DCIT, Ludhiana V. Greater Ludhiana Area Development Authority, Ludhiana

ITA 319/CHANDI/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 86146 (ITAT-CHANDIGARH)
• Duration Of Justice: 1 year(s) 10 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-02-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 10-12-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 21-03-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: JYOTI KUMARI
• Keywords: Gift; Business income; Depreciation; Business expenditure; Opportunity of being heard; Rule of consistency; Deemed to accrue or arise in india; Question of law; Cost of acquisition; Competent authority; Capital receipt; Commercial expediency; Revised return; Revenue expenditure; Capital expenditure
• Section: 43B; 37(1); 37; 28; 144; 139; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH A CHANDIGARH BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI T.R.SOOD, ACCOUNTANT MEMBER ITA NO. 252/CHD/2013 ASSESSMENT YEAR: 2009-10 GREATER LUDHIANA AREA VS THE ADDL.CIT, DEVELOPMENT AUTHORITY, RANGE VI, PUDA COMPLEX, LUDHIANA. FEROZEPUR ROAD, LUDHIANA. PAN: AAALG1055F & ITA NO. 319/CHD/2013 ASSESSMENT YEAR: 2009-10 THE DCIT, V GREATER LUDHIANA AREA CIRCLE VI, DEVELOPMENT AUTHORITY, LUDHIANA. PUDA COMPLEX, FEROZEPUR ROAD, LUDHIANA. PAN: AAALG1055F & ITA NO. 1028/CHD/2013 ASSESSMENT YEAR: 2010-11 GREATER LUDHIANA AREA VS THE DCIT, DEVELOPMENT AUTHORITY, CIRCLE-VI, PUDA COMPLEX, LUDHIANA. FEROZEPUR ROAD, LUDHIANA. PAN: AAALG1055F (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SUDHIR SEHGA L & SHRI ASHOK GOYAL RESPONDENT BY : SMT. JYOTI KUMARI DATE OF HEARING : 15.12.2014 DATE OF PRONOUNCEMENT : 05.02.2015 O R D E R PER BHAVNESH SAINI,JM THIS ORDER SHALL DISPOSE OF ALL THE ABOVE APPEALS O F THE SAME ASSESSEE FOR DIFFERENT ASSESSMENT YEARS. 2 2. WE HAVE HEARD LD. REPRESENTATIVES OF BOTH THE PA RTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE APPE ALS ARE DECIDED AS UNDER. ITA 319/CHD/2013 (DEPARTMENTAL APPEAL( A.Y. 2009-10) 3. THIS APPEAL BY REVENUE IS DIRECTED AGAINST THE O RDER OF LD. CIT(APPEALS)-I LUDHIANA DATED 02.01.2013 FOR ASSESS MENT YEAR 2009-10. 4. ON GROUND NO. 1, REVENUE CHALLENGED THE DELETION OF ADDITION OF RS. 13.84 CR ON ACCOUNT OF PAYMENTS MAD E BY THE ASSESSEE TO NORTHERN RAILWAYS FOR CONSTRUCTION OF R AILWAY UNDER BRIDGE NEAR LODHI CLUB, LUDHIANA. IN THE SAME GROU ND, REVENUE ALSO CHALLENGED THE DELETION OF ADDITION OF RS. 1.5 7 CR ON ACCOUNT OF PAYMENT MADE BY THE ASSESSEE TO PUNJAB M ANDI BOARD, LUDHIANA FOR CONSTRUCTION OF BRIDGE ON SIDHW AN CANAL AT DUGRI ROAD, LUDHIANA. 5. WE FIRST DEAL WITH THE ADDITION OF RS. 13.84 CR WHICH WAS MADE BY THE ASSESSING OFFICER ON THE GROUND OF DISA LLOWANCE OF EXPENDITURE DEBITED BY THE ASSESSEE FOR CONSTRUCTIO N OF RAILWAY UNDER BRIDGE IN LUDHIANA. THE ASSESSING OFFICER IN THIS REGARD HAS OBSERVED THAT THE ASSESSEE HAD MADE A PAYMENT O F RS. 13.84 CRORES TO NORTHERN RAILWAYS FOR CONSTRUCTION OF RAI LWAY UNDER BRIDGE AND THE SAME HAD BEEN CLAIMED AS BUSINESS EX PENDITURE BY GLADA ON THE GROUND THAT THE SAID BRIDGE WAS BEI NG CONSTRUCTED FOR OVERALL DEVELOPMENT AND SPECIFICALL Y TO EASE THE TRAFFIC SITUATION. THE ASSESSES HAS ALSO CLAIMED BE FORE THE ASSESSING OFFICER THAT THE DECISION OF THE HON'BLE KERALA HIGH COURT IN THE CASE OF CIT VS TRAVANCORE TITANIUM PRO DUCTS LTD. 3 (2010) 187 TAXMAN 81 (KER.) WAS CLEARLY APPLICABLE. IT WAS SUBMITTED THAT THE HON'BLE COURT HAD HELD THAT: THE PARAMETERS APPLICABLE IN CASE OF A PRIVATE COMPANY THAT TOO WI TH THE RESPECT OF THE CLAIM FOR BUSINESS EXPENDITURE ARE EXACTLY N OT APPLICABLE IN THE CASE OF PUBLIC SECTOR COMPANY, THE ASSESSING OFFICER AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE A NALYZED THE ROLE OF PUBLIC WORKS DEPARTMENT (BUILDING AND ROADS ) OF PUNJAB IN CONSTRUCTION, UPGRADATION AND MAINTENANCE OF ROA DS/BRIDGES IN THE STATE. HE ALSO REFERRED TO THE SET UP OF THE PUNJAB ROADS AND BRIDGES DEVELOPMENT BOARD AS AN UNDERTAKING TO ACT AS CATALYST FOR INFRASTRUCTURE DEVELOPMENT AND THE ROA D SECTOR IN THE STATE OF PUNJAB. THE ASSESSING OFFICER FURTHER EXAMINED THE ACT' CONSTITUTING GLADA IN ORDER TO UNDERSTAND THE OBJECTIVES OF THE SAME AND TO FIND OUT WHETHER CONSTRUCTION OF RAILWAY UNDER BRIDGE WAS INTENDED TO SERVE SUCH BUSINESS PU RPOSE, THE ASSESSING OFFICER REFERRED TO SECTIONS 28 AND 29 OF THE PUNJAB REGIONAL AND TOWN PLANNING DEVELOPMENT ACT 1995 TO HOLD THAT; THE CONSTRUCTION OF RAILWAY UNDER BRIDGE WAS NOT TH E FUNCTION OF GLADA, THE ASSESSING OFFICER THEREFORE HELD THAT TH E AMOUNT CLAIMED AS EXPENDITURE WAS MERE -APPLICATION OF FUN DS. 6. THE ASSESSEE CHALLENGED THE ADDITION BEFORE LD. CIT(APPEALS) AND ASSESSEE SUBMITTED THE FOLLOWING A RGUMENTS : THE LD AO HAS DISALLOWED THE EXPENDITURE INCURRED BY GLADA ON CONSTRUCTION OF RAILWAY UNDER BRIDGE STATING BY STATING THAT GLADA IS NOT AN AUTHORITY T O CONSTRUCT BRIDGES, IT IS OUT SIDE THE OBJECTS OF GL ADA. THE CONSTRUCTION OF BRIDGES IS DUTY OF PUNJAB ROADS & BRIDGES DEVELOPMENT BOARD. THEREFORE, THE EXPENDITURE IS NOT ALLOWABLE UNDER SECTION 37(1) OF THE 4 INCOME TAX ACT, 1961, IN THIS REGARD, WE SUBMIT AS UNDER : I) THE PUNJAB ROADS & BRIDGES DEVELOPMENT BOARD WAS CONSTITUTED BY THE GOVERNMENT OF PUNJAB VIDE PUNJAB ACT NO. 22 OF 1998 AND NOTIFIED ON 27TH JULY 1998 AS AN UNDERTAKING OF THE STATE GOVERNMENT TO ACT AS A CATALYST FOR INFRASTRUCTURE DEVELOPMENT IN THE ROAD SECTOR IN THE STATE OF PUNJAB. ITS PURPOSE IS TO ACT AS A NODAL AGENCY TO PLAN, AND MONITOR ALL ASPE CTS RELATING TO CONSTRUCTION AND IMPROVEMENT OF ROADS A ND BRIDGES IN THE STATE. THIS BOARD IS RESPONSIBLE FO R PLANNING AND DEPLOYMENT OF FUNDS ON STATE ROADS, FISCAL MANAGEMENT, PROJECT MANAGEMENT, INTERDEPARTMENTAL COORDINATION AND THE OTHER KEY AREAS. THE PRBDB IS RESPONSIBLE FOR DEVELOPMENT OF ROADS & BRIDGES ON STATE HIGHWAYS, DISTRICT ROADS E TC. ROADS & BRIDGES WITHIN CITY LIMIT ARE RESPONSIBILIT Y OF LOCAL AUTHORITY OR MUNICIPAL CORPORATION. THE PRBDB DEALS ONLY IN STATE HIGHWAYS & DISTRICT ROADS WHICH ARE OF STRATEGIC IMPORTANCE TO THE STATE, THE SAME IS D EAR FROM THE LIST OF PROJECTS UNDER TAKEN BY THE PRBDB WHICH HAS BEEN DOWNLOADED FROM THE WEBSITE OF PRBDB. THE BOARD HAS UNDERTAKEN PROJECTS ON ROADS OR AREA WHICH DO NOT FALL UNDER ANY LOCAL AUTHORITY OR MUNICIPAL CORPORATION. II) GLADA IS A STATUTORY BODY CONSTITUTED BY THE GOVERNMENT OF PUNJAB UNDER THE PUNJAB REGIONAL AND TOWN PLANNING AND DEVELOPMENT ACT, 1995 AND ITS OBJECTS AND FUNCTIONS ARE AS PER SECTION 28 OF THE PUNJAB REGIONAL AND TOWN PLANNING AND DEVELOPMENT ACT, 1995 WHICH READS AS UNDER :- 28(1) THE OBJECT OF AUTHORITY IS TO PROMOTE AND SECURE BETTER PLANNING AND DEVELOPMENT OF ANY AREA OF THE. STATE AND FOR THAT, PURPOSE THE AUTHORITY SHALL HAVE THE POWERS TO ACQUIRE BY WAY OF PURCHASE, EXCHANGE, TRANSFER OR GIFT OR TO HOLD, MANAGE, PLAN, DEVELOP AND MORTGAGE OR 5 OTHERWISE DISPOSE OF LAND OR OTHER PROPERTY OR TO CARRY OR IN COLLABORATION WITH ANY OTHER AGENCY OR THROUGH ANY OTHER AGENCY ON ITS BEHALF, BUILDING, ENGINEERING, MINING AND OTHER OPERATIONS TO EXECUTE WORKS IN CONNECTION WITH SUPPLY OF WATER, DISPOSAL OF SEWERAGE, CONTROL OF POLLUTION AND OTHER SERVICES AND AMENITIES AND GENERALLY TO DO ANYTHING WITH THE PRIOR APPROVAL OR ON DIRECTION OF THE STATE GOVT., FOR CARRYING GUI THE PROPOSAL OF THIS ACT. 28(2) IN PARTICULAR AND WITHOUT PREJUDICE TO THE GENERALITY OF THE FOREGOING PROVISION'S, THE AUTHORITY ITSELF OR IN COLLABORATION WITH ANY OTHER AGENCY OR THROUGH ANY OTHER AGENCY ON ITS BEHALF:- (I) IF SO REQUIRED BY THE STATE GOVERNMENT OR TH E BOARD, TAKE UP THE WORKS IN CONNECTION WITH THE PREPARATION AND IMPLEMENTATION OF REGIONAL PLANS, MASTER PLANS AND NEW TOWNSHIP PLANS AND TOWN IMPROVEMENT SCHEMES; II) UNDERTAKE THE WORK RELATING TO THE AMENITIE S AND SERVICES TO BE PROVIDED IN THE URBAN ESTATES, PROMOTION OF URBAN DEVELOPMENT AS WELL AS CONSTRUCTION OF HOUSES; (III) PROMOTE RESEARCH, DEVELOPMENT OF NEW TECHNIQUES OF PLANNING, LAND DEVELOPMENT AND HOUSE CONSTRUCTION AND MANUFACTURE OF BUILDING MATERIAL; (IV) PROMOTE COMPANIES, ASSOCIATIONS AND OTHER BODIES FOR CARRYING OUT THE PURPOSES OF THE ACT; AND (V) PERFORM ANY OTHER FUNCTIONS WHICH ARE SUPPLEMENTAL, INCIDENTAL OR CONSEQUENTIAL TO ANY OF THE FUNCTIONS REFERRED TO IN THIS SUB-SECTION OR WHICH MAY BE PRESCRIBED THUS, IT IS CLEAR THAT THE OBJECT OF AUTHORITY IS T O PROMOTE AND SECURE BETTER PLANNING AND DEVELOPMENT OF ANY AREA OF THE STATE, III) ATTENTION IS ALSO INVITED TO SECTION 49(2) O F THE PUNJAB REGIONAL AND TOWN PLANNING AND DEVELOPMENT ACT, 1995 WHICH READS AS UNDER; THE FUNDS OF THE AUTHORITY SHALL BE APPLIED TOWARDS 'MEETING: I) THE EXPENDITURE INCURRED IN THE ADMINISTRATION, IMPLEMENTATION AND CARRYING OUT THE PROVISIONS OF THIS ACT, II) THE COST OF ACQUISITION OF LAND FOR THE PURPOS E OF THIS ACT, 6 III) THE COST OF ACQUISITION FOR DEVELOPMENT OF LAND AND CONSTRUCTION OF HOUSE AND IV) THE EXPENDITURE FOR SUCH OTHER PURPOSE AS THE STATE GOVERNMENT MAY DIRECT OR PERMIT IV) GLADA IS NOT A COMMERCIAL ORGANIZATION. IT HA S BEEN SPECIFICALLY INCORPORATED FOR THE DEVELOPMENT AND BETTER PLANNING OF THE AREAS OF THE STATE. IT HAS T O WORK ACCORDING TO THE ACT UNDER WHICH IT HAS BEEN CONSTITUTED. NO OTHER OBJECT OR ACTIVITY CAN BE CAR RIED ON BY GLADA. IT'S BUSINESS PURPOSE MEANS THE OBJECT S FOR WHICH IT HAS BEEN CONSTITUTED I.E. DEVELOPMENT AND BETTER PLANNING OF THE AREA OF THE STATE. THE CONSTRUCTION OF RAILWAY UNDER BRIDGE WI LL HELP THE DEVELOPMENT OF THE AREAS DEVELOPED BY GLADA. GLADA IS STATUTORY BODY CONSTITUTED BY THE GOVT. OF PUNJAB. THE GOVERNING BODY CONSISTS OF SENIOR GOVT. OFFICIALS AND THE CHIEF MINISTER AS ITS CHAIRMAN. T HE DECISIONS OF GLADA ARE TAKEN BY THE GOVERNING BODY IN ITS MEETING. IT; CAN NOT BE COMPARED WITH THE PR IVATE COLONIZERS. ACTIVITIES OF PRIVATE COLONIZERS ARE UNDERTAKEN WITH PROFIT MOTIVE WHEREAS THE ACTIVITIE S OF GLADA ARE UNDERTAKEN WITH OVERALL DEVELOPMENT AND BETTER INFRASTRUCTURE OF AREA UNDER ITS JURISDICTIO N. V) IT HAS BEEN DECIDED BY THE GOVERNMENT OF PUNJAB (PHOTOCOPY ENCLOSED) THAT RAILWAY UNDER BRIDGE (RUB ) NEAR LODHI CLUB ; LUDHIANA IS -TO BE CONSTRUCTED BY GLADA, THIS R.UB IS TO BE CONSTRUCTED FOR THE OVERA LL DEVELOPMENT & KEEPING IN VIEW THE TRAFFIC PROBLEM O F LUDHIANA. THE TRAFFIC COMING FROM BHATINDA, FARIDKO T, FAROZEPUR & MOGA DISTRICT ETC. SHALL NOT REQUIRE TO ENTER INTO THE CITY AND. SNAIL PASS THROUGH FEROZEP UR ROAD TO PAKHOWAL ROAD PROPOSED MISSING LINK I, URBA N ESTATE PHASE II & III DUGRI, PROPOSED MISSING LINK II AND URBAN ESTATE AT VILLAGE GILL FROM PAKHOWAL ROAD TO SIDHWAN CANAL & SHALL CONSIDERABLY REDUCE THE VOLUME OF TRAFFIC PROBLEM AND CONGESTION ON CITY ROADS. UNPLANNED AND UNCONTROLLED TRAFFIC IS THE MA JOR PROBLEM OF LUDHIANA CITY. VI) RAILWAY'S DOES NOT PERMIT TO UNDERTAKE CONSTRUCTION ACTIVITY IN ITS PORTION AND HAD GOT DEPOSITED THE AMOUNT OF RS. 13.84 CR. FROM GLADA FO R ITS CONSTRUCTION,, AS SUCH, THIS AMOUNT HAS BEEN PA ID TO NORTHERN RAILWAY FOR CONSTRUCTION OF RUB. 7 VII) THUS, IT IS CLEAR THAT, GLADA IS DULY AUTHORIZED TO INCUR THIS EXPENDITURE AND SAME IS WITHIN THE OBJECTS OF GLADA, VIII) ALLOWABILITY U/S 37(1), TO MAKE A EXPENDI TURE TO BE ELIGIBLE UNDER SECTION 37(1) THE CONDITIONS TO BE FULFILLED ARE AS FOLLOWS: (A) NOT FALLING WITHIN THE EXPENDITURE COVERED BY THE SECTIONS 30 TO 36. (B) THE EXPENDITURE SHOULD NOT BE CAPITA! IN NATURE, (C) THE EXPENDITURE SHOULD NOT BE OF PERSONAL IN NATURE. (D) THE EXPENDITURE SHOULD HAVE BEEN INCURRED IN THE NORMAL COURSE OF BUSINESS AND FOR THE PURPOSE OF THE BUSINESS, IX) THIS PAYMENT IS ATTRIBUTED TO THE OBJECTS OF GL ADA AND THE SAME IS ALLOWABLE AS DEDUCTION UNDER SECTION 37 (1) OF THE INCOME TAX ACT, 1961. MEANS IT HAS BEEN INCURRE D FOR THE PURPOSE OF BUSINESS OF GLADA AND THE SAME IS AL SO NEITHER OF CAPITAL NATURE NOR OF PERSONAL NATURE. T HE SAID EXPENDITURE WILL ENHANCE THE REPUTATION OF GLADA AN D ALSO THE MARKETABILITY OF PROPERTIES OF GLADA LOCATED AR OUND THE LOCATION WHERE THE EXPENDITURE HAS BEEN INCURRED. T HUS THE SAID EXPENDITURE HAS BEEN INCURRED WHOLLY AND EXCLU SIVELY FOR THE PURPOSE AND BUSINESS OF GLADA. X) THE DELHI HIGH COURT IN THE CASE OF CIT VS DTTDC LTD 19 TAXMAHN.COM 269 HAS HELD THAT THAT THE EXPENDITURE INCURRED ON CONSTRUCTION OF FLYOVERS ETC., WAS REVE NUE EXPENSE AND NOT CAPITA! EXPENSE. THE EXPENDITURE HA S TO BE ALLOWED UNDER SECTION 37., XI) THE SUPREME COURT IN THE CASE OF EASTERN INVEST MENTS LTD VS CIT 20 ITR 1 HAS LAID DOWN FOLLOWING PRINCIP LES FOR ALLOWABLILITY OF EXPENDITURE : A) IT IS NOT NECESSARY TO SHOW THAT THE EXPENDITURE WAS PROFITABLE ONE OR NOT THAT IN FACT ANY PROFIT WAS EARNED. B) IT IS ENOUGH TO SHOW THAT THE MONEY WAS EXPENDED NOT OF NECESSITY AND WITH VIEW TO A DIRECT AND IMMEDIATE BENEFIT TO THE TRADE, BUT VOLUNTARILY AND ON THE GROUND OF COMMERCIAL EXPEDIENCY AND IN ORDER INDIRECTLY, TO FACILITAT E THE CARRYING ON BUSINESS. XII) THE BOMBAY HIGH COURT IN CASE OF CIT V. STATE BANK OF INDIA [2003] 261 ITR 82 (BORN.) AND CIT V. STATE BA NK OF INDIA [2003] 262 ITR 662 (BOM.),HAS HELD THAT SUBSI DY GIVEN 8 BY THE BANK TO ITS SUBSIDIARIES TOWARDS OPENING OF NEW BRANCHES WAS CONSIDERED AS AN EXPENDITURE IN THE HA NDS OF STATE BANK OF INDIA, IT WAS HELD THAT THOUGH BY GIV ING SUBSIDY ASSETS WERE CREATED, BUT THESE ASSETS BELONG TO THE SUBSIDIARIES AND ASSETS DID NOT BELONG TO THE STATE BANK OF INDIA AND THE PROFITS EARNED BY SUBSIDIARY ARE NO T PROFITS OF SBL IT WAS HELD THAT EXPENDITURE INCUR RED BY THE SBI WAS A NORMAL REVENUE EXPENDITURE AN. WHILE HOLD ING SO THE HON'BLE BOMBAY HIGH COURT RELIED THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OR EMPIRE JUTE C O. LTD. V. CIT [1980] 124 ITR 1 IN WHICH IT WAS HELD THAT W HAT MAY BE THE CAPITAL RECEIPT IN THE HANDS OF A PAYEE NEED NOT NECESSARILY BE THE CAPITA! EXPENDITURE IN THE HANDS OF THE PAYER. XIII) THE HON'BLE SUPREME COURT IN THE CASE OF S RI VENKATA SATYANARAYANA RICE MILL CONTRACTORS CO. V. CIT (199 7) 223 ITR 101 AND PATNAIK & CO. LTD. V. CIT [1986] 161 IT R 365, HAS HELD THAT: ANY CONTRIBUTION MADE BY AN ASSESSE TO A PUBLIC WELFARE FUND WHICH IS DIRECTLY CONNECTED OR RELATED WITH THE CARRYING ON OF THE ASSESSEE'S BUSINESS OR WHICH RESULTS IN BENEFIT TO THE ASSESSEE'S BUSINESS HAS TO BE REGARDED AS AN ALLOWABLE DEDUCTION UNDER SECTION 37 (1). SUCH A CONTRIBUTION, WHETHER VOLUNTARY OR AT THE IN STANCE OF THE AUTHORITY CONCERN, WHEN MADE FOR THE BENEFIT PU BLIC AND NOT REGARDED AS A PAYMENT OPPOSED POLICY SHOULD BE HELD ALLOWABLE AS AN EXPENDITURE. IT HAS BEEN THAT THERE IS NO LAW WHICH PROHIBITS TO MAKING SUCH DONATIONS AND, T HUS, IT WAS PLEADED THAT BENEFIT OF SECTION 37(1) COULD NOT BE DENIED TO THE ASSESSEE WHEN PAYMENT IS MADE FOR THE PURPOSE OF ASSESSEE'S BUSINESS. IT HAS BEEN HELD THAT IT IS NOT A CASE WHERE THE MO NEY IS CONTRIBUTED TO A PRIVATE FUND OR FOR THE BENEFIT OF ANY INDIVIDUAL WHICH COULD BE REGARDED AS A FORM OF ILL EGAL GRATIFICATION. THE GOVERNMENT OF INDIA DIRECTS THE ASSESSEE TO SPEND MONEY FOR THE SPECIFIC SCHEMES WHICH ARE B ENEFICIAL TO THE GENERAL PUBLIC AND PAYMENTS TO SUCH A SCHEME CANNOT BE REGARDED AS BEING OPPOSED TO PUBLIC POLICY. THE MERE FACT THAT MAKING OF A DONATION FOR CHARITABLE OR PUBLIC CAUSE INTEREST RESULTS IN THE GOVERNMENT GIVING PATRONAGE OR BENEFIT CAN BE NO GROUND TO DENY THE ASSESSEE A DED UCTION OF THAT AMOUNT UNDER SECTION 37(1) WHEN SUCH PAYMEN T HAD BEEN MADE FOR THE PURPOSE OF ASSESSEE'S BUSINESS. 9 XIV) THE RAJASTHAN HIGH COURT IN THE CASE OF HINDUS TAN ZINC LTD VS CIT 322 ITR 478 HAS HELD THAT WHERE EXPENDIT URE - WAS INCURRED BY ASSESSEE IN CONSTRUCTION OF PART OF DAM BUILT BY STATE GOVERNMENT INASMUCH AS IT REQUIRED L ARGE QUANTITY OF WATER' FOR DAY TO DAY OPERATION OF ITS SUPER SMELTER LOCATED NEARABOUT, SAME WAS ALLOWABLE AS RE VENUE EXPENDITURE AND WAS ALLOWED AS DEDUCTION U/S37(L). XV) THE HON'BLE SUPREME COURT IN THE CASE OF LAKSHM IJI SUGAR MILLS CO. PVT. LTD. VS. CIT 82 ITR 376 IN WHI CH IT HAS BEEN HELD THAT APART FROM THE ELEMENT OF COMPULSION , THE ROADS WHICH WERE CONSTRUCTED AND DEVELOPED WERE NOT THE PROPERTY OF THE ASSESSEE NOR WAS IT THE CASE OF THE REVENUE THAT THE ENTIRE COST OF DEVELOPMENT OF THOSE ROADS WAS DEFRAYED BY THE ASSESSEE. IT ONLY MADE CERTAIN CONT RIBUTION FOR ROAD DEVELOPMENT BETWEEN THE VARIOUS CANE PRODU CING CENTERS AND THE MILLS. THE APPARENT OBJECT AND PURP OSE WAS TO FACILITATE SHE RUNNING OF ITS MOTOR VEHICLES OR OTHER MEANS EMPLOYED FOR TRANSPORTATION OF SUGARCANE TO THE FAC TORY. FROM THE BUSINESS POINT OF VIEW AND ON A FAIR APPRE CIATION OF THE WHOLE SITUATION THE ASSESSEE CONSIDERED THA T THE DEVELOPMENT OF THE ROAD IN QUESTION COULD GREATLY F ACILITATE THE TRANSPORTATION OF SUGARCANE. THIS WAS ESSENTIAL FOR THE BENEFIT OF ITS BUSINESS OF MANUFACTURING SUGAR IN W HICH THE MAIN RAW MATERIAL ADMITTEDLY CONSISTED OF SUGARCANE . THESE FACTS WOULD BRING IT WITHIN THE PRINCIPLE, THAT: TH E EXPENDITURE WAS INCURRED FOR RUNNING THE BUSINESS O R WORKING IT WITH A VIEW TO PRODUCE THE PROFIT WITHOU T THE ASSESSEE GETTING ANY ADVANTAGE OF AN ENDURING BENEF IT TO ITSELF. THE EXPENDITURE WAS INCURRED BY THE ASSESSE E FOR REASONS OF COMMERCIAL EXPEDIENCY APART FROM STATUTO RY COMPULSION. THE DEVELOPMENT OF THE ROADS WAS NECESS ARILY MEANT FOR FACILITATING THE CARRYING ON OF THE ASSES SEE'S BUSINESS. FURTHERMORE, THE TRIBUNAL DID NOT GIVE AN Y FINDING THAT THE ROADS WERE TO BE ALTOGETHER NEWLY MADE AND THAT ASSESSEE WOULD GET AN ENDURING BENEFIT FROM THESE R OADS. THE EXPENDITURE IN QUESTION SHOULD HAVE, THEREFORE, BEEN ALLOWED AS AN ADMISSIBLE DEDUCTION. XVI) THE MADRAS HIGH COURT IN THE CASE OF CIT VS. M ADURA COATS LTD. 24 DTR 24 HAS HELD THAT THE WELFARE MEAS URES & COMMUNITY ASSISTANT PROGRAMMES ARE ALLOWABLE AS DEDUCTION UNDER SECTION 37(1) OF THE IT ACT, 1961. XVII) THE DELHI HIGH COURT IN THE CASE OF AIRPORT A UTHORITY OF INDIA VS ACIT 340 ITR 407 HAS HELD THAT THE EXPENDI TURE ON 10 REMOVAL OF ENCROACHMENTS AROUND THE AIRPORT IS ALLO WABLE AS BUSINESS EXPENDITURE UNDER SECTION 37(1) OF THE IT ACT. XVIII) THE KARNATAKA HIGH COURT IN THE CASE OF CIT VS KARNATAKA FINANCIAL CORPORATION 326 ITR 355 (KAR) H AS HELD THAT THE EXPENDITURE INCURRED AT THE INSTANCE OF TH E STATE FOR DEVELOPMENT OF INFRASTRUCTURAL FACILITIES OF VILLAG ES AND CONSTRUCTION OF NEW MARKET IS ALLOWABLE AS THESE AC TIVITIES WILL CATER TO THE NEED OF PEOPLE AND WOULD SATISFY THE PURPOSE FOR WHICH IT WAS; CREATED BY THE STATE END SUCH EXPENDITURE WAS DEDUCTIBLE. XIX) THUS, IN OUR VIEW EXPENDITURE INCURRED IS A LLOWABLE AS DEDUCTION U/S 37(1) OF THE IT ACT. AS SUBMITTED EARLIER, IT IS AGAIN SUBMITTED THAT TH E AMOUNT SPENT ON THE CONSTRUCTION OF RAILWAY UNDER BRIDGE I S WITHIN THE OBJECTS AND AUTHORITY OF THE GLADA. THERE ARE A NUMBER OF COLONIES & COMMERCIAL SITS DEVELOPED & OWNED, BY GL ADA NEAR & AROUND THE SITE WHERE THE RAILWAY UNDER BRIDGE IS B EING CONSTRUCTED. GLADA ALSO AUCTIONS PROPERTIES IN T HESE AREAS. COPY OF THE PAPER ADVERTISEMENT FOR THE AUCTION OF COMMERCIAL SITES IN THE VICINITY OF RAILWAY UNDER BRIDGE IS EN CLOSED HEREWITH. THE CONSTRUCTION OF THIS RAILWAY UNDER BRIDGE WILL ADD TO THE VALUE-OF THESE PROPERTIES. THEREFORE, THE AMOUNT SP ENT FOR THE CONSTRUCTION OF RAILWAY UNDER BRIDGE IS WHEN IN THE OBJECTS OF GLADA & FOR ITS BUSINESS PURPOSES, HENCE ALLOWABLE UNDER SECTION 37(1) OF THE IT ACT, 1961.' 