIGARH. PAN: AACCS5078H (APPELLANT) (RESPONDENT) 2 ASSESSEE BY : SHRI ASHWANI KUMAR DEPARTMENT BY : SHRI S.K. MITTAL, DR DATE OF HEARING : 21.07.2016 DATE OF PRONOUNCEMENT : 10.08.2016 O R D E R PER BHAVNESH SAINI, J.M. : THIS ORDER SHALL DISPOSE OFF ALL THE ABOVE CROSS APPEALS FILED IN THE CASE OF SAME ASSESSEE : 2. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF BOTH THE PARTIES, PERUSED THE FINDINGS OF THE AUTHO RITIES BELOW AND CONSIDERED THE MATERIAL AVAILABLE ON RECO RD. ITA NO.1329/CHD/2010(ASST.YEAR 2007-08) (ASSESSEES APPEAL) : 3. THIS APPEAL OF THE ASSESSEE HAS BEEN DIRECTED AGAINST THE ORDER OF THE LEARNED CIT (APPEALS), CHA NDIGARH DATED 27.7.2010 FOR ASSESSMENT YEAR 2007-08. 4. GROUND NOS.6, 7, 8 AND 9 ARE REGARDING CHARGING OF INTEREST, WHICH ARE MANDATORY AND CONSEQUENTIAL. THE LEARNED COUNSEL FOR THE ASSESSEE, THEREFORE, DID NO T PRESS THESE GROUNDS. THE GROUND NOS.6, 7, 8 AND 9 ARE ACCORDINGLY, DISMISSED. 5. ON GROUND NO.2, THE ASSESSEE CHALLENGED THE DISALLOWANCE OF DEDUCTION OF RS.11.99 LACS ON ACCOU NT OF IRRECOVERABLE AMOUNT WRITTEN OFF. DURING THE ASSE SSMENT 3 PROCEEDINGS, THE ASSESSEE WAS ASKED TO SHOW CAUSE A S TO WHY PRIOR PERIOD EXPENSES OF RS.11,99,660/- SHOWN I N THE COMPUTATION OF INCOME SHOULD NOT BE DISALLOWED BEIN G OF PRIOR PERIOD. THE ASSESSEE SUBMITTED THAT THESE EX PENSES HAVE BEEN INCURRED BY THE ASSESSEE ON BEHALF OF LAV AN CHEMICAL LTD., A SUBSIDIARY COMPANY IN CONNECTION W ITH THE IMPLEMENTATION OF PROJECT AT IRAN. THE ASSESSE E HAS BOOKED THE EXPENDITURE AS RECOVERABLE FROM OF LAVAN CHEMICAL LTD. IN ASSESSMENT YEAR 2006-07. HOWEVER, SINCE AT THE TIME OF SETTLEMENT, THE AFORESAID SUMS HAVE NOT BEEN RECOVERED FROM OF LAVAN CHEMICAL LTD., THE SAME HAS BEEN WRITTEN OFF AND DEBITED TO PROFIT & LOSS A CCOUNT UNDER THE HEAD PREVIOUS YEARS EXPENSES DURING THE ASSESSMENT YEAR UNDER APPEAL. HOWEVER, THE LIABILI TY TO INCUR THE EXPENSES IS NOT CRYSTALLIZED DURING THE P REVIOUS YEAR, RATHER IT WAS SHOWN AS RECOVERABLE SUM FROM L AVAN CHEMICAL COMPANY. THE AMOUNT HAS ALREADY BEEN OFF ERED TO TAX AS CREDITED DURING THE ASSESSMENT YEAR 2006- 07 BY REDUCING ALLOWABLE REVENUE EXPENSES TO THAT EXTENT AND, THEREFORE, THE SAME CANNOT BE TAXED AGAIN IN ASSESS MENT YEAR UNDER APPEAL AT THE TIME OF WRITING OF. THE A MOUNT WRITTEN OFF DURING THE YEAR HAS BEEN SHOWN UNDER TH E HEAD PRIOR PERIOD ADJUSTMENT ONLY TO COMPLY WITH THE ACCOUNTING PRINCIPLES PRESCRIBED FOR THE COMPANIES. IT WAS, THEREFORE, SUBMITTED THAT THE SAME MAY BE ALLO WED AS DEDUCTION UNDER SECTION 36(1)(VII) OF THE ACT AS AM OUNT OF DEBT WRITTEN OFF. THE ASSESSING OFFICER, HOWEVER, OBSERVED THAT SINCE THE ASSESSEE WAS FOLLOWING THE MERCANTIL E 4 SYSTEM OF ACCOUNTING, THESE EXPENSES SHOULD HAVE BE EN DEBITED IN THE YEAR WHEN LOSS ACTUALLY OCCURRED TO THE ASSESSEE.. THE LEARNED CIT (APPEALS) CONSIDERING T HE SUBMISSIONS OF THE ASSESSEE FOUND THAT THE ASSESSEE HAS INCURRED THESE EXPENSES ON BEHALF OF LAVAN CHEMICAL COMPANY, IT IS INCORRECT TO SAY THAT THESE WERE BUS INESS EXPENSES OF THE ASSESSEE. IF THESE HAD BEEN BUSINE SS EXPENSES, THE CLAIM UNDER PROFIT & LOSS ACCOUNT WOU LD HAVE BEEN VALID. SHOWING THE SAID AMOUNT AS RECOVE RABLE FROM THE SUBSIDIARY COMPANY ITSELF PROVES THAT THE SAME DID NOT BELONG TO THE ASSESSEE. IT IS ALSO NOTED T HAT THE COMPANY IS NOT A TRADE DEBTOR AND NO GOODS OR SERVI CES WERE SUPPLIED BY THE ASSESSEE TO THIS DEBTOR AND NO INCOME EARNED, THEREFORE, THE PROVISIONS OF BAD DEB T WOULD NOT APPLY. THE LEARNED CIT (APPEALS) ACCORDI NGLY, CONFIRMED THE ADDITION AND DISMISSED THIS GROUND OF APPEAL OF THE ASSESSEE. 6. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE DO NOT FIND ANY MERIT IN THIS GROUND OF APPEAL OF THE ASSESSEE. IT IS ADMITTED FACT THAT THE ASSESSEE IN CURRED THESE EXPENSES ON BEHALF OF THE SUBSIDIARY COMPANY AND ALSO BOOKED THE SAME AMOUNT AS RECOVERABLE FROM SUBSIDIARY COMPANY. THEREFORE, THESE ARE NOT BUSIN ESS EXPENSES OF THE ASSESSEE INCURRED FOR ANY BUSINESS PURPOSE AND SAME WERE RIGHTLY DISALLOWED BY THE AUTHORITIES BELOW. EVEN IF THE AMOUNT IS WRITTEN O FF IN THE BOOKS OF ACCOUNT, THE SAME WOULD NOT MAKE ANY DIFFE RENCE 5 BECAUSE SUBSIDIARY COMPANY IS NOT TRADE DEBTOR AND NO GOODS OR SERVICES WERE SUPPLIED BY THE ASSESSEE AND FURTHER NO INCOME HAVE BEEN EARNED IN THIS BEHALF. THE LEARNED CIT (APPEALS) WAS JUSTIFIED IN HOLDING THAT THE PROVISIONS OF BAD DEBT WOULD NOT APPLY IN THE FACT S AND CIRCUMSTANCES OF THE CASE. THIS GROUND OF APPEAL O F THE ASSESSEE HAS NO MERIT AND THE SAME IS ACCORDINGLY, DISMISSED. 7. ON GROUND NOS.3 AND 4, THE ASSESSEE CHALLENGED THE DISALLOWANCE OF INTEREST EXPENSES TO THE EXTENT OF RS.68.03 LACS. 8. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSEE WAS ASKED TO JUSTIFY THE COMMERCIAL EXPEDI ENCY OF THE FOLLOWING LOANS AND ADVANCES : S.NO. NAME OF THE PARTY BALANCE AS ON 31.3. 2007 (AMOUNT IN RS.) I M/S SAB UDYOG LTD. 41878057 II M/S STEEL STRIPS WHEELS INVESTMENT LTD. 1264700 III SH. BALDEV SINGH MANN 500000 IV SH. SURINDER KUMAR SINGLA 2600000 V M/S KALKA ESTATE (P) LTD. 1800000 VI M/S PRIYA TOOLS LTD. 5925000 VII V SH. S.S.DAWRA 10460675 9. AFTER CONSIDERING ASSESSEES SUBMISSIONS AND IN VIEW OF THE DECISION OF THE HON'BLE PUNJAB & HARYAN A HIGH COURT IN THE CASE OF CIT VS. M/S ABHISHEK INDUSTRI ES 6 LTD., 286 ITR 1 AND ASSESSEES OWN CASE REPORTED IN 288 ITR 1, THE ASSESSING OFFICER MADE THE OBSERVATION F OR DISALLOWANCE OF INTEREST IN THE CASE OF M/S SAB UD YOG LTD. THE ASSESSEE HAS SIMPLY STATED THAT IT WAS HO LDING MORE THAN 40% OF ITS TOTAL PAID UP CAPITAL AND IT H AS ALSO GIVEN SURETY AS ASKED BY THE ASSESSEE FROM TIME TO TIME. THE ASSESSEE ALSO STATED THAT THE AFORESAID ADVANCE HAS BEEN GIVEN OUT OF CURRENT ACCOUNT AND NOT FROM INTE REST BEARING FUNDS. HOWEVER, THE ASSESSING OFFICER NOTE D THAT NO SALE/PURCHASE OF ANY SORT IS BEING DONE BETWEEN BOTH THE COMPANIES. ALSO FOR PROVIDING SURETY IN THE CA SE OF M/S SATLUJ CONSTRUCTION LTD., THE ASSESSEE HAS SEPA RATELY GIVEN SURETY MONEY AMOUNTING TO RS.34,82,356/- TO M /S SAB UDYOG LTD. THE ASSESSING OFFICER NOTED THAT NO BUSINESS PURPOSE/EXIGENCY HAVE BEEN ESTABLISHED. THEREFORE, 12% OF INTEREST WAS TO BE DISALLOWED. IN THE CASE OF M/S STEEL STRIPS WHEELS INVESTMENT LTD., T HE ASSESSEE EXPLAINED THAT IT WAS OLD BALANCE AND PAID OUT OF CURRENT ACCOUNT. HOWEVER, THE ASSESSING OFFICER DISALLOWED THE INTEREST @ 12%. IN THE CASE OF SHR I BALDEV SINGH MANN, THE ASSESSEE STATED THAT ADVANCE HAS BE EN GIVEN OUT OF CURRENT ACCOUNT AND NOT FROM INTEREST BEARING FUNDS. THE ASSESSING OFFICER NOTED THAT IT IS PERS ONAL IN NATURE AND ACCORDINGLY, DISALLOWED THE INTEREST @ 1 2%. IN THE CASE OF ADVANCE TO SHRI SURINDER KUMAR SINGLA, M/S KALKA ESTATE PVT. LTD. AND M/S PRIYA TOOLS LTD., IT WAS EXPLAINED THAT IT IS OLD BALANCE BUT THE ASSESSING OFFICER DISALLOWED 12% OF INTEREST. IN THE CASE OF SHRI S. S.DAWRA, 7 THE ASSESSEE STATED THAT THE ADVANCES HAVE BEEN GIV EN OUT OF CURRENT ACCOUNT AND NOT FROM INTEREST BEARING FU NDS BUT THE ASSESSEE FAILED TO ESTABLISH BUSINESS EXPED IENCY. THEREFORE, 12% OF INTEREST WAS DISALLOWED MAKING TO TAL DISALLOWANCE OF RS.68,02,750/-. 10. THE ASSESSEE CHALLENGED THE ADDITION BEFORE TH E LEARNED CIT (APPEALS) AND WRITTEN SUBMISSION OF THE ASSESSEE IS REPRODUCED IN THE APPELLATE ORDER, IN W HICH THE ASSESSEES EXPLANATION WAS THAT THE ASSESSEE IS HAVING INVESTMENT IN SHARES OF SAB UDYOG LTD. AND HOLDING MORE THAN 40% OF ITS TOTAL PAID UP CAPITAL. THE ADVANCE WAS GIVEN FOR BUSINESS PURPOSES AND CERTIFICATE TO THAT EFFECT WAS ALSO FILED. BOTH THE COMPANIES ARE HAVING BUSI NESS CONNECTION, IT IS NOT UNCOMMON TO GIVE TEMPORARY ACCOMMODATION TO BUSINESS ASSOCIATES FROM WHOM COMPANY IS ALREADY AVAILING SERVICES AND ALSO HAVIN G 40% SHARE CAPITAL. THE TEMPORARY ADVANCE GIVEN FOR BUS INESS PURPOSES, HAS BEEN REPAID BY SAB UDYOG LTD. BY ASSESSMENT YEAR 2008-09. IN THE CASE OF SHRI BALDE V SINGH MANN, RS.5 LACS WERE GIVEN FOR PURCHASE OF LA ND AND SINCE DEAL DID NOT MATERIALIZED/FINALIZED, THEREFOR E, ADVANCE WAS TAKEN BACK ON 18.8.2007. IN THE CASE O F S.S.DAWRA, IT WAS SUBMITTED THAT HE IS HIGHLY QUALI FIED PERSON AND IN ORDER TO TAKE THE ADVANTAGE OF HIS INTELLECTUAL AND VAST EXPERIENCE, THE ASSESSEE WANT ED TIME TO JOIN ITS BOARD BUT HE DID NOT AGREE BECAUSE HE W AS IN NEED OF SOME TEMPORARY FUNDS TO WHICH THE ASSESSEE AGREED. 