7. THE LD. CIT(APPEALS), CONSIDERING THE OBJECT OF THE ASSESSEE AND CONSTRUCTION OF RAILWAY UNDER BRIDGE MADE FOR T HE BUSINESS PURPOSES, DELETED THE ADDITION. HIS FINDINGS IN PA RA 5 OF THE APPELLATE ORDER ARE REPRODUCED AS UNDER : I HAVE CONSIDERED THE BASIS OF DISALLOWANCE MADE B Y THE ASSESSING OFFICER AND ARGUMENTS OF THE AR DURING TH E ASSESSMENT AS WELL AS APPELLATE PROCEEDINGS. IT IS APPARENT THAT THE PAYMENT MADE BY THE ASSESSEE FOR CONSTRUCT ION OF RAILWAY UNDER BRIDGE IN ITS JURISDICTION/AREA OF AC TIVITY I.E. LUDHIANA IS INTENDED TO IMPROVE THE TRAFFIC SITUATI ON ESPECIALLY IN AREAS WHICH ARE FAILING IN AND AROUND THE COLONI ES DEVELOPED BY GLADA. IT IS ALSO IMPORTANT TO APPRECIATE THAT T HE CONSTRUCTION OF SAID BRIDGE WOULD IMPROVE THE CONNE CTIVITY BETWEEN FEROZEPUR ROAD TO PAKHOWAL ROAD LEADING TO SMOOTH FLOW OF TRAFFIC AND THEREFORE WOULD DEFINITELY SERV E THE PURPOSE OF GLADA IN CREATING BETTER CIVIC AMENITIES IN THE AREA OF ITS OPERATION. EVEN FROM PURELY COMMERCIAL POINT OF VIE W THE SAID 11 BRIDGE WOULD GO TO ADD TO THE QUALITY OF LIFE SO AS TO EVENTUALLY LEAD TO APPRECIATION IN THE MARKET RATES IN RESPECT OF PROPERTIES SITUATED IN THAT AREA. IN THIS SENSE, I CAN SEE THA T THE CLAIM OF EXPENDITURE IS RELATED TO THE OBJECTS OF GLADA. IT IS ALSO SEEN THAT THE ASSESSING OFFICER HAS MERELY REFERRED TO T HE OBJECTS OF GLADA IN CONCLUDING THAT SAID EXPENDITURE WAS APPLI CATION OF FUNDS BUT HAS DEFINITELY MISSED THE CLEAR LINK BETW EEN THE CONSTRUCTION OF RAILWAY UNDER BRIDGE AND IMPROVEMEN T OF CIVIL AMENITIES. I AM ALSO GUIDED BY THE JUDGMENT OF HON' BLE KERALA HIGH COURT AS REFERRED TO BY THE APPELLANT WHEREIN IT HAS BEEN CLEARLY HELD THAT THE STANDARDS/PARAMETERS IN RESPE CT OF CLAIM OF EXPENDITURE OF A PRIVATE COMPANY AND A PUBLIC SE CTOR COMPANY HAVE TO BE DIFFERENT. IN VIEW OF THE ABOVE THE CLAIM OF EXPENDITURE IS DIRECTED TO BE ALLOWED. 8. THE LD. DR RELIED UPON ORDER OF THE ASSESSING OF FICER AND SUBMITTED THAT THE ASSESSEE PAID THE AMOUNT FOR RAI LWAY UNDER BRIDGE AS PER DIRECTION OF THE STATE GOVERNMENT AND ASSESSEE HAS NO SAY. IT HAS NO NEXUS WITH THE BUSINESS OF T HE ASSESSEE AND RELIED UPON FOLLOWING DECISIONS : I) CIT VS SITALDAS TIRATHDAS 41 ITR 367 (S.C.) II) CIT VS MALAYALAM PLANTATIONS LTD. 53 ITR 140 ( S.C) III) LAKSHMIRATAN COTTON MILLS CO. LTD. V CIT 73 ITR 634 (S.C.) IV) OIL INDUSTRY DEVELOPMENT BOARD VS ACIT 123 ITD 67 (DEL) THE ASSESSEE IS INDEPENDENT AUTHORITY. THE CREATIO N OF BRIDGE IS NOT RELATED TO ASSESSEE. EXPENSES ARE NOT INCURRED FOR BUSINESS ACTIVITY OF ASSESSEE. 9. ON THE OTHER HAND, LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE AUTHORITIES BELOW AND S UBMITTED THAT RAILWAY UNDER BRIDGE WAS CONSTRUCTED AS PER TH E SCHEME OF THE ASSESSEE AND REQUIREMENTS FOR THE BUSINESS PURP OSES AND TO 12 ACHIEVE THE AIMS AND OBJECTS OF THE ASSESSEE. HE HAS RELIED UPON FOLLOWING DECISIONS ; I) CIT VS D.T.T.D.C. LTD. 350 ITR 1 (DEL) II) SRI VENKATA SATYANARAYNA RICE MILLS CONTRACTORS CO. VS CIT 223 ITR 101 III) PATNAIK & CO. LTD. VS CIT161 ITR 365 (S.C) IV) LAKSHMIJI SUGAR MILLS CO. P. LTD. VS CIT 82 ITR 376 (S.C.) V) CIT VS MADURA COATS LTD. 24 DTR 24 (MAD) HE HAS SUBMITTED THAT CASE LAW CITED BY LD. CIT(APP EALS) IN ASSESSMENT YEAR 2010-11 DO NOT APPLY TO THE FACTS O F THIS CASE. THE NOTIFICATION WAS ISSUED BY STATE GOVERNMENT FOR ASSESSEE'S CONSTITUTION. PB- 31 TO 33 ARE THE MINUTES AND MEE TINGS WITH THE CHIEF MINISTER WHO IS ALSO CHAIRMAN OF THE MANA GING COMMITTEE AND OTHER AUTHORITIES WERE ALSO PRESENT A T THE TIME OF MEETING FOR GIVING APPROVAL FOR CONSTRUCTION OF RAI LWAY UNDER BRIDGE. THE LETTER REGARDING ESTIMATE OF CONSTRUCT ION OF BRIDGE DATED 31.03.2005 IS ALSO FILED ON RECORD. 10. THE LD. COUNSEL FOR THE ASSESSEE ALSO FILED THE MAP OF THE RAILWAY UNDER BRIDGE TO SHOW THAT THE RAILWAY UNDER BRIDGE WAS CONSTRUCTED TO CONNECT THE PROPERTIES DEVELOPED BY THE ASSESSEE. HE HAS, THEREFORE, SUBMITTED THAT LD. CIT(APPEALS) ON PROPER APPRECIATION OF THE FACTS AND MATERIAL ON RECORD, C ORRECTLY DELETED THE ADDITION. 11. WE HAVE CONSIDERED RIVAL SUBMISSIONS. IT IS NO T IN DISPUTE THAT ASSESSEE MADE PAYMENTS FOR CONSTRUCTION OF RAI LWAY UNDER BRIDGE IN ITS JURISDICTION AND AREA OF ACTIVITY IN LUDHIANA WITH 13 THE PURPOSE TO IMPROVE THE TRAFFIC SITUATION, SPECI ALLY IN THE AREAS WHICH ARE FALLING IN AND AROUND THE COLONIES DEVELOPED BY THE ASSESSEE. THE LD. COUNSEL FOR THE ASSESSEE FIL ED THE MAP OF THE UNDER BRIDGE CONSTRUCTED BY THE ASSESSEE TO SHO W THAT RAILWAY UNDER BRIDGE WAS CONSTRUCTED TO CONNECT THE COLONIES WHICH WERE LOCATED ON BOTH SIDES OF RAILWAY TRACK. IT WAS, THEREFORE, FOR THE BENEFIT OF THE BUSINESS OF THE A SSESSEE ONLY. THE LD. CIT(APPEALS), THEREFORE, CORRECTLY APPRECIA TED THAT THE CONSTRUCTION OF THE SAID BRIDGE WOULD IMPROVE THE C ONNECTIVITY BETWEEN FEROZEPUR ROAD TO PAKHOWAL ROAD LEADING TO SMOOTH FLOW OF TRAFFIC AND THEREFORE, WOULD DEFINITELY SER VE THE PURPOSE OF THE ASSESSEE IN PROVIDING BETTER CIVIC AMENITIES IN THE AREA OF OPERATION. THE MAIN OBJECT OF THE ASSESSEE AUTHORI TY IS TO PROMOTE AND SECURE BETTER PLANNING AND DEVELOPMENT OF ANY AREA OF THE STATE. THE SCOPE OF THE ASSESSEE IS NOT LIM ITED TO THE CONSTRUCTION OF HOUSING PROJECT ONLY BUT TO WORK FO R THE DEVELOPMENT AND BETTERMENT OF THE STATE. 12. BEFORE AUTHORITIES BELOW, IT WAS CONTENDED THAT AS PER SECTION 28(1) OF PUNJAB REGIONAL AND TOWN PLANNING DEVELOPMENT AT 1995 REPRODUCED ABOVE WOULD PROVIDE THAT ASSESSEE CAN DO ANYTHING WITH THE PRIOR APPROVAL OR ON THE DIRECTION OF THE STATE GOVERNMENT FOR CARRYING OUT THE PURPOSES OF THIS ACT. IN THE SAME ACT, IT IS ALSO PROVIDED THAT THE FUNDS OF THE AUTHORITY SHALL BE APPLIED FOR SUCH OTHER PURPO SES AS THE STATE GOVERNMENT MAY DIRECT OR PERMIT. THOUGH WE A GREE SECTION 28 MAY NOT DETERMINE THE ALLOWABILITY OF EX PENDITURE UNDER SECTION 37 OF IT ACT, HOWEVER, THE AMOUNT IN QUESTION IS ENTIRELY PAID TO THE NORTHERN RAILWAY FOR CONSTRUCT ION OF UNDER 14 BRIDGE AS PER THE MINUTES DULY APPROVED BY THE AUTH ORITY. THE ASSESSEE HAS FURNISHED COMPLETE DETAILS ON THE SAME AT PAGES 21 TO 35 OF THE PAPER BOOK AND THE RELEVANT COPY OF THE M INUTES IS FILED AT PAGE 33 OF THE PAPER BOOK AND FURTHER CORRESPOND ENCE IS FILED AT PAGE 81 TO 83 OF IIND PAPER BOOK. THE PROJECT WAS APPROVED BY ASSESSEE AUTHORITY AND EXECUTION WITH ITS FUNDS. S INCE THE ASSESSEE HAS CONSTRUCTED THE RAILWAY UNDER BRIDGE T O OVERCOME THE TRAFFIC PROBLEM IN LUDHIANA AND FOR CREATING ACCESS OF THE PROJECTS UNDERTAKEN BY THE ASSESSEE, THEREFORE, THE PURPOSE OF RAISING CONSTRUCTION OF RAILWAY UNDER BRIDGE WAS COMMERCIAL IN NATURE FOR THE PURPOSE OF ACHIEVING THE OBJECTS OF THE ASSESSE E AUTHORITY. THIS EXPENDITURE HAS ALSO MADE THE MARKETABILITY OF THE PROPERTIES OF THE ASSESSEE AUTHORITY AROUND THE LOCATION WHERE UN DER BRIDGE WAS CONSTRUCTED. THE DECISIONS RELIED BEFORE LD. CIT(A PPEALS) SUPPORT THE FINDINGS OF LD. CIT(APPEALS). 13. THE LD. CIT(APPEALS), THEREFORE, CORRECTLY DECI DED THE ISSUE IN FAVOUR OF THE ASSESSEE HOLDING THAT THE AMOUNT IS S PENT FOR THE PURPOSE OF BUSINESS ACTIVITIES OF THE ASSESSEE. TH ERE IS, THEREFORE, CLEAR NEXUS BETWEEN THE AMOUNTS SPENT AND THE BUSIN ESS ACTIVITY OF THE ASSESSEE. WE, THEREFORE, DO NOT FIND ANY JUSTI FICATION TO INTERFERE WITH THE ORDER OF THE LD. CIT(APPEALS) IN DELETING THE ADDITION. THIS GROUND OF DEPARTMENTAL APPEAL IS DI SMISSED. 13(I) IN THE SAME GROUND, REVENUE CHALLENGED THE DELETION OF ADDITION OF RS. 1.57 CR ON ACCOUNT OF PAYMENT MADE BY ASSESSEE TO PUNJAB MANDI BOARD, LUDHIANA FOR CONSTRUCTION OF BRIDGE ON THE SIDHWAN CANAL AT DUGARI ROAD, LUDHIANA. THE LD . CIT(APPEALS) NOTED THAT THE ASSESSING OFFICER DISAL LOWED THESE EXPENDITURES ON THE SAME REASON AS PAYMENTS HAVE BE EN MADE 15 TO NORTHERN RAILWAY. THEREFORE, LD. CIT(APPEALS) F OLLOWING HIS ORDER ON THE ABOVE ISSUE, DELETED THIS ADDITION AS WELL. 14. BOTH THE PARTIES STATED THAT ISSUE IS SAME AS HAVE BEEN CONSIDERED WITH REGARD TO PAYMENT MADE TO NORTHERN RAILWAY FOR CONSTRUCTION OF RAILWAY UNDER BRIDGE. THE LD. COUN SEL FOR THE ASSESSEE ALSO FILED COPY OF THE MAP SHOWING THE LOC ATION WHERE THE BRIDGE IN QUESTION HAS BEEN CONSTRUCTED. IT WO ULD LINK THE COLONIES CONSTRUCTED BY THE ASSESSEE AUTHORITY. TH EREFORE, THE ISSUE BEING SAME, WE FOLLOWING THE ORDER WITH REGAR D TO PAYMENT MADE TO NORTHERN RAILWAY, DISMISS THIS GROUND OF TH E REVENUE AS WELL. IN THE RESULT, GROUND NO. 1 OF THE APPEAL OF REVENUE IS DISMISSED. 15. ON GROUND NO. 2, THE REVENUE CHALLENGED THE O RDER OF THE LD. CIT(APPEALS) IN DELETING THE ABOVE ADDITIONS AS MERE PAYMENT TO NORTHERN RAILWAY AND PUNJAB MANDI BOARD DO NOT E NTITLE THE ASSESSEE TO CLAIM DEDUCTION UNDER SECTION 37 OF THE ACT. THIS GROUND IS ACADEMIC AND ARGUMENTATIVE IN NATURE AND HAS ALREADY BEEN DECIDED WHILE DECIDING GROUND NO. 1 AB OVE. THE ASSESSEE HAS CORRECTLY CLAIMED DEDUCTION UNDER SECT ION 37 OF THE ACT. THEREFORE, FOLLOWING THE REASONS FOR DECISION ON GROUND NO. 1, WE DISMISS THIS GROUND OF APPEAL OF THE REVENUE . 16. IN THE RESULT, DEPARTMENTAL APPEAL STANDS DIS MISSED. ITA 252/CHD/2013 (ASSESSEE'S APPEAL ) (A.Y. 2009-10) 17. THIS APPEAL IS FILED BY THE ASSESSEE AGAIN ST THE SAME ORDER OF LD. CIT(APPEALS)-I LUDHIANA DATED 02.01.20 13 FOR ASSESSMENT YEAR 2009-10. 16 18. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTE D THAT EFFECTIVE GROUNDS RAISED IN THE APPEAL OF THE ASSES SEE ARE GROUND NOS. 1 AND 2 AND GROUND NOS. 3 TO 6 ARE GENERAL AND ARGUMENTATIVE IN NATURE. GROUND NOS. 3 TO 6 ARE AC CORDINGLY, DISMISSED AS CALL FOR NO FINDING. 19. ON GROUND NO.1, ASSESSEE CHALLENGED THE A DDITION OF RS. 1,86,77,600/- MADE BY ASSESSING OFFICER ON ACCO UNT OF AMOUNT PAID TO PUNJAB STATE DEVELOPMENT AND WELFARE FUND. ON GROUND NO. 2, ASSESSEE CHALLENGED THE ADDITION O F RS. 71,45,25,006/- AS RECEIPT OF EXTERNAL DEVELOPMENT C HARGES. THE LD. CIT(APPEALS) CONSIDERED THE GROUND NO. 2 IN DET AIL, THEREFORE, IT WOULD BE BETTER TO TAKE UP THIS ISSUE BEFORE DEC IDING GROUND NO. 1 ABOVE. 20. ON GROUND NO. 2, THE ASSESSING OFFICER MAD E ADDITION OF RS. 71,45,25,006/- ON ACCOUNT OF TREATMENT OF EX TERNAL DEVELOPMENT CHARGES AS REVENUE RECEIPTS. THE FACTS IN THIS REGARD ARE THAT THE ASSESSEE HAD RECEIVED AND SHOWN RS.91.36 CRORES UNDER THE HEAD EXTERNAL DEVELOPMENT CHARGES (EDC) AS ON 31.03.2009 AS LIABILITY IN HIS BOOKS OF ACCOUNTS AND OUT OF SAME, AN AMOUNT OF RS.71,45,25,006/- HAD BEEN RECEI VED DURING THE YEAR UNDER CONSIDERATION. THE AMOUNT OF INTERE ST OF RS.5.53 CRORES EARNED ON THE SAME HAD BEEN SHOWN AS INTERES T INCOME IN THE PROFIT AND LOSS ACCOUNT. THE EXTERNAL DEVELOPME NT CHARGES ARE COLLECTED FROM THE PROMOTERS/DEVELOPERS OF COLO NIES AS PER THE STIPULATED RATES AND ARE MEANT TO BE SPENT ON T HE EXTERNAL DEVELOPMENT OF THE SAID COLONIES. THE ASSESSEE CLAI MED BEFORE THE ASSESSING OFFICER THAT AMOUNT RECEIVED AS EXTER NAL 17 DEVELOPMENT CHARGES DID NOT BELONG TO GLADA BUT TO THE STATE GOVERNMENT AND HENCE HAD BEEN TREATED AS LIABILITY. THE ASSESSING OFFICER ANALYZED THE PROVISIONS OF SECTIO N 2(P) AND 5(5) OF PUNJAB APARTMENT AND PROPERTY REGULATION AC T 1995 TO HOLD THAT IT, IS NOWHERE ENVISAGED THAT AMOUNT RECE IVED AS EXTERNAL DEVELOPMENT CHARGES WAS COLLECTED ON BEHAL F OF THE GOVERNMENT AND WAS TO BE TREATED AS A LIABILITY. TH E SAID AMOUNT RECEIVED AS EXTERNAL DEVELOPMENT CHARGES SHO ULD HAVE BEEN TREATED AS INCOME ON THE SAME LINES AS INTERES T ACCRUING ON THE AMOUNT STANDING UNDER THIS HEAD. THE ASSESSE E CHALLENGED THE ADDITION BEFORE LD. CIT(APPEALS) AND HIS ARGUMENTS ARE REPRODUCED AS UNDER : I) THE AUTHORITY GETS THE DEPOSIT OF EXTERNAL DE VELOPMENT CHARGES FROM THE PROMOTERS OF PRIVATE COLONIES. THESE CHARG ES ARE DEPOSITED BY THE PROMOTER FOR DEVELOPMENT WORKS TO HE CARRIED OUT AT THE PERIPHERY OF COLONIES BY THE GOVT OR LOC AL AUTHORITIES THESE ARE THE CHARGES FOR PROVIDING INFRASTRUCTUR E I.E. ROADS, WATER SUPPLY AND SEWERAGE SYSTEM ETC. II) THESE ARE COLLECTED UNDER THE PUNJAB APARTMENT AND PROPERTY REGULATION ACT, 1995. SOME OF T HE RELEVANT PROVISIONS OF THE PUNJAB APARTMENT AND PROPERTY REGULATION ACT, 1995 ARE REPRODUCED AS UNDER : SECTION 2(1) DEFINES COMPETENT AUTHORITY: COMPETENT AUTHORITY MEANS ANY PERSON OR AUTHORITY APPOINTED B Y THE STATE GOVERNMENT, BY NOTIFICATION, IN THE OFFIC IAL GAZETTE, TO EXERCISE AND PERFORM ALL OR ANY POWER S AND FUNCTIONS OF THE COMPETENT AUTHORITY UNDER THIS ACT AND THE RULES MADE THERE UNDER;' SECTION 2(P) DEFINES EXTERNAL DEVELOPMENT WORK. 'EXTERNAL DEVELOPMENT WORKS' INCLUDES ROADS AND ROAD- SYSTEMS, WATER SUPPLY, SEWERAGE AND DRAINAGE SYSTEMS, ELECTRIC SUPPLY OR ANY OTHER WORK WHICH MAY HAVE TO HE EXECUTED, IN THE PERIPHERY OF, OR OUTSID E, A COLONY FOR ITS BENEFIT.' SECTION 2(V) DEFINES LOCAL AUTHORITY: 18 LOCAL AUTHORITY MEANS A CORPORATION CONSTITUTED UN DER SECTION 4 OF THE PUNJAB MUNICIPAL CORPORATION ACT 1 976 (PUNJAB ACT NO 42 OF 1976) OR A COMMITTEE CONSTITUT ED UNDER SECTION 12 OF THE PUNJAB MUNICIPAL ACT, 1911 ( PUNJAB ACT NO 3 OF 1911) OR ANY OTHER AUTHORITY NOTIFIED BY THE STATE GOVERNMENT FOR THE PURPOSED O F THIS ACT' SECTION 5(5), THE PROMOTER IS BOUND TO PAY THESE CHARGES; 'THE PROMOTER SHALL ENTER INTO AGREEMENT UNDERTAKING TO PAY PROPORTIONATE DEVELOPMENT CHARGES FOR EXTERNAL DEVELOPMENT WORKS TO BE CARRIED OUT BY THE GOVERNMENT OR A LOCAL AUTHORI TY, SECTION 5(6), THE USE OF EXTERNAL DEVELOPMENT CHAR GES : 'THE COMPETENT AUTHORITY SHALL DETERMINE THE PROPOR TION IN WHICH, AND THE TIME WITHIN WHICH, THE ESTIMATED DEVELOPMENT CHARGES REFERRED TO IN SUB SECTION (5) SHALL BE PAID TO THE STATE GOVERNMENT, OR THE LOCAL AUTHO RITY, AS THE CASE MAY BE. III) COMPETENT AUTHORITY MEANS GLADA AND LOCAL AUTH ORITY MEANS OTHER LOCAL BODIES SUCH AS MC, PWD ETC. IV) AS PER SECTION 5(5) OF PAPRA ACT 1995, THE PR OMOTER IS REQUIRED TO DEPOSIT EXTERNAL DEVELOPMENT CHARGES WI TH GLADA FOR EXTERNAL DEVELOPMENT TO BE CARRIED OUT BY THE GOVERNMENT IT SELF OR OTHER LOCAL AUTHORITY. V) AS PER SECTION 5(6) OF PAPRA ACT 1995, THE GLADA (COMPETENT AUTHORITY) SHALL PAY THE EXTERNAL DEVELO PMENT CHARGES TO THE GOVERNMENT OR LOCAL-AUTHORITY. VI) THESE CHARGES ARE DEPOSITED BY THE PROMOTERS FO R DEVELOPMENT WORKS TO BE CARRIED OUT IN OR OUTSIDE T HEIR COLONIES BY GOVT., OR LOCAL AUTHORITIES. THE AMOUNT RECEIVED IS KEPT IN A SEPARATE BANK ACCOUNT & IS TRANSFERRED TO THE STATE GOVT. OR LOCAL AUTHORITIES AS & WHEN REQUIRED VII) GLADA ITSELF DOES NOT CARRY OUT ANY DEVELOPMEN T WORK. THE GLADA IS ONLY ACTING AS A NODAL AGENCY, IT HAS NO CONTROL OVER THE FUND. WHEN THE AMOUNT HAS TO BE IN CURRED, THE SAME IS GIVEN TO THE OTHER AUTHORITIES FOR CARR YING OUT WORK. THEREFORE, THESE CHARGES ARE NOT THE INCOME O F THE AUTHORITY BUT IT IS A FUND/LIABILITY COLLECTED ON B EHALF OF OTHER AGENCIES. 19 VIII) THE DELHI HIGH COURT IN THE CASE OF CIT VS DT TDC LTD 19 TAXMANN.COM 269 HAS HELD THAT SINCE AMOUNT UNDER OGES WAS KEPT IN A DEPOSIT UNRELATED TO BUSINESS OF ASSESSEE AND ASSESSEE DID NOT EXERCISE DOMINION OVE R SAID FUND/DEPOSIT AND DEAL WITH SAID FUND/DEPOSIT, IT WA S TO BE HELD THAT SAME WAS NOT TAXABLE INCOME OF ASSESSEE. THE HIGH COURT HELD AS UNDER: EVERY RECEIPT OR AMOUNT RECEIVED/ACCOUNTED, IS NOT INCOME, AMOUNT RECEIVED IS INCOME IN THE HANDS OF T HE ASSESSEE IF HE HAS TITLE/RIGHT THE SAID AMOUNT IN F ORM OF DOMINION AND RIGHT TO USE THE SAID AMOUNT WHEN EXAMINING, THE CONCEPT OF 'INCOME' ONE HAS TO KEEP IN MIND, COMMERCIAL REALITY/ SPECIALTY OF THE SITUATIO N RATHER THAN PURE THEORETICAL OR DOCTRINE ASPECTS. T HE BUSINESS ASPECT OF THE MATTER HAS TO BE VIEWED AS A WHOLE BUT WITHOUT DISREGARDING THE STATUTORY LANGUAGE. DEPENDING UPON THE NATURE AND CHARACTER OF THE DEPOSITS/PAYMENTS, TREATMENTS SHOULD BE GIVEN TO HOLD WHETHER OR NOT THE AMOUNT RECEIVED WAS INCOME/PROFIT. A DISTINCTION HAS TO BE MADE BETWEEN DEDUCTIONS FOR ASCERTAINING PROFIT MADE AND DISTRIBUTION MADE OUT OF PROFITS; AND RECEIPTS WHICH DO NOT FORM PART OF THE PROFIT. THE LATTER DO NOT FORM PART OF THE PROFIT A ND LOSS ACCOUNT. [PARA 27] THE NATURE AND CHARACTER OF THE RECEIPT HAS TO BE LOOKED FROM PRACTICAL AND A COMMERCIAL POINT OF VIE W. [PARA 28] IT IS THE TRUE NATURE OF THE RECEIPT AND PURPOSE TH EREOF IS THE DETERMINATIVE FACTOR AND THE RELEVANT PRINCI PLE TO APPLY TO DECIDE WHETHER OR NOT AN AMOUNT SHOULD BE. INCLUDED OR EXCLUDED FROM THE PROFIT/INCOME. THIS R EQUIRES EXAMINATION OF THE QUESTION FROM VARIOUS ANGLES AS NOTICED ABOVE,, DO THE RECEIPTS BEAR A CHARACTER OF INCOME AT THE TIME WHEN IT REACHES THE HANDS OF THE ASSESSES? DOES THE -MONEY VEST WITH THE ASSESSEE ONCE AND FOR ALL ? WHETHER T HE ASSESSEE EXERCISES COMPLETE DOMINION OVER THE FUND OR IS IT TO BE REGARDED AS THE MONEY OF THE DEPOSITORS OR A THI RD PERSON. WHEN AN ASSESSEE DOES NOT HAVE DOMINION OVER THE FU ND IT: IS DIFFICULT TO CATEGORIZE THE SAME AS INCOME, [PARA 3 4] MERE FACT THAT THE AMOUNT WAS RETAINED IN THE BANK ACCOUNT OF THE ASSESSEE UNDER THE HEAD 'OGES', DOES NOT SHO W OR PROVE THAT IT WAS THE INCOME OF THE ASSESSEE. MERE REALIZ ATION OF AN AMOUNT IN COURSE OF TRADING WAS NOT DETERMINATIVE W HETHER 20 THE AMOUNT RECEIVED WAS INCOME. THE 'COURT/AUTHORIT IES MUST DETERMINE THE NATURE AND CHARACTER OF THE RECE IPTS BEFORE THE AMOUNT CAN BE TAXED AS INCOME. THIS PART OF THE SALE CONSIDERATION, .I.E., OGES WAS KEPT IN A DEPOSIT UN RELATED TO THE BUSINESS OF THE ASSESSEE AND ASSESSEE DID NOT EXERC ISE DOMINION OVER THE SAID FUND/DEPOSIT AND DEAL WITH T HE SAID FUND/DEPOSIT. KEEPING IN .VIEW THE AFORESAID ELUCID ATION OF LAW AND APPLYING THE SAME TO THE FACTUAL MATRIX, NOTING THE NATURE AND CHARACTER OF THE OGES IT WAS TO BE HELD THAT THE SAME WAS NOT TAXABLE INCOME OF THE ASSESSEE. THE SA ME HAS TO BE EXCLUDED FROM THE PROFIT. THE AFORESAID RECEIPTS WE RE NOT INCOME EARNED AND DO NOT HAVE CHARACTER OF INCOME EARNED B Y THE ASSESSEE OVER WHICH IT HAD OR RIGHT, [PARA 36] IX ) THE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. KARNATAKA URBAN INFRASTRUCTURE DEVELOPMENT & FINANC E CORPN. 284 ITR 582 HAS HELD THAT THESE FUNDS ARE NO T THE INCOME OF THE ASSESSEE. X) ALSO THE HON'BLE SUPREME COURT IN THE CASE OF MOTILAL C.LAL JAIN VS. CIT 94 CTR 195 HAS HELD THAT WHEN NO INCOME ACCRUES TO THE ASSESSES, HE CAN NOT BE TAXED . XI) THE DELHI 1TAT IN THE CASE OF SAHARANPUR DEVELO PMENT AUTHORITY VS. AGIT 48 SOT 186 HAS HELD THAT INFRAST RUCTURE DEVELOPMENT FUND IS NOT THE INCOME OF THE ASSESSEE AS THE ASSESSEE HAS NO CONTROL OVER THIS FUND. XII) THE ITAT AHMEDABAD BENCH IN THE CASE OF NATION AL DIARY DEVELOPMENT BOARD VS. ACIT 114 TTJ 145 HAS HE LD THAT THE FUNDS RECEIVED FOR IMPLEMENTATION OF CERTA IN PROJECTS ARE NOT THE INCOME OF ASSESSEE. XIII) IN VIEW OF ABOVE DISCUSSION, IT CAN BE CONCLUDED THAT THE ADDITION OF RS. 71.45 CRORES ON ACCOUNT OF EXT ERNAL DEVELOPMENT CHARGES IS AGAINST LEGAL AND FACTUAL PO SITION AND THE SAME MERITS TO BE DELETED.' IT WAS FURTHER SUBMITTED BY THE AR WHICH I S AS UNDER; I) AS SUBMITTED EARLIER, WE AGAIN SUBMIT THAT THE EXTERNAL DEVELOPMENT CHARGES RECEIVED BY GLADA ARE NOT THE INCOME OF GLADA. WE ARE ACTING AS AGENT/CUSTODIAN OF THE STATE GOVT. II) RELIANCE IS PLACED UPON THE JUDGMENT OF I 7AT MUMBAI BENCH IN THE CASE OF CITY & INDUSTRIAL DEVELOPMENT CORPORATION OF MAHARASHTRA INNITED 138 ITD 381 WHEREIN THE TRIBUNAL HAS DELETED THE ADDITION O F 21 MONEY RECEIVED BY THE COMPANY FOR THE DEVELOPMENT O F INFRASTRUCTURE & TOWNS. THE ASSESSEE WAS CONSIDERE D AS THE ASSESSEE WAS CONSIDERED AS THE AGENT OF STATE G OVT. THE TRIBUNAL HAS HELD AS UNDER:- THE ARGUMENTS OF THE ASSESSEE THAT IT MUST BE TREAT ED AS OR SURROGATE OR AN AGENT, IS TO BE ADJUDICATED AT F IRST. TO CONSIDER THE TAXATION POINT OF VIEW, ONE HAS TO REF ER TO ARTICLE 289 OF THE CONSTITUTION. [PARA 38] THE ENTIRE CASE OF THE ASSESSEE HINGES ON CLAUSE (2 ) OR CLAUSE (3) OF ARTICLE 289 OF THE CONSTITUTION OF IN DIA, THE BASIC PURPORT OF ARTICLE 289(2) IS TO NEUTRALIZE CL AUSE'(1), BUT WITH A RIDER THAT, IF THERE IS ANY 'TRADE OR BU SINESS 1 , DONE, ON BEHALF OF THE GOVERNMENT OR ANY OPERATIONS INTERLINKED THEREWITH OR ANY PROPERTY ISSUED OR OCC UPIED FOR THE PURPOSES OF SUCH TRADE OR BUSINESS, OR ANY INCOME ACCRUING OR ARISING IN CONNECTION THEREWITH. TO MAK E THIS CLAUSE EFFECTIVE, EVEN FOR GOVERNMENT / STATE, COND UCT-OF 'TRADE OR BUSINESS' IS NECESSARY, AND THIS SIMPLY M EANS INVOLVEMENT OF COMMERCIAL AND PROFIT MOTIVE FOR THE VENDOR. THEREFORE, WHENEVER, THERE IS AN ACTIVITY IN THE NA TURE OF TRADE OR BUSINESS, CLAUSE (2) SHALL COME TO LIFE, W HICH ACCORDING TO CLAUSE, SHALL BE APPLICABLE TOWARDS TH E STATE I.E. , IF AN ACTIVITY WHICH IS IN THE NATURE OF TRADE OR BUSINESS, RUN BY THE STATE ITSELF, THE LIABILITY FO R TAX WILL ARISE, A TYPICAL EXAMPLE IS THAT OF SERVICE TAX COL LECTED BY THE STATE ON EVENTS BEING CONDUCTED BY THE VENDORS, HAVE TO BE DEPOSITED BY THE STATE, IN THE GOVERNMENT EXCHEQUER, MAKING THE STATE AN ASSESSEE UNDER SERVI CE TAX. THIS IS ONLY POSSIBLE WHERE THERE IS AN ACTIVI TY OF 'TRADE OR BUSINESS', BUT, IF, CONFINED TOWARDS DEVELOPMENT, EITHER OF A NEW TOWNSHIP OR BETTERMENT OF THE FUNCTIONS OF THE LOCAL AUTHORITY, ARTICLE 289(2 ) SHALL REMAIN IN THE OBLIVION AND SHALL NOT COME INTO PLAY . THE ONLY CLAUSE LEFT FOR CONSIDERATION THEN WOULD B E CLAUSE (3), WHICH COMES INTO PLAY ONCE CLAUSE (2) I S DISBANDED. AS SOON AS CLAUSE (2) BECOMES DISBANDED, CLAUSE (3) COME TO LIFE, WHICH OPERATES ONLY IF, 'PARLIAMENT MAY BY LAW DECLARE TO BE INCIDENTAL TO THE ORDINARY FUNCTIONS OF GOVERNMENT'. HERE, IN THE INS TANT CASE, ONE HAS TO READ PARLIAMENT' AS 'STATE GOVERN MENT' BECAUSE IN THE INSTANT CASE, IT IS THE STATE GOVERNMENT WHICH HAS AUTHORIZED THE ASSESSEE TO PERFORM THE DEVELOPMENT PROJECTS AT VARIOUS PLACES, [PARA 39] 22 ONE CANNOT AGREE WITH THE ARGUMENT OF THE REVENUE T HAT THERE IS NO DOCUMENT WHICH HAS DRAWN OUT' THE AGENT - PRINCIPAL RELATIONSHIP, BECAUSE THE VERY FIRST RESO LUTION OF STATE GOVERNMENT DATED 18-3-1970 MENTION IN PARA NO . 2 THAT THE ASSESSEE WOULD ACT AS AN 'AGENT' OF GOVERN MENT FOR THE DEVELOPMENT OF THE AREAS WITH A VIEW TO SEC URE THE OBJECTIVE MENTIONED IN THE RESOLUTION OF THE ST ATE GOVERNMENT AND IN PARA NO. 3 OF THIS RESOLUTION CLE ARLY SAY, 'THE SUBSIDIARY COMPANY WILL WORK UNDER THE CO NTROL AND SUPERVISION OF THE STATE GOVERNMENT IN THE GENE RAL ADMINISTRATIVE DEPARTMENT', THUS, THE FIRST RESOLUT ION ITSELF MAKES IT CLEAR THAT THE ASSESSEE IS AN AGENT , BUT FUNCTIONS AS AN ARM OF THE STATE GOVERNMENT, BECAUS E, IF THE ] ASSESSEE CAN ONLY WORK UNDER THE CONTROL AND SUPERVISION OF THE STATE GOVERNMENT, MEANING THEREB Y THAT THE ASSESSEE CANNOT MAKE/TAKE ANY DECISIONS OF ITS OWN, THEN, IN SUCH A CASE AUTHORITY FOR PERFORMANCE OF ALL ACTIVITIES LIE SOMEWHERE ELSE. IN ANY CASE, AS PER THIS RESOLUTION, IT CLEARLY MAKES THE ASSESSEE AN 'AGENT' OF THE STATE. [PARA 40] WHEN ONE LOOKS INTO THE FINANCIAL FUNCTIONS OF THE ASSESSEE, IT APPEARS THAT ALL DEALINGS HAVE TO BE R OUTED THROUGH AUTHORIZATIONS BY THE GOVERNMENT AND ALL FU NDS RECEIVABLE WOULD BE IN COMPLIANCE AND WITH INTIMATI ONS TO OFFICIALS OF VARIOUS GOVERNMENT DEPARTMENTS, [PA RA 41] ACCORDING TO MRTP ACT, 1966, THE MACHINERY SECTIONS , I.E., SECTIONS 113 AND 113A TALK OF APPOINTMENT OF DEVELOPMENT AUTHORITY AND LOCAL AUTHORITY AND ACCORDINGLY, THROUGH VARIOUS RESOLUTIONS, IN COMPLI ANCE OF THESE SECTIONS, MRTP ACT HAS APPOINTED THE ASSES SEE AS THE DEVELOPMENT AUTHORITY FOR DEVELOPMENT TO NEW TOWNSHIPS AND LOCAL AUTHORITIES FOR STREAMLINING TH E FUNCTIONS OF ALREADY EXISTING TOWNS LIKE AURANGABAD , NASHIK, NAGPUR ETC. THIS, ON ITS OWN, SHOWS THAT TH E ASSESSEE IS ACTING TOTALLY ON BEHALF OF THE GOVERNM ENT. ANOTHER DISTINGUISHING FEATURE IS THAT AS SOON AS T HE 'PROJECT' IS COMPLETE, IT GETS HANDED BACK TO THE S TATE, I.E. WHEN THERE IS A DEVELOPMENT PROJECT, AS PER PHASES, AND IN THE CASE OF LOCAL AUTHORITY, AS AND WHEN THE AUTHORIZING COMMITTEE IS SATISFIED, THE REINS ARE TRANSFERRED TO THE MUNICIPAL BOARDS, FROM WHOM, THE PROJECT WAS TAKEN OVER. [PARA 42] IN TUNE WITH THESE OBSERVATIONS, READ WITH SECTIONS 113 & 113A OF MRTP ACT ALONG WITH ARTICLES 289(1) & 289(3 ) AND HOLDING THAT THE ASSESSEE CORPORATION IS NOT DOING ANY 23 TRADE ACTIVITY ON ITS OWN, IT IS TO BE HELD THAT TH E ASSESSEE IS AN AGENT OF THE' STATE GOVERNMENT. FURT HER, THE FACT THAT THE DEPARTMENT HAS BEEN ASSESSING THE ASSESSEE AS A STATE GOVERNMENT UNDERTAKING F OR THE LAST' THREE YEARS, CANNOT ALSO BE IGNORED AND, THEREFORE , EVEN THIS CANNOT BE CALLED AS AN AFTERTHOUGHT AND APPLYI NG THE 'RULE OF CONSISTENCY', IF IS HELD THAT THE DEPARTME NT CANNOT BE ALLOWED TO TAKE A DISTINCTIVE APPROACH IN THE CU RRENT YEAR. [PARA 43] THE REVENUE AUTHORITIES WERE THUS, CLEARLY IN ERROR IN ASSESSING THE BUSINESS INCOME IN THE HANDS OF THE ASSESSEE. THIS INCOME IS DELETED, AS NOT BELONGING TO THE ASSESSEE. 21. THE LD. CIT(APPEALS), HOWEVER, CONFIRMED T HE ADDITION AND DISMISSED THIS GROUND OF APPEAL OF THE ASSESSEE . HIS FINDINGS IN PARA 9 OF THE APPELLATE ORDER ARE REPRO DUCED AS UNDER: 9. I HAVE CONSIDERED THE BASIS OF DISALLOWANCE MA DE BY THE ASSESSING OFFICER AND ARGUMENTS OF THE AR DURIN G THE ASSESSMENT AS WELL AS APPELLATE PROCEEDINGS. THE APPELLANT HAS MAINLY RELIED UPON HIS ARGUMENT THAT THE EXTERNAL DEVELOPMENT CHARGES NEVER BELONGED TO GLAD A BUT TO THE STATE GOVERNMENT, HOWEVER THIS CLAIM IS NOT SUPPORTED BY ANY PROVISION IN THE RELEVANT STATUTE I.E. PUNJAB APARTMENT AND PROPERTY REGULATION ACT 1995. FURTHER THE LETTER OF THE SECRETARY HOUSING URBAN A ND DEVELOPMENT OF PUNJAB GOVERNMENT REFERRED TO BY THE APPELLANT DOES NOT HELP AS IT ONLY SAYS THAT FUNDS COLLECTED UNDER EXTERNAL DEVELOPMENT CHARGES (EDC) HAVE TO BE USED FOR SPECIFIC PURPOSE AS MEANT. IT ONLY M EANS THAT THE AMOUNT COLLECTED AS EXTERNAL DEVELOPMENT CHARGES SHOULD BE SPENT ON EXTERNAL DEVELOPMENT OF THE COLONIES AND FOR NOT ANY OTHER PURPOSE. IT IS ALSO A MATTER OF FACT THAT SUCH EXTERNAL DEVELOPMENT CHARGES ARE BEING COLLECTED AS A MATTER OF GUARANTEE TO ENSURE THAT T HE EXTERNAL DEVELOPMENT MEANT TO BE DONE IS NOT COMPROMISED ON ACCOUNT OF WANT OF FUNDS AT A LATER STAGE. THE FACT THAT THE CHARGES COLLECTED AS EXTERNAL DEVELOPMENT CHARGES HAVE NOT BEEN SPENT BY GLADA FO R A LONG TIME ONLY MEANS THAT THE EXTERNAL DEVELOPMENT IN THE 24 FORM OF ROADS AND LIGHTING ETC HAS ALREADY BEEN IN PLACE BY OTHER AGENCIES OF STATE/CENTRAL GOVERNMENTS AS P ART OF THEIR WORK. IN CASE NO AMOUNT IS SPENT OUT OF EXTER NAL DEVELOPMENT CHARGES FOR THE INTENDED PURPOSE, THE SURPLUS THEREOF CAN ONLY BE TREATED AS THE INCOME O F THE ASSESSEE AS THE SAID AMOUNT IS NOT BEING COLLECTED AS AN AGENT BUT AS DUE TO IT BY SPECIFIC PROVISIONS IN TH E ACT GOVERNING IT. IT IS ALSO IMPORTANT TO APPRECIATE TH AT THE INTEREST AMOUNT OF RS.5.5 CRORES ON THE ACCOUNT OF EXTERNAL DEVELOPMENT CHARGES COLLECTED TILL 31.03.2009 HAS B EEN SHOWN BY THE APPELLANT AS ITS INCOME, IN CASE THE P RINCIPLE AMOUNT WAS NOT BELONGING TO THE ASSESSEE, THE INTER EST OBVIOUSLY WOULD ALSO NOT BELONG AND THE VICE VERSA SHOULD ALSO HOLD. THE APPELLANT HAS PLACED RELIANCE ON THE DECISION OF CIT VS. BIHAR RAJYA PUL NIRMAN NIGAM 19 1 ITR 173/59 TAXMAN 38 WHEREIN THE FACTS ARE CLEARLY DIFF ERENT AS THE SAID COMPANY WAS COLLECTING THE TOLL UNDER T HE TOLLS ACT WHEREIN AMOUNTS SO COLLECTED WERE SPECIFICALLY PART OF THE CONSOLIDATED FUNDS OF THE STATE AND HENCE STATE REVENUES. THE FACTS OF THE CASE UNDER CONSIDERATION CLEARLY SHOWS THAT THE EXTERNAL DEVELOPMENT CHARGES COLLECT ED IS NOT PART OF THE STATE REVENUES BUT PART OF THE REVE NUE RECEIPTS OF THE CORPORATION FOR THE PURPOSES OF MAK ING EXTERNAL DEVELOPMENT AND IF SUCH EXTERNAL DEVELOPMENT IS ALREADY DONE THEN THE SURPLUS THEREOF WOULD ONLY AM OUNT TO PROFITS, EVEN THE RELIANCE PLACED BY THE APPELLANT ON THE JUDGMENT OF HON'BLE APEX COURT IN THE CASE OF CIT VS SITALDAS AND TIRATHDAS 41 ITR 367 IS OF NO HELP AS THE IMPUGNED JUDGMENT ONLY LAYS DOWN THE RULES WITH REGARD TO THE ACCESSI BILITY OF A PARTICULAR RECEIPT AS INCOME. IN THE INSTANT CASE I F THE AMOUNT DID NOT BELONG TO THE ASSESSEE THE INTEREST INCOME O N THE SAME WOULD NOT EVEN BE ITS INCOME AS WELL. THE CLAIM OF THE APPELLANT THAT THERE WAS DIVERSION BY OVERRIDING TITLE IS NOT ADMISSIBLE AS THE EXTERNAL DEVELOPMENT CHARGES ARE BEING COLLE CTED FOR A SPECIFIED PURPOSE ARE AS PER THE FACTS OF THE CASE WHICH HAVE ALREADY BEEN TAKEN CARE OF, LEADING TO THE SAID SUR PLUS. IT IS A DIFFERENT MATTER THAT THE SAID SURPLUS HAD NOT BEEN USED PENDING CLEAR DIRECTIONS FROM THE STATE GOVERNMENT BUT THE INTEREST ON THE SAME HAS BEEN TREATED AS INCOME. IN THE CIRCUMSTANCES, IT BECOMES APPARENT THAT THE FUNDS REPRESENTING COLLECTED EXTERNAL DEVELOPMENT CHARGES BELONG TO THE ASSESSEE AND SHOULD HAVE BEEN TREATED AS ITS IN COME. AS SUCH, THE ADDITION MADE BY THE ASSESSING OFFICER IS CONFIRMED. 25 22. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE LD. CIT(APPEALS) AND RELIED UPON THE SA ME CASE LAWS WHICH WERE RELIED BEFORE LD. CIT(APPEALS) AND ALSO REFERRED TO THE JUDGEMENT OF THE DELHI HIGH COURT IN THE CASE OF D. T.T.D.C. LTD. (SUPRA) IN WHICH IT WAS HELD MERE FACT THAT THE AMOUNT WAS RETAINED IN THE BANK ACCOUNT OF THE ASSESSEE UNDER THE HEAD OGES DOES NOT SHOW OR PROVE THAT IT WAS INCOME OF THE ASSESSEE. IT WAS SUBMITTED THAT ASSESSEE DID NOT MAKE ANY CLAIM OF DEDUCTION AND THE ENTIRE AMOUNT WAS DEPOSI TED IN A PARTICULAR BANK ACCOUNT WHICH WAS RECEIVED FROM THE COLONIZERS AND WAS PAYABLE BY THE ASSESSEE TO THE STATE GOVERN MENT OR ANY OTHER AUTHORITY. THUS THE EXTERNAL DEVELOPMENT CHA RGES DID NOT BELONG TO THE ASSESSEE AND NO EXPENSES HAVE BEE N CLAIMED IN NEXT YEAR. HE HAD FILED COPY OF THE NOTIFICATION D ATED 23.06.2005 ISSUED BY GOVERNMENT OF PUNJAB TO REVISE THE POLICY OF EXTERNAL DEVELOPMENT CHARGES WITH REGARD TO PAYM ENT OF EXTERNAL DEVELOPMENT CHARGES BY THE PROMOTERS IN LI CENSED COLONIES AND SUBMITTED THAT AS PER DIRECTION OF THE STATE GOVERNMENT, EXTERNAL DEVELOPMENT CHARGES WERE PAID TO THE ASSESSEE WHICH WERE PAYABLE BY ASSESSEE TO THE STAT E GOVERNMENT. THE DETAILS OF THE EXTERNAL DEVELOPMEN T CHARGES RECEIVED FROM VARIOUS COLONIZERS ARE ALSO FILED. 23. ON THE OTHER HAND, LD. DR RELIED UPON ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT EXTERNAL DEVEL OPMENT CHARGES ARE COLLECTED BY THE ASSESSEE. THEREFORE, IT IS INCOME OF THE ASSESSEE. THE ASSESSEE, AS PER RULE WAS ENTITL ED TO COLLECT THE DEVELOPMENT CHARGES, THEREFORE, IT SHOULD BE SH OWN AS INCOME AND WHATEVER EXPENDITURE IS INCURRED, THE AS SESSEE COULD 26 CLAIM DEDUCTION OF THE SAME. SINCE THE ASSESSEE MA INTAINED CASH ACCOUNTING SYSTEM, THEREFORE, IT WAS CORRECTLY ADDED AS INCOME OF THE ASSESSEE. LD. DR RELIED UPON DECISIO NS OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS BAZPUR CO- OPERATIVE SUGAR FACTORY LTD. 172 ITR 321 (S.C) AND CHLWRINGHEE SALES BUREAU (P) LTD. VS CIT 87 ITR 542 (S.C). LD. DR ALSO SUBMITTED THAT AS PER PROVISIONS OF PUDA ACT, ALL A MOUNTS VEST IN ASSESSEE AUTHORITY AND IN ASSESSMENT YEAR 2010-1 1, LD. CIT(APPEALS) FOUND THAT NO EXPENSES HAVE BEEN INCU RRED BY THE ASSESSEE. THEREFORE, THE RECEIPTS IN THE HANDS OF THE ASSESSEE IS INCOME AND HAS TO BE TAXED ACCORDINGLY. 24. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE ASSESSEE EXPLAINED THAT THE ASSESSEE AUTHORITY RECEIVED THE EXTERNAL DEVELOPMENT CHARGES FROM THE PROMOTERS OF PRIVATE C OLONIES AND THE CHARGES WERE DEPOSITED BY THE PROMOTERS FOR DEV ELOPEMENT WORK TO BE CARRIED OUT AT THE PERIPHERY OF THE COLO NIES BY THE GOVERNMENT OR LOCAL AUTHORITY. THE AMOUNTS ARE COL LECTED AS PER SPECIFIED RATES AND WERE MEANT TO BE SPENT ON T HE EXTERNAL DEVELOPMENT OF THE COLONIES. THESE CHARGES ARE FOR PROVIDING INFRASTRUCTURE, THE FACILITIES LIKE ROADS, WATER SU PPLY AND CIVIL SYSTEM ETC. THE ASSESSEE EXPLAINED THAT THESE AMOU NTS ARE COLLECTED AS PER PUNJAB APARTMENT AND PROPERTY REGU LATION ACT, 1995 AND PROVISIONS OF THE SAME ARE ALSO REPRODUCED IN THE IMPUGNED ORDER. THE ASSESSEE, THEREFORE, SUBMITTED THAT EXTERNAL DEVELOPMENT CHARGES DOES NOT BELONG TO THE ASSESSEE AT ALL THE SAME IS COLLECTED AS PER THE DIRECTION O F THE STATE GOVERNMENT. 27 25. THE LD. COUNSEL FOR THE ASSESSEE FILED COPY OF THE NOTIFICATION OF GOVERNMENT OF PUNJAB DATED 23.06.20 05 TO SHOW THAT PUNJAB GOVERNMENT HAS REVISED POLICY OF EXTERN AL DEVELOPMENT CHARGES WITH REGARD TO THE PAYMENT OF E XTERNAL DEVELOPMENT CHARGES BY THE PROMOTERS IN LICENSED CO LONIES. THE ASSESSEE ALSO DEPOSITED THE AMOUNT IN QUESTION IN A SEPARATE BANK ACCOUNT WHICH IS NOT IN DISPUTE. IT IS, THEREF ORE, CLEAR THAT THE AMOUNT IN QUESTION IS RECEIVED BY ASSESSEE AS P ER DIRECTION OF THE GOVERNMENT OF PUNJAB. THIS AMOUNT WAS SHOWN AS PAYABLE IN THE ACCOUNTS OF THE ASSESSEE. THEREFORE , THE NATURE AND CHARACTER OF THE RECEIPT SHOULD HAVE BEE N EXAMINED BY THE AUTHORITIES BELOW AS PER THE RELEVANT PROVIS IONS OF THE LAW AND THE NOTIFICATION ISSUED BY THE GOVERNMENT OF PU NJAB IN THIS REGARD. IT APPEARS THAT AUTHORITIES BELOW HAVE FAI LED TO CONSIDER THE RELEVANT PROVISIONS OF THE LAW AND THE NOTIFICA TIONS ISSUED BY THE GOVERNMENT OF PUNJAB IN THIS REGARD WHICH WOULD CLEARLY THROUGH LIGHT ON THE NATURE AND CHARACTER OF THE RE CEIPT OF EXTERNAL DEVELOPMENT CHARGES RECEIVED BY THE ASSESS EE. BECAUSE THE ASSESSEE CLAIMED THAT THE AMOUNT IS REC EIVED AS PER DIRECTION OF THE STATE GOVERNMENT AND WAS TO BE SPE NT AS PER THE DIRECTION OF THE STATE GOVERNMENT OR SPECIFIED AUTH ORITY. THUS, HOW THE SAID AMOUNT COULD BE INCOME OF THE ASSESSEE , IS NOT ESTABLISHED BY THE AUTHORITIES BELOW. THE MAIN REA SON FOR THE ABOVE ADDITION AS MADE BY THE ASSESSING OFFICER IS THAT THE ASSESSEE HAS SHOWN THE AMOUNT OF INTEREST ON THE BA NK DEPOSIT AS INCOME FOR THE YEAR UNDER CONSIDERATION. SINCE THE PRINCIPLE AMOUNT ITSELF IS SHOWN AS LIABILITY AND THE AMOUNT IS TO BE SPENT AS PER THE DIRECTION OF THE STATE GOVERNMENT, MEREL Y SHOWING 28 INTEREST AS INCOME ON SUCH LIABILITY BY ITSELF IS N OT SUFFICIENT TO PUT THE ENTIRE LIABILITY UPON ASSESSEE TO TREAT THE LIABILITY AMOUNT AS INCOME. THE ASSESSEE HAS NO RIGHT/TITLE O R INTEREST IN EXTERNAL DEVELOPMENT CHARGES. THE ASSESSEE IS COMP ETENT/ NODAL AUTHORITY TO RECEIVE EXTERNAL DEVELOPMENT CHA RGES AS PER PROVISIONS OF LAW REFERRED ABOVE. THEREFORE, IT WA S LIABILITY OF ASSESSEE TO PAY BACK THE AMOUNT AS PER DIRECTION OF STATE GOVERNMENT OR LOCAL AUTHORITY. LD. CIT(APPEALS) AD MITTED THAT EXTERNAL DEVELOPMENT CHARGES KEPT PENDING AND NOT U SED PENDING CLEARANCE FROM STATE GOVT. WOULD PROVE IT W AS NOT MONEY OF THE ASSESSEE. FURTHER, THE FACTS DISCLOSE THAT ASSESSEE MAY BE A CUSTODIAN OF THE AMOUNT OF EXTERNAL DEVELO PMENT CHARGES, THEREFORE, HOW IT COULD BE TREATED AS INCO ME OF THE ASSESSEE, IS NOT EXPLAINED BY THE AUTHORITIES BELOW . THE ASSESSEE ALSO IN THE PAPER BOOK, FILED CERTAIN CORR ESPONDENCE TO SHOW THAT SINCE EXTERNAL DEVELOPMENT CHARGES WERE L YING UNUTILIZED, THEREFORE, DUE TO FINANCIAL CONSTRAINTS , REQUEST WAS MADE TO THE STATE GOVERNMENT TO PERMIT THE ASSESSEE AUTHORITY TO USE EXTERNAL DEVELOPMENT CHARGES FOR DEVELOPMENT PROJECTS IN THE LARGER PUBLIC INTEREST. THIS CORRESPONDENCE WOULD REVEAL THAT ASSESSEE WAS NOT ENTITLED EVEN TO USE THIS AMO UNT OF ITS OWN FOR ANY PURPOSE. IT MAY ALSO BE NOTED HERE THAT SINCE THE AMOUNT IN QUESTION ITSELF IS SHOWN AS OUTSTANDING S INCE LONG, WOULD PROVE THAT THE AMOUNT DID NOT BELONG TO THE A SSESSEE AND WAS SHOWN AS LIABILITY IN THE ACCOUNTS. THE ABOVE F ACTS WOULD CLEARLY DISCLOSE THAT THE ASSESSEE CANNOT USE THE E XTERNAL DEVELOPMENT CHARGES ACCOUNT FOR ANY PURPOSES UNLESS IT IS APPROVED BY THE STATE GOVERNMENT. THE ASSESSEE SIN CE REFERRED 29 TO THE PROVISIONS OF PUNJAB APARTMENT AND PROPERTY REGULATION ACT, 1995 BY WHICH EXTERNAL DEVELOPMENT CHARGES ARE COLLECTED BY THE ASSESSEE AND THE PROVISIONS THEREON STATE TH AT THE COMPETENT AUTHORITY SHALL TRANSFER THE FUNDS TO THE STATE GOVERNMENT OR LOCAL AUTHORITY ( THROUGH AUTHORITY) IS COMPETENT AUTHORITY AND IT DID NOT CARRY OUT ANY DEVELOPMENT WORK OF ITS OWN AND ONLY ACTS AS NODAL AGENCY. THESE PROVISION S HAVE NOT BEEN PROPERLY APPRECIATED BY THE AUTHORITIES BELOW. THE AUTHORITIES BELOW SHOULD ALSO ASCERTAIN WHETHER THE SIMILAR TYPE OF AUTHORITY LIKE THE ASSESSEE, HOW THEY HAVE GIVEN THE TREATMENT OF THE EXTERNAL DEVELOPMENT CHARGES IN THEIR RECORD S AND WHAT IS THE STAND OF THE REVENUE DEPARTMENT IN THE CASES OF THE SIMILAR OTHER AUTHORITIES. THE NATURE AND CHARACTER OF RECEIPT IS NOT EXAMINED BY AUTHORITIES BELOW. 