8 THIS HAS BENEFITED THE ASSESSEE INDIRECTLY IN THE B USINESS PURPOSE. THE ADVANCE HAS BEEN RECEIVED BACK ON 15.4.2008. SHRI S.S.DAWRA ALSO JOINED THE BOARD OF THE ASSESSEE AND THE ASSESSEE WAS AVAILING BENEFIT OF H IS ASSOCIATION. IT WAS ALSO EXPLAINED THAT IN OTHER C ASES THERE WAS OLD BALANCE OF RS.1.78 CRORES AND A NEW ADDITION OF RS.4.66 CRORES TO VARIOUS PARTIES. ALL THE OLD AND NEW ADVANCES HAVE BEEN GIVEN OUT OF CURRENT ACC OUNT OF THE ASSESSEE. IN THE EARLIER YEARS, THE DEPARTM ENT HAD ACCEPTED THE POSITION OF BALANCES AND NO DISALLOWAN CE HAVE BEEN MADE OUT OF THE SAME. THEREFORE, THERE I S NOT JUSTIFICATION TO MAKE THE DISALLOWANCE. THE DETAIL S OF OLD ADVANCES IS AS UNDER : SNO. NAME OLD BALANCE AS ON 31.3.07 SOURCE OF PAYMENT 1 SURINDER KUMAR SINGLA 2600000 SBOP NEHRU PLACE , N DELHI CURRENT A/C NO. 32311 2 KALKA ESTATE (P) LTD. 1800000 PNB SEC. 17 CURRENT A/C NO. 1159 3 STEEL STRIPS WHEELS INV. LTD. 1264700 SBOP NEHRU PLACE , N D ELHI CURRENT A/C NO. 32311 4 PRIYA TOOLS LTD. 5925000 HDFC CURRENT A/C NO. 1528 S S DAWRA 6207500 CURRENT A/C, DETAIL CHART OF PAYMENT IS ENCLOSED. TOTAL 17797200 11. THE ASSESSEE RELIED UPON THE DECISION OF THE KARNATKA HIGH COURT IN THE CASE OF CIT VS. SRIDEV ENTERPRISES, 59 TAXMAN 439, IN WHICH IT WAS HELD TH AT WHEN ASSESSEES CLAIMS FOR DEDUCTION WERE ALLOWED I N RESPECT OF SUMS ADVANCED DURING THE EARLIER YEARS, A DEPARTURE FROM THAT FINDING IN RESPECT OF THE SAID AMOUNTS 9 ADVANCED DURING THE PREVIOUS YEAR, WOULD RESULT IN A CONTRADICTORY FINDING AND WOULD NOT BE EQUITABLE TO PERMIT THE REVENUE TO TAKE A DIFFERENT STAND NOW IN RESPEC T OF THE AMOUNTS, WHICH WERE SUBJECT MATTER OF PREVIOUS YEAR S ASSESSMENT. FURTHER, THE ASSESSEE SUBMITTED THAT I T WAS HAVING INTEREST FREE FUNDS AVAILABLE WITH IT AT THE BEGINNING OF THE FINANCIAL YEAR AS ON 1.4.2006 AMOU NTING TO RS.63.56 CRORES (DETAILS ENCLOSED). DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE COMPANY FURTHER R AISED INTEREST FREE UNSECURED LOANS OF RS.4.50 CRORES AN D IT HAS ALSO EARNED CASH PROFIT AMOUNTING TO RS.4.30 CRORES DURING THE YEAR. THEREFORE, THE ASSESSEE WAS HAVIN G FUNDS AVAILABLE AT THE BEGINNING OF THE YEAR AMOUNTING TO RS.63.56 CRORES AND RS.8.80 CRORES, WHICH COMES TO RS.72.36 CRORES, WHICH WERE SUFFICIENT TO COVER THE IMPUGNED NEW ADVANCES AMOUNTING TO RS.4.66 CRORES G IVEN DURING THE YEAR, WHICH ARE ONLY 6.44% OF THE TOTAL INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE COMPANY. TH E ASSESSEE ALSO RELIED UPON THE DECISION OF THE HON'B LE SUPREME COURT IN THE CASE OF MUNJAL SALES CORPORAT ION VS. CIT, 215 CTR 105 AND OTHER DECISIONS IN SUPPORT OF THE CONTENTION THAT THE DISALLOWANCE UNDER SECTION 36(1)(III) OF THE ACT IS WHOLLY UNJUSTIFIED. 12. THE LEARNED CIT (APPEALS) CONSIDERING THE EXPLANATION OF THE ASSESSEE OBSERVED THAT IT IS NOW HERE PROVED THAT THE MONEY ADVANCED WAS ON ACCOUNT OF COMMERCIAL EXPEDIENCY OR ANY BUSINESS PURPOSE AND 10 ACCORDINGLY, DISMISSED THE GROUND OF APPEAL OF THE ASSESSEE. 13. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATE D THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW. HE HAS SUBMITTED THAT MOST OF THE ADVANCES ARE OLD ON WHICH NO DISALLOWANCE HAVE BEEN MADE IN EARLIER YEARS. P B-47 IS CERTIFICATE OF SAB UDYOG LTD., CONFIRMING THEREIN T HAT THE ADVANCE OF RS.4.18 CRORES WAS STANDING IN THEIR BOO KS OF ACCOUNT ON ACCOUNT OF TEMPORARY ADVANCE, WHICH WERE USED EXCLUSIVELY FOR BUSINESS PURPOSES. HE HAS ALS O RELIED UPON THE DECISION OF THE PUNJAB & HARYANA HI GH COURT IN THE CASE OF CIT VS. KAPSONS ASSOCIATES 38 1 ITR 204. ON THE OTHER HAND, THE LEARNED D.R. RELIED UP ON THE ORDERS OF THE AUTHORITIES BELOW. 14. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE ASSESSING OFFICER RELIED UPON THE DECISION OF THE H ON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF ABHISHE K INDUSTRIES LTD. (SUPRA). THE HON'BLE SUPREME COURT IN THE CASE OF ITS RECENT JUDGMENT IN THE CASE OF HERO C YCLES P. LTD. VS. CIT, 379 ITR 347 HELD THAT WHEN ADVANCES T O SISTER CONCERN ARE GIVEN FOR BUSINESS EXPEDIENCY, N O DISALLOWANCE UNDER SECTION 36(1)(III) OF THE ACT CA N BE MADE. IT WAS FURTHER HELD THAT WHEN THE ASSESSEE W AS HAVING CREDIT BALANCE IN BANK ACCOUNT AT THE TIME O F ADVANCE, NO DISALLOWANCE OF INTEREST ON BORROWINGS SHOULD BE MADE. IN THIS JUDGMENT, THE HON'BLE SUPREME COU RT 11 HAS OVERRULED THE JUDGMENT IN THE CASE OF ABHISHEK INDUSTRIES LTD. (SUPRA). THE HON'BLE PUNJAB & HARY ANA HIGH COURT IN THE CASE OF KAPSONS ASSOCIATES (SUPR A) HELD THAT WHEN THE ASSESSEE WAS HAVING SUFFICIENT INTERE ST FREE ADVANCE TO COVER INTEREST FREE ADVANCE, NO DISALLOW ANCE UNDER SECTION 36(1)(III) OF THE ACT CAN BE MADE. T HE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF ANOTHER JUDGMENT IN THE CASE OF BRIGHT ENTERPRISES PVT. LTD. VS. CIT, 381 ITR 107 CONSIDERED THE ADVANCE TO THE SISTER CONCERN, IN WHICH THE ASSESSEE HELD 89% SHAR E. THE INVESTMENT IN SUBSIDIARY COMPANY WAS FOUND FOR COMMERCIAL EXPEDIENCY AND DISALLOWANCE WAS NOT FOUN D JUSTIFIED UNDER SECTION 36(1)(III) OF THE ACT. THE FACTS OF THE CASE AS NOTED ABOVE, ARE NOT IN DISPUTE THAT IN MOST OF THE CASES OF THE PARTIES TO WHOM ADVANCES WERE GIVE N WERE OLD BALANCE. IT IS NOT IN DISPUTE THAT IN EARLIER YEAR, NO ADVANCE HAVE BEEN MADE UNDER SECTION 36(1)(III) OF THE ACT. THEREFORE, THE DECISION OF THE KARNATAKA HIGH COURT IN THE CASE OF SRIDEV ENTERPRISES (SUPRA) SQUARELY APPLY TO THE FACTS OF THE CASE AND THE REVENUE CANNOT BE ALL OWED TO MAKE DISALLOWANCE OF INTEREST UNDER SECTION 36(1)(I II) OF THE ACT IN THE YEAR UNDER APPEAL WHEN NO DISALLOWAN CE HAVE BEEN MADE IN THE PRECEDING ASSESSMENT YEAR IN RESPECT OF THE OLD BALANCE. THE SUBSTANTIAL ADVANC E GIVEN IN THE YEAR UNDER APPEAL IS IN RESPECT OF M/S SAB U DYOG LTD. IT IS NOT IN DISPUTE THAT THE ASSESSEE WAS H OLDING MORE 40% OF ITS TOTAL PAID UP CAPITAL AND ACCORDING TO THE ASSESSEE, THE ADVANCES HAVE BEEN GIVEN FOR BUSINESS 12 PURPOSE, CERTIFICATE TO THE SAME EFFECT HAD BEEN FI LED BEFORE THE AUTHORITIES BELOW (PB-47) IN WHICH SAB U DYOG LTD. CONFIRMED THAT THE AMOUNT IN QUESTION WAS TEMP ORARY ADVANCE, WHICH WAS RE-PAID DURING THE ASSESSMENT YE AR 2008-09 AND IT WAS FOR BUSINESS PURPOSE ONLY AND US ED FOR THE BUSINESS PURPOSE ONLY. SINCE THE ASSESSEE COMPANY WAS HAVING INVESTMENT IN SHARES OF SAB UDYO G LTD. AND WAS HOLDING MORE 40% OF ITS TOTAL PAID UP CAPITAL. THEREFORE, IT WAS IN THE INTEREST OF THE ASSESSEE TO SEE THAT SAB UDYOG LTD. IS FUNCTIONING PROPERLY FOR BUSINESS PURPOSE, OTHERWISE, THE INVESTMENT OF THE ASSESSEE WOULD HAVE SUFFERED. IN CASE OF TEMPORARY BUSINESS ADVANCE WAS NOT GIVEN TO SAB UDYOG LTD., T HE INTEREST OF THE ASSESSEE WOULD HAVE SUFFERED. MORE OVER, THE ASSESSEE HAS EXPLAINED THAT IT WAS HAVING INTER EST FREE FUNDS AVAILABLE WITH IT IN ASSESSMENT YEAR UNDER AP PEAL AS EXPLAINED BEFORE THE LEARNED CIT (APPEALS), THE SUBMISSIONS OF THE ASSESSEE BEFORE THE LEARNED CIT (APPEALS) HAVE NOT BEEN CONTROVERTED BY THE REVENUE IN ANY MANNER. THEREFORE, IT IS CLEAR THAT THE ASSESS EE WAS HAVING SUFFICIENT INTEREST FREE ADVANCES TO COVER I NTEREST FREE ADVANCE GIVEN TO THE ABOVE PARTY INCLUDING SAB UDYOG LTD. THEREFORE, NO DISALLOWANCE UNDER SECTION 36(1 )(III) COULD BE MADE AGAINST THE ASSESSEE. IN THIS VIEW O F THE MATTER, WE ARE OF THE VIEW THAT THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CASE OF HERO CYCLES P VT. LTD. (SUPRA) AND JUDGMENTS OF HON'BLE PUNJAB & HARY ANA HIGH COURT IN THE CASES OF KAPSONS ASSOCIATES AND BRIGHT 13 ENTERPRISES PVT. LTD. (SUPRA) SQUARELY APPLY TO THE FACTS AND CIRCUMSTANCES OF THE CASE. WE ARE, THEREFORE, OF THE VIEW THAT NO DISALLOWANCE UNDER SECTION 36(1)(III) OF THE ACT SHOULD BE MADE IN THIS CASE. WE ACCORDINGLY, S ET ASIDE THE ORDERS OF THE AUTHORITIES BELOW AND DELET E THE ADDITION. THE GROUND NOS.3 AND 4 OF THE APPEAL OF THE ASSESSEE ARE ALLOWED. 15. ON GROUND NO.5, THE ASSESSEE CHALLENGED THE ORDER OF THE CIT (APPEALS) IN CONFIRMING THE DISALL OWANCE OF INTEREST OF RS.260.83 LACS ON BORROWED CAPITAL U SED FOR BUSINESS PURPOSE UNDER SECTION 36(1)(III) OF THE AC T. 16. THE BRIEF FACTS OF THE CASE ARE THAT IN THE RE VISED RETURN, THE ASSESSEE CLAIMED INTEREST OF RS.2,60,83 ,542/- RELATING TO TERM LOAN OF SSL TOWER PROJECT FROM I TS TAXABLE INCOME, WHEREAS IN THE ORIGINAL RETURN, THE SAME WAS CAPITALIZED BY IT ALONGWITH COST OF THE PROJECT . THE ASSESSEE IN THE REPLY SUBMITTED THAT IT WAS ENGAGED IN THE BUSINESS OF DEVELOPMENT OF REAL ESTATE PROPERTIES A S A PART OF ITS EXISTING REAL ESTATE BUSINESS. IT HAD ACQUI RED A PROPERTY AT DERABASSI (PUNJAB) FOR DEVELOPMENT OF A HOUSING AND COMMERCIAL COMPLEX. ON 19.1.2006, THE ASSESSEE WAS SANCTIONED A TERM LOAN OF RS.25 CRORES BY SBI FOR CONSTRICTION OF DWELLING UNITS ON THE PROPE RTY. AN AMOUNT OF RS.20 CRORES WAS PAID BY THE ASSESSEE FOR PURCHASE OF LAND ON 20.1.2006. THIS LAND WAS REGIS TERED IN THE NAME OF THE ASSESSEE ON 23.3.2006 FOR TOTAL 14 CONSIDERATION OF RS.25 CRORES. THE ASSESSEE HAS ST ATED THAT THIS PROPERTY IS A PART OF ITS CURRENT ASSETS AND, THEREFORE, INTEREST COST AMOUNTING TO RS.2,60,83,54 2/- INCURRED ON THE LOAN SHOULD HAVE BEEN DEBITED TO TH E PROFIT & LOSS ACCOUNT AND CLAIMED AS EXPENDITURE. IT HAS FURTHER BEEN STATED THAT INADVERTENTLY THE INTEREST PAID ON BORROWED CAPITAL WAS INCLUDED IN THE VALUE OF COMME RCIAL PROPERTY UNDER DEVELOPMENT WHILE FINALIZING THE BOO KS FOR THE ASSESSMENT YEAR UNDER APPEAL. LATER ON, THE AS SESSEE CLAIMED DEDUCTION OF INTEREST AMOUNTING RS.2.60 CRO RES ON BORROWED CAPITAL UNDER SECTION 36(1)(III) OF THE AC T BY FILING A REVISED RETURN. THE ASSESSEE ALSO SUBMIT TED THAT INTEREST COST IS AN ALLOWABLE DEDUCTION UNDER SECTI ON 36(1)(III) OF THE ACT AS IT