26. IT FURTHER APPEARS THAT LD. CIT(APPEALS) HAS NO T GIVEN ANY FINDING ON THE CASE LAWS RELIED UPON BY THE ASSESSE E BEFORE HIM. CONSIDERING THE ABOVE DISCUSSION AND THE RELEVANT C ASE LAWS CITED BEFORE LD. CIT(APPEALS) AND THE NOTIFICATION PRODUCED BEFORE US CLEARLY DISCLOSE THAT THE MATTER REQUIRES RE- CONSIDERATION AT THE LEVEL OF THE ASSESSING OFFICER . THE DECISIONS CITED BY LD. DR IN THE CASE OF BAZPUR COOPERATIVE S UGAR FACTOR LTD. (SUPRA), THE AMOUNTS IN QUESTION WERE FOUND TO BE DEDUCTED IN THE COURSE OF TRADING OPERATION AND IN THE CASE OF CHOWRINGHEE SALES BUREAU P. LTD. (SUPRA), THE SALE TAX WAS RECEIVED BY THE ASSESSEE IN ITS CHARACTER AS AN AUC TIONEER, THE AMOUNT WAS FOUND TO BE FORM PART OF THE TRADING OR BUSINESS RECEIPTS. THESE DECISIONS STATED BY LD. DR ARE NOT APPLICABLE TO THE ISSUE IN CONTROVERSY. 30 27. FROM THE ABOVE DISCUSSION, WE SET ASIDE THE ORD ERS OF THE AUTHORITIES BELOW AND RESTORE THE ISSUE TO THE FILE OF ASSESSING OFFICER WITH DIRECTION TO RE-DECIDE THE ISSUE IN TH E LIGHT OF THE RELEVANT PROVISIONS OF THE LAW REFERRED TO BY THE A SSESSEE BEFORE THE AUTHORITIES BELOW ALONGWITH THE NOTIFICATIONS I SSUED WITH REGARD TO EXTERNAL DEVELOPMENT CHARGES. THE ASSESSI NG OFFICER SHALL GIVE REASONABLE SUFFICIENT OPPORTUNITY OF BEI NG HEARD TO THE ASSESSEE. IN THE RESULT, THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 28. ON GROUND NO. 1 ASSESSEE CHALLENGED THE ADDITIO N OF RS. 1,86,77,600/- MADE BY ASSESSING OFFICER ON ACCOUNT OF AMOUNT PAID TO PUNJAB STATE DEVELOPMENT & WELFARE FUND AS PER NOTIFICATION OF PUNJAB GOVERNMENT FOR THE WELFARE A CTIVITIES IN THE FIELD OF EDUCATION, HEALTH AND WELFARE. IT IS SEEN THAT THE SAME AMOUNT HAS BEEN DISALLOWED BEING EXPENDITURE D EBITED AS PAYMENT TOWARDS PUNJAB STATE DEVELOPMENT & WELFARE FUND. THE ASSESSEE CLAIMED BEFORE ASSESSING OFFICER THAT THE SAID AMOUNT HAD BEEN AS PER NOTIFICATION DATED 31.03.200 8 AND HAD BEEN PAID ON THE AUCTIONED VALUE OF THE PROPERTIES FOR THE WELFARE ACTIVITIES IN THE FIELD OF EDUCATION, HEALT H AND SOCIAL WELFARE. THE ASSESSING OFFICER HELD THAT THE SAID AMOUNT WAS MERE APPLICATION OF INCOME BUT NOT AN EXPENDITURE A S NONE OF THE OBJECTS OF THE ASSESSEE AUTHORITY REQUIRE IT TO MAKE PAYMENT TO THE STATE WELFARE FUND. THE LD. CIT(APPEALS) AG REED WITH THE FINDINGS OF THE ASSESSING OFFICER AND DISMISSED THI S GROUND OF APPEAL OF THE ASSESSEE. 29. THE LD. COUNSEL FOR THE ASSESSEE RELIED UPON SU BMISSIONS MADE BEFORE AUTHORITIES BELOW AND REFERRED TO PB-36 WHICH IS 31 NOTIFICATION DATED 17.03.2008 THROUGH WHICH ASSESSE E WAS DIRECTED TO INSTRUMALISED TO DEPOSIT 5% OF THE AMOU NT REALIZED FROM THE BIDDERS BY WAY OF SALE OF PROPERTY OF ALL IMMOVABLE PROPERTIES AUCTIONED OR SOLD OR TRANSFERRED BY ANY MEANS. THE NOTIFICATION IS ISSUED BY GOVERNMENT OF PUNJAB. TH E MAIN OBJECT OF THE ASSESSEE IS TO ACHIEVE THE AIMS AND OBJECTS FOR WHICH IT WAS FORMULATED BY THE STATE GOVERNMENT AS PER LAW. THEREFORE, THE AMOUNT SPENT BY THE ASSESSEE WAS AS PER DIRECTI ON OF THE STATE GOVERNMENT WHO HAS CONSTITUTED THE ASSESSEE A UTHORITY. THEREFORE, PAYMENT MADE BY WAY OF 5% IS ALLOWABLE D EDUCTION. HE HAS RELIED UPON DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF SRI VENKATA SATYANARAYNA RIUCFE MILLS CONTR ACTORS CO. VS CIT 223 ITR 101 IN WHICH IT WAS HELD AS UNDER : ASSESSEE DOING BUSINESS OF EXPORT OF RICE AND CONTRIBUTING 50 PAISE PER QUINTAL TO DISTRICT WELF ARE FUND MAINTAINED BY THE DISTRICT COLLECTOR WITHOUT W HICH CONTRIBUTION HE WOULD NOT GET PERMIT, THE PAYMENT I S DIRECTLY CONNECTED WITH ASSESSEE'S CARRYING ON OF BUSINESS, IS NOT AGAINST PUBLIC POLICY, AND IS ALLO WABLE UNDER S. 37(1). 30. HE HAS ALSO RELIED UPON DECISION OF THE KERALA HIGH COURT IN THE CASE OF CIT VS TRAVANCORE TITANIUM PRODUCTS LTD. 187 TAXMAN 81 (KERALA) IN WHICH IT WAS HELD AS UNDER : PAYMENT OF SERVICE CHARGES BY THE ASSESSEE GOVERNM ENT COMPANY TOWARDS DISCHARGING THE OBLIGATION UNDER GOVERNMENT ORDERS IS A BUSINESS EXPENDITURE AND THE PAYMENT BEING MANDATORY FOR CARRYING ON BUSINESS, T HE EXPENDITURE SO INCURRED BY THE COMPANY IS ALLOWABLE UNDER S. 37(1). 31. ON THE OTHER HAND, LD. DR RELIED UPON ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT PAYMENT IN QUE STION IS NOT CONNECTED WITH THE BUSINESS ACTIVITY OF THE ASSESSE E AND IT WAS 32 DIVERSION OF THE PROFIT. THE ASSESSEE DID NOT DECI DE HOW TO INCUR THE EXPENDITURE AND THE AMOUNT IS SPENT ONLY AS PER DIRECTION OF THE STATE GOVERNMENT. THE LD. DR RELIED UPON DECIS ION OF THE HON'BLE SUPREME COURT IN THE CASE OF KEDAR NATH JUT E MILLS CO. 82 ITR 363 AND SITALDAS & TEERATH DASS 41 ITR 367. THE LD. DR SUBMITTED THAT THE LETTER OF THE STATE GOVERNMENT C ANNOT OVER- RIDE THE PROVISIONS OF THE INCOME TAX ACT. 32. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE MATERIAL AVAILABLE ON RECORD. THE ASSESSEE HAS PAI D THE AMOUNT IN QUESTION I.E. RS. 1.86 CR TO THE GOVERNMENT OF P UNJAB AS PER NOTIFICATION DATED 17.03.2008 (PB- 36). WHEN THE ST ATE GOVERNMENT HAS DIRECTED BY WAY OF NOTIFICATION TO T HE ASSESSEE TO DEPOSIT 5% OF THE BID AMOUNT ON SALE OF THE PROP ERTIES WITH THE STATE GOVERNMENT TOWARDS THE PUNJAB STATE DEVEL OPMENT FUNDS IN THE PUBLIC ACCOUNT OF THE STATE, IT IS DEF INITELY CONNECTED WITH THE BUSINESS ACTIVITY OF THE ASSESSE E ON SALE OF PROPERTIES. THE ASSESSEE AUTHORITY IS BOUND TO FOL LOW THE DIRECTIONS OF THE PUNJAB GOVERNMENT AND HAS TO ACT ACCORDINGLY. THE PAYMENT IN QUESTION IS, THEREFORE NOT VOLUNTARY OR GRATUITOUS BUT AS AN OBLIGATION AND PRIMARY CHARGES AS PER THE NOTIFICATION ISSUED BY THE STATE GOVERNMENT. THE A MOUNT OF 5% IS, THEREFORE, DIRECTLY RELATE TO THE SALES ACTIVIT IES OF THE ASSESSEE AUTHORITY. THE ASSESSEE HAS FOLLOWED THE DIRECTION S OF THE STATE GOVERNMENT AS PER THE EXISTING LAWS AND THE NOTIFIC ATION AS ISSUED BY THE STATE GOVERNMENT. THE NON-COMPLIANCE OF THE DIRECTIONS OF THE STATE GOVERNMENT WOULD DIRECTLY A FFECT THE BUSINESS ACTIVITIES OF THE ASSESSEE AUTHORITY. THE REFORE, THE CONTRIBUTIONS TO THE WELFARE FUND IS IN THE NATURE OF COMMERCIAL 33 EXPEDIENCY AND HAS A NEXUS WITH THE BUSINESS ACTIVI TY OF THE ASSESSEE. SINCE THE ASSESSEE MADE PAYMENT OF 5% OF THE BID AMOUNT OF THE AUCTION ON SALE OF PROPERTY AS PER NO TIFICATION EFFECTIVE, THEREFORE THE AMOUNT IS INCURRED FOR THE PURPOSE OF BUSINESS ACTIVITIES OF THE ASSESSEE. THE DECISIONS RELIED UPON BY LD. COUNSEL FOR THE ASSESSEE CLEARLY SUPPORT THE SU BMISSION OF LD. COUNSEL FOR THE ASSESSEE. WE, THEREFORE, HOLD THAT THE AMOUNT IN QUESTION IS SPENT AND INCURRED BY ASSESSEE WHOLLY A ND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THEREFORE , SAME IS ALLOWABLE AS DEDUCTION. WE ACCORDINGLY SET ASIDE TH E ORDERS OF THE AUTHORITIES BELOW AND DELETE THE ADDITION. IN THE RESULT, GROUND NO. 1 OF THE APPEAL OF THE ASSESSEE IS ALLOW ED. 33. NO OTHER POINT IS ARGUED OR PRESSED. 34. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED, AS INDICATED ABOVE. ITA 1028/CHD/2013 35. THIS APPEAL BY ASSESSEE IS DIRECTED AGAINST THE ORDER OF LD. CIT(APPEALS)-II LUDHIANA DATED 23.10.2013 FOR ASSES SMENT YEAR 2010-11. 36. ON GROUND NO. 1, ASSESSEE CHALLENGED THE ADDITI ON OF RS. 67,90,756/- ON ACCOUNT OF AMOUNT PAID TO NORTHERN R AILWAY FOR CONSTRUCTION OF RAILWAY UNDER BRIDGE NEAR LODHI CLU B, LUDHIANA AS PER OBJECT OF THE ASSESSEE AUTHORITY. THE ASSES SEE DERIVES INCOME FROM DEVELOPING LAND WHICH IS THEN SOLD IN T HE SHAPE OF PLOTS THROUGH DRAW OR AUCTION. ON SOME DEVELOPED L AND, DIFFERENT TYPE OF HOUSES ARE CONSTRUCTED WHICH ARE ALLOTTED 34 THROUGH DRAW. DURING THE COURSE OF ASSESSMENT PROC EEDINGS, THE ASSESSEE HAS DEBITED A SUM OF RS. 67,90,756/- A S CONTRIBUTION TO NORTHERN RAILWAYS. THE ASSESSEE SU BMITTED THAT IT HAS BEEN DECIDED BY THE GOVERNMENT OF PUNJAB THA T RAILWAY UNDER BRIDGE NEAR LODHI CLUB WAS TO BE CONSTRUCTED BY THE ASSESSEE AUTHORITY. THEREFORE, THIS AMOUNT IS PAID TO THE RAILWAYS FOR CONSTRUCTION OF RAILWAY UNDER BRIDGE. THE ASSESSING OFFICER DISALLOWED THE AMOUNT CONSIDERING THAT IT HAS NO NEXUS WITH THE BUSINESS ACTIVITIES OF THE ASSESS EE. THE ASSESSEE FILED DETAILED WRITTEN SUBMISSIONS WHICH I S NOTED IN THE IMPUGNED ORDER. HOWEVER, THE LD. CIT(APPEALS) DISM ISSED THIS GROUND OF APPEAL OF THE ASSESSEE HOLDING THAT THIS AMOUNT IS NOT SPENT WHOLLY AND EXCLUSIVELY FOR THE BUSINESS PURPO SE OF THE ASSESSEE NOR IT WAS REVENUE EXPENDITURE. 37. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT LD. CIT(APPEALS) IN PRECEDING ASSESSMENT YEAR 2009-10 H AS ALLOWED THE APPEAL OF THE ASSESSEE ON THE SIMILAR ISSUE AND IT IS IDENTICAL ISSUE ON WHICH DEPARTMENTAL APPEAL IS FILED, THE SA ME MAY BE DECIDED ACCORDINGLY. HE HAS SUBMITTED THAT ASSESSE E IS NOT SPECIALIZED IN BUILDING BRIDGES AND PAYMENTS HAVE B EEN MADE TO THIS AGENCY FOR BUSINESS PURPOSES. 38. THE LD. DR RELIED UPON THE SUBMISSIONS MADE IN PRECEDING ASSESSMENT YEAR 2009-10 AND ALSO SUBMITTED THAT IT IS CAPITAL EXPENDITURE BECAUSE IT IS NOT THE WORK OF THE ASSES SEE TO RAISE THE CONSTRUCTION OF UNDER BRIDGE OVER RAILWAYS. 39. ON CONSIDERATION OF THE RIVAL SUBMISSIONS AND F ACTS OF THE CASE, WE FIND THAT ISSUE IS IDENTICAL WHICH IS DECI DED IN 35 ASSESSMENT YEAR 2009-10 IN THE DEPARTMENTAL APPEAL AND THE DEPARTMENTAL APPEAL HAS BEEN DISMISSED. THEREFORE, FOLLOWING THE REASONS FOR DECISION IN THE DEPARTMENTAL APPEAL , WE SET ASIDE THE ORDERS OF AUTHORITIES BELOW AND DELETE THE ADDI TION. IN THE RESULT, GROUND NO. 1 OF THE APPEAL OF THE ASSESSEE IS ALLOWED. 40. ON GROUND NO. 2, ASSESSEE CHALLENGED THE ADDITI ON OF RS. 28 CRORES ON ACCOUNT OF AMOUNT PAID TO PUNJAB W ATER SUPPLY AND SEWERAGE BOARD FOR SEWERAGE WORK WITHIN THE JURISDICTION OF ASSESSEE AUTHORITY AS PER ITS OBJEC TS. 41. THE BRIEF FACTS ARE THAT DURING THE COURSE OF A SSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTED THAT ASSES SEE PAID A SUM OF RS. 28 CRORES TO PUNJAB WATER SUPPLY AND SEW ERAGE BOARD FOR SEWERAGE TREATMENT PLANT WORK AND OTHER S EWERAGE WORK AND DEBITED THE SAME TO THE PROFIT & LOSS ACCO UNT. ON SIMILAR GROUNDS, AS DISCUSSED BY THE ASSESSING OFFI CER IN THE ASSESSMENT ORDER, THE ASSESSING OFFICER DISALLOWED THE CONTRIBUTION OF RS. 28 CRORES AND ADDED THE SAME TO THE INCOME OF THE ASSESSEE. THE ASSESSEE CHALLENGED THE ADDIT ION BEFORE LD. CIT(APPEALS) AND REITERATED THE SUBMISSIONS ALREADY MADE ON THIS ISSUE AND MAIN CONTENTION OF THE ASSESSEE WAS THAT THE EXPENDITURE HAS BEEN MADE IN ACCORDANCE WITH THE OB JECTS AND FUNCTIONS OF THE AUTHORITY AND ASSESSEE IS BOUND BY THE DIRECTION OF THE STATE GOVERNMENT. THE AMOUNT IS I NCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THE ASSESSING OFFICER IN HIS REPORT BRIEFLY SUBMITTED T HAT ASSESSEE AUTHORITY IS INDEPENDENT ORGANIZATION, THEREFORE AS SESSEE CAN NOT CLAIM THE EXPENDITURE WHICH IS BORNE BY ANOTHER BODY. AT THE MOST, IT CAN BE SAID THAT ASSESSEE HAD DONATED THESE 36 AMOUNTS TO THESE ORGANIZATIONS SO AS TO OVERCOME TH EIR FINANCIAL DIFFICULTIES. SUCH EXPENDITURE CANNOT BE ALLOWED. THE ASSESSEE, HOWEVER, SUBMITTED BEFORE LD. CIT(APPEALS) THAT THE DETAILS FURNISHED SQUARELY SUPPORT THE CASE OF THE ASSESSEE HAT IT WAS REVENUE EXPENDITURE. 42. THE LD. CIT(APPEALS), HOWEVER FOUND THAT EXPEND ITURE WAS INCURRED BY ASSESSEE AUTHORITY BY WAY OF TRANSFER O F FUNDS TO PWSSB AS PER DIRECTION OF THE STATE GOVERNMENT AND PWSSB HAS SPENT THE MONEY FOR CONSTRUCTION OF SEWERAGE TREATM ENT PLANT AND SEWERAGE SYSTEM AT LUDHIANA. THE SEWERAGE PLANT S HAVE BEEN INSTALLED AT VILLAGE BALOKE, LUDHIANA AND VILL AGE BHATIAN, LUDHIANA AND SEWERAGE SYSTEM WAS MADE IN DIFFERENT AREAS OF LUDHIANA. THE OWNERSHIP OF THE SEWERAGE PLANT VEST S WITH PWSSB AND IT IS THEIR RESPONSIBILITY TO MAINTAIN TH E SAME AND THERE IS NO FORMAL AGREEMENT BETWEEN THESE TWO INDE PENDENT AUTHORITIES. THE LD. CIT(APPEALS), FOLLOWING THE O RDERS ON GROUND NO. 1 ABOVE HELD THAT THE AMOUNT IN QUESTION WAS NOT WHOLLY AND EXCLUSIVELY INCURRED FOR BUSINESS PURPOS E AND ACCORDINGLY DISMISSED THE APPEAL OF THE ASSESSEE. 43. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE AUTHORITIES BELOW AND SUBMITTED THAT OB JECT OF THE ASSESSEE IS TO PROMOTE AND SECURE BETTER PLANNING A ND DEVELOPMENT OF ANY AREA OF THE STATE AS PER PROVISI ONS OF SECTION 28(1) OF PRTPD ACT UNDER WHICH ASSESSEE AUTHORITY I S CONSTITUTED, IT IS SPECIFICALLY MENTIONED THAT THE ASSESSEE SHALL CARRY OUT OTHER OPERATIONS LIKE SUPPLY OF WATER, DI SPOSAL OF SEWERAGE, CONTROL OF POLLUTION AND OTHER SERVICES. HE HAS SUBMITTED THAT ASSESSEE IS NOT AN EXPERT IN CARRYIN G OUT 37 SEWERAGE WORK. THEREFORE, IT WAS DONE THROUGH THE INDEPENDENT AGENCY WHO IS SPECIALIZED IN THAT FIELD. THE PAYME NT IS ALSO COVERED BY SECTION 28(2)(II) OF THE SAID ACT WHICH PROVIDES THE ASSESSEE AUTHORITY TO UNDERTAKE WORK RELATING TO TH E AMENITIES AND SERVICES TO BE PROVIDED IN URBAN AREAS, URBAN E STATE AND PROMOTION OF URBAN DEVELOPMENT AS WELL AS CONSTRUCT ION OF HOUSES. HE HAS SUBMITTED THAT AS PER SECTION 49(2) OF THE PRTPD ACT ALSO ALLOWED THE FUNDS OF THE ASSESSEE TO BE USED FOR A PURPOSE AS DIRECTED BY THE STATE GOVERNMENT. THE COPIES OF THE MINUTES OF MEETING HELD UNDER THE CHAIRMANSHIP OF CHIEF SECRETARY, PUNJAB ARE FILED AT PAGES 46 TO 48 AND E NGLISH TRANSLATION IS FILED AT PAGE 48A AND 49A FOR SEWERA GE SCHEME. COPY OF THE LETTER ISSUED BY PWSSB REQUESTING THE A SSESSEE FOR DEPOSIT OF REQUISITE AMOUNT AND FURTHER AFFIRMING T HAT THE AMOUNT WOULD BE UTILIZED IN THIS YEAR IS FILED AT P AGE 50 OF THE PAPER BOOK. COPIES OF THE LETTERS ISSUED BY CHIEF ADMINISTRATOR, ASSESSEE AUTHORITY CONFIRMING THE AMOUNTS TO BE PAI D UNDER THE SEWERAGE SCHEME ARE FILED AT PAGES 51 AND 52 OF THE PAPER BOOK. THE ASSESSEE HAS, THEREFORE, INCURRED THE EXPENSES AS PER THE OBJECTS OF THE ASSESSEE AUTHORITY. THE DEDUCTION CA NNOT BE DISALLOWED WHEN WORK IS DONE THROUGH OTHER AGENCY. THE ASSESSEE IS NOT A COMMERCIAL ORGANIZATION AND IT HA S BEEN SPECIFICALLY INCORPORATED FOR THE DEVELOPMENT AND B ETTER PANNING OF THE AREAS OF THE STATE. THE UTILIZATION CERTIFI CATE IS ISSUED BY PWSSB DEPARTMENT FOR UTILIZATION OF FUNDS, COPIES O F WHICH ARE FILED AT PAGES 194 AND 195 OF THE PAPER BOOK WHICH MENTIONED THAT SEWERAGE WORK WAS CARRIED OUT AT LUDHIANA. CO PY OF THE NOTIFICATION STATING THE JURISDICTION OF THE ASSESS EE AUTHORITY 38 WITH COPY OF THE MAP IS FILED AT PB- 216 AND 220. THE ASSESSEE HAS NOT CAPITALIZED ANY EXPENDITURE IN THE BOOKS OF ACCOUNT AND THE CONSTRUCTION WORK LIKE BRIDGES, SEWERAGE SYSTEM , ROADS ETC. ARE FOR THE PUBLIC AT LARGE AND EXPENDITURE IS INCU RRED FOR THE DEVELOPMENT OF THE SAME. BOTH THE AUTHORITIES ARE CREATED BY THE STATE GOVERNMENT AND AMOUNTS ARE INCURRED AS PE R DIRECTION OF THE STATE GOVERNMENT. IT WAS, THEREFORE, NOT A CAPITAL EXPENDITURE BECAUSE NO CAPITAL IS GENERATED BY THE ASSESSEE. 44. ON THE OTHER HAND, LD. DR RELIED UPON ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT IT IS AN APPLI CATION OF FUNDS. LD. DR SUBMITTED THAT THE AMOUNT WAS SPENT A S APPROVED BY THE GOVERNMENT OF INDIA UNDER THE JNNURM PROJECT AND STATE GOVERNMENT HAS CONTRIBUTED AS THEIR SHARES. THEREF ORE, STATE GOVERNMENT DIRECTED THE ASSESSEE AUTHORITY TO CONTR IBUTE THE ULB SHARE. THEREFORE, IT WAS A CONTRIBUTION OF THE ASSESSEE AUTHORITY ONLY TOWARDS SEWERAGE TREATMENT PLANT AND SEWERAGE SYSTEM. THEREFORE, IT WAS CAPITAL EXPENDITURE IN N ATURE. 45. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND MATERI AL AVAILABLE ON RECORD. AS PER SECTION 28(1) OF PRTPD ACT UNDER WHICH THE ASSESSEE AUTHORITY IS CONSTITUTED, IT IS SPECIFICALLY MENTIONED THAT ASSESSEE AUTHORITY SHALL CARRY OUT O THER OPERATIONS LIKE SUPPLY OF WATER, DISPOSAL OF SEWERA GE, CONTROL OF POLLUTION AND OTHER SERVICES. THE OBJECT OF THE AS SESSEE IS TO PROMOTE AND SECURE BETTER PLANNING AND DEVELOPMENT OF THE AREAS OF THE STATE OF PUNJAB. THE ASSESSEE IS CREA TED BY THE GOVERNMENT OF PUNJAB UNDER THE ABOVESAID ACT FOR TH E DEVELOPMENT OF THE AREAS ESPECIALLY THE JURISDICTIO N LIES WITH THE LUDHIANA. COPY OF THE MINUTES OF EXECUTIVE COMMITT EE OF 39 ASSESSEE AUTHORITY IS FILED AT PAGE 48A IN WHICH TH E EXECUTIVE COMMITTEE HAS APPROVED PAYMENT IN QUESTION THE PWSS B FOR CONSTRUCTION OF SEWERAGE DISPOSAL SYSTEM PROVIDING SEWERAGE SCHEME AT LUDHIANA UNDER JNNURM. PB-49A IS THE COP Y OF THE LETTER DATED 19.05.2010 IN WHICH THE MEETING WAS CO NVENED UNDER THE CHAIRMANSHIP OF THE CHIEF MINISTER OF PUN JAB AND IT WAS DIRECTED THAT THE ASSESSEE TO PRO VIDE RS.25 CR ORES AS THEIR CONTRIBUTION TO THE SEWERAGE SYSTEM THROUGH ULB. T HE LETTER OF PWSSB IS FILED AT PAGE 50 OF THE PAPER BOOK FOR PRO VIDING SEWERAGE SCHEME, LUDHIANA UNDER JNNURM REQUESTING T HE ASSESSEE TO MAKE DEPOSIT OF THE AMOUNT IN QUESTION. THEREFORE, THE AMOUNT IN QUESTION IS DIRECTLY CONNECTED WITH T HE ACTIVITIES OF THE ASSESSEE TO PROMOTE AND SECURE BETTER PLANNI NG AND DEVELOPMENT OF THE AREA WITHIN THE JURISDICTION OF THE ASSESSEE AND AMOUNT IS SPENT AS PER OBJECTIVES OF THE ASSESS EE. THE COPIES OF THE LETTERS OF PWSSB DEPARTMENT ARE FILED AT PAGE 194- 195 TO CERTIFY THAT THE AMOUNT IN QUESTION HAVE BEE N SPENT FOR CONSTRUCTION OF SEWERAGE TREATMENT PLANT AND SEWERA GE SYSTEM AT LUDHIANA. THE COPY OF THE NOTIFICATION AND MAP I S ALSO FILED TO SHOW THAT SEWERAGE SYSTEM IS LAID OUT IN THE AREAS OF LUDHIANA. THE ASSESSEE ALSO EXPLAINED THAT SINCE ASSESSEE IS NOT EXPERT, THEREFORE, CONSTRUCTION OF SEWERAGE SYSTEM WAS CARR IED OUT THROUGH INDEPENDENT AGENCY CONTROLLED BY THE STATE GOVERNMENT. THEREFORE, THERE IS NOTHING WRONG IN THE EXPLANATIO N OF THE ASSESSEE. THE EXPENDITURE IS INCURRED ON THE DIREC TION OF THE GOVERNING BODY OF THE ASSESSEE AUTHORITY WHICH IS C OVERED UNDER THE PROVISIONS OF PRTPD ACT AND WAS ALLOWABLE EXPEN DITURE AS PER SECTION 28 OF PRTPD ACT. THE ASSESSEE HAS NOT CAPITALIZED 40 ANY EXPENDITURE IN THE BOOKS OF ACCOUNT AND SEWERAG E SYSTEM WAS MEANT FOR PUBLIC AT LARGE. 