WAS USED FOR BUSINESS P URPOSE OF THE ASSESSEE. THE ONLY REQUIREMENT FOR THE PURPOSE OF CLAIMING DEDUCTION UNDER SECTION 36(1)(III) OF THE ACT IS THAT THE CAPITAL WHICH WAS BORROWED IS USED FOR THE PURPOSE OF BUSINESS. SINCE THE CAPITAL BORROWED HA S BEEN USED FOR THE PURPOSE OF BUSINESS OF ACQUIRING AND DEVELOPING COMMERCIAL PROPERTY, WHICH IS A PART OF CURRENT ASSETS AND NOT FIXED ASSETS, THEREFORE, IT WAS ALLO WABLE DEDUCTION. THE ASSESSEE RELIED UPON THE DECISION O F THE HON'BLE SUPREME COURT IN THE CASE OF INDIA CEMENTS LTD. VS. CIT, 60 ITR 52, WHEREIN IT IS HELD THAT WHERE THE ACT OF BORROWING WAS INCIDENTAL TO THE CARRYING ON THE BUS INESS, THE LOAN OBTAINED WAS NOT AN ASSET . THE ASSESSEE ALSO RELIED UPON THE DECISION OF THE BOMBAY HIGH COURT I N THE CASE OF CALICO DYEING & PRINTING WORKS VS. CIT, 34 ITR 15 265, IN WHICH IT WAS HELD THAT IF THE CAPITAL BORROWED WAS USED FOR BUSINESS PURPOSE IN THE RELEVANT YEAR OF A CCOUNT, IT DID NOT MATTER WHETHER THE CAPITAL WAS BORROWED IN ORDER TO ACQUIRE A REVENUE ASSET OR A CAPITAL ASSET . THE ASSESSING OFFICER, HOWEVER, DID NOT ACCEPT THE CONT ENTION OF THE ASSESSEE AND OBSERVED THAT THE ASSESSEE HAS NO RECEIPTS FROM THE SALE OF FLATS/PROPERTY FROM SSL TOWER PROJECT. THE ASSESSEE HAS SHOWN ONLY ADVANCE FROM CUSTOMERS AGAINST THE PROPERTY AT RS.2.03 CRORES AS A LIABILITY IN THE BALANCE SHEET. SINCE NO INCOME HA S BEEN SHOWN, THEREFORE, NO EXPENDITURE IS ALLOWABLE DEDUC TION. THE ASSESSING OFFICER ACCORDINGLY, MADE THE ADDITIO N. 17. THE ASSESSEE CHALLENGED THE ADDITION BEFORE TH E LEARNED CIT (APPEALS) AND WRITTEN SUBMISSION OF THE ASSESSEE IS REPRODUCED IN THE IMPUGNED ORDER, IN WH ICH THE ASSESSEE MORE OR LESS REITERATED THE SAME FACTS . IT WAS SUBMITTED THAT THE ASSESSEE HAS ACQUIRED A PROP ERTY AT DERABASSI FOR DEVELOPMENT OF A HOUSING AND COMME RCIAL COMPLEX, WHICH IS PART OF EXISTING REAL ESTATE BUSI NESS. THE LOAN WAS OBTAINED FROM SBI FOR BUSINESS PURPOSE AND SO USED FOR THE BUSINESS PURPOSE, THEREFORE, THE AS SESSEE IS ENTITLED FOR DEDUCTION UNDER SECTION 36(1)(III) OF THE ACT. THE INTEREST COST IS AN ALLOWABLE DEDUCTION UNDER S ECTION 36(1)(III) OF THE ACT WHEN IT IS USED FOR THE BUSIN ESS PURPOSE. IN THE PRESENT CASE, THE ASSESSEE IS A BU ILDER AND HAS OBTAINED LOAN FOR UNDERTAKING THE PROJECT O F CONSTRUCTION AND DEVELOPMENT OF A HOUSING AND 16 COMMERCIAL COMPLEX, WHICH IS THE MAIN BUSINESS ACTI VITY OF THE ASSESSEE. THE ASSESSEE RELIED UPON THE JUDG MENT OF CALCUTTA HIGH COURT IN THE CASE OF TETRON COMMERCI AL LTD. VS. CIT, 261 ITR 422 TO SUPPORT THE CONTENTION THAT THE INTEREST ON BORROWED CAPITAL FOR THE PURCHASE O F PLOT OF LAND EVEN WHEN THERE WAS A SINGLE TRANSACTION IS ALLOWABLE AS A DEDUCTION BECAUSE THE ACTIVITY OF BU SINESS HAS ALREADY STARTED WITH THE PURCHASE OF LAND. THE ASSESSEE ALSO RELIED UPON THE DECISION OF THE BOMBA Y HIGH COURT IN THE CASE OF CIT VS. LOKHANDWALA CONSTRUCT ION INDUSTRIES LTD., 260 ITR 579, WHEREIN INTEREST PAID ON CAPITAL BORROWED FOR DEVELOPMENT RIGHTS IN RESPECT OF LAND WAS HELD AS ALLOWABLE DEDUCTION. IT WAS SUBMITTED THAT THE ASSESSEE HAS SHOWN ADVANCES FROM CUSTOMERS OF RS.2.03 CRORES, WHICH HAVE BEEN RECEIVED FROM VARIO US CUSTOMERS AS ADVANCE MONEY FOR BOOKING OF THE FLATS . IT IS NOT THE CASE THAT THE ASSESSEE HAS TRANSFERRED THE OWNERSHIP RIGHTS TO THE CUSTOMERS. FURTHER, AS PER AS-9 FOR RECOGNITION OF REVENUE IN CASE OF REAL ESTATE S ALES, IT IS NECESSARY THAT ALL THE CONDITIONS SPECIFIED IN PARA GRAPHS 10 AND 11 ARE SATISFIED. IN THE CASE OF THE ASSES SEE, WHEN ADVANCES WERE RECEIVED FROM CUSTOMERS ON ACCOU NT OF BOOKING AMOUNT AGAINST THE BOOKING OF YET TO BE CONSTRUCTED FLATS, THEREFORE, REVENUE RECOGNITION I S DEFERRED TILL THE TIME OF COMPLETION OF CONSTRUCTIO N. THE ASSESSEE RELIED UPON THE BOARDS CIRCULAR DATED 29.1.2009, IN WHICH IT WAS CLARIFIED THAT GENERALL Y, THE INITIAL AGREEMENT BETWEEN THE 17 PROMOTERS/BUILDERS/DEVELOPERS AND THE ULTIMATE OWNE R IS IN THE NATURE OF AGREEMENT TO SELL. THE MAIN BUSIN ESS OF THE ASSESSEE IS DEVELOPMENT OF HOUSING AND COMMERCI AL COMPLEX AND INTEREST EXPENDITURE ON LOAN WAS INCURR ED SOLELY FOR THE PURPOSE OF EARNING INCOME IN THE NOR MAL COURSE, THEREFORE IT IS AN ALLOWABLE DEDUCTION. 18. THE LEARNED CIT (APPEALS), HOWEVER, DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE BECAUSE THE ASSESSEE HAS NOT SHOWN ANY INCOME FROM THE PROJECT IN QUESTION. THEREFORE, DEDUCTION WAS NOT ALLOWED AND APPEAL OF THE ASSESSEE HAS BEEN DISMISSED. 19. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF BOTH THE PARTIES. THE LEARNED COUNSEL FOR THE ASSE SSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORIT IES BELOW AND SUBMITTED THAT THE LAND WAS PURCHASED OUT OF BORROWED CAPITAL, WHICH WAS PART OF THE CURRENT ASS ETS. THEREFORE, DEDUCTION IS ALLOWABLE. 20. ON THE OTHER HAND, THE LEARNED D.R. RELIED UPO N THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED T HAT SINCE NO BUSINESS STARTED IN ORIGINALLY, WHICH WAS CAPITALIZED, THEREFORE, THE APPEAL OF THE ASSESSEE MAY BE DISMISSED. 21. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE ASSE SSEE 18 RELIED UPON THE FOLLOWING DECISIONS BEFORE THE AUTH ORITIES BELOW : I) DECISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF CALICO DYEING & PRINTING WORKS VS. CIT, 34 ITR 265, IN WHICH IT WAS HELD AS UNDER : HELD, THAT THE ASSESSEE WAS ENTITLED TO THE DEDUCT ION CLAIMED, EVEN THOUGH THE PLANT AND MACHINERY WERE N OT USED IN THE YEAR OF ACCOUNT. WHERE THE ASSESSEE CLAIMS DEDUCTION OF INTEREST PAI D ON CAPITAL BORROWED UNDER SECTION 10(2)(III) OF THE IN COME- TAX ACT, ALL THAT THE ASSESSEE HAS TO SHOW IS THAT T HE CAPITAL WHICH WAS BORROWED WAS USED FOR THE PURPOSES OF THE BUSINESS OF THE ASSESSEE IN THE RELEVANT YEA R OF ACCOUNT. IT DOES NOT MATTER WHETHER THE CAPITAL IS BORROWED IN ORDER TO ACQUIRE A REVENUE ASSET OR A C APITAL ASSET. IF THE CAPITAL IS USED IN THE YEAR OF ACCOUNT AND THE USE IS FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE, IT IS IMMATERIAL WHETHER THE USER OF THE C APITAL ACTUALLY YIELDED PROFIT OR NOT AND IT IS NOT OPEN TO T HE DEPARTMENT TO REJECT THE CLAIM OF THE ASSESSEE IN RES PECT OF THE INTEREST PAID ON THAT CAPITAL MERELY BECAUSE TH E USE OF THE CAPITAL IS UNREMUNERATIVE. II) DECISION OF HON'BLE SUPREME COURT IN THE CASE OF INDIA CEMENTS LTD. VS. CIT, 60 ITR 52, IN WHICH IT WAS HELD AS UNDER : THE APPELLANT OBTAINED A LOAN OF RS. 40 LAKHS FRO M THE INDUSTRIAL FINANCE CORPORATION SECURED BY A CHARG E ON ITS FIXED ASSETS. IN CONNECTION THEREWITH IT SPE NT A SUM OF RS.84,633 TOWARDS STAMP DUTY, REGISTRATION 19 FEES, LAWYERS FEES, ETC., AND CLAIMED THIS AMOUNT A S BUSINESS EXPENDITURE : HELD, THAT THE AMOUNT SPENT WAS NOT IN THE NATURE OF CAPITAL EXPENDITURE AND WAS LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE ASSESSEE'S BUSINESS AND WAS THEREFORE ALLOWABLE AS A DEDUCTION UNDER 10 (2)(XV) OF THE INDIAN INCOME-TAX ACT, 1922. THE ACT OF BORROWING MONEY WAS INCIDENTAL TO THE CARRYING ON OF BUSINESS, THE LOAN OBTAINED WAS N OT AN ASSET OR AN ADVANTAGE OF ENDURING NATURE, THE EXPENDITURE WAS MADE FOR SECURING THE USE OF MONEY FOR A CERTAIN PERIOD, AND IT WAS IRRELEVANT TO CONS IDER THE OBJECT WITH WHICH THE LOAN WAS OBTAINED. (III) DECISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT V . LOKHANDWALA CONSTRUCTION INDUSTRIES LTD,260 ITR 579, IN WHICH IT WAS HELD AS UNDER : WHERE AN ASSESSEE CLAIMS DEDUCTION OF INTEREST PAID ON CAPITAL BORROWED, ALL THAT THE ASSESSEE HAS TO SHOW IS THAT THE CAPITAL WHICH WAS BORROWED WAS USED FOR BUSINESS PURPOSE IN THE RELEVANT YEAR OF ACCOUNT AND IT DOES NOT MATTER WHETHER THE CAPITAL WAS BORROWED IN ORDER TO ACQUIRE A REVENUE ASSET OR A CAPITAL ASSET. THE ASSESSEE-COMPANY WAS ENGAGED IN THE BUSINESS OF CONSTRUCTION OF BUILDINGS. THE ASSESSE E HAD SECURED DEVELOPMENT RIGHTS FROM BOMBAY GAW RAKSHAK MANDAL UNDER AN AGREEMENT DATED DECEMBER 13, 1984, IN RESPECT OF A PLOT OF LAND. THE ASSESSEE HAD TAKEN LOANS AMOUNTING TO RS.1.15 CRORES OUT OF WHICH AN AMOUNT OF RS.1.10 CRORES CAME TO BE UTILISED DURING TH E ACCOUNTING YEAR RELATING TO THE ASSESSMENT YEAR 1987- 88. THE ASSESSEE CLAIMED DEDUCTION OF RS.14,09,942/- PAID AS INTEREST ON THE MONEYS BORROWED UNDER SECTIO N 36(1)(III) OF THE INCOME-TAX ACT, 1961. THE DEDUCTIO N 20 WAS ALLOWED BUT THE COMMISSIONER EXERCISING HIS AUTHORITY UNDER SECTION 263 OF THE INCOME-TAX ACT CAM E TO THE CONCLUSION THAT THE LOAN OF RS.1.15 CRORES WAS UTILISED BY THE ASSESSEE FOR ACQUIRING A CAPITAL ASS ET AND, THEREFORE, THE CLAIM FOR DEDUCTION UNDER SECTIO N 36(1)(III) COULD NOT HAVE BEEN ALLOWED BECAUSE IT WAS NOT A REVENUE EXPENDITURE. THE TRIBUNAL, HOWEVER, HELD THAT THE INTEREST WAS DEDUCTIBLE. ON FURTHER APPEA L TO THE HIGH COURT : HELD, DISMISSING THE APPEAL, THAT SINCE THE ASSESSEE HAD RECEIVED LOAN FOR OBTAINING STOCK-IN-TRA DE (KANDIVALI PROJECT), THE ASSESSEE WAS ENTITLED TO DEDUCTION UNDER SECTION 36(1)(III). (III) DECISION OF HON'BLE CALCUTTA HIGH COURT IN TH E CASE OF TETRON COMMERCIAL LTD. VS. CIT, 261 ITR 422, IN WHICH IT WAS HELD AS UNDER : ALTHOUGH THE ASSESSEE WAS CARRYING ON BUSINESS IN SHARES AND OTHER MATERIALS, ONE OF THE MAIN OBJECTS OF THE MEMORANDUM OF ASSOCIATION OF THE ASSESSEE WAS T O CARRY ON BUSINESS IN REAL ESTATE. THE ASSESSEE HAD PURCHASED TWO IMMOVABLE PROPERTIES BEING LAND AND A FLAT. THE IMMOVABLE PROPERTIES WERE PURCHASED FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE WHICH HAD ALREADY COMMENCED ITS BUSINESS. IT CONTINUED AND STEPPED INTO THE SECOND STAGE AS SOON AS CONSTRUCTIO N WAS STARTED. THE ASSESSEE CLAIMED THE INTEREST PAID ON THE BORROWED CAPITAL AS ADMISSIBLE DEDUCTION UNDER SECTION 36(1)(III). BUT THE TRIBUNAL PROCEEDED ON THE BASI S THAT THE BUSINESS HAD NOT COMMENCED AND THAT IT WAS THE CAPITAL EXPENSE THAT WAS SHOWN AS ADVANCE AGAINST THE IMMOVABLE PROPERTY AND THEREFORE IT COU LD NOT BE A BORROWED CAPITAL ENTITLING THE ASSESSEE TO THE BENEFIT OF SECTION 36(L)(III). ON APPEAL: 21 HELD, (I) THAT THE CONTENTION THAT THERE WAS NOTHIN G TO INDICATE THAT THE WORKS WERE IN PROGRESS WAS NOT TENABLE INASMUCH AS IT WAS NOT NECESSARY TO SHOW THA T THE WORK WAS IN PROGRESS. IT WAS THE NATURE OF THE EXPENSES THAT WOULD DETERMINE THE CHARACTER WHATEVER THE MANNER IN WHICH IT WAS SHOWN IN THE ACCOUNTS OF THE ASSESSEE. IN THIS CASE, THE BUSINE SS WAS AT THE SECOND STAGE AND AS SUCH THE BUSINESS SHALL BE DEEMED TO HAVE BEEN COMMENCED. ACCORDING TO THE MEMORANDUM OF ASSOCIATION OF THE ASSESSEE, O NE OF ITS MAIN OBJECTS WAS TO CARRY ON BUSINESS IN REA L ESTATE. THIS HAD COMMENCED ON THE ACQUISITION OF THE LAND OR THE FLAT. IT WAS NOT NECESSARY TO SHOW THAT IT WAS INTENDED FOR SALE OR OTHERWISE. THE FACT REMAINED THAT BY 1994 THE HOUSE CONSTRUCTED ON THE LAND AND THE FLAT WERE SOLD AND SHOWN IN THE RETURN FOR THE REL EVANT YEAR. THIS WAS SHOWN AS PROFIT FROM BUSINESS. THEREFORE, IT WAS NOT NECESSARY TO PROVE HOW IT WAS DEALT WITH AT THE STAGE OF ASSESSMENT. THE INTERES T PAID ON THE BORROWED CAPITAL WAS LIABLE FOR DEDUCTION UNDE R SECTION 36(1)(III) OF THE ACT IN RESPECT OF THE ASSESS MENT YEAR 1989-90.1989-90. 22. WHEN THE FACTS OF THE CASE, AS NOTED ABOVE, AR E CONSIDERED IN THE LIGHT OF ABOVE DECISIONS, IT IS C LEAR THAT THE DISALLOWANCE OF INTEREST IS WHOLLY UNJUSTIFIED. THE INTEREST COST IS AN ALLOWABLE DEDUCTION UNDER SECTI ON 36(1)(III) OF THE ACT, IF IT IS USED FOR THE PURPOS E OF BUSINESS. THE ASSESSEE BORROWED CAPITAL/LOAN, WHIC H HAS BEEN USED FOR THE PURPOSE OF ACQUIRING AND DEVELOPI NG COMMERCIAL PROPERTY, WHICH IS A PART OF CURRENT ASS ETS AND NOT FIXED ASSETS. IT IS ADMITTED FACT THAT THE ASS ESSEE COMPANY DERIVES INCOME FROM CONSTRUCTION AND UNDERTAKING EXECUTION OF CIVIL WORKS. THEREFORE, I NTEREST 22 COST WAS RIGHTLY CLAIMED AS REVENUE EXPENDITURE UND ER SECTION 36(1)(III) OF THE ACT. IT IS ALSO NOT IN D ISPUTE THAT THE FUNDS WERE BORROWED FOR THE PURPOSE OF BUSINESS CARRIED ON BY THE ASSESSEE. THE ASSESSEE OUT OF TH E BORROWED FUNDS ACQUIRED THE PROPERTY AT DERABASSI F OR DEVELOPMENT OF A HOUSING AND COMMERCIAL COMPLEX. S INCE THE ASSESSEE HAD RECEIVED LOAN FOR OBTAINING STOCK- IN- TRADE (LAND AT DERABASSI), THE ASSESSEE WAS ENTITLE D TO DEDUCTION UNDER SECTION 36(1)(III) OF THE ACT. THE BUSINESS OF THE ASSESSEE HAD COMMENCED ON THE ACQUISITION OF LAND AT DERABASSI. IT WAS NOT NECESSARY FOR THE ASSESSE E TO SHOW THAT IT WAS INTENDED FOR SALE OR OTHERWISE I N THE CASE OF ASSESSEE, THE ASSESSEE HAS RECEIVED THE ADV ANCE AGAINST BOOKING OF THE FLATS IN RESPECT OF THE PROP ERTY ACQUIRED, AGAINST WHICH THE ASSESSEE WOULD HAVE SHO WN THE PROFIT LATER ON. THEREFORE, FOR CONSIDERING TH E EXPENDITURE ON ACCOUNT OF INTEREST PAID ON BORROWED FUNDS, IT WAS NOT NECESSARY FOR THE ASSESSEE TO CO- RELATE THE SAME WITH THE REVENUE RECEIPTS. THE ASSESSEE W AS NOT REQUIRED TO PROVE HOW IT HAS DEALT WITH THE LAND IN ASSESSMENT YEAR UNDER APPEAL. THE INTEREST PAID ON THE BORROWED CAPITAL WAS ALLOWABLE DEDUCTION UNDER SECT ION 36(1)(III) OF THE ACT. THE AUTHORITIES BELOW MEREL Y REJECTED THE CLAIM OF THE ASSESSEE OF DEDUCTION OF INTEREST, AS THE ASSESSEE HAS NOT SHOWN ANY INCOME FROM SSL TOWER P ROJECT, WHICH POINT IS ALREADY CONSIDERED IN THE ABOVE DECI SION, WHICH IS IN FAVOUR OF THE ASSESSEE. IN THE PRESENT CASE, THE ASSESSEE IS BUILDER AND HAS OBTAINED THE LOAN FOR UNDERTAKIN G THE 23 PROJECT OF CONSTRUCTION AND DEVELOPMENT OF A HOUSIN G AND COMMERCIAL COMPLEX, WHICH IS THE MAIN BUSINESS ACTI VITY OF THE ASSESSEE AND INTEREST EXPENDITURE ON LOAN WA S INCURRED SOLELY FOR THE PURPOSE OF EARNING INCOME I N THE NORMAL COURSE. THE MOMENT THE ASSESSEE ACQUIRED TH E LAND FOR THE PURPOSE OF RAISING CONSTRUCTION, THE B USINESS ACTIVITY OF THE ASSESSEE WOULD HAVE STARTED. IN VI EW OF THE ABOVE DISCUSSION, WE ARE OF THE VIEW THAT THE AUTHO RITIES BELOW WERE WHOLLY UNJUSTIFIED IN MAKING DISALLOWANC E OF INTEREST OF RS.2,60,83,542/- UNDER SECTION 36(1)(II I) OF THE ACT. WE ACCORDINGLY, SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW AND DELETE THE ADDITION. THIS GR OUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 23. THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ITA NO.73/CHD/2012(ASST.YEAR 2008-09) (ASSESSEES APPEAL) : 24. THIS APPEAL OF THE ASSESSEE HAS BEEN DIRECTED AGAINST THE ORDER OF THE LEARNED CIT (APPEALS), CHA NDIGARH DATED 29.11.2011 FOR ASSESSMENT YEAR 2008-09 ON THE FOLLOWING GROUNDS : 1. THE LD. CIT (APPEALS) HAS GROSSLY ERRED IN LAW AS WELL AS ON FACTS IN CONFIRMING THE DISALLOWANCE OF INTERE ST EXPENSES FOR EXTENDING INTEREST FREE ADVANCES OF RS.50,75,729/- TO SISTER CONCERN IN EARLIER YEARS. THE DISALLOWANCE OF INTEREST MAY PLEASE BE DELETED. 24 2. THAT THE LD. CIT (APPEALS) HAS GROSSLY ERRED IN L AW AS WELL AS ON FACTS IN CONFIRMING THE DISALLOWANCE OF INTEREST OF RS.3,17,62,522/- ON BORROWED CAPITAL US ED FOR THE BUSINESS PURPOSE U/S 36(1)(III). THE ADDITION O N THIS ACCOUNT AMOUNTING TO RS.3,17,62,522/- MAY PLEASE BE DELETED. 25. IT IS STATED THAT BOTH THESE GROUNDS ARE SAME AS HAVE BEEN CONSIDERED IN ASSESSMENT YEAR 2007-08 ON GROUND NOS.3, 4 AND 5 ABOVE. THE LEARNED CIT (APPE ALS) ON BOTH THESE GROUNDS FOLLOWED HIS ORDER FOR ASSESS MENT YEAR 2007-08 AND DISMISSED THESE GROUNDS OF APPEAL OF THE ASSESSEE. SINCE IN ASSESSMENT YEAR 2007-08 WE HAVE DELETED THE SIMILAR ADDITIONS, THEREFORE, FOLLOWING THE ORDER FOR ASSESSMENT YEAR 2007-08 IN ITA NO.1329/CHD/2010 (SUPRA), WE SET ASIDE THE ORDERS O F AUTHORITIES BELOW AND DELETE BOTH THE ADDITIONS. T HE GROUND NOS.1 AND 2 OF THE APPEAL OF THE ASSESSEE AR E ALLOWED. 26. THE APPEAL OF THE ASSESSEE IS ALLOWED. ITA NO.381/CHD/2013(ASST.YEAR 2009-10) (ASSESSEES APPEAL) : 27. THIS APPEAL OF THE ASSESSEE HAS BEEN DIRECTED AGAINST THE ORDER OF THE LEARNED CIT (APPEALS), CHA NDIGARH DATED 18.1.2013 FOR ASSESSMENT YEAR 2009-10 ON THE FOLLOWING GROUNDS : 1. THAT THE LD. CIT (APPEALS) HAS GROSSLY ERRED IN LAW AS WELL AS ON FACTS IN CONFIRMING THE DISALLOWANCE OF INTEREST OF RS.2,20,07,838/- ON BORROWED CAPITAL USED 25 FOR THE BUSINESS PURPOSE U/S 36(1)(III). THE ADDITI ON ON THIS ACCOUNT AMOUNTING TO RS.2,20,07,838/- MAY PLEASE BE DELETED. 2. THE LD. CIT (APPEALS) HAS GROSSLY ERRED IN LAW A S WELL AS ON FACTS IN CONFIRMING THE DISALLOWANCE OF INTEREST EXPENSES FOR EXTENDING INTEREST FREE ADVAN CES OF RS.5,28,000/- TO SISTER CONCERN IN EARLIER YEARS. THE DISALLOWANCE OF INTEREST MAY PLEASE BE DELETED. 3. THE LD. CIT (APPEALS) HAS GROSSLY ERRED IN LAW A S WELL AS ON FACTS IN CONFIRMING THE DISALLOWANCE OF EXPENSES ON ACCOUNT OF I P ADDRESS FEE OF RS.68,503/ - U/S 40(A)(IA). THE DISALLOWANCE OF EXPENSES OF RS.68,503/- MAY PLEASE BE DELETED. 28. IT IS STATED THAT GROUND NOS.1 AND 2 ARE SAME AS HAVE BEEN CONSIDERED IN ASSESSMENT YEARS 2007-08 AN D 2008-09. THE LEARNED CIT (APPEALS) FOLLOWING HIS O RDER FOR ASSESSMENT YEAR 2008-09 ABOVE DISMISSED BOTH THESE GROUNDS OF APPEAL. IN ASSESSMENT YEAR 2008-09, WE HAVE FOLLOWED OUR ORDER FOR ASSESSMENT YEAR 2007-08 ON G ROUND NOS.3, 4 AND 5 AND DELETED BOTH THE ADDITIONS. THE REFORE, FOLLOWING THE REASON FOR DECISION ON THESE GROUNDS FOR ASSESSMENT YEARS 2007-08 AND 2008-09, THE ORDERS OF THE AUTHORITIES BELOW ARE SET ASIDE AND BOTH THE ADDITI ONS ON GROUND NOS.1 AND 2 ARE DELETED. THE GROUND NOS.1 A ND 2 OF THE APPEAL OF THE ASSESSEE ARE ALLOWED. 29. ON GROUND NO.3, THE ASSESSEE CHALLENGED THE ADDITION OF RS.68,503/- UNDER SECTION 40(A)(IA) OF THE ACT. THE LEARNED CIT (APPEALS) NOTED THAT THE ASSESSEE H AS NOT SUBMITTED AS TO WHY THE AMOUNT WAS NOT SUBJECT TO T DS. 26 IN THE ABSENCE OF ANY EXPLANATION, THE CIT (APPEALS ) CONFIRMED THE ADDITION. NO ARGUMENTS HAVE BEEN MAD E BEFORE US TO CHALLENGE THE ORDER OF THE LEARNED CIT (APPEALS). THEREFORE, THIS GROUND OF APPEAL OF THE ASSESSEE IS DISMISSED. 30. THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ITA NO.138/CHD/2012(ASST.YEAR 2008-09) (DEPARTMENTAL APPEAL) : 31. THE GROUND NO.1 OF THE APPEAL OF THE REVENUE I S GENERAL AND NEEDS NO ADJUDICATION. 32. ON GROUND NO.2, THE REVENUE CHALLENGED THE DELETION OF ADDITION 3,68,23,158/- ON ACCOUNT OF EX CESS PAYMENT BY SIDCUL. 