46. THE LD. CIT(APPEALS) CONSIDERING THE ISSUE IN T HE LIGHT OF RAILWAY UNDER BRIDGE CONSTRUCTED BY ASSESSEE AND FO LLOWING HIS FINDINGS ON THAT ISSUE, DISMISSED THE APPEAL OF THE ASSESSEE. HOWEVER, ON SAID ISSUE, WE HAVE ALREADY DISMISSED T HE DEPARTMENTAL APPEAL IN ASSESSMENT YEAR 2009-10 AND ALLOWED THE APPEAL OF THE ASSESSEE IN THIS YEAR. THEREFORE , CONSIDERING THE TOTALITY OF THE FACTS AND CIRCUMSTANCES AND AIM S AND OBJECTS OF THE ASSESSEE IN THE LIGHT OF THE SPECIAL ACT UND ER WHICH THE ASSESSEE AUTHORITY IS CREATED, IT IS CLEAR THAT AMO UNT IN QUESTION IS INCURRED BY ASSESSEE FOR SEWERAGE WORK WITHIN TH E JURISDICTION OF THE ASSESSEE AUTHORITY. IT IS, THEREFORE, CLEAR LY THE REVENUE IN NATURE AND HAS TO BE ALLOWED AS EXPENDITURE INCURRE D WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS ACTIVITIES OF THE ASSESSEE. NO CAPITAL IS GENERATED BY ASSESSEE AUTHORITY FOR I NCURRING THE EXPENDITURE ON THIS ISSUE. WE, THEREFORE, SET ASID E THE ORDERS OF THE AUTHORITIES BELOW AND DELETE THE ADDITION OF RS . 28 CRORES. IN THE RESULT, GROUND NO. 2 OF APPEAL OF ASSESSEE I S ALLOWED. 47. ON GROUND NO. 3, ASSESSEE CHALLENGED THE ADDITI ON OF RS. 40 CRORES ON ACCOUNT OF AMOUNT PAID TO PUNJAB INFRA STRUCTURE DEVELOPMENT BOARD (PIDB) FOR CONSTRUCTION OF FLYOVE RS AND BRIDGES WITHIN THE JURISDICTION OF THE ASSESSEE AUT HORITY AS PER THE OBJECTS OF THE ASSESSEE AUTHORITY. 48. THE BRIEF FACTS ARE THAT ASSESSEE PAID THE AFOR ESAID AMOUNT TO PIDB FOR FOUR-LANEING OF THE ROADS AND CONSTRUCT ION OF FLYOVERS AND UNDER BRIDGES ALONG SOUTHERN BYPASS AN D IT DEBITED 41 THE SAME TO THE PROFIT & LOSS ACCOUNT. THE ASSESSI NG OFFICER DISALLOWED THE SAME AMOUNT AS DISCUSSED IN EARLIER GROUNDS. THE ASSESSEE, ONCE AGAIN REITERATED BEFORE LD. CIT( APPEALS) THAT AMOUNT IN QUESTION WAS GIVEN TO PIDB FOR FOUR-LANEI NG THE ROAD AND CONSTRUCTION OF FLYOVERS AND UNDER BRIDGES ALON GWITH THE SOUTHERN BYPASS. THE DEVELOPMENT OF THE ROAD WILL THE OVERALL DEVELOPMENT OF LUDHIANA AND REMOVE THE TRAFFIC PROB LEM OF LUDHIANA. MOREOVER, THE CONSTRUCTION OF THIS ROAD WILL ALSO ADD VALUE TO THE PROPERTIES OF THE ASSESSEE AUTHORITY L OCATED IN VICINITY OF THE ROADS. THE CONSTRUCTION/DEVELOPMEN T OF THE ROAD IS WITHIN THE OBJECTS OF THE ASSESSEE AUTHORITY AND HENCE ALLOWABLE UNDER SECTION 37 OF THE INCOME TAX ACT. THE SUBMISSIONS OF THE ASSESSEE WERE FORWARDED TO THE A SSESSING OFFICER AND THE ASSESSING OFFICER REITERATED THE FA CTS STATED IN THE ASSESSMENT ORDER AND SUBMITTED THAT DUE TO FINA NCIAL CONSTRAINS OF FUNDINGS OF PIDB, THE AMOUNT WAS PAID . IT IS NOWHERE MENTIONED THAT IT WAS A PROJECT OF THE ASSE SSEE AUTHORITY. THE ASSESSEE ATTACHED THE COPY OF THE M INUTES OF MEETINGS HELD UNDER THE CHAIRMANSHIP OF THE CHIEF S ECRETARY SO AS TO DISCUSS INFRASTRUCTURE PROJECTS OF LUDHIANA. THE PROJECTS WERE PREPARED BY PIDB AND THE ASSESSEE HAS ACTED ON THE BEHEST OF THE STATE GOVERNMENT RATHER THAN ACTING ON BUSIN ESS CONSIDERATIONS. 49. THE LD. CIT(APPEALS), CONSIDERING THE SUBMISSIO NS OF BOTH THE PARTIES FOUND THAT EXPENDITURE WAS INCURRED BY ASSESSEE AUTHORITY BY WAY OF TRANSFER OF FUNDS TO PIDB AT TH E DIRECTION OF THE STATE GOVERNMENT. THE AMOUNT HAS BEEN SPENT FO R WIDENING OF THE ROADS AND CONSTRUCTION OF FLYOVERS AND THE O WNERSHIP 42 VESTS WITH PIDB. THERE IS NO FORMAL AGREEMENT BETW EEN THE PARTIES. THE LD. CIT(APPEALS) FOLLOWING HIS FINDIN GS ON GROUND NO. 1 ABOVE WITH REGARD TO THE CONSTRUCTION OF RAIL WAY UNDER BRIDGE, CONFIRMED THE ADDITION AND HELD THAT IT WAS CAPITAL EXPENDITURE IN NATURE. 50. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE AUTHORITIES BELOW AND REFERRED TO PB- 4 6 WHICH IS MINUTES OF THE ASSESSEE AUTHORITY IN WHICH IT WAS A PPROVED THAT ASSESSEE AUTHORITY SHALL PAY THE AMOUNT IN QUESTION FOR CONSTRUCTION OF FOUR-LANEING ROAD ALONGWITH SIDHWAN CANAL, CONSTRUCTION OF ROAD AND THE FLYOVER AND ROB (WEST) BYPASS, LUDHIANA. COPY OF THE SIDHWAN SCHEME IS FILED AT P AGE 57. COPIES OF THE PROCEEDINGS OF THE MEETING HELD BY PI DB ARE FILED AT PAGES 58 TO 63. COPY OF THE LETTER ISSUED BY CH IEF ADMINISTRATOR BY ASSESSEE AUTHORITY CONFIRMING THE AMOUNT TO BE PAID TO PIDB IS FILED AT PAGE 64 AND 65 OF THE PAPE R BOOK. THE ASSESSEE, AS PER SPECIAL LAW, WAS UNDER OBLIGATION TO CONSTRUCT THE ROADS AND FLYOVERS. THE PIDB DEPARTMENT IN THE IR LETTER (PB- 197 AND 198) MENTIONED THE COST SHARING BY PIDB AND ASSESSEE AUTHORITY. THEREFORE, IT WAS THE EXPENDITURE INCUR RED BY ASSESSEE. THE LD. COUNSEL FOR THE ASSESSEE RELIED UPON THE SAME SUBMISSIONS AS WERE MADE ON GROUND NO. 1 & 2 ABOVE AND ALSO SUBMITTED THAT ASSESSEE IS NOT EXPERT IN RAISING TH E FLYOVERS AND THE BRIDGES, THEREFORE PAYMENT IS MADE TO PIDB FOR CONSTRUCTION OF FLYOVERS/BRIDGES FOR THE BENEFIT OF COLONIES DEV ELOPED BY THE ASSESSEE AUTHORITY. IT IS, THEREFORE, NOT CAPITAL EXPENDITURE IN NATURE. 43 51. ON THE OTHER HAND, LD. DR RELIED UPON ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE ASSESSEE M ADE CONTRIBUTION TO THE PROJECT WHICH IS NOT THE PROJEC T OF THE ASSESSEE AUTHORITY AND PAYMENTS HAVE BEEN MADE AT T HE DIRECTION OF THE STATE GOVERNMENT. THE OWNERSHIP O F ALL THE FLYOVERS/BRIDGES LIES WITH THE MUNICIPAL CORPORATIO N FOR MAINTENANCE. LD. DR RELIED UPON SAME SUBMISSIONS A S WERE MADE IN DEPARTMENTAL APPEAL ON GROUND NO. 1 IN ASSE SSMENT YEAR 2009-10. 52. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND MATERI AL ON RECORD. THIS ISSUE IS SAME AS IS CONSIDERED ON GRO UND NO. 1 AND 2 IN THE PRESENT APPEAL AS WELL AS GROUND RAISED IN DEPARTMENTAL APPEAL FOR CONSTRUCTION OF THE RAILWAY UNDER PASS. THE ASSESSEE HAS DEVELOPED COLONIES AND THEREFORE, HAS TO PROVID E INFRASTRUCTURE AND OTHER FACILITIES AS PER SECTION 28 OF PRTPD ACT. ON CONSTRUCTION OF RAILWAY UNDERPASS IN THE C OLONY DEVELOPED BY THE ASSESSEE, LD. CIT(APPEALS) HAS ALL OWED THE CLAIM OF ASSESSEE IN ASSESSMENT YEAR 2009-10 AND WE HAVE DISMISSED THE DEPARTMENTAL APPEAL. THIS ISSUE IS I DENTICAL AS WAS CONSIDERED EARLIER ON GROUND NO.1 & 2 ABOVE AS WELL AS IN DEPARTMENTAL APPEAL ON WHICH WE HAVE CONFIRMED THE ORDER OF THE LD. CIT(APPEALS). THEREFORE, FOLLOWING THE ORD ERS ON THESE GROUNDS, WE SET ASIDE THE ORDERS OF AUTHORITIES BEL OW AND DELETE THE ADDITION. IN THE RESULT, GROUND NO. 3 OF THE A PPEAL OF THE ASSESSEE IS ALLOWED. 53. ON GROUND NO. 4, ASSESSEE HAS CHALLENGED THE AD DITION OF RS. 27 CRORES ON ACCOUNT OF PAYMENT MADE TO MUNICIP AL CORPORATION, LUDHIANA FOR CONSTRUCTION OF BRIDGES A ND OTHER 44 DEVELOPMENT WORK WITHIN THE JURISDICTION OF THE ASS ESSEE AUTHORITY AS PER OBJECTS OF THE ASSESSEE AUTHORITY. BRIEFLY THE ASSESSING OFFICER NOTED THAT ASSESSEE HAD MADE CONT RIBUTION OF RS. 27 CRORES TO THE MUNICIPAL CORPORATION, LUDHIAN A FOR RAILWAY OVER BRIDGE (LAKKAR BRIDGE) PRATAP CHOWK FL YOVER, GILL CHOWK FLYOVER, INDOOR STADIUM AT PAKHOWAL ROAD AND OTHER DEVELOPMENT WORK AND IT DEBITED THE SAME TO PROFIT & LOSS ACCOUNT. THE ASSESSING OFFICER MADE THE ADDITION. THE ASSESSEE SUBMITTED THAT THE AMOUNT IN QUESTION WAS GIVEN TO MUNICIPAL CORPORATION, LUDHIANA (MCL) FOR CONSTRUCT ION OF RAILWAY OVER BRIDGES ABOVE AND INDOOR STADIUM AND O THER DEVELOPMENT WORK. THE AMOUNT HAS BEEN GIVEN AFTER OBTAINING NECESSARY APPROVAL. THE CONSTRUCTION/DEVELOPMENT O F ROADS AND BRIDGES IS WITHIN THE OBJECTIVES OF THE ASSESSEE AN D THUS, ALLOWABLE DEDUCTION. THE ASSESSING OFFICER SUBMITT ED BEFORE LD. CIT(APPEALS) THAT ASSESSEE HAD TRANSFERRED THE FUND S TO MCL. IT MAY BE A LOAN OR GIFT FOR CONTRIBUTION FROM HIS OWN CAPITAL AND IT HAS NO CONNECTION WITH THE BUSINESS ACTIVITIES OF T HE ASSESSEE. NO PROPER CONTRACTS HAVE BEEN ENTERED INTO. THE LD . CIT(APPEALS), ON THE SAME REASONING, AS GIVEN ON GR OUND NOS. 1 TO 3 ABOVE, DISMISSED APPEAL OF THE ASSESSEE AND HE LD THAT EXPENDITURE IS CAPITAL IN NATURE AND NOT SPENT WHOL LY OR EXCLUSIVELY FOR BUSINESS PURPOSES. 54. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE AUTHORITIES BELOW AND SUBMITTED THAT TH E AMOUNT IN QUESTION WAS PAID TO MCL FOR CONSTRUCTION OF FLYOVE RS AND OVER BRIDGE, STADIUM AND OTHER DEVELOPMENT WORK. THE CO PY OF THE MINUTES APPROVING THE PAYMENT TO MCL IS FILED AT PA GE 46 OF THE 45 PAPER BOOK, COPY OF THE LETTER ISSUED BY MCL TO ASS ESSEE AUTHORITY SPECIFYING THE PROJECT-WISE CONTRIBUTION REQUIREMENT IS FILED AT PAGE 54 OF THE PAPER BOOK. THE COPY OF TH E LETTER ISSUED BY CHIEF ADMINISTRATOR, ASSESSEE AUTHORITY CONFIRMI NG THE AMOUNT TO BE PAID TO MCL IS FILED AT PAGE 64 AND 65 OF THE PAPER BOOK. THE ASSESSEE, AS PER PROVISIONS OF SECTION 2 8(2)(II) OF THE SPECIAL ACT INCURRED THE EXPENDITURE. SO, IT WAS I NCURRED AS PER THE OBJECTIVES OF THE ASSESSEE AUTHORITY. THE UTIL IZATION CERTIFICATE ISSUED BY MCL IS FILED AT PAGE 199 OF T HE PAPER BOOK. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ISSUE IS SAME AS IS CONSIDERED ABOVE. SINCE ASSESSEE IS NOT A SPECIALIZED PERSON IN BUILDING FLYOVERS AND BRIDGES, THEREFORE, THE EXPENSES WERE INCURRED THROUGH MCL. 55. ON THE OTHER HAND, LD. DR SUBMITTED THAT AUTHOR ITIES BELOW HAVE CORRECTLY DENIED THE DEDUCTION TO THE ASSESSEE BEING THE APPLICATION OF INCOME ONLY. THE ASSESSEE AUTHORITY HAS MADE A CONTRIBUTION WHICH IS NOT THE PROJECT OF THE ASSESS EE AUTHORITY. THE AMOUNTS WERE REQUIRED BY MC, LUDHIANA. THEREFO RE, AMOUNT WAS GIVEN FOR FINANCIAL CONSTRAINTS. THERE IS NO AGREEMENT OF THE SAME AND THE ISSUE IS SAME AS IS C ONSIDERED BY ASSESSMENT YEAR 2009-10. 56. ON CONSIDERATION OF THE RIVAL SUBMISSIONS, WE D O NOT FIND ANY JUSTIFICATION TO SUSTAIN THE ADDITION. WE HAVE DECIDED THE SIMILAR ISSUE ABOVE ON GROUND NOS. 1 TO 3 AND HELD THAT ASSESSEE, FOR BETTER DEVELOPMENT OF ITS COLONIES HA S CARRIED OUT THE WORK OF CONSTRUCTION OF BRIDGES AND OTHER DEVEL OPMENT WORK WITHIN THE JURISDICTION OF THE ASSESSEE AUTHORITY A T LUDHIANA AND OTHER PLACES. THE BRIDGES AND DEVELOPMENT WORK IS CONNECTED 46 WITH THE BUSINESS ACTIVITY OF THE ASSESSEE AND FOR BENEFIT OF THE COLONIES, CONSTRUCTED AND DEVELOPED BY THE ASSESSEE AUTHORITY. SINCE WE HAVE ALLOWED DEDUCTION OF THE SIMILAR EXPE NDITURE ON OTHER GROUNDS OF APPEAL, THEREFORE FOLLOWING THE RE ASONS FOR THE SAME, WE SET ASIDE THE ORDERS OF THE AUTHORITIES BE LOW AND DELETE THE ADDITION. 57. IN THE RESULT, GROUND NO. 4 OF THE APPEAL OF TH E ASSESSEE IS ALLOWED. 58. ON GROUND NO. 5, ASSESSEE CHALLENGED THE ADDITI ON OF RS. 41,06,741/- ON ACCOUNT OF AMOUNT PAID TO PUNJAB STA TE DEVELOPMENT & WELFARE FUND WHICH IS STATUTORY LIABI LITY AS PER THE OBJECTS OF THE ASSESSEE SOCIETY. THE ASSESSING OFFICER NOTED THAT ASSESSEE HAS PAID THE CONTRIBUTION TO THE ABOV E WELFARE FUND. THE ASSESSEE SUBMITTED THAT 5% OF THE AUCTIO N AMOUNT HAS BEEN PAID TO PUNJAB STATE DEVELOPMENT & WELFARE FUND AS PER THE STATE GOVERNMENTS NOTIFICATION. THE ASSESS ING OFFICER DISALLOWED THE AMOUNT. THE LD. CIT(APPEALS) CONFIR MED THE ADDITION. 59. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS GROUND IS SAME AS IS CONSIDERED IN ASSESSMENT YEAR 2009-10 AND SUBMITTED THAT THE DECISION ON THE SAME MAY BE FOLL OWED HERE ALSO. THE LD. DR ALSO SUBMITTED THAT ISSUE IS SAME AS IS CONSIDERED IN ASSESSMENT YEAR 2009-10. 60. ON CONSIDERATION OF THE FACTS OF THE CASE, WE F IND THAT THIS ISSUE IS SAME AS IS CONSIDERED AND DECIDED IN ASSES SMENT YEAR 2009-10 IN WHICH WE HAVE ALLOWED THE CLAIM OF THE A SSESSEE FOR DEDUCTION OF THE EXPENDITURE. BY FOLLOWING THE SAM E REASONS FOR 47 DECISION ON IDENTICAL ISSUE, WE SET ASIDE THE ORDER S OF THE AUTHORITIES BELOW AND DELETE THE ADDITION. 61. IN THE RESULT, GROUND NO. 5 OF THE APPEAL OF TH E ASSESSEE IS ALLOWED. 62. ON GROUND NO. 6, ASSESSEE CHALLENGED THE ADDITI ON OF RS. 15,12,89,222/- AS INCOME WHICH HAVE BEEN RECEIVED O N ACCOUNT OF EXTERNAL DEVELOPMENT CHARGES WHICH ARE LYING WIT H THE ASSESSEE ON BEHALF OF THE STATE GOVERNMENT. THE LD . REPRESENTATIVES OF BOTH THE PARTIES SUBMITTED THAT THE ISSUE IS SAME AS IS CONSIDERED IN ASSESSMENT YEAR 2009-10. I N ASSESSMENT YEAR 2009-10, WE HAVE RESTORED THIS ISSU E TO THE FILE OF ASSESSING OFFICER WITH DIRECTION TO RE-DECIDE TH IS ISSUE BY CONSIDERING THE RELEVANT STATUTORY PROVISIONS OF LA W AND MATERIAL ON RECORD. FOLLOWING THE ORDERS FOR ASSESSMENT YEA R 2009-10, WE SET ASIDE THE ORDERS OF AUTHORITIES BELOW AND RE STORE THIS ISSUE TO THE FILE OF ASSESSING OFFICER WITH DIRECTI ON TO RE-DECIDE THIS ISSUE BY GIVING REASONABLE SUFFICIENT OPPORTUN ITY OF BEING HEARD TO THE ASSESSEE. IN THE RESULT, GROUND NO. 6 OF THE APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES . 63. ON GROUND NO. 7, ASSESSEE CHALLENGED THE ADDITI ON OF RS. 1,69,49,493/- AS INCOME OF THE ASSESSEE WHICH IS LY ING WITH THE ASSESSEE AS BUILDING PLAN SECURITY AND ARE LIABLE T O BE REFUNDED. 64. ON GROUND NO. 8, ASSESSEE CHALLENGED THE ADDITI ON BY TREATING DEPOSITS OF RS. 74,30,344/- AS INCOME OF T HE ASSESSEE WHICH IS LIABLE TO BE REFUNDED. 48 65. THE ASSESSEE ON GROUND NO. 9 CHALLENGED THE ADD ITION OF RS. 14,03,859/- AS INCOME OF THE ASSESSEE WHICH IS SECURITY FROM DIFFERENT DEPARTMENTS AND IS LIABLE TO BE REFU NDED. 66. THE ASSESSEE ON GROUND NO. 10 CHALLENGED THE AD DITION OF RS. 4,04,48,216/- BEING DEPOSITS RECEIVED FROM CUST OMERS AMOUNTING TO RS. 6,49,43,225/- AGAINST THE FLATS AN D BY ALLOWING EXPENDITURE OF RS. 2,44,95,009/- AS INCOME OF THE A SSESSEE. 67. THE LD. CIT(APPEALS) HAS DECIDED ALL THESE GROU NDS TOGETHER ALONGWITH ADDITION OF RS. 75,42,113/- BEING EARNEST MONEY RECEIVED. THE LD. CIT(APPEALS) DELETED THE ADDITIO N OF RS. 75,42,113/- ON WHICH NO APPEAL HAS BEEN FILED. HOW EVER, AS THE COMPOSITE ORDER IS PASSED ON ALL THESE GROUNDS, THE REFORE, FACTS TAKEN FROM THE ORDER OF THE LD. CIT(APPEALS) WOULD BE TAKEN TOGETHER ON ALL THESE GROUNDS. 68. THE BRIEF FACTS ARE THAT THE ASSESSING OFFICER NOTED THAT AS PER THE 'SIGNIFICANT ACCOUNTING POLICY AND NOTES ON ACCOUNTS ATTACHED TO THE BALANCE SHEET, IT WAS MENTIONED AS UNDER : 144 FLATS AT SECTOR 40, LUDHIANA HAVE BEEN ALLOTTE D DURING THE YEAR. THESE FLATS ARE UNDER CONSTRUCTION. AS SUCH AMOUNT RECEIVED AGAINST THESE FLATS HAVE BEEN SHOWN UNDER 'SECURITIE S AND DEPOSITS' ON THE LIABILITY SIDE OF THE BALANCE SHEET' 69. THE ASSESSING OFFICER ALSO NOTED THAT SCHEDULE 'B' OF THE BALANCE SHEET SHOWS AN AMOUNT OF RS. 116,72,81,185/ - UNDER THE HEAD 'SECURITIES AND DEPOSITS'. THE ASSESSING O FFICER WAS OF THE VIEW THAT AS THE ASSESSEE WAS FOLLOWING CASH SY STEM OF ACCOUNTING THESE RECEIPTS OUGHT TO HAVE BEEN SHOWN AS INCOME OF THE ASSESSEE DURING THE PERIOD UNDER CONSIDERATI ON. THE AO 49 FURTHER POINTED OUT THAT IN COLUMN L(A) OF FORM NO. 3CD OF THE AUDIT REPORT, THE APPELLANT HAD MENTIONED ITS METHO D OF ACCOUNT EMPLOYED IN THE PREVIOUS YEAR AS 'GENERALLY CASH EXCEPT AS MENTIONED IN THE NOTE ON ACCOUNTS ATTACHED TO THE B ALANCE SHEET'. THE AO OBSERVED THAT U/S 145(1) THE APPELLANT WAS R EQUIRED TO COMPUTE ITS INCOME IN ACCORDANCE WITH EITHER CASH O R MERCANTILE SYSTEM OF ACCOUNTING. IN VIEW OF THESE FACTS, THE A O ASKED THE APPELLANT TO EXPLAIN WHY AMOUNT RECEIVED ON ACCOUNT OF ALLOTMENT OF THE FLATS MAY NOT BE ADDED TO THE INCO ME OF THE ASSESSEE. 70. REGARDING THE AMOUNTS RECEIVED AGAINST FLATS UN DER CONSTRUCTION THE APPELLANT SUBMITTED THAT IT HAD RE CEIVED RS.6,49,43,225/- DURING THE YEAR AGAINST THE ALLOTM ENT OF FLATS AGAINST WHICH AN EXPENDITURE OF RS.2,44,95,009/- HA D BEEN INCURRED. THE APPELLANT FURTHER SUBMITTED THAT CONS TRUCTION OF FLATS HAS NOT BEEN COMPLETED AND THE APPELLANT HAD NEITHER CLAIMED ANY EXPENDITURE NOR SHOWN ANY INCOME AGAINS T THESE FLATS. THE APPELLANT SUBMITTED THAT INCOME AND EXPE NDITURE WILL BE BOOKED IN THE YEAR IN WHICH THE CONSTRUCTION WIL L BE COMPLETED AND THE POSSESSION WILL BE HANDED OVER TO THE PROSPECTIVE BUYERS. REGARDING ITS ACCOUNTING POLICY , THE APPELLANT SUBMITTED THAT THE FINANCIAL STATEMENTS O F GLADA ARE PREPARED ON CASH SYSTEM OF ACCOUNTING EXCEPT THE IN TEREST WHICH IS ACCOUNTED FOR ON ACCRUAL BASIS. THE APPELLANT SU BMITTED THAT THE PROJECT COMPLETION METHOD BEING FOLLOWED BY THE APPELLANT IS PERMISSIBLE UNDER THE INCOME TAX ACT. THE ASSESSE E ALSO RELIED 50 UPON THE FOLLOWING CASE LAWS :- I) CIT VS HYUNDAI HEAVY INDUSTRIES CO. LTD. (2007) 291 ITR 482 (S.C.) II) CIT VS BILAHARI INVESTMENT P. LTD. (2008) 299 I TR 1 (S.C). REGARDING BUILDING PLAN SECURITY, THE APPELLANT SUB MITTED THAT THIS AMOUNT REPRESENTED THE SECURITY RECEIVED FROM ALLOTTEES AT THE TIME OF MAP APPROVAL OVER AND ABOVE THE MAP APP ROVAL FEES. THE MAP APPROVAL FEE WAS SHOWN AS INCOME AND THE SE CURITY WAS REFUNDED AFTER THE COMPLETION OF BUILDING/HOUSE S AS PER NORMS. 71. REGARDING THE PENDING ADJUSTMENT ACCOUNT, THE A PPELLANT SUBMITTED THAT THESE AMOUNTS REPRESENTS THE AMOUNTS RECEIVED ABOUT WHICH THE STATUS WAS NOT CLEAR DUE TO PROPER DOCUMENTATION, THEREFORE, THIS AMOUNT WAS KEPT AS L IABILITY TILL ITS CLARIFICATION. REGARDING EARNEST MONEY FROM PRO SPECTIVE BUYERS, THE APPELLANT SUBMIT: THAT THE AMOUNT REPRE SENTED THE AMOUNTS RECEIVED FROM THE APPLICANTS UNDER APPLICAT ION FOR ALLOTMENT OF PLOTS AND FLATS. THE UNSUCCESSFUL APPL ICANTS ARE REFUNDED THE AMOUNTS. THE SUCCESSFUL APPLICANTS ARE ALLOTTED FLATS AND EARNEST MONEY IS ADJUSTED AGAINST INSTALM ENTS. 72. REGARDING EARNEST MONEY FROM CONTRACTORS, THE A SSESSEE SUBMITTED THAT THE AMOUNT REPRESENTED THE AMOUNTS R ECEIVED FROM THE CONTRACTORS ALONG WITH TENDER FORMS. THE U NSUCCESSFUL CONTRACTORS ARE REFUNDED THE AMOUNTS. THE SUCCESSFU L CONTRACTORS ARE ALLOTTED TENDERS AND EARNEST MONEY IS ADJUSTED AGAINST THEIR BILLS. REGARDING OTHER DEPOSITS, THE ASSESSEE SUBMITTED THAT THE AMOUNT REPRESENTS SECURITY DEPOS ITS RECEIVED 51 AGAINST LAND USED BY THE VARIOUS AUTHORITIES AND TH E DEPARTMENTS OF STATE AND OTHER DEPARTMENTS. 73. THE ASSESSING OFFICER CONSIDERED THE APPELLANT'S R EPLY BUT FOUND THE SAME UNSATISFACTORY. REFERRING TO THE TWO DECISIONS RELIED UPON THE ASSESSEE IN SUPPORT OF ITS CONTENTI ON THAT PROJECT COMPLETION METHOD IS AN ACCEPTED METHOD, TH E ASSESSING OFFICER POINTED OUT THAT THESE DECISIONS HAVE BEEN DELIVERED WITH RESPECT TO A/YS 1987-88 TO 1988-89 AND 1991-92 TO 1997- 98, RESPECTIVELY, WHEREAS, THE FINANCE ACT, 1995 HA S AMENDED THE PROVISIONS OF SECTION 145 W.E.F. 01.04.1997. TH E ASSESSING OFFICER OBSERVED THAT W.E.F. 01.04.1997, THE APPELL ANT WAS REQUIRED TO FOLLOW EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING AND THEREFORE THESE DECISIONS WERE NOT A PPLICABLE IN THE ASSESSEES CASE. AS THE APPELLANT WAS FOLLOWING CASH SYSTEM OF ACCOUNTING, THE ASSESSING OFFICER HELD THAT THE RECEIPTS SHOWN UNDER SCHEDULE B ATTACHED TO THE BALANCE SH EET WERE REQUIRED TO BE SHOWN AS INCOME OF THE APPELLANT. FO LLOWING ADDITIONS WERE MADE TO THE TOTAL INCOME OF THE APPE LLANT:- I) ADDITION OF RS.75,42,113/- BEING 10% OF THE EARNEST MONEY RECEIVED, II) ADDITION OF RS. 1,69,49,493/- RECEIVED ON ACCOUNT O F BUILDING PLAN SECURITY. III) ADDITION OF RS.74,30,344/- BEING DEPOSITS RECEIVED BY THE APPELLANT. IV) ADDITION OF RS. 14,03,859/- BEING SECURITY REC EIVED FROM DIFFERENT DEPARTMENTS. V) ADDITION OF RS.4,04,48,216/- BEING DEPOSITS RECEIVE D FROM CUSTOMERS AGAINST FLATS. 52 74. THE ASSESSEE REITERATED THE SUBMISSIONS BE FORE LD. CIT(APPEALS) AND ALSO SUBMITTED THAT: 'THE DETAILS OF AMOUNT RECEIVED AGAINST ALLOTMENT O F THE FLATS AT SECTOR-40, IT IS SUBMITTED THAT WE HAVE RE CEIVED RS.6,49,43,225/- DURING THE YEAR, THE DETAIL OF WHI CH IS AS UNDER:- 10% APPLICATION MONEY RS. 1,15,20,000/- ALLOTMENT MONEY RS. 5,34,23,225/- AND WE HAVE INCURRED THE FOLLOWING DEVELOPMENT EXPE NSES FOR THE CONSTRUCTION OF FLATS WHICH HAVE BEEN SHOWN IN THE STOCK :- CIVIL CONSTRUCTION RS. 2,16,62,231/- PUBLIC HEALTH EXPENDITURE RS. 28,32,778/- (WATER & SEWE4RAGE) THE ABOVE COSTS DO NOT INCLUDE THE LAND COST WHICH ALSO FORMS PART OF THE COST OF PROJECT. THE CONSTRUCTION OF FLATS IS NOT COMPLETE AS SUBMIT TED EARLIER IN OUR REPLY. WE AGAIN SUBMIT THAT WE HAVE NEITHER CLAIMED ANY EXPENDITURE NOR SHOWN ANY INCOME AGAINS T THESE FLATS. INCOME & EXPENDITURE WILL BE BOOKED IN THE YEAR IN WHICH CONSTRUCTION WILL BE COMPLETED AND TH E POSSESSION WILL BE HANDED OVER TO THE PROSPECTIVE B UYERS, THIS ACCOUNTING POLICY IS REGULARLY FOLLOWED & IS B EING ACCEPTED BY THE DEPARTMENT. 4. IT IS SUBMITTED THAT THE FINANCIAL STATEMENTS OF GLADA ARE PREPARED ON CASH SYSTEM OF ACCOUNTING EXCEPT TH E INTEREST WHICH IS ACCOUNTED FOR ON ACCRUAL BASIS. T HIS METHOD IS BEING REGULARLY FOLLOWED BY GLADA SINCE ITS INCE PTION & THIS METHOD OF ACCOUNTING IS ALSO RECOGNIZED BY THE INCOME TAX DEPARTMENT UNDER THE SECTION 145 WHICH PERMITS THE MAINTENANCE OF BOOKS ON CASH BASIS. 5. IT IS SUBMITTED THAT THE PROJECT COMPLETION M ETHOD OF ACCOUNTING IS PERMISSIBLE, IT IS SUBMITTED THAT THE PROJECT COMPLETION METHOD IS PERMISSIBLE IN THE INCOME TAX ACT, 53 1961. IT IS WELL SETTLED THAT THE PROJECT COMPLETIO N METHOD IS ONE OF THE RECOGNIZED METHODS OF ACCOUNTING. IN COMMISSIONER INCOME-TAX AND ANOTHER V. HYUNDAI HEAV Y INDUSTRIES CO. LTD. (2007) 291 ITR 482 (SC) THE SUP REME COURT HELD AS FOLLOWS :- 'LASTLY, THERE IS A CONCEPT IN ACCOUNTS WHICH IS CA LLED THE CONCEPT OF CONTRACT ACCOUNTS. UNDER THAT CONCEPT, T WO METHODS EXIST FOR ASCERTAINING PROFIT FOR CONTRACTS , NAMELY, 'COMPLETED CONTRACT METHOD' AND 'PERCENTAGE OF COMP LETION METHOD'. TO KNOW THE RESULTS OF HIS OPERATIONS, THE CONTRACTOR PREPARES WHAT IS CALLED A CONTRACT ACCOU NT WHICH IS DEBITED WITH VARIOUS COSTS AND WHICH IS CREDITED WITH REVENUE ASSOCIATED WITH A PARTICULAR CONTRACT. HOWE VER, THE RULES OF RECOGNITION OF COST AND REVENUE DEPEND ON THE METHOD OF ACCOUNTING. ' THIS VIEW WAS REITERATED BY THE SUPREME COURT IN COMMISSIONER OF LNCOME-TAX V INVESTMENT P. LTD. (20 08) 299 ITR I (SC.) AFTER THE ABOVE JUDGMENTS OF THE SUPREME COURT IT C ANNOT BE SAID THAT THE PROJECT COMPLETION METHOD FOLLOWED B Y THE ASSESSEE WOULD RESULT IN DEFERMENT OF THE PAYMENT O F THE TAXES WHICH ARE TO BE ASSESSED ANNUALLY UNDER THE I NCOME TAX ACT, THEREFORE, THE METHOD OF ACCOUNTING FOLLOWED BY GLA DA I.E. PROJECT COMPLETION METHOD IS PERMISSIBLE UNDER THE INCOME TAX ACT. ' 75. COPY OF THE APPELLANT'S SUBMISSIONS WAS PROVID ED TO THE ASSESSING OFFICER, WHO WAS PRESENT DURING THE COURS E OF APPELLATE PROCEEDINGS. THE AO VIDE REPORT DATED 23. 09.2013, SUBMITTED AS UNDER:- REPLY OF THE ASSESSEE ON ALL THE ABOVE ISSUES HAS B EEN CONSIDERED. THE ASSESSEE HAS CITED TWO DECISIONS I. E. 291 ITR 482 AND 299 ITR 1 TO SUPPORT HIS CONTENTION THA T THE PROJECT COMPLETION METHOD IS THE RIGHT METHOD AS IS BEING FOLLOWED BY THE ASSESSEE. HOWEVER PERUSAL OF THE DE CISIONS OF HON'BLE SUPREME COURT MENTIONED SUPRA REVEAL THAT 54 THESE DECISIONS HAVE BEEN DELIVERED WITH RESPECT TO THE ASST YEARS 1987-88 TO 1988-89 AND ASSTT. YEARS 1991-92 T O 1997-98 RESPECTIVELY WHEREAS THE FINANCE ACT 1995 H AS AMENDED THE PROVISIONS OF SECTION 145 WITH EFFECT F ROM 1.4.1997. AS SUCH THE ABOVE DECISIONS DO NOT COME T O THE RESCUE OF THE ASSESSEE AND FROM 1.4.1997 THE ASSESS EE IS REQUIRED TO FOLLOW THE METHOD OF ACCOUNTING EITHER CASH OR MERCANTILE. THEREFORE THE REPLY OF THE ASSESSEE IS NOT ACCEPTABLE ON THIS ACCOUNT AND IS REJECTED ACCORDIN GLY. AS THE ASSESSEE IS FOLLOWING CASH SYSTEM OF ACCOUNTING THE RECEIPTS SHOWN UNDER SCHEDULE 'B' ATTACHED TO THE BALANCE SHEET REQUIRED TO BE SHOWN AS INCOME BY THE ASSESSE E AS DETAILED BELOW:- THE ASSESSEE HAD SHOWN TO HAVE RECEIVED RS.6,49,43, 225/- DURING THE YEAR, AGAINST THE ALLOTMENT OF FLATS AT SECTOR 40 AND ALSO STATED TO HAVE INCURRED EXPENSES OF RS.2,44,95,009/-. THEREFORE, BALANCE RS.4,04,48,2 16/- SHOULD BE ADDED TO THE INCOME OF THE ASSESSEE ON TH E BASIS OF CASH SYSTEM OF ACCOUNTING. 10.'ADDITION OF RS. 75,42,113/- ON ACCOUNT OF EARNE ST MONEY FROM PROSPECTIVE IN THIS REGARD IT IS SUBMITTED THAT THE ASSESSE E HAS SHOWN RECEIPTS OF RS. 7,54,21,138/- UNDER THE HEA D EARNEST MONEY (PROSPECTIVE BUYERS). THE ASSESSEE HAS STATED THAT THIS AMOUNT REPRESENT THE RECEIPTS FROM PROSPECTIVE BUYERS ON APPLICATION AGAINST ALLOTMENT OF FLATS / PLOTS. THESE RECEIPTS OTHER THAN THE ALLOTTEES AR E TO BE REFUNDED. BUT THE ASSESSEE HAD NOT GIVEN ANY BIFURC ATION OF THESE RECEIPTS OR PROVED THAT THIS AMOUNT HAS BEEN REFUNDED BACK IN PAST, HENCE 10% OF THIS AMOUNT (RS.75,42,11 3/-) WAS CONSIDERED TO BE RECEIPTS FROM THE ALLOTTEES AN D WAS ADDED TO INCOME OF THE ASSESSEE ON THE BASIS OF CAS H SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE. 11. ADDITION OF RS. 14,03,859/- ON ACCOUNT OF SECUR ITY DEPOSITS FROM OTHERS. IN THIS REGARD IT IS SUBMITTED THAT THE ASSESSEE, H AS SHOWN RECEIPTS OF RS. 14,03,859/- AGAINST THE LAND USED BY VARIOUS AUTHORITIES AND OTHER DEPARTMENTS. THE ASSE SSEE HAS FAILED TO PROVE THAT IT IS A REFUNDABLE SECURIT Y DEPOSIT. TILL DATE NO SUCH AMOUNT HAS BEEN REFUNDED BACK .HE NCE 55 THIS AMOUNT SHOULD BE ADDED TO THE INCOME OF THE AS SESSEE AS THE ASSESSEE IS FOLLOWING CASH SYSTEM OF ACCOUNT ING. 12. ADDITION OF RS. 74,30,334/- ON ACCOUNT OF DEPOS ITS AGAINST PENDING ADJUSTMENTS. THE ASSESSEE HAD SHOWN DEPOSITS PENDING ADJUSTMENT AMOUNTING TO RS. 74,30,344/-ABOUT WHICH THE ASSESSE E HAD STATED THAT THE STATUS OF THESE RECEIPTS IS NOT CLE AR DUE TO (NO) PROPER DOCUMENTATION. AS THE ASSESSEE HAS FAIL ED TO EXPLAIN THESE RECEIPTS DURING THE YEAR, THESE ARE T REATED TO BE THE INCOME OF THE ASSESSEE AND SHOULD BE ADDED T O ITS INCOME. 76. COPY OF THE ASSESSING OFFICERS REPORT WAS PROVI DED TO THE ASSESSEE. THE ASSESSEE MADE NO FURTHER SUBMISSIONS ON THESE ISSUES. 77. THE LD. CIT(APPEALS), CONSIDERING THE SUBMISSIO N OF THE ASSESSEE, CONFIRMED ALL THE ABOVE FOUR ADDITIONS ON WHICH ASSESSEE HAS PREFERRED APPEAL. HIS FINDINGS IN PAR A 10.5 ARE REPRODUCED AS UNDER : 10.5 I HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISS IONS. EACH OF THE AFORESAID ADDITIONS ARE BEING DISCUSSED AS UNDER : - I) ADDITION OF RS.75,42,113/- BEING 10% OF THE EARN EST MONEY RECEIVED;- THE DETAILS OF EARNEST MONEY RECEIVED/REFUNDED/ADJU STED DURING THE LAST FIVE YEARS IS AS UNDER : EARNEST EARNEST E/M BALANCE S.NO. YEAR MONEY MONEY ADJUSTED (RECEIVED (REFUNDED AGAINST COST OF SALES 1. 2005-06 -- 2. 2006-07 476677416 23000 476654416 56 3 2007-08 1611660 478266076 NIL 4. 2008-09 752550 752550 NIL 5. 2009-10 130631402 55210263 75421138 DURING THE COURSE OF APPELLATE PROCEEDINGS THE APPE LLANT WAS ASKED TO FILE THE DETAILS OF ANY REFUNDS OR ANY ADJUSTMEN TS AGAINST SALES MADE OUT OF THE BALANCE EARNEST MONEY AS ON 31.3.20 10 AMOUNTING TO RS.7,54,21,138/- UPTO 31.3.2013. AS PER THE DETA ILS SUBMITTED BY THE APPELLANT OUT OF THE BALANCE AMOUNT OF RS. 7 ,54,21,138/- AS ON 31.03.2010 NO AMOUNT WAS REFUNDED DURING THE YEA R 2010-11. THE BALANCE EARNEST MONEY WITH THE APPELLANT AS ON 31.03.2011 WAS RS. 53,36,29,138/-. HOWEVER, THE BALANCE AS ON 31.3.2012 WAS RS. 5,88,60,328/- AND BALANCE AS ON 31.3.2013 W AS RS 6,21,19,425/-. FROM THE AFORESAID FACTS IT IS APPAR ENT THAT THE EARNEST MONEY COLLECTED IS PURELY REFUNDABLE AMOUNT WHICH IS DULY REFUNDED FROM TIME TO TIME. IT CANNOT BE HELD TO BE THE INCOME OF THE APPELLANT. IN CASE ANY AMOUNT OUT OF EARNEST MONEY IS ADJUSTED TOWARDS SALE IN ANY YEAR, IT WILL BE LIABLE TO BE I NCLUDED IN THE INCOME OF THAT YEAR. THE ADDITION MADE BY THE AO ON THIS ACCOUNT IS DELETED. II) ADDITION OF RS. 1,69,49,493/- RECEIVED ON ACCOU NT OF BUILDING PLAN SECURITY THE DETAILS OF BUILDING PLAN SECURITY RECEIVED/REF UNDED DURING THE LAST FIVE YEARS IS AS UNDER : S.NO. YEAR BUILDING PLAN BUILDING BALANCE SECURITY SECURITY RECEIVED REFUNDED 1. 2005-06 NIL NIL NIL 2. 2006-07 540000 NIL 540000 3. 2007-08 1644500 NIL 1644500 4. 2008-09 1333500 NIL 1333500 5. 2009-10 13431493 375000 16949493 OUT OF THE BALANCE AMOUNT OF RS. 1,69,49,493 / - UNDER THIS HEAD, NO AMOUNT WAS REFUNDED DURING THE YEAR 2010-11 AS WELL AS DURING THE YEAR 2011-12 & 2012-13. THE TOTAL BALANCE LYING IN THIS ACCOUNT AS ON 31.03.2013 WAS RS. 2,27,87,338/-. DURING THE COURSE OF APPELLATE PROCEEDINGS, AR OF T HE APPELLANT EXPLAINED THE PURPOSE OF BUILDING PLAN SECURITY. TH E CONDITION FOR REFUND OF THIS SECURITY IS THAT THE CONSTRUCTION SH OULD BE IN ACCORDANCE WITH THE APPROVED PLAN AND THE PERSON HA S TO FURNISH 57 A COMPLETION CERTIFICATE. IT IS A MATTER OF COMMON KNOWLEDGE THAT IN MOST OF THE CASES, CONSTRUCTION IS NOT IN ACCORDANC E WITH THE APPROVED PLANS AND OFTEN THERE IS SOME VIOLATION OF THE PLAN EVEN IF IT IS MINOR VIOLATION. IN SUCH CIRCUMSTANCES BUI LDER DOES NOT APPLY FOR A COMPLETION CERTIFICATE AND PREFERS TO F ORFEIT THE BUILDING PLAN SECURITY RATHER THAN INVITING CLOSURE/DEMOLITI ON OF BUILDING. THIS IS EVIDENT FROM THE FACT THAT DURING THE PERIO D OF 8 YEARS FROM 2006-07 TO 2012-13, ONLY RS/ 3,75,000/- WERE REFUND ED IN THE YEAR 2009-10 AND THE BALANCE IN THIS ACCOUNT AS ON 31.03.2013 WAS RS. 2,27,87,338/-. THUS ALTHOUGH, INITIALLY THE AMOUNTS OF BUILDING PLAN SECURITY WERE RECEIVED AS REFUNDABLE SECURITY, WITH PASSAGE OF TIME THESE AMOUNTS HAVE BECOME A PART OF APPELLANT'S FUNDS WITH NO LIKELIHOOD OF ANY CLAIM FOR REFUNDS. THIS AMOUNT WOULD ACCORDINGLY PARTAKE THE CHARACTER OF APPELLAN T'S INCOME U/S 28(IV) OF THE I.T. ACT. RELIANCE IN THIS REGARD IS PLACED ON FOLLOWING CASE LAWS:- (I) CIT V. SUNDARAM LYENGAR AND SONS LTD. (1996) 2 22 ITR 344 (SC). (A.Y. 2004-05) THE HON'BLE SUPREME COURT HELD AS UNDER: 'IF A COMMONSENSE VIEW OF THE MATTER IS TAKEN, THE ASSESSEE, BECAUSE OF THE TRADING OPERATION, HAD BECOME RICHER BY THE AMOUNT WHICH IT TRANSFERRED TO ITS PROFIT AND LOSS ACCOUNT. THE MONEYS HAD ARISEN OUT OF ORDINARY TRADING TRANSACTI ONS. ALTHOUGH THE AMOUNTS RECEIVED ORIGINALLY WERE NOT OF INCOME NATURE, THE AMOUNTS REMAINED WITH THE ASSESSEE FOR A LONG PERIO D UNCLAIMED BY THE TRADE PARTIES. BY LAPSE OF TIME, THE CLAIM O F THE DEPOSIT BECAME TIME-BARRED AND THE AMOUNT ATTAINED A TOTALL Y DIFFERENT QUALITY. IT BECAME A DEFINITE TRADE SURPLUS. ATKINS ON J. POINTED OUT THAT IN TATTERSALL'S CASE [1939] 7 ITR 316 (CA) NO TRADING ASSET WAS CREATED. MERE CHANGE OF METHOD OF BOOK-KE EPING HAD TAKEN PLACE. BUT, WHERE A NEW ASSET CAME INTO BEING AUTOMATICALLY BY OPERATION OF LAW, COMMONSENSE DEMA NDED THAT THE AMOUNT SHOULD BE ENTERED IN THE PROFIT AND LOSS ACCOUNT FOR THE YEAR AND BE TREATED AS TAXABLE INCOME. IN OTHER WORDS, THE PRINCIPLE APPEARS TO BE THAT IF AN AMOUNT IS RECEIV ED IN THE COURSE OF TRADING TRANSACTION, EVEN THOUGH IT IS NOT TAXAB LE IN THE YEAR OF RECEIPT AS BEING OF REVENUE CHARACTER, THE AMOUNT C HANGES ITS CHARACTER WHEN THE AMOUNT BECOMES THE ASSESSEE'S OW N MONEY BECAUSE OF LIMITATION OR BY ANY OTHER STATUTORY OR CONTRACTUAL RIGHT. WHEN SUCH A THING HAPPENS, COMMONSENSE DEMAN DS THAT THE AMOUNT SHOULD BE TREATED AS INCOME OF THE ASSES SEE. 58 IN THE PRESENT CASE, THE MONEY WAS RECEIVED BY THE ASSESSEE IN THE COURSE OF CARRYING ON HIS BUSINESS. ALTHOUGH IT WAS TREATED AS DEPOSIT AND WAS OF CAPITAL NATURE AT THE POINT O F TIME IT WAS RECEIVED, BY EFFLUX OF TIME THE MONEY HAS BECOME TH E ASSESSEE'S OWN MONEY. WHAT REMAINS AFTER ADJUSTMENT OF THE DEP OSITS HAS NOT BEEN CLAIMED BY THE CUSTOMERS. THE CLAIMS OF TH E CUSTOMERS HAVE BECOME BARRED BY LIMITATION. THE ASSESSEE ITSE LF HAS TREATED THE MONEY AS ITS OWN MONEY AND TAKEN THE AMOUNT TO ITS PROFIT AND LOSS ACCOUNT. THERE IS NO EXPLANATION FROM THE ASSESSEE WHY THE SURPLUS MONEY WAS TAKEN TO ITS PROFIT AND LOSS ACCOUNT EVEN IF IT WAS SOMEBODY ELSE'S MONEY. IN FACT, AS ATKINS ON J. POINTED OUT THAT WHAT THE ASSESSEE DID WAS THE COMMONSENSE WAY OF DEALING WITH THE AMOUNTS. ' (II) LOGITRONICS PVT. LTD, V. CIT (2011) 333 ITR 386 / 19 7 TAXMAN 394/ 53 DTR 50 /240 CTR 20 (DELHI)(HIGH COURT) (III) ROLLATAINERS LTD. V. CIT (2012) 250 CTR 25 (DELHI(H IGH COURT) (IV) SOLID CONTAINERS LTD. VS DCIT 308 ITR 417 (BOMBAY) THE HON'BLE HIGH COURT HELD AS UNDER: 'THE AMOUNT WHICH INITIALLY DID NOT FALL WITHIN THE SCOPE OF THE PROVISIONS RENDERING IT LIABLE TO TAX SUBSEQUENTLY HAD BECOME THE ASSESSEE'S INCOME BEING PART OF THE TRADING OF THE ASSESSEE. SIMILAR VIEW WAS ALSO TAKEN BY A BENCH OF THE MADRAS HIGH C OURT IN THE CASE OF CIT V. ARIES ADVERTISING P. LTD [2002] 255 IT R 510. THE COURT TOOK THE VIEW THAT THE ASSESSEE BECAUSE OF TR ADING OPERATION BECAME RICHER BY THE AMOUNT WHICH HAD BEEN TRANSFER RED AND/OR RETAINED IN THE PROFIT AND LOSS ACCOUNT OF THE ASSES SEE. ' THE AO WAS THEREFORE FULLY JUSTIFIED IN ADDING THE AMOUNT OF RS. 1,69,49,493/- TO THE TOTAL INCOME OF THE APPELLANT. III) ADDITION OF RS.74,30,344/- BEING DEPOSITS RECEIVED BY THE APPELLANT:- WITH RESPECT TO THESE RECEIPTS APPELLANT HAS MERELY SUBMITTED THAT STATUS WAS NOT CLEAR & THEREFORE THESE HAVE BEEN KE PT IN SUSPENSE ACCOUNT. APPELLANT HAS NOT EXPLAINED OR GIVEN ANY E VIDENCE TO SHOW THAT THESE RECEIPTS WERE NOT REVENUE RECEIPTS. MERE LY BECAUSE THESE RECEIPTS HAVE BEEN KEPT IN SUSPENSE ACCOUNT DOES NO T SIMPLY THAT THESE RECEIPTS DO NOT FORM PART OF INCOME. RELIANCE IN THIS REGARD IS PLACED ON THE CASE OF CIT VS TAMIL NADU INDUSTRIAL I NVESTMENT CORPN. LTD. (MAD) 240 ITR 573. IN THIS CASE IT WAS H ELD THAT INTEREST, GUARANTEE COMMISSION AND COMMITMENT CHARGES COLLECT ED BY ASSESSEE AND KEPT IN SUSPENSE A/C IS INCOME. 59 KEEPING IN VIEW THE AFORESAID FACTS, THE ADDITION M ADE BY THE AO IS CONFIRMED. IV) ADDITION OF RS.14.03.859/- BEING SECURITY R ECEIVED FROM DIFFERENT DEPARTMENTS;- DETAILS OF SECURITY RECEIVED UNDER THIS HEAD DURING THE LAST FIVE YEARS IS AS UNDER : FACTS ON THIS ISSUE ARE SIMILAR TO THE FACTS ON THE ISSUE OF BUILDING PLAN SECURITY. SUBSTANTIAL AMOUNT OF SECURITY HAS N OT BEEN REFUNDED BY GLADA. ON SIMILAR GROUNDS AS IN THE CAS E OF BUILDING PLAN SECURITY THE BALANCE LYING UNDER THIS HEAD IS INCOME OF THE APPELLANT. KEEPING IN VIEW THE AFORESAID FACTS, THE ADDITION BY THE AO IS CONFIRMED. V) ADDITION OF RS.4,04,48,216/- BEING DEPOSITS RECE IVED FROM CUSTOMERS AGAINST FLATS:- ON THIS ISSUE THE APPELLANT'S CONTENTION IS THAT IT WAS FOLLOWING PROJECT COMPLETION METHOD. THE AO HAS POINTED OUT T HAT AFTER THE AMENDMENT TO SECTION 145(1) WITH EFFECT FROM 1-4-19 97, THE APPELLANT COULD FOLLOW EITHER MERCANTILE OR CASH ME THOD OF ACCOUNTING. AS PER THE PROVISION OF SUB-SECTION (1) OF SECTION 145 OF THE INCOME TAX ACT, 1961, THE APPELLANT HAS TO COMP UTE ITS INCOME EITHER ON MERCANTILE OR CASH SYSTEM OF ACCOUNTING R EGULARLY EMPLOYED BY HIM. THE APPELLANT HAS OPTION TO ADOPT EITHER CASH SYSTEM OF ACCOUNTING OR MERCANTILE SYSTEM OF ACCOUN TING. BUT IT IS NOT PERMISSIBLE TO COMPUTE INCOME FROM DIFFERENT AC TIVITIES BY APPLYING DIFFERENT METHOD OF ACCOUNTING IN THE SAME YEAR. AS PER S.NO. YEAR SECURITY DEPOSITS RECEIVED SECURITY DEPOSITS REFUNDED BALANCE 1. 2005-06 NIL NIL NIL 2. 2006-07 49000 - 49000 3 2007-08 199500 114000 85500 4, 2008-09 710000 44500 25500 5. 