33. THE BRIEF FACTS ON THE ISSUE ARE THAT THE ASSESSEE FILED REVISED RETURN AND THE ASSESSING OFF ICER ASKED REASON FOR THE SAME. THE ASSESSEE EXPLAINED THAT THE REVISED RETURN WAS FILED AFTER CLAIMING DEDUCT ION OF RS.3,68,23,158/-, WHICH WAS OMITTED BY FILING THE O RIGINAL RETURN ON ACCOUNT OF DEMAND RAISED BY SIDCUL. DURI NG THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE HAD FILED A COPY OF LETTER FROM SIDCUL DATED 28.01.2008 , VIDE WHICH THE ASSESSEE WAS INFORMED BY SIDCUL AS UNDER: ' ON DEPARTMENTAL ENQUIRY BY SIDCUL, IT WAS FOUND THAT AN OVERPAYMENT OF RS.1,07,87,680/- AND RS.2,60,35,478/ - WAS MADE TO YOU AGAINST THE EARTHWORK IN ROAD EMBANKMENT UND ER AGREEMENT NO. 15 / SIDCUL/2005-06 AND AGREEMENT NO. 16 / SIDC UL/2005-06 27 RESPECTIVELY FOR CONSTRUCTION OF INFRASTRUCTURE WOR KS AT IIE, PANT NAGAR. YOU ARE REQUESTED TO DEPOSIT THE AMOUNT IMME DIATELY TO SIDCUL OFFICE. IN CASE YOU HAVE ANY DIRECTIONS, FRO M ANY COURT IN THIS REGARD, PLEASE PUT UP YOUR REPRESENTATION ACCO RDINGLY TO M.D. SIDCUL, WITHIN 15 DAYS FROM RECEIPT OF THIS LETTER. FAILING WHICH SIDCUL WILL BE LIABLE TO RECOVER THIS AMOUNT BY LEG AL MEANS AVAILABLE TO SIDCUL UNDER THE LAW'. 34. THE ASSESSEE WAS INFORMED BY SIDCUL VIDE LETTE R DATED 13.02.2008 THAT THE EXCESS PAYMENT AGGREGATIN G TO RS.3,68,23,158/- HAD BEEN MADE DUE TO EXCESS MEASUREMENT OF EARTH WORK DONE IN ROAD CONSTRUCTION . THE ASSESSEE SERVED A NOTICE FOR APPOINTMENT OF AN ARBITRATOR TO SETTLE THE DISPUTE RAISED BY SIDCUL A ND APPROACHED THE HON'BLE HIGH COURT OF UTTRAKHAND, WH O APPOINTED THE ARBITRATOR TO ADJUDICATE THE DISPUTE. THE ASSESSEE CLAIMED BEFORE THE ASSESSING OFFICER THAT THE DEDUCTION OF THE AMOUNT OF RS.3,68,23,158/- SHOULD BE ALLOWED ON THE FACTS OF THE CASE. THE ASSESSING OF FICER DID NOT AGREE WITH THE SUBMISSION OF THE LEARNED CO UNSEL FOR THE ASSESSEE ON THE ISSUE AND MADE THE ADDITION WITH THE FOLLOWING OBSERVATIONS: 2(E) IN VIEW OF ABOVE FOREGOING FACTS, IT CANNOT B E SAID I) THAT THE LIABILITY HAS BEEN INCURRED DURING THE YEAR, OR II) THAT THE LIABILITY EXISTS IN PRAESENTI, OR III) THAT IT STANDS ASCERTAINED WITH REASONABLE CERTAINT Y, OR IV) THAT THE ASSESSEE HAS BEEN FASTENED WITH THE LIABIL ITY DURING THE YEAR, OR CONSTITUTES A COMMERCIAL LOSS IN PRAES ENTI, OR THAT THE LIABILITY HAS CRYSTALLIZED DURING THE YEAR . THEREFORE, THE ASSESSEE'S CLAIM FOR DEDUCTION OF RS 3,68,23,158/- AS MADE IN THE REVISED RETURN OF INCOME IS NOT ALLOWED. AN ADDITION OF RS.3,68,23,158/- IS, 28 THEREFORE, MADE TO THE RETURNED INCOME OF THE ASSES SEE ON THIS ACCOUNT. 35. DURING THE COURSE OF APPELLATE PROCEEDINGS, THE LEARNED COUNSEL FOR THE ASSESSEE HAS FILED A WRITTEN SUBMISSION, RELEVANT PORTION OF WHICH IS REPRODUCED AS UNDER: REGARDING OBSERVATION OF LD. ADDITIONAL COMMISSION ER OF INCOME TAX THAT THE ASSESSEE IS ALREADY IN RECEIPT OF PAYM ENT OF RS.3,68,23,150/- FOR WORK DONE AND IT HAS TAKEN CRE DIT FOR TDS MADE ON THESE PAYMENTS. IN THIS REGARD, IT IS SUBMITTED THAT THE ASSESSEE H AS SHOWN THE GROSS WORK DONE AS RS.3,68,23,150/- AND TAKEN THE C REDIT FOR TDS DEDUCTED BY SIDCUL FROM THE PAYMENT OF RS.3,68,23,1 50/- MADE TO ASSESSEE NET OF TDS AND DEPOSITED IN GOVT. ACCOU NT. THE NET PAYMENT HAS BEEN MADE BY SIDCUL TO ASSESSEE AFTER D EDUCTION OF TDS. HOWEVER SINCE ASSESSEE HAS SHOWN THE GROSS WOR K DONE RS.3,68,23,150/- AS INCOME AND SIDCUL IS DEMANDING THE WHOLE PAYMENT OF RS.3,68,23,150/-, BACK, THEREFORE THE LI ABILITY AMOUNTING TO RS.3,,68,23,150/- HAS ACCRUED TO THE ASSESSEE DU RING THE YEAR UNDER CONSIDERATION AND THEREFORE, ASSESSEE IS CLAI MING THE DEDUCTION OF RS.3,68,23,150/-. IT HAS BEEN HELD BY THE JURISDICTIONAL P & H HIGH C OURT IN THE CASE OF PUNJAB STATE CO OPERATIVE SUPPLY & MARKETING FED ERATION LTD. VS DEPUTY CIT 217 CTR 550 (P & H) (PG 16-20) WHILE FOLLOWING THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CA SE OF GOETZE INDIA LTD. VS. CIT (2006) 204 CTR (SC) 182 (PG 21-2 2), THAT, DEDUCTION ON ACCOUNT OF ANY CLAIM CANNOT BE ALLOWED TO THE ASSESSEE IF SUCH A CLAIM IS NOT MADE IN THE ORIGINA L RETURN OR UNLESS A REVISED RETURN IS FILED IN ACCORDANCE WITH THE PROVISIONS OF THE ACT. THEREFORE, SINCE DULY QUANTIFIED DEMAND HA S BEEN RAISED DURING THE YEAR UNDER CONSIDERATION IT HAS BEEN CLA IMED BY FILING THE REVISED RETURN. 29 REGARDING OBSERVATION OF LD. ADDITIONAL COMMISSIONE R OF INCOME TAX THAT THE ASSESSEE COMPANY IS CONTESTING THE CLAIM OF SIDCUL AND HAS NOT ACCEPTED THE LIABILITY. , AND AN ARBITRATOR HAS BEEN APPOINTED UNDER THE DIRECTIO NS OF HON'BLE HIGH COURT WITH THE CONSENT OF BOTH PARTIES TO ADJUDICATE UPON THE DISPUTE. IN THIS REGARD IT IS SUBMITTED THAT ALTHOUGH THE AS SESSEE IS CONTESTING THE RECOVERY OF DEMAND RAISED BY SIDCUL, BUT CONTESTING THE DEMAND RAISED BY SIDCUL DOES NOT DEB AR THE ASSESSEE FROM CLAIMING THE DEDUCTION UNDER INCOME T AX ACT. THE ISSUE IS SQUARELY COVERED BY THE DECISION OF TH E P & H HIGH COURT IN THE CASE OF CIT VS S A BUILDERS PVT. LTD. (PG 23- 26) WHEREIN THE F OLLOWING QUESTION OF LAW HAS BEEN REFERRED AND ANSWERED AGAINST THE REVENUE. WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE APPELLATE TRIBUNAL WAS RIGHT IN LAW IN HOLDING THAT FORFEITURE OF SECURITY DEPOSIT AMOUNTING TO RS.16.2 7 LACS BY WAY OF COMPENSATION FOR NOT COMPLETING THE CONTRACT WORKS WITHIN THE STIPULATED PERIOD SPECIFIED IN THE AGREE MENT, CONSTITUTED AN ALLOWABLE COMMERCIAL LOSS, NOTWITHST ANDING THE FACT THAT THE MATTER IS PENDING DISPOSAL BEFORE THE ARBITRATOR.' IT WAS HELD BY THE HON'BLE GUJARAT HIGH COURT IN TH E CASE OF NAVJIVAN ROLLER FLOUR & PULSE MILLS LTD. V. DEPUTY COMMISSIONER OF INCOME (2009) 315 ITR 190 (PG 27-29) THAT 'WHEN THE TRADE ASSOCIATION MADE AN AWARD FOR DAMAGES FOR BREACH OF CONTRACT THE LIABILITY TO PAY SUCH DAMAGES HAD ALREADY BEEN INCURRED BY THE ASSESSEE. MERELY BECAUSE THE AWARD WAS CHALLENGED IN APPEAL BY THE A SSESSEE CANNOT BE A GROUND FOR HOLDING THAT THE LIABILITY H AD NOT BEEN INCURRED.' THE HON'BLE DELHI HIGH COURT HAS ALSO ALLOWED THE A PPEAL OF 30 THE ASSESSEE IN THE CASE OF R.C. GUPTA, DELHI, VS. COMMISSIONER OF INCOME TAX, DELHI (2008) 298 ITR 161 (PG 30-32) WHEREIN ASSESSEE HAD EFFECTED CERTAI N PURCHASES FROM HINDUSTAN STEEL LIMITED (HSL) IN RES PECT OF WHICH SUM OF RS.5,06,761/- WAS PAYABLE. HSL FILED A SUIT FOR RECOVERY AS ASSESSEE WAS DISPUTING THE LIABILITY. NOTWITHSTANDING THE DISPUTE, THE ASSESSEE CLAIMED D EDUCTION OF THE AMOUNT WHICH WAS ULTIMATELY ALLOWED TO HIM. THE HON'BLE HIGH COURT FURTHER GAVE REFERENCE OF THE JU DGMENTS OF CASES IN J.K. SYNTHETICS V. CIT (1976) 105 ITR 864 WHEREIN THE ALLAHABAD HIGH COURT(PG 33-46) HELD THAT AN ASSESSE E FOLLOWING THE MERCANTILE SYSTEM COULD LEGITIMATELY CLAIM A DEDUCTION IN RESPECT OF A BUSINESS LIABILITY, WHICH IN THAT CASE WAS EXCISE DUTY, EVEN WHERE SUCH LIABILITY HAD NOT BEEN QUANTIFIED OR PAID OR WAS DISPUTED. THIS DECISION W AS UPHELD BY THE HON'BLE SUPREME COURT IN UNION OF INDIA V. J .K. SYNTHETICS (1993) 199 ITR 14 (PG 47-48). REGARDING OBSERVATION OF LD. ADDITIONAL COMMISSIONE R OF INCOME TAX THAT THE AMOUNT OF RS.3, 68,23,150/- WHICH IS REQUIRED TO BE DEPOSITED BACK HAS NOT ACTUALLY BEEN DEPOSITED BACK BY THE ASSESSEE COMPANY., AND THAT THE AMOUNT HAS NOT BEEN PAID BACK TO SIDCUL AN D THE ASSESSEE CONTINUES TO ENJOY USUFRUCT OF THE SAME. THE LIABILITY HAS NOT BEEN ACCEPTED AND CANNOT BE S AID THAT IT CAUSES A COMMERCIAL LOSS TO THE ASSESSEE. IN THIS REGARD, IT IS SUBMITTED THAT THE ASSESSEE IS MAINTA INING ITS ACCOUNTS AS PER MERCANTILE SYSTEM. THE LIABILITY ON ACCOUNT OF DEMAND RAISED BY SIDCUL QUANTIFIED AT RS.3,68,23 ,158/-, HAS ACCRUED TO ASSESSEE DURING THE YEAR UNDER CONSI DERATION WHEN THE ASSESSEE HAS ALSO INCLUDED THE WORK DONE F ROM SIDCUL AMOUNTING TO RS.9,94,65,631/- IN ITS TAXABLE INCOME DURING THE YEAR. HOWEVER, SINCE ASSESSEE HAS NOT RE DUCED THE 31 GROSS WORK DONE AMOUNTING TO RS.9,94,65,631/- TO THE EXTENT OF DEMAND OF REPAYMENT BY SIDCUL, THE SAME HAS BEEN DO NE BY FILING THE REVISED RETURN. THE EXISTENCE OF LIABILITY STAN DS QUANTIFIED ON THE DATE OF THE LETTER FROM SIDCUL. COPY OF LETTER RECE IVED FROM SIDCUL FOR PAYMENT OF RS.3,68,23,158/- IS ENCLOSED (PG 15) . THE LAW IN THIS REGARD IS SETTLED THAT IF A BUSINESS LIABILITY HAS DEFINITELY ARISEN IN THE ACCOUNTING YEAR, THE DEDUCTION SHOULD BE ALL OWED ALTHOUGH THE LIABILITY MAY HAVE TO BE DISCHARGED AT A FUTURE DATE. WHAT SHOULD BE CERTAIN IS THE INCURRING OF THE LIABILITY. IT SH OULD ALSO BE CAPABLE OF BEING ESTIMATED WITH REASONABLE CERTAINTY. IF TH ESE REQUIREMENTS ARE SATISFIED THEN THE LIABILITY IS IN PRESENT THOU GH IT WILL BE DISCHARGED AT A FUTURE DATE. IT DOES NOT MAKE ANY D IFFERENCE IF THE FUTURE DATE ON WHICH THE LIABILITY SHALL HAVE TO BE DISCHARGED IS NOT CERTAIN. IN CASE OF THE ASSESSEE THE LIABILITY IS CERTAIN AND HAS BEEN RAISED DURING THE CURRENT YEAR VIDE LETTER DAT ED 28.01.2008. FURTHER THE ASSESSEE HAS ALSO KEPT ITS BANK GUARANT EES AMOUNTING TO RS.1.10 CRORES AS SECURITY WITH SIDCUL ON THE DIRECTION OF SIDCUL TILL THE DISPOSAL OF MATTER BY ARBITRATOR. THE SIDCUL IS FREE TO ENCASH OUR BANK GUARANTEES WHENEV ER IT WANTS. THEREFORE THE CONTENTION OF THE LD. ASSESSING OFFIC ER THAT THE LIABILITY IS NOT A COMMERCIAL LOSS AND ASSESSEE IS ENJOYING USUFRUCT OF THE RECEIPT IS NOT CORRECT. THE HON'BLE SUPREME COURT IN THE CASE OF BHARAT EAR TH MOVERS V. COMMISSIONER OF INCOME TAX (2000) 245 ITR 428 (P G 49- 53) WHILE QUOTING ITS OWN JUDGMENT IN METAL BOX CO. OF INDIA LTD. VS. THEIR WORKMEN (1969) 73 ITR 53 (SC) (PG 54-70) HAS REPRODUCED SOME PRINCIPLES LAID DOWN BY IT AND DECI DED THE ISSUE IN FAVOUR OF THE ASSESSEE, THE RELEVANT OF WHICH ARE E XTRACTED AS UNDER: I. FOR AN ASSESSEE MAINTAINING HIS ACCOUNTS ON MERCANT ILE SYSTEM, A LIABILITY ALREADY ACCRUED, THOUGH TO BE D ISCHARGED AT A FUTURE DATE, WOULD BE A PROPER DEDUCTION WHILE WORKING OUT THE PROFITS AND GAINS OF HIS BUSINESS, REGARD B EING HAD TO THE ACCEPTED PRINCIPLES OF COMMERCIAL PRACTICE A ND 32 ACCOUNTANCY. IT IS NOT AS IF SUCH DEDUCTION IS PERM ISSIBLE ONLY IN CASE OF AMOUNTS ACTUALLY EXPENDED OR PAID; II. JUST AS RECEIPTS, THOUGH NOT ACTUAL RECEIPTS BUT AC CRUED DUE ARE BROUGHT IN FOR INCOME-TAX ASSESSMENT, SO AL SO LIABILITIES ACCRUED DUE WOULD BE TAKEN INTO ACCOUNT WHILE WORKING OUT THE PROFITS AND GAINS OF THE BUSINESS; III. A CONDITION SUBSEQUENT, THE FULFILLMENT OF WHICH MA Y RESULTING THE REDUCTION OR EVEN EXTINCTION OF THE L IABILITY, WOULD NOT HAVE THE EFFECT OF CONVERTING THAT LIABIL ITY INTO A CONTINGENT LIABILITY. IV. A TRADER COMPUTING HIS TAXABLE PROFITS FOR A PARTIC ULAR YEAR MAY PROPERLY DEDUCT NOT ONLY THE PAYMENT S ACTUALLY MADE TO HIS EMPLOYEES BUT ALSO THE PRESENT VALUE OF ANY PAYMENTS IN RESPECT OF THEIR SERVICES IN THA T YEAR TO BE MADE IN A SUBSEQUENT YEAR IF IT CAN BE SATISFACT ORILY ESTIMATED. THE COURT ALSO CONSIDERED THE JUDGEMENT OF THE APEX COURT IN THE CASE OF CALCUTTA CO. LTD. (37 ITR 1) (PG 71-79) AND STATED THAT IN THAT CASE IT IS HELD THAT THE LIABILITY ON THE A SSESSES HAVING BEEN IMPARTED, THE LIABILITY WOULD BE ACCRUED LIABILITY AND WOULD NOT CONVERT INTO A CONDITIONAL ONE MERELY BECAUSE THE L IABILITY WAS TO BE DISCHARGED AT A FUTURE DATE. THE HON'BLE P & H HIGH COURT HAS DISMISSED THE DEPA RTMENT S APPEAL IN THE CASE OF COMMISSIONER OF INCOME-TAX V. GEMI MOTORS INDIA P. LTD. 327 ITR 443 (P & H) (PG 80-81) WHEREIN IT WAS HELD THAT IF ANY EXPENDITURE IS UNDERTAKEN TO B E BORNE BY THE ASSESSEE IN RESPECT OF SERVICES RECEIVED, SALES MAD E, ETC., THE SAME IS A LIABILITY IN PRESENT EVEN THOUGH IT MAY NOT BE CAPABLE OF EXACT QUANTIFICATION. IN SUCH A CIRCUMSTANCE, A PRO VISION MADE ON REASONABLE BASIS, FOR EXAMPLE, BY HAVING REGARD TO THE FACTS OF EARLIER YEARS OR THE REPORT OF AN EXPERT IN THE MAT TER, WILL BE 33 DEDUCTIBLE IN COMPUTING THE INCOME. THE HON'BLE P & H HIGH COURT IN THE CASE OF COMMISS IONER OF INCOME-TAX (CENTRAL), LUDHIANA V. MAJESTIC AUTO LTD . (2008) 296 ITR 309 (PG 82-84) HAS HELD THAT THE PRO VISION MADE BY THE APPELLANT-COMPANY FOR MEETING THE LIABILITY INC URRED BY IT UNDER THE LEAVE ENCASHMENT SCHEME PROPORTIONATE WIT H THE ENTITLEMENT EARNED BY EMPLOYEES OF THE COMPANY, INC LUSIVE OF THE OFFICERS AND THE STAFF, SUBJECT TO THE CEILING ON A CCUMULATION AS APPLICABLE ON THE RELEVANT DATE, IS ENTITLED TO DED UCTION OUT OF THE GROSS RECEIPTS FOR THE ACCOUNTING YEAR DURING WHICH THE PROVISION IS MADE FOR THE LIABILITY. THE LIABILITY IS NOT A CONT INGENT LIABILITY. FURTHER THE HON'BLE ITAT, MUMBAI BENCH IN THE CASE OF GODAVARI SUGAR MILLS LTD. V. DEPUTY COMMISSIONER OF INCOME TAX 115 TTJ 788 (2007) (PG 85-93) -WHILE PLACING RE LIANCE ON THE DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF SR IKANT TEXTILES VS. CIT (1971) 81 ITR 222 (BOM) HAS HELD AS UNDER 'WHEN WE APPLY THE RATIONALE LAID DOWN BY THE HON'B LE HIGH COURT IN THE ABOVE CASE, IT HAS TO BE HELD THAT THE LIABILITY HAS CRYSTALLIZED WHEN THE BANK HAS ISSUED THE LETTERS F URNISHING THE DETAILS OF INTEREST PAYABLE AND NOT WHEN THE BIFR H AS PASSED THE ORDER IN AUGUST, 1991. THE LETTERS OF THE BANK ARE IN A WAY DEMAND NOTICES, THOUGH ISSUED AT THE INSTANCE OF THE ASSES SEE AND THEREFORE, IT CAN BE SAID THAT THE LIABILITY HAS CRYSTALLIZED DURING THE RELEVANT ASSESSMENT YEAR AND SUBSEQUENT WAIVER THEREOF IN TH E YEAR 1991- 92 IS OF NO CONSEQUENCE FOR DETERMINATION OF LIABIL ITY DURING THE RELEVANT ASSESSMENT YEAR. IN THIS VIEW OF THE MATTE R, WE ARE OF THE OPINION THAT THE ASSESSEE IS ELIGIBLE FOR DEDUCTION OF THE ENTIRE AMOUNT OF RS.3,72,10,370 DURING THE RELEVANT ASSESS MENT YEAR WHEN THE DEMAND HAS BEEN RAISED BY THE BANK OF INDI A. ' THE HON'BLE DELHI HIGH COURT HAS ALSO ALLOWED THE A PPEAL OF THE ASSESSEE IN THE CASE OF R. C. GUPTA, DELHI, VS. COM MISSIONER OF INCOME TAX, DELHI (2008) 298 ITR 161 (PG 30-32) WHEREIN 34 ASSESSEE HAD EFFECTED CERTAIN PURCHASES FROM HINDUS TAN STEEL LIMITED (HSL) IN RESPECT OF WHICH SUM OF RS. 5,06,761/- WAS PAYABLE. HSL FILED A SUIT FOR RECOVERY AS ASSESSES WAS DISPUTING THE LIABILITY. NOTWITHSTANDING THE DISPU TE, THE ASSESSEE CLAIMED DEDUCTION OF THE AMOUNT WHICH WAS ULTIMATEL Y ALLOWED TO HIM. THE COURT FURTHER HELD THAT THE LIABILIT Y IN THE INSTANT CASE WAS CAPABLE ON BEING ESTIMATED WITH REASONA BLE CERTAINTY WHEN A RECOVERY SUIT WAS FILED BY HINDUS TAN STEEL LIMITED AGAINST THE ASSESSEE ON 18.8.1978. MERELY B ECAUSE THE LIABILITY WAS NOT A STATUTORY ONE IT COULD NOT BE S AID THAT THE LIABILITY THAT WAS NOT AN ASCERTAINED ONE BUT A CON TINGENT ONE. IT WAS HELD BY THE HON'BLE GUJARAT HIGH COURT IN TH E CASE OF NAVJIVAN ROLLER FLOUR & PULSE MILLS LTD. U. DEPUTY COMMISSIONER OF INCOME (2009) 315 ITR 190 (PG 27-29 ) THAT IN MERCANTILE SYSTEM OF ACCOUNTING IT IS WELL SETTLED THAT BOTH RECEIPT AND LIABILITY ACCRUE AT THE EARLIEST P OINT OF TIME AND ARE NOT POSTPONED MERELY ON THE BASIS OF AN ENTRY M ADE OR ABSENCE OF AN ENTRY. ADMITTEDLY, THE ASSESSEE IS FO LLOWING MERCANTILE SYSTEM OF ACCOUNTING. ON 28TH MAY, 1987 WHEN THE TRADE ASSOCIATION MADE AN AWARD FOR DAMAGES FOR BRE ACH OF CONTRACT THE LIABILITY TO PAY SUCH DAMAGES HAD ALRE ADY BEEN INCURRED BY THE ASSESSEE. MERELY BECAUSE THE AWARD WAS CHALLENGED IN APPEAL BY THE ASSESSEE CANNOT BE A GR OUND FOR HOLDING THAT THE LIABILITY HAD NOT BEEN INCURRED. IT HAS BEEN HELD BY THE HON'BLE TTAT PUNE BENCH IN THERMAX BABCOCK & WILCOX LTD. US ADDL. CIT 304 ITR 130 THAT ONCE AN ASSESSEE IS MAINTAINING ITS ACCOUNTS AS PER THE MER CANTILE SYSTEM, ANY LIABILITY WHICH HAS ACCRUED IN A YEAR, THOUGH T O BE DISCHARGED AT A FUTURE DATE, WOULD BE A PROPER DEDUCTION WHILE WORKING OUT THE PROFITS AND GAINS OF BUSINESS. IN VIEW OF THE AFORESAID JUDICIAL PRECEDENTS, LEGAL FACTS, LAW AND CIRCUMSTANCES OF THE CASE, IT MAY PLEASE BE NOT ED THAT PURSUANT TO DEMAND RAISED VIDE LETTER DATED 28.01.2 008 ISSUED BY 35 SJDCUL, THE LIABILITY HAS BEEN ACCRUED, ASCERTAINED AND FASTENED ON THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION . THE LIABILITY IS CRYSTALLIZED DURING THE CURRENT YEAR ITSELF AND IT IS NOT A CONTINGENT LIABILITY, THE SAME MAY PLEASE BE ALLOWED AS DEDUCT ION DURING THE YEAR UNDER CONSIDERATION. THEREFORE, IT IS RESPECTF ULLY PRAYED THAT THE ADDITION OF RS.3,68,23,158/- MAY PLEASE BE DELE TED AND THIS GROUND OF APPEAL MAY PLEASE BE ALLOWED TO THE ASSES SEE.' 35. THE LEARNED CIT (APPEALS) CONSIDERING THE SUBMISSION OF THE ASSESSEE IN THE LIGHT OF VARIOUS DECISIONS DELETED THE ADDITION AND ALLOWED THE APPE AL OF THE ASSESSEE. HIS FINDING IN PARAS 2.3 TO 2.3.6 OF THE IMPUGNED ORDER IS REPRODUCED AS UNDER : 2.3 I HAVE CONSIDERED THE FACTS OF THE CASE AND S UBMISSION OF THE LD. COUNSEL FOR THE APPELLANT. I HAVE ALSO GONE THROUGH THE ASSESSMENT RECORDS OF THE CASE. IT IS SEEN THAT SIDCUL HAD WRITTEN TO THE APPELLANT ON 28.01.2008 ITSELF THAT OVERPAYMENT OF RS.3,68,23,158/- HAD BEEN MADE TO THE APPELLANT. THE APPELLANT HAD ASKED FOR DETAILS OF OVERPAYMENT FROM SIDCUL VIDE ITS LETTER DATED 08.02.2008. THE APPELL ANT RECEIVED ANOTHER LETTER DATED 13.02.2008 FROM SIDCU L TO DEPOSIT THE AMOUNT OF RS.3,68,23,158/-. THE APPELLA NT AGAIN ASKED FOR DETAILS OF OVERPAYMENT FROM SIDCUL VIDE ITS LETTER DATED 29.02.2008. THE SIDCUL SENT COMPLETE D ETAILS AND ENQUIRY REPORT VIDE ITS LETTER DATED 02.04.2008 . THE APPELLANT INFORMED SIDCUL VIDE ITS LETTER DATED 28.04.2008 THAT THE ENQUIRY REPORT WAS SELF-CONTRAD ICTORY AND WAS BASED ON INCORRECT FACTS. THE APPELLANT ALS O ASKED FOR REFERENCE OF DISPUTE TO THE ARBITRATOR AND THE HON'BLE UTTRAKHAND HIGH COURT AT NAINITAL APPOINTED AN ARBITRATOR TO ADJUDICATE UPON THE DISPUTE BETWEEN S IDCUL AND THE APPELLANT. 36 2.3.1 THE APPELLANT HAD DECLARED THE RECEIPTS OF RS.9,94,65,631/- IN THE ORIGINAL RETURN OF INCOME B UT FILED A REVISED RETURN BY CLAIMING THE DEDUCTION OF THE A MOUNT OF RS.3,68,23,158/- ON THE GROUND THAT THE GROSS RE CEIPTS NEEDED TO BE REDUCED BY THIS AMOUNT SINCE THE LIABI LITY TO PAY THIS SUM OF RS. 3,68,23,158/- HAD ARISEN DURING THE YEAR. THE QUESTION TO BE DECIDED IS WHETHER THE APPELLANT WAS RIGHT IN CLAIMING THE DEDUCTION OF THE AMOUNT O F RS. 3,68,23,158/-. 