2009-10 1263859 20000 1243859 1403859 60 APPELLANT'S OWN SUBMISSIONS IT WAS FOLLOWING CASH S YSTEM OF ACCOUNTING. THEREFORE, WHEN THE BILLS ARE RAISED AN D THE MONEY REALIZED, THE INCOME ACCRUED TO THE APPELLANT. HOWE VER, THE SAME WAS NOT ACCOUNTED FOR IN THE PROFIT & LOSS ACCOUNT TILL THE CONTRACT WORK WAS COMPLETED. THIS ACCOUNTING TREATMENT IS NO T IN ACCORDANCE WITH LAW. ACCORDING TO SECTION 4 OF THE INCOME TAX ACT, INCOME TAX IS CHARGEABLE IN RESPECT OF TOTAL INCOME OF EACH A.Y. INCOME RECEIVED DURING THE YEAR CANNOT BE DEFERRED TO FUTURE BY ADOPTING A METHOD OF ACCOUNTING WHICH IS INCONSISTE NT WITH THE METHOD OF ACCOUNTING WHICH APPELLANT CLAIMS TO BE R EGULARLY FOLLOWING. IF THE INCOME HAS BEEN RECEIVED DURING THE YEAR, IT HAS TO BE RECORDED DURING THE YEAR PARTICULARLY WHEN THE A PPELLANT IS FOLLOWING THE CASH SYSTEM OF ACCOUNTING. IN VIEW O F THE CHARGING SECTION, THE INSTALLMENT RECEIVED DURING THE YEAR I S TO BE ACCOUNTED FOR WHILE COMPUTING APPELLANT'S INCOME. IN VIEW OF THESE FACTS, IT IS CLEAR THAT THE INSTALLMENTS ACTUALLY RECEIVED DURIN G THE YEAR UNDER ASSESSMENT ARE TO BE TREATED AS REVENUE RECEIPTS. IN APPELLANT'S CASE, THERE IS NO DISPUTE THAT APPEL LANT RECEIVED THESE AMOUNTS DURING THE YEAR AND THESE AMOUNTS ARE INSTALLMENTS PAID BY THE PURCHASERS ON PURCHASE OF FLATS FROM APPELLANT. THEREFORE, THESE RECEIPTS ARE REVENUE IN NATURE. SINCE APPELLANT IS FOLLOWING CASH SYSTEM OF ACCOUNTING, T HESE AMOUNTS ARE TO BE TAXED DURING THE YEAR. APPELLANT CANNOT D EFER THE INCOME TO FUTURE YEARS BY ADOPTING INCORRECT METHOD OF ACC OUNTING WITH A VIEW TO POSTPONE THE TAX LIABILITY. RELIANCE IS PLACED ON THE FOLLOWING CASE LAWS:- (A)M/S. TUTICORIN ALKALI CHEMICALS & FERTILIZERS LT D. VS CIT (SO 227 ITR 172 ACCOUNTANCY PRACTICE CANNOT OVERRIDE SEC. 56 OR ANY PROVISIONS OF I.T. ACT THE INCOME-TAX LAW DOES NOT MARCH STEP BY STEP IN THE FOOTPRINTS OF THE ACCOUNTANCY PROFESSION - WHEN THE QUESTION IS WHETHER A RECEIPT OF MONEY IS TAXABLE OR NOT OR WHE THER CERTAIN DEDUCTIONS FROM THAT RECEIPT ARE PERMISSIBLE IN LAW OR NOT, THE QUESTION HAS TO BE DECIDED ACCORDING TO THE PRINCIP LES OF LAW AND NOT IN ACCORDANCE WITH ACCOUNTANCY PRACTICE. (B) SUTLEI COTTON MILLS LTD. VS CIT (SO 116 ITR 1 61 THE MATTER OF TAXABILITY CANNOT BE DECIDED ON THE B ASIS OF THE ENTRIES WHICH THE ASSESSEE MAY CHOOSE TO MAKE IN HI S ACCOUNTS, BUT HAS TO BE DECIDED IN ACCORDANCE WITH THE PROVIS IONS OF LAW. (C) CIT VS U.P. STATE INDUSTRIAL DEVELOPMENT CORPORA TION (S.C) 225 ITR 703 PRINCIPLES OF COMMERCIAL ACCOUNTING SHOULD BE APPLI ED IN ASCERTAINING PROFITS & GAINS. (D) CIT VS BRITISH PAINTS INDIA LTD. (S.C) 188 ITR 4 4 IT IS NOT ONLY THE RIGHT, BUT THE DUTY OF THE AO TO CONSIDER WHETHER OR NOT THE BOOKS DISCLOSE THE TRUE STATE OF ACCOUNTS A ND THE CORRECT INCOME CAN BE DEDUCED THEREFROM - EVEN IF METHOD OF ACCOUNTING IS REGULARLY FOLLOWED, ITO CAN REJECT IT SINCE THERE I S NO ESTOPPEL ON THESE MATTERS - EACH YEAR BEING A SELF-CONTAINED UN IT, TAXES OF A PARTICULAR YEAR IS PAYABLE WITH REFERENCE TO THE IN COME OF THAT YEAR AS COMPUTED IN TERMS OF THE ACT. E) CIT VS CHANDIGARH INDUSTRIAL & GENERAL DEVELOPMENT CORPORATION LTD. 319 ITR 85 (P&H) IN THIS CASE, THE HON'BLE HIGH COURT HAS HELD IN SI MILAR CIRCUMSTANCES THAT AMOUNT RECEIVED ON ACCOUNT OF IN STALLMENTS ARE TAXABLE DURING THE YEAR. THE QUESTION OF LAW BEFORE THE HON'BLE COURT WAS WHETHER INCOME OF THE ASSESSEE WAS TO BE TAXED ON RECEIPT BASIS EVEN THOUGH THE ASSESSEE WAS FOLLOWIN G MERCANTILE SYSTEM OF ACCOUNTING. IT HELD AS UNDER: 'APPLYING THE AFORESAID PRINCIPLES TO THE FACTS OF THE PRESENT CASE, IT IS UNDISPUTED THAT THE ASSESSEE ALLOTS AN INDUSTRIA L SHED ON LEASEHOLD BASIS IN WHICH PREMIUM IS REQUIRED TO BE PAID OVER 10 YEARS PERIOD AND THE RIGHTS ARE TRANSFERRED IN FAVO UR OF THE ALLOTTEE/LESSEE ON THE PAYMENT OF FINAL INSTALLMENT S. FURTHER, TILL THE ASSESSEE RECEIVED PAYMENT OF ANNUAL INSTALLMENTS DU RING THE YEAR, IT IS AN INCHOATE RIGHT IN FAVOUR OF THE ASSESSEE A S IN THE EVENT OF FAILURE ON THE PART OF THE ALLOTTEE/LESSEE, THE MAN AGING DIRECTOR OF THE CORPORATION HAS ONLY RIGHT TO RESUME BUT CANNOT ENFORCE THE PAYMENT OF THE BALANCE AMOUNT. STILL FURTHER, THE R EVENUE SINCE 1979 HAD BEEN TREATING THE ACCRUAL OF PROFITS ON YE ARLY BASIS ON 62 INSTALLMENTS DUE TILL THE PAYMENT OF LAST INSTALLME NTS WAS MADE AND THERE IS NO JUSTIFICATION FOR THE REVENUE IN DEVIAT ING FROM THE SAID APPROACH WHICH IS IN CONFORMITY WITH LAW. VIEWED FR OM THIS, THE APPROACH OF THE TRIBUNAL WAS CORRECT AND IT HAD RIG HTLY HELD THAT EVEN UNDER MERCANTILE SYSTEM OF ACCOUNTING, THE INC OME WOULD ACCRUE ON RECEIPT OF INSTALMENT ON YEAR TO YEAR BAS IS AND NOT ON THE ALLOTMENT OF LAND OR INDUSTRIAL SHEDS.' RATIO OF THIS JUDGMENT IS APPLICABLE TO APPELLANT'S CASE AS FACTS ARE IDENTICAL AND FURTHER APPELLANT IS FOLLOWING CASH S YSTEM OF ACCOUNTING. F) PARAM ANAND BUILDERS (P)LTD. VS ITO (ITAT. M UM) 59 ITD 29 (G) UTTAM SINGH DUGGAL & CO. P. LTD. VS CIT (DEH 127 ITR 21 (H) CIT VS NANDRAM HIMATRAM (ORI) 103 ITR 433 ASSESSEE CONTRACTOR CLAIMED 'PROJECT COMPLETION MET HOD 1 REJECTED U/S 145(2) SINCE INCOME ACCRUES EVERY YEAR - RECEIP T OF 'ON MONEY 1 WAS THERE IN ALL THE YEARS. (I) IAC VS PUNJ & SONS (ITAT, DEL) 56 ITD 281 CONTRACTOR MADE CLAIM OF COMPLETED CONTRACT METHOD - AS PER CONTRACT, ASSESSEE ENTITLED TO RECEIVE PAYMENT BY 3 1.3.83 VESTED RIGHT AROSE ON THAT DAY EVEN THOUGH SOME PAYMENTS W ERE RECEIVED SUBSEQUENTLY -ASSESSABLE IN AY 83-84 REFERENCE MAY ALSO BE MADE TO THE FOLLOWING CASE L AWS: (I) DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF TIRATH RAM AHUJA (P.) LTD. V. CIT [1976] 103 ITR 15, IN WHICH I T WAS POINTED OUT THAT ONE NEED NOT WAIT FOR COMPLETION OF THE PR OJECT IN ORDER TO ASCERTAIN THE INCOME. IT WILL BE OPEN TO THE REV ENUE TO ESTIMATE THE PROFIT ON THE BASIS OF RECEIPTS OF EAC H YEAR EVEN THOUGH THE CONTRACT IS NOT COMPLETED IN THAT YEAR. (II) HON'BLE PATNA HIGH COURT IN THE CASE OF SHRI SUKHDE O DAS JALAN V. CIT [1954] 26 ITR 617, IN WHICH IT WAS POINTED O UT THAT PROFITS IN UNCOMPLETED CONTRACT ARE ALSO TAXABLE IN THE RELEVANT ACCOUNTING YEAR. (III) DECISIONS OF HON'BLE SUPREME COURT IN THE CASE OF E .D. SASOON & CO. LTD. V. CIT [1954/26 ITR 27 AND MORVI INDUSTRIES LTD V. CIT 63 [1971] 82 ITR 835, IN WHICH IT WAS INTER ALIA POINT ED OUT THAT THE ACCRUAL OF INCOME DOES NOT DEPEND UPON ENTRIES MADE IN THE BOOKS OF ACCOUNT AS IT OCCURS AT THE TIME OF MAKING THE TRANSACTION. THUS, THE INCOME EMBEDDED IN THE RECEIPTS, CARRIED TO THE BALANCE- SHEET IN RESPECT OF AFORESAID KIND OF CONTRACTS, WA S LIABLE TO BE TAXED IN THIS YEAR. KEEPING IN VIEW THE AFORESAID FACTS, THE ADDITION MADE BY THE AO IS CONFIRMED. 78. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE AUTHORITIES BELOW WITH REGARD TO GROUND NOS. 7, 8 & 9. ON GROUND NO. 7, HE HAS SUBMITTED THAT THE GROU ND IN QUESTION REPRESENTS SECURITY AS RECEIVED FROM DIFFE RENT ALLOTTEES AT THE TIME OF MAP APPROVAL OVER AND ABOVE THE MAP APPROVAL FEES. THE APPROVAL FEES IS BOOKED AS INCOME BY THE ASSESSEE AND SECURITY IS REFUNDED AS AND WHEN DEMANDED BY THE AL LOTTEES. THE COPY OF THE LETTER ISSUED BY PUNJAB URBAN PLANN ING & DEVELOPMENT AUTHORITY PRESCRIBED THE RATES AT WHICH BUILDING SECURITY HAS TO BE CHARGED AND ALSO ABOUT THE REFUN D OF THE SAME AT THE TIME OF SUBMISSION OF THE BUILDING PLAN IS FILED AT PAGES 167, 168 AND 169 OF THE PAPER BOOK. HE HAS S UBMITTED THAT BUILDING PLAN SECURITY IS REFUNDABLE AS AND WH EN BUILDING IS COMPLETED. THE DETAILS OF THE REFUND ARE FILED AT PAGE 209 OF THE PAPER BOOK TO SHOW THAT IN ASSESSMENT YEAR UNDER AP PEAL, ASSESSEE HAS REFUNDED RS. 3,75,000/-. THE SAID AMO UNT HAS BEEN SHOWN AS LIABILITY IN THE BALANCE SHEET, COPY OF WHICH IS FILED AT PAGE 3 OF THE PAPER BOOK. SINCE THE AMOUN T DID NOT BELONG TO THE ASSESSEE, THEREFORE, ASSESSEE CANNOT FORFEIT THE AMOUNT AND ASSESSEE IS BOUND TO RETURN THE SECURITY AMOUNT AS AND WHEN DEMANDED. HE HAS SUBMITTED THAT AUTHORITI ES BELOW 64 HAVE MERELY CONFIRMED THE ADDITION BECAUSE THERE IS NO LIKELIHOOD OF CLAIM OF REFUND IN FUTURE. HE HAS SU BMITTED THAT THE DECISIONS RELIED UPON BY LD. CIT(APPEALS) ARE C LEARLY DISTINGUISHABLE ON FACTS BECAUSE IN THE SAID CASES, THE AMOUNTS HAVE NOT BEEN RECEIVED AS SECURITY DEPOSIT. 79. ON GROUND NO. 8, LD. COUNSEL FOR THE ASSESSEE S UBMITTED THAT THE AMOUNT REPRESENTS THE AMOUNT EITHER RECEIV ED FROM THE ALLOTTEES OR FROM OTHER DEPARTMENTS WHICH DO NOT BE LONG TO THE ASSESSEE AND NEED ADJUSTMENTS. THE SAID AMOUNT HAS BEEN KEPT IN SEPARATE ACCOUNT AND SAME IS ADJUSTED AS AND WHE N SOME CLARIFICATION IS RECEIVED FROM THE PARTIES WHOSE AM OUNT IS OUTSTANDING IN THE BOOKS OF THE ASSESSEE. THE COMP LETE DETAILS WERE FILED AT PB- 211 AND 212. THE AMOUNT IN THE S AID ACCOUNT CANNOT BE TERMED AS INCOME OF THE ASSESSEE. THE JU DGEMENTS RELIED UPON BY LD. CIT(APPEALS) ARE CLEARLY DISTING UISHABLE ON FACTS. 80. ON GROUND NO. 9, LD. COUNSEL FOR THE ASSESSEE S UBMITTED THAT THE AMOUNT IS SECURITY DEPOSITS RECEIVED AGAIN ST THE LAND USED BY DIFFERENT DEPARTMENTS AND IT IS SECURITY RE FUNDABLE IN NATURE AND THE ASSESSEE HAS REFUNDED TIME TO TIME, SEPARATE DETAIL OF WHICH IS FILED AT PAGE 210 OF THE PAPER B OOK TO SHOW THAT IN THE YEAR UNDER CONSIDERATION, RS. 20,000/- HAS BEEN REFUNDED. IT IS NOT THE INCOME OF THE ASSESSEE. 81. ON THE OTHER HAND, LD. DR RELIED UPON ORDERS OF THE AUTHORITIES BELOW. 82. THE LD. DR SUBMITTED THAT SINCE ONLY RS. 3,75,0 00/- AS BUILDING PLAN SECURITY HAS BEEN REFUNDED, THEREFORE , NON 65 SUBMISSION OF THE COMPLETION CERTIFICATE BY VARIOUS COLONIZERS/BUILDERS WOULD SHOW IT IS INCOME IN THE HANDS OF THE ASSESSEE. 83. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND MATERI AL AVAILABLE ON RECORD. THE ASSESSEE, ON ACCOUNT OF B UILDING COMPLETION SECURITY HAS REFUNDED RS. 3,75,000/- IN THE ASSESSMENT YEAR UNDER APPEAL. THE SECURITY AMOUNT IS RECEIVED AS PER THE LETTER ISSUED BY PUNJAB URBAN PLANNING & DEVELOPMENT AUTHORITY PRESCRIBING THE RATES AT WHIC H BUILDING SECURITY HAS TO BE CHARGED AND THE SAME IS TO BE RE FUNDED TO THE CONCERNED PARTIES AT THE TIME OF SUBMISSION OF THE BUILDING COMPLETION. COMPLETE DETAILS WERE FILED BEFORE AUTH ORITIES BELOW AND ASSESSEE HAS ALSO SHOWN THE SECURITY AS THEIR L IABILITY IN THE BALANCE SHEET. THUS, THE AMOUNT IN QUESTION DID NO T BELONG TO THE ASSESSEE AND WAS KEPT IN THE BOOKS OF ACCOUNT A S LIABILITY OF THE ASSESSEE. THE AMOUNT IS REFUNDABLE AS AND WHEN COMPLETION CERTIFICATE IS OBTAINED BY THE PARTIES W HO HAVE SUBMITTED BUILDING PLAN. THE REFUND OF THE SECURIT Y IS TO BE DONE AS PER GUIDELINES ISSUED BY THE PUNJAB URBAN P LANNING & DEVELOPMENT AUTHORITY. NO DETAILS HAVE BEEN BROUGH T ON RECORD IF AFTER PASSING OF CERTAIN PERIOD, WHETHER ASSESSE E WOULD BE ENTITLED TO FORFEIT THE AMOUNT IN QUESTION. NO DET AIL IS ALSO BROUGHT ON RECORD AS TO HOW MANY PARTIES HAVE SUBMI TTED COMPLETION CERTIFICATE AND IN HOW MANY CASES, SOME ACTIONS HAVE BEEN TAKEN BY THE ASSESSEE AUTHORITY. MERELY BECAUSE ONLY SMALL AMOUNT IS REFUNDED TO THE PARTIES WOULD NOT P ROVE THAT ASSESSEE HAS FORFEITED THE AMOUNT IN QUESTION AND E ARNED AS INCOME. THE ASSESSEE HAS CONTINUOUSLY SHOWN THE SEC URITY 66 AMOUNT AS LIABILITY IN THE BOOKS OF ACCOUNT AND HAS NEVER TAKEN THE AMOUNT IN ITS PROFIT & LOSS ACCOUNT. THEREFORE , THE CASE LAWS RELIED UPON BY LD. CIT(APPEALS) ARE CLEARLY DI STINGUISHABLE. IN THE ABSENCE OF COMPLETE DETAILS BROUGHT ON RECOR D, LD. CIT(APPEALS) WAS NOT JUSTIFIED IN DISMISSING THIS G ROUND OF APPEAL OF THE ASSESSEE. THEREFORE, THE MATTER REQU IRES RE- CONSIDERATION AT THE LEVEL OF THE ASSESSING OFFICER . 84. WITH REGARD TO GROUND NO. 8 REGARDING CERTAIN D EPOSITS, ASSESSEE HAS MAINTAINED A SUSPENSE ACCOUNT ON ACCOU NT OF VARIOUS AMOUNTS RECEIVED FROM DIFFERENT ALLOTTEES O R FROM OTHER DEPARTMENTS. THERE WAS SOME DOUBT WITH REGARD TO P ERSONS AGAINST WHOM THE AMOUNT HAS TO BE DEPOSITED, THEREF ORE, ACCORDING TO SUBMISSION OF THE ASSESSEE, AS AND WHE N CLARIFICATION IS RECEIVED FROM THE PARTIES, THE AMO UNT IS ADJUSTED AGAINST THEIR NAMES. THEREFORE, IN SUCH CIRCUMSTAN CES, THE DEPOSITS RECEIVED BY THE ASSESSEE AND TAKEN INTO SU SPENSE ACCOUNT DUE TO CERTAIN CONFUSIONS REGARDING THE ALL OTMENT OF THE PROPERTY OR THE AMOUNT RECEIVED FROM THE CONCERNED PARTIES WHEN AMOUNT IS TAKEN INTO SUSPENSE ACCOUNT WOULD NO T PROVE THAT THE AMOUNT LYING IN THE SUSPENSE ACCOUNT HAS B ECOME INCOME OF THE ASSESSEE. THE DECISIONS RELIED UPON B Y LD. CIT(APPEALS) ARE THEREFORE, NOT APPLICABLE TO THE F ACTS OF THE CASE AND THIS MATTER ALSO REQUIRES CLARIFICATION FROM TH E SIDE OF THE ASSESSEE AND INVESTIGATION BY ASSESSING OFFICER AS TO IN HOW MANY CASES, THE CLARIFICATION HAS BEEN RECEIVED AND HOW FURTHER TREATMENTS HAVE BEEN GIVEN ON THIS MATTER. THEREFO RE, THIS ISSUE ALSO REQUIRES RE-CONSIDERATION AT THE LEVEL OF THE ASSESSING OFFICER. 67 85. ON GROUND NO. 9 ALSO, THE POSITION IS SAME BECA USE THE SECURITY AMOUNT RECEIVED FROM DIFFERENT DEPARTMENTS IS TREATED AS INCOME OF THE ASSESSEE. THIS ISSUE IS SAME AS I S CONSIDERED ON BUILDING PLAN SECURITY ON WHICH THE MATTER REQUI RES RE- CONSIDERATION AT THE LEVEL OF THE ASSESSING OFFICER . IN VIEW OF THE ABOVE AND IN ABSENCE OF ANY SPECIFIC FINDING BY THE AUTHORITIES BELOW, WE SET ASIDE THE ORDERS OF THE AUTHORITIES B ELOW AND RESTORE ALL THESE THREE ISSUES ON GROUND NOS. 7, 8 AND 9 TO THE FILE OF ASSESSING OFFICER WITH DIRECTION TO RE-DECI DE THESE GROUNDS IN DETAIL CONSIDERING THE FACTUAL ASPECT BY GIVING REASONABLE SUFFICIENT OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 86. IN THE RESULT, GROUND NOS. 7, 8 AND 9 ARE ALLOW ED FOR STATISTICAL PURPOSES. 87. NOW WE TAKE UP GROUND NO. 10 WITH REGARD TO THE ADDITION OF RS. 4.04 CR BEING DEPOSIT RECEIVED FROM THE CUST OMERS AGAINST FLATS. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ISSUE IS COVERED AGAINST THE ASSESSEE BY JUDGEMENT OF ITA T, CHANDIGARH BENCH IN THE GROUP CASE OF ACIT, CIRCLE VI(I) CHANDIGARH VS PUNJAB URBAN DEVELOPMENT AUTHORITY, M OHALI IN ITA NO. 762/CHD/2007 ETC. DATED 06.12.2013. LD. DR FOR THE REVENUE ALSO SUBMITTED THAT THE ISSUE IS COVERED A GAINST THE ASSESSEE BY THE ABOVE DECISION IN THE CASE OF PUNJA B URBAN DEVELOPMENT AUTHORITY (SUPRA). 88. ON CONSIDERATION OF THE SUBMISSIONS AND MATERIA L ON RECORD, WE FIND THAT GROUND NO. 10 IS COVERED AGAINST THE A SSESSEE BY ORDER OF ITAT CHANDIGARH BENCH IN THE CASE OF PU NJAB URBAN DEVELOPMENT AUTHORITY, MOHALI (SUPRA) IN WHIC H ON 68 IDENTICAL ISSUE, THE TRIBUNAL IN PRINCIPLE, CONFIRM ED THE ORDERS OF THE AUTHORITIES BELOW WITH REGARD TO ADDI TION MAINTAINED ON ACCOUNT OF ADVANCES RECEIVED FROM THE CUSTOMER BY FOLLOWING CASH SYSTEM OF ACCOUNTING. H OWEVER, CERTAIN DIRECTIONS HAVE BEEN GIVEN AS TO HOW THE AD DITION IS TO BE MADE AGAINST THE ASSESSEE. THE FINDINGS OF THE TRIBUNAL IN THIS CASE IN PARAS 62 TO 72 ARE REPROD UCED AS UNDER : 62 WE HAVE HEARD THE RIVAL SUBMISSIONS CAREFULLY. SECTION 145 OF INCOME TAX ACT READS AS UNDER: SECTION 145 (1) INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND G AINS OF BUSINESS OR PROFESSION' OR 'INCOME FROM OTHER SOURC ES' SHALL, SUBJECT TO THE PROVISIONS OF SUB-SECTION (2), BE COMPUTED IN ACCORDANCE WITH EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. (2) THE CENTRAL GOVERNMENT MAY NOTIFY IN THE OFFICI AL GAZETTE FROM TIME TO TIME ACCOUNTING STANDARDS TO BE FOLLOWED BY ANY CLASS OF ASSESSEES OR IN RESPECT OF ANY CLASS OF INCOME. (3) WHERE THE ASSESSING OFFICER IS NOT SATISFIED AB OUT THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE, OR WH ERE THE METHOD OF ACCOUNTING PROVIDED IN SUB-SECTION (1) OR ACCOUNTING STANDARDS AS NOTIFIED UNDER SUB-SECTION (2), HAVE NOT BEEN REGULARLY FOLLOWED BY THE ASSESSEE, T HE ASSESSING OFFICER MAY MAKE AN ASSESSMENT IN THE MANNER PROVIDED IN SECTION 144 . THE ABOVE PROVISION WAS SUBSTITUTED BY FINANCE ACT ,1995 W.E.F. 1.4.1997. BEFORE THIS SUBSTITUTION THE ASSESSEE HA D CHOICE TO FOLLOW MERCANTILE OR CASH OR EVEN HYBRID SYSTEM OF ACCOUNTING I.E. THE ASSESSEE COULD CHOOSE CASH SYSTEM OF ACCOUNTING FOR ONE SOURCE OF INCOME AND MERCANTILE SYSTEM OF ACCOUNTIN G FOR OTHER SOURCES. THIS CHOICE HAVE BEEN REMOVED AND NOW THE ASSESSEE COULD FOLLOW EITHER CASH SYSTEM OF ACCOUNTING OR ME RCANTILE SYSTEM OF ACCOUNTING. PLAIN READING OF THE PROVISIO N SHOWS THAT THE ASSESSEE COULD FOLLOW ONLY ONE SYSTEM OF ACCOUN TING IN RESPECT OF INCOME UNDER THE HEAD PROFITS AND GAI NS OF BUSINESS OR PROFESSION OR INCOME FROM OTHER SOURCES. THESE RESTRICTIONS HAVE NOT BEEN PRESCRIBED FOR OTHER HEADS OF BUSINES S. IN CASE BEFORE US, INCOME OF THE ASSESSEE IS CHARGEABLE UND ER THE HEAD PROFITS AND GAINS OF BUSINESS THEREFORE, THE ASS ESSEE COULD HAVE ADOPTED ONLY ONE SYSTEM OF ACCOUNTING. BEFORE THE PRESENT ASSESSMENT YEAR THE ASSESSEE WAS FOLLOWING MERCANTI LE SYSTEM OF 69 ACCOUNTING AND IN THIS YEAR SYSTEM HAS BEEN CHANGED FROM MERCANTILE SYSTEM OF ACCOUNTING TO CASH SYSTEM OF A CCOUNTING. THOUGH IT IS VERY SURPRISING HOW A LARGE ORGANIZATI ON SUCH AS THE ASSESSEE, COULD FOLLOW CASH SYSTEM OF ACCOUNTING BU T IT IS ADMITTED FACT THAT THE ASSESSEE FOLLOWED CASH SYSTE M OF ACCOUNTING. IN FACT IN RESPECT OF OTHER ADDITIONS LIKE RECEIPT OF INTEREST FROM BANK AND RECEIPT OF INTEREST FROM GOV ERNMENT OF PUNJAB, IT WAS VEHEMENTLY ARGUED ON BEHALF OF THE A SSESSEE THAT THESE RECEIPTS CAN BE TAXED ONLY WHEN THE SAME HAVE BEEN ACTUALLY RECEIVED BY THE ASSESSEE BECAUSE THE ASSES SEE WAS FOLLOWING CASH SYSTEM OF ACCOUNTING. THEREFORE, A DMITTED POSITION IS THAT THE ASSESSEE IS FOLLOWING CASH SYS TEM OF ACCOUNTING. 63 NORMALLY PEOPLE OTHER THAN THE TRADERS KEEP ACCO UNTS IN CASH SYSTEM I.E. PEOPLE LIKE DOCTORS, ADVOCATES OR OTHER PROFESSIONALS KEEP THEIR ACCOUNTS IN CASH BASIS BEC AUSE THEY ARE NOT SELLING ANY MERCHANDISE AND IT IS VERY EASY TO FOLLOW CASH SYSTEM FOR THEM. AS WE HAVE ALREADY OBSERVED THAT IT IS SURPRISING THAT THE ASSESSEE HAD FOLLOWED CASH SYST EM OF ACCOUNTING. THEREFORE, WHEN THE TRADERS FOLLOW CAS H SYSTEM AND WHENEVER SUCH TRADERS SELL ANY MERCHANDISE ON CREDI T HE WOULD ENTER THE TRANSACTION ONLY IN A MEMORANDUM ACCOUNT OR IN SOME OTHER ROUGH ACCOUNT AS A RECORD SO THAT HE DOES NOT FORGET THE SAME. THIS IS THE REASON WE ARE SURPRISED THAT ASS ESSEE IS FOLLOWING CASH SYSTEM OF ACCOUNTING WHEN IN ASSESSE ES CASE LARGE NUMBER OF TRANSACTIONS ARE INVOLVED THEN HOW CAN AN ORGANIZATION FOLLOW CASH SYSTEM BECAUSE IN THE TRAN SACTION WHERE NO CASH IS INCOMING OR OUTGOING SUCH TRANSACTIONS A RE NOT RECORDED UNDER THIS SYSTEM AND THEY ARE ONLY NOTED AS MEMORANDUM ENTRIES OR IN ROUGH JOTTING. UNDER THE CASH SYSTEM OF ACCOUNTING SUCH TRADER WOULD NOT ENTER THE SALE PROCEEDS ON THE INCOME SIDE IN HIS BOOKS OF ACCOUNT OR CASH BOO K UNTIL THE SAME IS ACTUALLY RECEIVED. SIMILARLY AN ITEM OF E XPENDITURE WILL BE BOOKED ONLY WHEN ACTUAL CASH PAYMENT IS MADE. I N CASE OF MERCANTILE SYSTEM OF ACCOUNTING INCOME AS WELL AS E XPENDITURE WOULD BE RECOGNIZED ON THE PRINCIPLE OF ACCRUAL. I N FACT THIS ISSUE WAS CONSIDERED BY THE HON'BLE SUPREME COURT IN CASE OF RAJA MOHAN RAJA BAHADUR VS. CIT, 66 ITR 378 (S.C). IN T HAT CASE THE ASSESSEE WAS A MONEY LENDER AND HAD GIVEN LOAN TO O NE SHRI NISAR AHMAD KHAN, TALUQDAR OF MOHANA ESTATE. THE ASSESSEE WAS MAINTAINING BOOKS OF ACCOUNT ON CASH SYSTEM OF ACCOUNTING. 