2.3.2 THE HON'BLE SUPREME COURT IN THE CASE OF BHARAT EARTH MOVERS (245 ITR 428) HAD REITERATED THE PRINCIPLES FOR DECIDING WHETHER A BUSINESS LIABILIT Y IS AN ASCERTAINED OR A CONTINGENT ONE. THE HON'BLE APEX C OURT HELD IN THIS CASE AS UNDER: 'THE LAW IS SETTLED: IF A BUSINESS LIABILITY HAS DE FINITELY ARISEN IN THE ACCOUNTING YEAR, THE DEDUCTION SHOULD BE ALLOWE D ALTHOUGH THE LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. WHAT SHOULD BE CERTAIN IS THE INCURRING OF TH E LIABILITY. IT SHOULD ALSO BE CAPABLE OF BEING ESTIMATED WITH REAS ONABLE CERTAINTY THOUGH THE ACTUAL QUANTIFICATION MAY NOT BE POSSIBL E. IF THESE REQUIREMENTS ARE SATISFIED THE LIABILITY IS NOT A C ONTINGENT ONE. THE LIABILITY IS IN PRAESENTI THOUGH IT WILL BE DISCHAR GED AT A FUTURE DATE. IT DOES NOT MAKE ANY DIFFERENCE IF THE FUTURE DATE ON WHICH THE LIABILITY SHALL HAVE TO BE DISCHARGED IS NOT CE RTAIN..... A FEW PRINCIPLES WERE LAID DOWN BY THIS COURT, THE RELEVANCE OF WHICH FOR OUR PURPOSE ARE EXTRACTED AND REPRODUCED AS UNDER: (I) FOR AN ASSESSEE MAINTAINING HIS ACCOUNTS ON THE MERCANTILE SYSTEM, A LIABILITY ALREADY ACCRUED, THOUGH TO BE D ISCHARGED AT A FUTURE DATE, WOULD BE A PROPER DEDUCTION WHILE WORK ING OUT THE PROFITS AND GAINS OF HIS BUSINESS, REGARD BEING HAD TO THE ACCEPTED PRINCIPLES OF COMMERCIAL PRACTICE AND ACCO UNTANCY. IT IS 37 NOT AS IF SUCH DEDUCTION IS PERMISSIBLE ONLY IN THE CASE OF AMOUNTS ACTUALLY EXPENDED OR PAID; (II) JUST AS RECEIPTS, THOUGH NOT ACTUAL RECEIPTS B UT ACCRUED DUE ARE BROUGHT IN FOR INCOME-TAX ASSESSMENT, SO ALSO LIABI LITIES ACCRUED DUE WOULD BE TAKEN INTO ACCOUNT WHILE WORKING OUT T HE PROFITS AND GAINS OF THE BUSINESS; (III) A CONDITION SUBSEQUENT, THE FULFILMENT OF WHI CH MAY RESULT IN THE REDUCTION OR EVEN EXTINCTION OF THE LIABILIT Y, WOULD NOT HAVE THE EFFECT OF CONVERTING THAT LIABILITY INTO A CONT INGENT LIABILITY;' 2.3.3 HON'BLE DELHI HIGH COURT BY FOLLOWING THE AFO RESAID DECISION OF HON'BLE SUPREME COURT HELD IN THE CAS E OF SH. R.C.GUPTA (298 ITR 161) THAT THE LIABILITY COULD BE CLAIMED, WHEN A RECOVERY SUIT WAS FILED THOUGH THE SAID AMOUNT DID NOT PERTAIN TO THAT YEAR.\ 2.3.4 HON'BLE DELHI HIGH COURT FOLLOWED THE AFORESA ID DECISION OF HON'BLE SUPREME COURT IN THE CASE OF JA SJEET FILMS (P) LTD. (298 ITR 166) ALSO AND HELD THAT THE LIABILITY TO PAY INTEREST ACCRUED WHEN IT WAS DEMANDED BY THE DDA BY ITS LETTER DATED 09.09.80 AND THE FACT THAT THE INTEREST WAS PAID LATER MAKES NO DIFFERENCE TO THE LEGAL POSITIO N, SINCE THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACC OUNTING. 2.3.5 HON'BLE GUJARAT HIGH COURT HAS TAKEN SIMILAR VIEW IN THE CASE OF NAVJIVAN ROLLER AND PULSE MILL S LTD. (315 ITR 190) THAT WHEN THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND THE TRADE ASSOC IATION MADE AN AWARD FOR DAMAGES OF BREACH OF CONTRACT, THE LIABILITY TO PAY SUCH DAMAGES HAD ALREADY BEEN INCU RRED AND MERELY BECAUSE THE AWARD WAS CHALLENGED IN APPE AL BY THE ASSESSEE COULD NOT BE A GROUND FOR HOLDING THAT THE LIABILITY HAD NOT BEEN INCURRED. THEIR LORDSHIPS IN THIS CASE HAVE HELD THAT IN MERCANTILE SYSTEM OF ACCOUNT ING, IT IS WELL SETTLED THAT BOTH RECEIPT AND LIABILITY ACCRUE AT THE 38 EARLIEST POINT OF TIME AND ARE NOT POSTPONED MERELY ON THE BASIS OF AN ENTRY MADE OR ABSENCE OF AN ENTRY. 2.3.6 HON'BLE ITAT BOMBAY BENCH HAS ALSO HELD IN PARA 9 OF ITS ORDER IN THE CASE OF GODAWARI SUGAR MILLS LTD (115 TTJ 788) AS UNDER: WHEN WE APPLY THE RATIONALE LAID DOWN BY THE HON'B LE HIGH COURT IN THE ABOVE CASE, IT HAS TO BE HELD THAT THE LIABI LITY HAS CRYSTALLIZED WHEN THE BANK HAS ISSUED THE LETTERS F URNISHING THE DETAILS OF INTEREST PAYABLE AND NOT WHEN THE BIFR H AS PASSED THE ORDER IN AUGUST, 1991. THE LETTERS OF THE BANK ARE IN A WAY DEMAND NOTICES, THOUGH ISSUED AT THE INSTANCE OF THE ASSES SEE AND THEREFORE, IT CAN BE SAID THAT THE LIABILITY HAS CR YSTALLIZED DURING THE RELEVANT ASSESSMENT YEAR AND SUBSEQUENT WAIVER THEREOF IN THE YEAR 1991-92 IS OF NO CONSEQUENCE FOR DETERMINATION OF LIABILITY DURING THE RELEVANT ASSESSMENT YEAR. IN THIS VIEW O F THE MATTER, WE ARE OF THE OPINION THAT THE ASSESSEE IS ELIGIBLE FO R DEDUCTION OF THE ENTIRE AMOUNT OF RS. 3,72,10,370 DURING THE RELEVAN T ASSESSMENT YEAR WHEN THE DEMAND HAS BEEN RAISED BY THE BANK OF INDIA 2.3.6 IN THE INSTANT CASE, IT CANNOT BE SAID THA T THE AMOUNT IN QUESTION CANNOT BE CLAIMED AS DEDUCTION M ERELY ON THE GROUND THAT THE APPELLANT IS CONTESTING ITS LIABILITY TO PAY THE AMOUNT TO SIDCUL AND THE ASCERTAINMENT O F THE LIABILITY IS PENDING ARBITRATION. THE ASSESSING OFFICER HAS TRIED TO DISTINGUISH THE CASE OF THE AP PELLANT WITH THE DECIDED CASE OF BHARAT EARTH MOVERS LTD. (SUPRA ), BUT THE PRINCIPLES LAID DOWN BY HON'BLE SUPREME COURT IN TH AT CASE HAVE TO BE APPLIED TO DETERMINE WHETHER THE DEDUCTI ON OF THE DISPUTED AMOUNT WAS ALLOWABLE TO BE APPELLANT. THE APPELLANT MAINTAINS ITS ACCOUNTS ON MERCANTILE BASI S AND SO THE AMOUNT OF THIS LIABILITY IS TO BE ALLOWED IN THIS YEAR AND IT IS IMMATERIAL THAT THE MATTER IS DISPUTED BE FORE THE ARBITRATOR, IN VIEW OF THE DECISION OF HON'BLE DELH I HIGH COURT IN THE CASE OF R.C. GUPTA (SUPRA) AND HON'BLE ITAT, 39 BOMBAY BENCH IN THE CASE OF GODAWARI SUGAR MILLS LT D (SUPRA). HENCE, THE ASSESSING OFFICER WAS NOT RIGHT IN MAKING THE ADDITION OF RS.3,68,23,158/- ON THIS ACC OUNT AND THE SAME IS DELETED. GROUND OF APPEAL NO. 1 IS ALLOWED. 36. THE LEARNED D.R. RELIED UPON THE ORDER OF THE ASSESSING OFFICER AND SUBMITTED THAT SINCE THE MATT ER WAS IN DISPUTE BEFORE THE ARBITRATOR, THEREFORE, IT WAS CONTINGENT LIABILITY. HE HAS RELIED UPON THE DECI SION OF THE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. BHA RAT FIRE BRICKS & POTTERY WORKS (P) LTD., 202 ITR 821, IN WHICH THE ISSUE WAS OF BUSINESS LOSS/DEDUCTION. TH E ASSESSEE WAS AWARDED CONTRACT BY GOVERNMENT DEPARTM ENT FOR SUPPLY OF REFRACTORIES BUT DUE TO INCREASE IN PRICES OF RAW MATERIAL, THE ASSESSEE DID NOT SUPPLY REFRACTOR IES ACCORDING TO CONTRACT. THE GOVERNMENT CANCELLED CONTRACT AND PLACED SAME WITH OTHER COMPANY AT ENHA NCED RATE AND EXTRA EXPENDITURE INCURRED AS RESULT THEREOF WAS DEMANDED FROM THE ASSESSEE. THE ASSESSEE DID NOT A CCEPT THAT LIABILITY AND MATTER WAS PENDING BEFORE ARBITR ATOR. IT WAS, THEREFORE, HELD THAT THE LIABILITY OF THE ASSE SSEE WAS CONTINGENT AND, THEREFORE, COULD NOT BE DEDUCTED IN WORKING OUT ITS BUSINESS INCOME. THE LEARNED D.R. ALSO RELIED UPON THE ORDER OF THE I.T.A.T. DELHI BENCH I N THE CASE OF DCIT VS. INDAG RUBBER LTD., 98 ITD 218, IN WHICH IT WAS HELD THAT LIABILITY ACCRUED AGAINST THE ASSE SSEE ON DATE WHEN ARBITRATION AWARD WAS MADE RULE OF THE CO URT. HE HAS ALSO RELIED UPON THE ORDER OF THE I.T.A.T. B OMBAY 40 BENCH IN THE CASE OF SAIBA DEVELOPERS (P) LTD. VS. ITO, 40 ITD 419, IN WHICH THE ISSUE WAS OF FOREIGN AWARD. 37. ON THE OTHER HAND, THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND SUBMITTED THAT THE ISSUE IS C OVERED IN FAVOUR OF THE ASSESSEE BY THE JUDGMENTS RELIED U PON BEFORE THE CIT (APPEALS). HE HAS ALSO REFERRED TO LETTER OF SIDCUL DATED 28.1.2008 RELIED UPON BEFORE THE AUTHORITIES BELOW, COPY OF WHICH IS FILED AT PAGE 1 5 OF THE PAPER BOOK. 38. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. TH E HON'BLE DELHI HIGH COURT IN THE CASE OF R.C. GUPTA VS. CIT, 298 ITR 161 HELD AS UNDER : THE PRINCIPLES RELATING TO DEDUCTION AS BUSINESS E XPENDITURE ARE : (I) FOR AN ASSESSEE MAINTAINING HIS ACCOUNTS O N THE MERCANTILE SYSTEM, A LIABILITY ALREADY ACCRUED, THO UGH TO BE DISCHARGED AT A FUTURE DATE, WOULD BE A PROPER DEDUCT ION WHILE WORKING OUT THE PROFITS AND GAINS OF HIS BUSINESS, R EGARD BEING HAD TO THE ACCEPTED PRINCIPLES OF COMMERCIAL P RACTICE AND ACCOUNTANCY. IT IS NOT AS IF SUCH DEDUCTION IS PER MISSIBLE ONLY IN THE CASE OF AMOUNTS ACTUALLY EXPENDED OR PAID; (II ) JUST AS RECEIPTS, THOUGH NOT ACTUAL RECEIPTS BUT ACCRUED DUE ARE BROUGHT IN FOR INCOME-TAX ASSESSMENT, SO ALSO LIABILIT IES ACCRUED DUE WOULD BE TAKEN INTO ACCOUNT WHILE WORKIN G OUT THE PROFITS AND GAINS OF THE BUSINESS; (III) A CONDI TION SUBSEQUENT, THE FULFILMENT OF WHICH MAY RESULT IN THE REDUCTION OR EVEN EXTINCTION OF THE LIABILITY, WOULD NOT HAVE THE EFFECT OF CONVERTING THAT LIABILITY INTO A CONTINGENT LIABILITY; (IV) A TRADER COMPUTING HIS TAXABLE PROFITS FOR A PARTICULAR YEAR MAY PROPERLY DEDUCT NOT ONLY THE PAYMENTS ACTUALLY MADE T O HIS 41 EMPLOYEES BUT ALSO THE PRESENT VALUE OF ANY PAYMENT S IN RESPECT OF THEIR SERVICES IN THAT YEAR TO BE MADE I N A SUBSEQUENT YEAR, IF IT CAN BE SATISFACTORILY ESTIMATED. ON A SCRUTINY OF THE ASSESSEE TRADING ACCOUNT THE ASSESSING OFFICER NOTICED THAT DURING THE ASSESSMEN T YEAR 1979-80 A SUM OF RS.50,761 STOOD DEBITED TO THE RAW MATERIAL ACCOUNT. THE EXPLANATION OF THE ASSESSEE WAS THAT T HIS AMOUNT WAS PAYABLE TO H FOR CERTAIN PURCHASES WHICH HAD BE EN MADE ON OCTOBER 22, 1975, BUT IN RESPECT OF WHICH THE AS SESSEE HAD DISPUTED ITS LIABILITY. ACCORDING TO THE ASSESSEE THE LIABILITY STOOD ACCRUED IN THE FINANCIAL YEAR ENDING MARCH 31 , 1979, SINCE A SUIT FOR RECOVERY HAD BEEN FILED BY H AGAIN ST IT ON AUGUST, 18, 1978. THE ASSESSING OFFICER DISALLOWED THE CLAIM ON THE GROUND THAT THE SAID AMOUNT DID NOT RELATE T O ANY PURCHASES MADE DURING THE PREVIOUS YEAR 1978-79 REL EVANT TO THE ASSESSMENT YEAR 1979-80. THE TRIBUNAL HELD THA T AS LONG AS THE DISPUTE CONTINUED AND THE ASSESSEE KEPT RESI STING THE LIABILITY, IT WOULD NOT BE ENTITLED TO CLAIM THE DEDU CTION EVEN IF IT FOLLOWED THE MERCANTILE SYSTEM OF ACCOUNTING. ON A R EFERENCE : HELD, THAT THE LIABILITY IN THE INSTANT CASE WAS CAPA BLE ON BEING ESTIMATED WITH REASONABLE CERTAINTY WHEN A RECOVERY SUIT WAS FILED BY H AGAINST THE ASSESSEE ON AUGUST 18, 1978. MERELY BECAUSE THE LIABILITY WAS NOT A STATUTORY ONE IT COULD NOT BE SAID THAT THE LIABILITY WAS NOT AN ASCERTAINED ONE BUT A C ONTINGENT ONE. THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF RS .50,761 TOWARD DISPUTED LIABILITY WAS TO BE ALLOWED IN THE A SSESSMENT YEAR 1979-80. 39. THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF NAVJIVAN ROLLER FLOUR & PULSE MILLS LTD. VS. DCIT, 315 ITR 190 HELD AS UNDER : HELD, ALLOWING HE APPEAL, THAT THE ASSESSEE WAS FO LLOWING THE MERCANTILE SYSTEM OF ACCOUNTING AND THE LIABILITY TO PAY DAMAGES WAS INCURRED BY THE ASSESSEE WHEN THE TRADE 42 ASSOCIATION PASSED AN AWARD FOR DAMAGES FOR BREACH OF CONTRACT. MERELY BECAUSE THE AWARD WAS CHALLENGED IN APPEAL BY THE ASSESSEE THAT COULD NOT BE A GROUND FOR HOLD ING THAT THE ASSESSEE DID NOT INCUR THE LIABILITY. THE LIABILITY TO MAKE PAYMENT AROSE UNDER THE ARBITRATION AWARD DECLARED I N THE RELEVANT ACCOUNTING PERIOD FOR THE ASSESSMENT YEAR 1988-89 HAD ACCRUED IN THAT YEAR. 40. THE ASSESSEE HAD PRODUCED A LETTER FROM SIDCUL DATED 28.1.2008, COPY OF WHICH IS FILED AT PAGE 15 OF THE PAPER BOOK AND REPRODUCED IN THE APPELLATE ORDER, I N WHICH SIDCUL AFTER DEPARTMENTAL ENQUIRY CONDUCTED, FOUND THAT OVERPAYMENT OF RS.3.68 CRORES HAD BEEN M ADE TO THE ASSESSEE. THE SIDCUL, THEREFORE, RAISED DEM AND AND DIRECTED THE ASSESSEE TO DEPOSIT THE AMOUNT OF RS.3.68 CRORES IMMEDIATELY WITH THEM. THE ASSESSEE ASKED FOR THE DETAILS OF THE SAME AND WAS AGAIN INF ORMED BY SIDCUL TO DEPOSIT THE AMOUNT IN QUESTION. THE ASSESSEE WAS PROVIDED WITH COMPLETE DETAILS AND ENQ UIRY REPORT BY SIDCUL FOR RAISING THE ABOVE DEMAND. THE ASSESSEE HAD DECLARED THE RECEIPTS OF RS.9.94 CRORE S IN THE ORIGINAL RETURN OF INCOME BUT FILED A REVISED RETUR N BY CLAIMING DEDUCTION OF THE AFORESAID AMOUNT OF RS.3. 68 CRORES ON THE GROUND THAT THE GROSS RECEIPTS NEEDED TO BE REDUCED BY THIS AMOUNT SINCE THE LIABILITY TO PAY T HIS AMOUNT HAD ARISEN DURING THE YEAR. THE ASSESSEE IN THIS REGARD AGAINST THIS LIABILITY HAS ALSO KEPT ITS BAN K GUARANTEE OF RS.1.10 CRORES AS SECURITIES WITH SIDC UL. THE ASSESSEE IS MAINTAINING MERCANTILE SYSTEM OF ACCOUNTING, THEREFORE, THE LIABILITY OF THE ABOVE A MOUNT OF 43 RS.3.68 CRORES HAS CRYSTALLIZED AND LIABILITY AROSE IN ASSESSMENT YEAR UNDER APPEAL. THE LIABILITY HAS NO T ARISEN MERELY ON ESTIMATE BASIS BUT AFTER DEPARTMEN TAL ENQUIRY CONDUCTED BY SIDCUL. THEREFORE, IT WAS A BUSINESS LIABILITY AND IS AN ASCERTAINED LIABILITY, WHICH AROSE IN ASSESSMENT YEAR UNDER APPEAL. MERELY BECA USE THE LIABILITY WAS TO BE DISCHARGED IN FUTURE, WOULD NOT BE CONSIDERATION FOR DISALLOWING THE CLAIM OF THE ASSE SSEE. THE LEARNED CIT (APPEALS), THEREFORE, CORRECTLY FOL LOWED THE PRINCIPLES LAID DOWN BY THE HON'BLE SUPREME COU RT IN THE CASE OF BHARAT EARTH MOVERS VS. CIT, 245 ITR 428. THE ISSUE HAS ALSO BEEN DECIDED FAVOURABLY BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF R.C. GUPTA VS. CIT (SUPRA) AND BY THE HON'BLE GUJARAT HI GH COURT IN THE CASE OF NAVJIVAN ROLLER FLOUR & PULSE MILLS LTD. (SUPRA). IN THE INSTANT CASE, IT CANNOT BE SA ID THAT THE AMOUNT IN QUESTION CANNOT BE CLAIMED AS DEDUCTI ON MERELY ON THE GROUND THAT THE ASSESSEE IS CONTESTIN G ITS LIABILITY TO PAY THE AMOUNT TO SIDCUL AND ASCERTAIN MENT OF THE LIABILITY IS PENDING ARBITRATION. AS NOTED ABOVE, LIABILITY HAS ARISEN AGAINST THE ASSESSEE ON CONDUCTING A DEPARTMENTAL ENQUIRY BY SIDCUL, WHICH HAS ATTAINED FINALITY IN THE YEAR UNDER APPEA L. THE ASSESSEE HAS MAINTAINED ITS ACCOUNTS ON MERCANTILE SYSTEM AND SO THE AMOUNT OF THIS LIABILITY SHALL HAVE TO BE ALLOWED IN THIS YEAR AND IT IS IMMATERIAL THAT THE MATTER IS IN DISPUTE BEFORE 44 THE ARBITRATOR, IN VIEW OF THE DECISION OF THE DELH I HIGH COURT IN THE CASE OF R.C. GUPTA VS. CIT (SUPRA). 41. THE LEARNED D.R., HOWEVER, RELIED UPON THE DECISION OF THE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. BHARAT FIRE BRICKS & POTTERY WORKS (P) LTD. (SUPRA) , IN WHICH THE FACTS ARE DIFFERENT. THE LAW OF ARBITRAT ION HAS CHANGED BY ENACTING ARBITRATION AND CONCILIATION AC T, WHEREBY THERE IS NO NEED THAT THE AWARD OF THE ARBITRATRATOR SHOULD BE MADE AS RULE OF THE COURT. THE AWARD IS EXECUTABLE AS IT IS. THEREFORE, NONE OF T HE DECISION RELIED UPON BY THE LEARNED D.R. WOULD SUPP ORT THE CASE OF THE REVENUE. 42. CONSIDERING THE TOTALITY OF THE FACTS AND CIRCUMSTANCES NOTED ABOVE, WE DO NOT FIND ANY INFIR MITY IN THE ORDER OF THE LEARNED CIT (APPEALS) IN DELETING THE ADDITION IN QUESTION. THE GROUND NO.2 OF APPEAL OF THE REVENUE IS ACCORDINGLY, DISMISSED. 43. ON GROUND NO.3, THE REVENUE CHALLENGED THE DELETION OF ADDITION OF RS.26,38,308/- ON ACCOUNT O F RETENTION/WITHHELD MONEY. 44. THE LEARNED CIT (APPEALS) FOLLOWING HIS ORDER FOR PRECEDING ASSESSMENT YEAR 2007-08 DATED 27.7.2010 DELETED THE ADDITION. IN ASSESSMENT YEAR 2007-08, WE HAVE DISMISSED THE DEPARTMENTAL APPEAL IN ITA NO.1316/CHD/2010 DATED 21.7.2016. THE FINDINGS IN PARA 4 OF THIS ORDER ARE REPRODUCED AS UNDER : 45 4. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE ARE OF THE VIEW THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY EARLIER ORDER OF THE TRIBUNAL. THE LEARNED COUNSEL FOR THE ASSESSEE FILED COPY OF THE ORDER OF THE TRIBUNAL DATED 24.6.2011 IN THE CASE OF THE ASSESSEE FOR ASSESSMENT YEAR 2006-07 IN ITA NO.542/CHANDI/2010, IN WHICH DEPARTMENTAL APPEAL WAS DISMISSED BY FOLLOWING THE EARLIER ORDERS. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO SUBMITTED THAT THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF SAME ASSESSEE IN ITA NO.61 OF 2004 VIDE JUDGMENT DATED 6.5.2013 DISMISSED THE DEPARTMENTAL APPEAL. COPIES OF THE ORDERS ARE PLACED ON RECORD. THESE FACTS WOULD SHOW THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF I.T.A.T., CHANDIGARH BENCH AS WELL AS THE HON'BLE PUNJAB & HARYANA HIGH COURT, AS REFERRED TO ABOVE. IT MAY ALSO BE NOTED HERE THAT THE ORDERS, WHICH REPRODUCED IN THE IMPUGNED ORDER OF I.T.A.T., CHANDIGARH BENCH, THE LEARNED D.R. CONCEDED BEFORE THE TRIBUNAL THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE. SINCE THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY EARLIER ORDERS, AS REFERRED TO ABOVE, AND NO INFIRMITY HAVE BEEN POINTED OUT IN THE ORDER OF THE CIT (APPEALS), THE DEPARTMENTAL APPEAL HAS BEEN DISMISSED. 45. FOLLOWING THE ORDER DATED 21.7.2016 OF THE TRIBUNAL IN THE CASE OF SAME ASSESSEE, WE DISMISS THIS GROUND OF APPEAL OF THE REVENUE. THE GROUND NO.3 O F DEPARTMENTAL APPEAL IS, THEREFORE, DISMISSED. 46 46. ON GROUND NO.4, THE REVENUE CHALLENGED THE DELETION OF ADDITION OF RS.3,92,610/- (RS.2,51,142/ - + RS.1,41,468/-) INVOKING THE PROVISIONS OF SECTION 4 0(A)(IA) OF THE ACT. 47. THE ASSESSEE SUBMITTED BEFORE THE CIT (APPEALS ) THAT THE AMOUNT OF RS.2,51,142/- AND RS.1,41,468/- PERTAINS TO CABLE CONNECTORS/LAN EXTENDERS/NET WORK ING PURCHASE, ETC. BEING PURCHASES OF CABLES, ETC. FROM DIFFERENT PARTIES NOT LIABLE FOR TDS. IT WAS ALSO SUBMITTED THAT THE ASSESSEE MOVED FOR RECTIFICATION UNDER SEC TION 154 OF THE ACT BEFORE THE ASSESSING OFFICER, WHICH WAS NOT CONSIDERED. THE LEARNED CIT (APPEALS) ON CONSIDERA TION OF THE FACTS FOUND THAT ON THESE TWO ITEMS, THE ASSESS EE MADE PURCHASES OF CABLES AND NETWORKING RESPECTIVEL Y, THEREFORE, ON PURCHASES, THE PROVISIONS OF TDS WOUL D NOT APPLY AND ACCORDINGLY, DELETED THE ADDITION. 48. ON CONSIDERATION OF THE RIVAL SUBMISSIONS, WE DO NOT FIND ANY MERIT IN THIS GROUND OF APPEAL OF THE REVENUE. THE LEARNED D.R. HAS NOT POINTED OUT ANY INFIRMITY IN THE ORDER OF THE LEARNED CIT (APPEALS) IN DELETING THE ADDITION HOLDING THAT THE TDS PROVISIO NS WOULD NOT APPLY TO THE PURCHASES, SO MADE. THIS GR OUND OF APPEAL OF THE REVENUE IS DISMISSED. 49. THE DEPARTMENTAL APPEAL IS DISMISSED. 50. IN THE RESULT; 47 I) THE APPEAL OF THE ASSESSEE IN ITA NO.1329/CHD/2010 IS PARTLY ALLOWED. II) THE APPEAL OF THE ASSESSEE IN ITA NO.73/CHD/2012 IS ALLOWED. III) THE APPEAL OF THE ASSESSEE IN ITA NO.381/CHD/2013 IS PARTLY ALLOWED. IV) THE APPEAL OF THE REVENUE IN ITA NO.138/CHD/2012 IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT. SD/- SD/ (ANNAPURNA GUPTA) (BHAVNESH SAINI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 10 TH AUGUST, 2016 *RATI* COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT(A)/THE CIT/THE DR. ASSISTANT REGISTRAR, ITAT, CHANDIGARH