70 THE ASSESSEE COMMENCED AN ACTION IN CIVIL COURT FOR A DECREE FOR RECOVERY OF RS. 2,58,000/-. ULTIMATELY JUDICIAL CO MMITTEE OF THE PRIVY COUNCIL DECREED IN FAVOUR OF THE ASSESSEE. S HRI NISAR AHMAD KHAN OBTAINED UNDER THE UP ENCUMBERED ESTATE S ACT, 25 OF 1934 AN ORDER APPLYING THE PROVISION OF THE ACT TO HIM. THE SPECIAL JUDGE, SULTANPUR, PASSED AN ORDER FOR PAYME NT OF RS. 5,00,992/- TO THE ASSESSEE. PURSUANCE TO THE ORDER THE ASSESSEE RECEIVED IN 1946, RS. 1,54,692/- FROM THE DEBTOR AN D FOR THE BALANCE THE GOVERNMENT OF THE UNITED PROVINCES GAVE TO THE ASSESSEE ENCUMBERED ESTATE BONDS OF THE FACE VALUE OF RS. 3,46,300. THE AMOUNT RECEIVED IN THE YEAR 1946 WAS APPROPRIATED BY THE ASSESSEE TOWARDS THE PRINCIPAL DUE. THE ASSESSEE SPLIT UP THE AMOUNT OF THE FACE VALUE OF T HE BONDS INTO TWO SUMS OF RS. 2,22,097-9-11 AND RS. 1,24,202-6-1 AND CREDITED THE FIRST AMOUNT IN THE BOOKS OF ACCOUNT TOWARDS TH E BALANCE OF PRINCIPAL AND THE SECOND AMOUNT TO AN ACCOUNT STYLE D INTEREST ACCRUED. IN SUBMITTING THE RETURN OF HIS TAXABLE INCOME FOR THE ASSESSMENT YEAR 1948-49 THE ASSESSEE DID NOT DISCLO SE ANY RECEIPT OF INCOME FROM INTEREST DUE ON THE LOANS AD VANCED TO NISAR AHMAD KHAN. THE ASSESSEE WAS DULY ASSESSED T O TAX ON THE INCOME DISCLOSED BY HIM. IN OCT 1948, THE ASSE SSEE SOLD THE ENCUMBERED ESTATES BONDS AND REALIZED A TOTAL SUM O F INTEREST RECEIVED DURING THE YEAR ON ACCOUNT THE DIFFERENCE BETWEEN THE AMOUNT REALIZED BY SALE OF THE BONDS AND THE AMOUNT DUE AS PRINCIPAL. THE ITO ISSUED A NOTICE U/S 34(1)(A) O F THE INDIAN INCOME TAX ACT AND BROUGHT TO TAX THE DIFFERENCE B ETWEEN THE FACE VALUE OF THE BONDS AND THE AMOUNT DUE AS PRINC IPAL AS ESCAPED INCOME OF THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 1948-49. THE ORDER WAS CONFIRMED BY THE APPEL LATE ASSISTANT COMMISSIONER AND THE INCOME-TAX APPELLATE TRIBUNAL. THE HIGH COURT ALSO DECIDED THE ISSUE AGAINST THE A SSESSEE. ON FURTHER APPEAL BEFORE THE HON'BLE SUPREME COURT IT WAS MAINLY CONTENDED THAT THE ASSESSEE WAS MAINTAINING BOOKS O F ACCOUNT ON CASH SYSTEM OF ACCOUNTING AND UNTIL THE ASSESSEE RE ALIZED THE VALUE OF BONDS, NO INTEREST CAN BE SAID TO HAVE BEE N RECEIVED BY THE ASSESSEE BECAUSE IT WAS FURTHER SUBMITTED THAT WHEN THE ACCOUNTS ARE MAINTAINED ON CASH SYSTEM OF ACCOUNTIN G, RECEIPT OF MONEY ALONE MAY BE TAKEN INTO ACCOUNT IN DETERMININ G THE TAXABLE INCOME. THE HON'BLE APEX COURT MAINLY OBSE RVED AT PAGE 382 AS UNDER: UNDER SECTION 4 OF THE INCOME-TAX ACT, 1922, THE T OTAL INCOME OF ANY PREVIOUS YEAR OF A RESIDENT ASSESSEE INCLUDES ALL INCOME, PROFITS AN D GAINS FROM WHATEVER SOURCES 71 DERIVED WHICH ARE RECEIVED OR ARE DEEMED TO BE RECE IVED IN THE TAXABLE TERRITORIES IN SUCH YEAR BY OR ON BEHALF OF SUCH PERSON, OR ACCRUE OR ARISE OR ARE DEEMED TO ACCRUE OR ARISE TO HIM IN THE TAXABLE TERRITORIES DURING S UCH YEAR, OR ACCRUE OR ARISE TO HIM WITHOUT THE TAXABLE TERRITORIES DURING SUCH YEAR, O R HAVING ACCRUED OR ARISEN TO HIM WITHOUT THE TAXABLE TERRITORIES BEFORE THE BEGINNIN G OF SUCH YEAR AND AFTER THE 1 ST DAY OF APRIL, 1933, ARE BROUGHT INTO OR RECEIVED IN THE TAXABLE TERRITORIES BY HIM DURING SUCH YEAR. THE ACT DOES NOT CONTAIN MUCH GUIDANCE AS TO CASES IN WHICH TAX IS TO BE LEVIED ON INCOME RECEIVED, AND CASES IN WHICH TAX IS TO BE LEVIED ON INCOME ACCRUED OR ARISEN. SECTION 13 HOWEVER REQUIRES THAT INCOME, PR OFITS AND GAINS FOR THE PURPOSES OF SECTIONS 10 AND 12 SHALL BE COMPUTED IN ACCORDANCE WITH THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. IF ACCOUNTS ARE MAINTAINED ACCORDING TO THE MERCANTILE SYSTEM, WHENEVER THE RIGHT TO RECEIVE MO NEY IN THE COURSE OF A TRADING TRANSACTION ACCRUES OR ARISES, EVEN THOUGH INCOME I S NOT REALIZED, INCOME EMBEDDED IN THE RECEIPT IS DEEMED TO ARISE OR ACCRUE. WHERE THE ACCOUNTS ARE MAINTAINED ON CASH BASIS RECEIPT OF MONEY OR MONEYS WORTH AND NO T THE ACCRUAL OF THE RIGHT TO RECEIVE IS THE DETERMINING FACTOR. THEREFORE, IF CO MMERCIAL ASSETS ARE RECEIVED BY A TRADER MAINTAINING ACCOUNTS ON CASH BASIS IN SATISF ACTION OF AN OBLIGATION, INCOME WHICH IS EMBEDDED IN THE VALUE OF THE ASSETS IS DEE MED TO BE RECEIVED: THE RECEIPT OF INCOME IS NOT DEFERRED TILL THE ASSET IS REALIZED I N TERMS OF CASH OR MONEY. IT MAKES NO DIFFERENCE WHETHER THE RECEIPT OF ASSETS IS IN PURS UANCE OF AN AGREEMENT OR THAT THE TRADER IS COMPELLED BY LAW TO ACCEPT THE ASSETS FRO M THE DEBTOR. ONCE TITLE OF THE TRADER TO AN ASSET RECEIVED IS COMPLETE, WHETHER BY A CONSENSUAL ARRANGEMENT OR BY OPERATION OF LAW, HE RECEIVES THE INCOME EMBEDDED I N THE VALUE OF THE ASSET. IN CALIFORNIAN COPPER SYNDICATE V. HARRIS LORD TRAYNER IN DEALING WITH A CASE OF ASSESSEEMENT TO INCOME-TAX OF A COMPANY, FORMED FOR THE PURPOSE, INTER ALIA, OF ACQUIRING AND RE-SELLING MINING PROPERTY, WHICH RES OLD THE WHOLE OF ITS ASSETS TO A SECOND COMPANY AND RECEIVED PAYMENT IN FULLY PAID S HARES OF THE PURCHASING COMPANY, OBSERVED: A PROFIT IS REALIZED WHEN THE SELLER GETS THE PRI CE HE HAS BARGAINED FOR. NO DOUBT HERE THE PRICE TOOK THE FORM OF FULLY PAID SHARES I N ANOTHER COMPANY, BUT, IF THERE CAN BE NO REALIZED PROFIT, EXCEPT WHEN THAT IS PAID IN CASH, THE SHARES WERE REALIZABLE AND COULD HAVE BEEN TURNED INTO CASH, IF THE APPELLANTS HAD BEEN PLEASED TO DO SO. I CANNOT THINK THAT INCOME-TAX IS DUE OR NOT ACCORDIN G TO THE MANNER IN WHICH THE PERSON MAKING THE PROFIT PLEASES TO DEAL WITH IT. THE OTHER OBSERVATIONS HAVE BEEN SUMMARIZED IN THE HEAD NOTE WHICH READ AS UNDER: IF ACCOUNTS ARE MAINTAINED ACCORDING TO THE MERCAN TILE SYSTEM, WHENEVER THE RIGHT TO RECEIVE MONEY IN THE COURSE OF A TRADING TRANSACTIO N ACCRUES OR ARISES, EVEN THOUGH INCOME IS NOT REALIZED, INCOME EMBEDDED IN THE RECE IPT IS DEEMED TO ACCRUE OR ARISE. WHERE THE ACCOUNTS ARE MAINTAINED ON CASH BASIS, RE CEIPT OF MONEY OR MONEYS WORTH AND NOT THE ACCRUAL OF THE RIGHT TO RECEIVE IS THE DETERMINING FACTOR. THEREFORE, IF COMMERCIAL ASSETS ARE RECEIVED BY A TRADER MAINTAIN ING ACCOUNTS ON CASH BASIS IN SATISFACTION OF AN OBLIGATION, INCOME WHICH IS EMBE DDED IN THE VALUE OF THE ASSETS IS DEEMED TO BE RECEIVED; THE RECEIPT OF INCOME IS NOT DEFERRED TILL THE ASSET IS REALIZED IN TERMS OF CASH OR MONEY. IT MAKES NO DIFFERENCE WHET HER THE RECEIPT OF ASSETS IS IN PURSUANCE OF AN AGREEMENT OR THAT THE TRADER IS COM PELLED BY LAW TO ACCEPT THE ASSETS FROM THE DEBTOR. ONCE TITLE OF THE TRADER TO AN ASS ET RECEIVED IS COMPLETE WHETHER BY A CONSENSUAL ARRANGEMENT OR BY OPERATION OF LAW, HE R ECEIVES THE INCOME EMBEDDED IN THE VALUE OF THE ASSET. THEREFORE, IN CASH SYSTEM OF ACCOUNTING FOR DETERMI NATION OF THE INCOME RECEIPT ON MONEY (CASH) OR MONEYS WORTH IN STRUMENTS ARE DETERMINING FACTOR AND IN ACCRUAL OF RIGHT TO RECEIVE SUCH 72 MONEY IS A MATERIAL. IN OTHER WORDS, WHENEVER THE CASH IS RECEIVED ON INCOME SIDE THE SAME HAS TO BE TAXED IF THE CASH IS RECEIVED ON CAPITAL SIDE FOR EXAMPLE LOAN FROM BANK THEN THE SAME WOULD NOT BE REQUIRED TO BE TAXED. HOWEVER, I F THERE IS SIMPLY A RIGHT TO RECEIVE SUCH CASH THE SAME CANNOT BE TAXED IN THE CASH SYSTEM OF ACCOUNTING. IN OUR OPINION, THI S WOULD ANSWER THE QUESTION AND OR CONTENTION RAISED BY THE LD. CO UNSEL OF THE ASSESSEE THAT BEFORE TAXING AN ITEM THE SAME HAS TO PASS THROUGH THE TEST OF CHARGING SECTION. SECTION 4 OF THE ACT WHICH IS CHARGING SECTION, READS AS UNDER: SECTION 4 - (1) WHERE ANY CENTRAL ACT ENACTS THAT INCOME-TAX SHALL BE CHARGED FOR ANY ASSESSMENT YEAR AT ANY RATE OR RATES, INCOME-TA X AT THAT RATE OR THOSE RATES SHALL BE CHARGED FOR THAT YEAR IN ACCORDANCE WITH, AND [SUBJECT TO THE PROVISIONS (INCLUDING PROVISIONS FOR THE LEVY OF ADDITIONAL INCOME-TAX) O F, THIS ACT] IN RESPECT OF THE TOTAL INCOME OF THE PREVIOUS YEAR [* * *] OF EVERY PERSON : PROVIDED THAT WHERE BY VIRTUE OF ANY PROVISION OF THIS ACT INCOME-TAX IS TO BE CHARGED IN RESPECT OF THE INCOME OF A PERIOD OTHER THAN THE PREVIOUS YEAR, INCOME-TAX SHALL BE CHARGED ACCORDINGLY. (2) IN RESPECT OF INCOME CHARGEABLE UNDER SUB-SECTI ON (1), INCOME-TAX SHALL BE DEDUCTED AT THE SOURCE OR PAID IN ADVANCE, WHERE IT IS SO DEDUCTIBLE OR PAYABLE UNDER ANY PROVISION OF THIS ACT. PLAIN READING OF THIS PROVISION WOULD SHOW THAT TAX CAN BE CHARGED AT THE RATE PRESCRIBED BY ANY CENTRAL ACT W HICH IS PRACTICALLY DONE THROUGH PASSING OF FINANCE ACT IN EVERY YEAR BY THE PARLIAMENT. SUCH TAX CAN BE CHARGED IN RESPECT OF TOTAL INCOME OF THE PREVIOUS YEAR. TOTAL INCOME HAS BEEN DEFINED IN SECTION 5 OF THE ACT. THE WORD INCOME HAS BEEN DE FINED IN SECTION 2(24) SO THEREFORE, BEFORE CHARGING TAX IT HAS TO BE SEEN THAT AN ITEM IS IN THE NATURE OF INCOME AND COVER ED BY THE DEFINITION OF INCOME GIVEN IN SECTION 2(24) OF THE ACT. IT IS FURTHER TO BE NOTED THAT INCOME HAS BEEN DEFINED IN INCLUSIVE MANNER. THIS IS VERY COMPLEX ISSUE AND WITHOUT GOI NG INTO THE DETAILS WE WOULD SIMPLY TAKE THE SIMPLE MEANING OF THE INCOME. IN THE NORMAL COMMERCIAL PARLANCE AN ITEM WHICH IS OF REVENUE NATURE, IS TAKEN AS INCOME. NOW IN A CASE WHERE AN ORGANIZATION WHICH IS CARRYING OUT THE BUSINESS OF CONSTRUCTION AND DEVELOPMENT OF HOUSES AND IF SUCH ORGANIZATION SELL S THE SAME OUTRIGHTLY OR ON INSTALLMENTS BASIS THEN SUCH INSTA LLMENTS WOULD BE IN NATURE OF INCOME. THEREFORE, THERE IS NO F ORCE IN THE SUBMISSIONS OF THE LD. COUNSEL OF THE ASSESSEE THAT INSTALLMENTS RECEIVED BY THE ASSESSEE DO NOT COME UNDER THE CHAR GING SECTION AND THEREFORE, SAME CANNOT BE TAXED SIMPLY BECAUSE U/S 145 THE RECEIPT UNDER CASH SYSTEM HAS TO BE TAXED. NO DOUB T SECTION 145 73 IS A MACHINERY SECTION BUT MACHINERY SECTION ALSO H AVE LOT OF BEARING ON DETERMINATION OF INCOME AND CANNOT BE IG NORED LIGHTLY. IN THIS CONNECTION WE WOULD LIKE TO REFER TO ONE OF THE CELEBRATED JUDGMENT OF HON'BLE SUPREME COURT IN CASE OF CIT VS . B.C. SRINIVASA SETTY, 128 ITR 294 (S.C). IN THAT CASE T HE ASSESSEE WAS A REGD FIRM. CLAUSE 13 OF THE INSTRUMENT OF PA RTNERSHIP DEED SHOWED THAT GOODWILL OF THE FIRM HAVE NOT BEEN VALUED AND VALUATION WOULD BE MADE AT THE DISSOLUTION OF THE P ARTNERSHIP. PERIOD OF THE PARTNERSHIP WAS EXTENDED AND SUBSEQUE NTLY PARTNERSHIP WAS DISSOLVED ON 31.12.1965. AT THE TI ME OF DISSOLUTION GOODWILL WAS VALUED AT RS. 1,50,000/-. THE NEW PARTNERSHIP WITH THE SAME NAME WAS CONSTITUTED THRO UGH ANOTHER DEED OF PARTNERSHIP. NEW FIRM BOOKED OVER ALL THE ASSETS INCLUDING GOODWILL AND LIABILITY OF THE DISSOLVED F IRM. ORIGINALLY NO ADDITION WAS MADE ON ACCOUNT OF GAIN ARISING OU T OF TRANSFER OF GOODWILL BUT THIS ASSESSMENT ORDER WAS FOUND ERR ONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE AND THER EFORE, LD. COMMISSIONER PASSED REVISIONARY ORDER DIRECTING THE ASSESSING OFFICER TO MAKE FRESH ASSESSMENT AFTER TAKING INTO ACCOUNT THE CAPITAL GAIN ARISING OUT OF SALE OF GOODWILL. THE ASSESSEE MAINTAINED THAT NO SALE TOOK PLACE TO ATTRACT THE T AX ON CAPITAL GAIN U/S 45 OF THE INCOME TAX ACT . THE TRIBUNAL ALLOWED THE APPEAL. WHEN THE MATTER TRAVELED TO THE HON'BLE SU PREME COURT THE MATTER WAS ARGUED IN GREAT DETAIL. ONE OF THE ISSUE AROSE WHETHER THERE WAS TRANSFER AND IT WAS HELD YES IT W AS A TRANSFER. ANOTHER ISSUE AROSE WHETHER THE GAIN OF SUCH TRANSF ER OF GOODWILL WOULD BE TAXED U/S 45 OF THE ACT. IT WAS FOUND THA T GOODWILL IS A SELF GENERATED ASSET AND NO COST OF ACQUISITION CA N BE ATTRIBUTED TO SELF GENERATED ASSETS. SINCE SECTION 48 WHICH I S MODE OF COMPUTATION OF CAPITAL GAIN PRESCRIBES REDUCTION OF COST OF ACQUISITION FROM THE SALE CONSIDERATION IT WAS HEL D THAT IN THE ABSENCE OF COST OF ACQUISITION COMPUTATION OF CAPI TAL GAIN, WAS NOT POSSIBLE. THEREFORE, SAME WAS HELD TO BE NOT TAXABLE. THIS CLEARLY SHOWS THAT COMPUTATION PROVISION WHICH IS A GAIN A MACHINERY PROVISION, HAD LOT OF BEARING ON THE TAXA BILITY OF GAIN RECEIVED ON TRANSFER OF GOODWILL. THEREFORE, EVEN IF SECTION 145 BEING MACHINERY SECTION HAS ITS OWN IMPLICATIONS. IMPLICATIONS ARE VERY CLEAR THAT THE ASSESSEE HAS A RIGHT TO FOL LOW EITHER MERCANTILE SYSTEM OF ACCOUNTING OR CASH SYSTEM OF A CCOUNTING FOR DETERMINATION OF THE INCOME. THE ASSESSEE HAS BEEN GIVEN A CHOICE AND IN THE CASE BEFORE US, THE ASSESSEE HAS DELIBERATELY AND AFTER APPLYING ITS MIND DECIDED TO FOLLOW CASH SYSTEM OF 74 ACCOUNTING, THEREFORE, THE ASSESSEE HAS TO BEAR TH E CONSEQUENCES OF SUCH SYSTEM OF ACCOUNTING. 64 THE LD. COUNSEL OF THE ASSESSEE HAS STRONGLY REL IED ON THE DECISION OF K.K. KHULLAR VS. DCIT (SUPRA). IN THIS CASE THE ASSESSEE WAS AN ADVOCATE AND RECEIVED CERTAIN AMOUN TS FOR SERVICES TO BE PERFORMED OVER A PERIOD OF TIME. TH E AMOUNT RECEIVED FROM THE CLIENT IN RESPECT OF SERVICES REN DERED IN THE YEAR UNDER CONSIDERATION , WAS SHOWN AS INCOME AND THE BALANCE AMOUNT WAS SHOWN AS ADVANCE. THE ASSESSING OFFICER HELD THAT AS PER THE PROVISIONS OF SECTION 145 THE ASSESSEE W AS FOLLOWING CASH SYSTEM OF ACCOUNTING AND THEREFORE, WHOLE AMOU NT WAS TAXABLE. THE TRIBUNAL DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE VIDE FOLLOWING PARAS: WE HAVE CONSIDERED THE FACTS OF THE CASE AND RIVAL SUBMISSIONS. WE MAY REFER TO THE CHARGING SECTION 4 OF THE ACT TO THE EFFECT THA T INCOME-TAX SHALL BE CHARGED FOR ANY ASSESSMENT YEAR AT THE RATE OR RATES PROVIDED I N ANY CENTRAL ACTS IN RESPECT OF THE TOTAL INCOME OF THE PREVIOUS YEAR OF EVERY PERS ON. SECTION 5 DEALS WITH THE SCOPE OF TOTAL INCOME, WHICH IS DEFINED IN RESPEC T OF ANY PREVIOUS YEAR IN TERMS OF ACCRUAL, DEEMED ACCRUAL, RECEIPT AND DEEMED RECEIPT ETC. SECTION 145 DEALS WITH THE METHOD OF ACCOUNTING IN RESPECT OF PROFITS AND GAINS OF BUSINESS OR PROFESSION OR INCOME FROM OTHER SOURCES. THUS, WHILE SECTION S 4 AND 5 DEAL WITH THE SCOPE OF INCOME AND ITS CHARGE TO INCOME-TAX, SECTION 145 IS A PROCEDURAL SECTION REGARDING THE METHOD TO BE FOLLOWED FOR RECORDING OF INCOME I N THE BOOKS OF ACCOUNT. IT IS NO DOUBT TRUE THAT FOR THE ASSESSMENT YEAR 1997-98 AND ONWARDS, THE ASSESSEE CAN FOLLOW EITHER THE CASH OR THE MERCANTILE SYSTEM OF ACCOUNTING AND THE HYBRID SYSTEM OF ACCOUNTING IS PROHIBITED. HOWEVER, WHAT IS TO BE TAXED IS INCOME AND RECEIPT OF AN AMOUNT IS NOT TO BE THE BASIS FOR THE LEVY OF THE T AX. IN THE CASE OF MESSRS. SHOORJI VALLABHDAS AND CO. [1962] 46 ITR 144, THE HONBLE S UPREME COURT POINTED OUT THAT THE INCOME-TAX ACT TAKES INTO ACCOUNT TWO POINTS OF TIME ON WHICH THE LIABILITY TO TAX IS ATTRACTED, NAMELY,-(I) ACCRUAL OF INCOME OR (II) RECEIPT OF INCOME. IT IS FURTHER MENTIONED THAT THE SUBSTANCE OF THE MATTER IS INCO ME. IT MAY BE EMPHASIZED THAT IT IS ACCRUAL OF INCOME OR RECEIPT OF INCOME THAT CAN BECOME THE SUBJECT-MATTER OF TAX AND IT IS THE INCOME WHICH HAS TO BE RECORDED AS PE R SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE IN VIEW OF SECTION 145 OF THE ACT, BECAUSE THE SUBSTANCE OF THE MATTER IS INCOME. THEREFORE, THERE IS AN INFIRMIT Y IN THE ORDER OF THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) IN PARAGRAPH 4 .7 WHERE IT WAS STATED THAT THE ENTIRE AMOUNT RECEIVED, WHETHER ARREARS OR ADVANCE, IS TO BE SHOWN AS INCOME UNDER THE CASH SYSTEM OF ACCOUNTING. THE CORRECT POSITION WOULD BE THAT THE ENTIRE INCOME RECEIVED, WHETHER ARREAR OR ADVANCE O F INCOME, HAS TO BE SHOWN AS INCOME UNDER THE CASH SYSTEM OF ACCOUNTING. THE HIGHLIGHTED PORTION OF THE ABOVE PARAGRAPH CLEA RLY SHOWS THAT IN CASH SYSTEM OF ACCOUNTING THE RECEIPT OF MONEY W HETHER ARREARS OR ADVANCE, HAS TO BE SHOWN AS INCOME, THER EFORE, THIS DECISION IS TOTALLY DISTINGUISHABLE. 65 ANOTHER DECISION RELIED ON WAS THAT OF CIT VS. M ESSRS, SHOORJI VALLABHDAS AND CO. (SUPRA). IN THAT CASE T HE ASSESSEE FIRM WAS THE MANAGING AGENT OF TWO SHIPPING COMPANI ES AND 75 UNDER THE MANAGING AGENCY AGREEMENT, THE ASSESSEE W AS ENTITLED FOR COMMISSION @ 10% OF THE FREIGHT CHARGE S. BETWEEN APRIL 1, 1947 AND DECEMBER 31, 1947 AN AMOUNT OF RS . 1,71,885/- FROM ONE COMPANY AND RS. 2,56,815/- FROM OTHER COMP ANY BECAME DUE TO THE ASSESSEE AS COMMISSION @ 10%. THIS AMO UNT WAS CREDITED IN THE BOOKS OF ACCOUNT AND DEBITED TO MAN AGING AGENT. IN NOVEMBER 1947 THE ASSESSEE DESIRED TO HAVE MANAG ING AGENCY TRANSFERRED TO TWO PRIVATE COMPANIES AND IN THIS CO NNECTION AGREED IN DECEMBER, 1948 TO ACCEPT 2% AS COMMISSIO N AND GAVE UP 7% OF ITS EARNINGS. THE REVENUE SOUGHT TO ASSESS THE AMOUNTS TO RS. 1,36,903/- AND RS. 2,00,625/- BEING 7% OF THE FOREGONE AMOUNT AS INCOME. ON THESE FACTS IT WAS H ELD AS UNDER: HELD, THAT THE SUBSEQUENT AGREEMENT HAD ALTERED TH E RATE OF COMMISSION IN SUCH A WAY AS TO MAKE THE INCOME WHICH REALLY ACCRUED TO T HE ASSESSEE DIFFERENT FROM WHAT HAD BEEN ENTERED IN THE BOOKS OF ACCOUNT. THIS WAS NOT A CASE OF A GIFT BY THE ASSESSEE TO THE MANAGED COMPANIES OF A PORTION OF I NCOME WHICH HAD ALREADY ACCRUED, BUT AN AGREEMENT TO RECEIVE A LESSER REMUN ERATION THAN WHAT HAD BEEN AGREED UPON. THE ASSESSEE HAD IN FACT RECEIVED ONLY THE LESSER AMOUNT IN SPITE OF THE ENTRIES IN THE ACCOUNT BOOKS, AND THIS LESSER A MOUNT ALONE WAS TAXABLE. INCOME-TAX IS A LEVY ON INCOME. THOUGH THE INCOME-T AX ACT TAKES INTO ACCOUNT TWO POINTS OF TIME AT WHICH THE LIABILITY TO TAX IS ATT RACTED, VIZ., THE ACCRUAL OF THE INCOME OR ITS RECEIPT, YET THE SUBSTANCE OF THE MATTER IS THE INCOME. IF INCOME DOES NOT RESULT AT ALL, THERE CANNOT BE A TAX, EVEN THOUGH I N BOOK-KEEPING, AN ENTRY IS MADE ABOUT A HYPOTHETICAL INCOME, WHICH DOES NOT MATER IALIZE. WHERE INCOME HAS, IN FACT, BEEN RECEIVED AND IS SUBSEQUENTLY GIVEN UP IN SUCH CIRCUMSTANCES THAT IT REMAINS THE INCOME OF THE RECIPIENT, EVEN THOUGH GI VEN UP, THE TAX MAY BE PAYABLE. WHERE, HOWEVER, THE INCOME CAN BE SAID NOT TO HAVE RESULTED AT ALL, THERE IS OBVIOUSLY NEITHER ACCRUAL NOR RECEIPT OF INCOME, EV EN THOUGH AN ENTRY TO THAT EFFECT MIGHT, IN CERTAIN CIRCUMSTANCES, HAVE BEEN MADE IN THE BOOKS OF ACCOUNT. THUS IT IS CLEAR FROM ABOVE THAT THE AMOUNT WHICH W AS SOUGHT TO BE ASSESSED WAS NOT IN NATURE OF INCOME BECAUSE TH E ASSESSEE HAS CLEARLY AGREED TO REDUCE THE RATE OF COMMISSION ON CONVERSION OF THE AGENCY IN THE NAME OF PRIVATE COM PANIES. IN CASE BEFORE US, NOWHERE IT HAS BEEN DENIED THAT INS TALLMENTS RECEIVED BY THE ASSESSEE FIRM FROM THE ALLOTTEES OF THE HOUSES IS NOT IN THE NATURE OF THE INCOME. THEREFORE, THE P ROPOSITION LAID DOWN IN CASE OF CIT V MESSRS SHOOROJI VALLABHDAS AN D CO. SUPRA) ARE NOT APPLICABLE. 66 WE WOULD ALSO LIKE TO NOTE THAT IN ORIGINAL RETU RN FILED BY THE ASSESSEE, WAS FOR INCOME OF RS. 21.19 CRORES WH EREAS IN THE REVISED RETURN A LOSS OF RS. 19.12 CRORES WAS CLAIM ED. THE ASSESSING OFFICER EXAMINED THE REASONS FOR LOSS AND HE FOUND THAT MAIN REASON WAS THAT EXPENDITURE ACCOUNTS SHOW THE FIGURES OF COST OF PLOTS AND THEREFORE, SALE WHICH WAS NOT THERE IN THE ORIGINAL INCOME AND EXPENDITURE ACCOUNT. RESULT OF THESE FIGURES IS AS UNDER: 76 COST OF PLOTS RS. 105,42,88,169/- SALE OF PLOTS RS. 65,18,29,803/- LOSS RS. 40,24,58,366/- RS. 105,43,88,169/- RS. 105,42,88,169/- THIS MATTER WAS INVESTIGATED IN DETAIL AND ULTIMATE LY THE REASON FOR THESE ENTRIES WAS ANALYZED AND DISCUSSED BY THE ASSESSING OFFICER AS MENTIONED IN THE ASSESSMENT ORDER AS UND ER: AS REGARDS THE REASON FOR HUGE LOSS FROM PURCHASE A ND SALE OF PLOTS, IT WAS EXPLAINED BY THE COUNSEL, DURING DISCUSSION AND ALSO EXPLAINE D BY THE ASSESSEE IN ITS LETTER NO. 1567 DATED 08.03.2006 THAT SINCE THE ASSESSEE HAS C HANGED ITS SYSTEM TO CASH SYSTEM OF ACCOUNTING, ONLY THE AMOUNT ACTUALLY RECE IVED OUT OF TOTAL SALE AMOUNT HAS BEEN SHOWN AS SALE WHEREAS THE PLOTS WHICH HAVE BEE N SOLD BUT ONLY A PART OF THE SALE AMOUNT OF WHICH HAS BEEN RECEIVED ARE NOT REFL ECTED IN THE CLOSING STOCK WHICH IS THE REASON FOR THE LOSS IN THE PURCHASE AND SALE OF PLOTS FOR THE ASSESSMENT YEAR 2003-04. BUT IN THE SUBSEQUENT YEARS I.E. ASSESSMEN T YEAR 2004-05 ONWARDS, THERE IS PROFIT FROM PURCHASE AND SALE OF PLOTS. DURING DISC USSION, IT WAS EXPLAINED BY THE COUNSEL BY GIVING AN EXAMPLE. SUPPOSE, THE COST OF PLOT IS RS. 1,00,000/- AND IT IS SOLD FOR RS. 1,50,000/- DURING THIS YEAR BUT ONLY 25% OF THE COST OF THE PLOT I.E., RS. 37,500/- IS ACTUALLY RECEIVED DURING THE YEAR. ACTUALLY, THE PROFIT EARNED IS RS. 50,000/. BUT SINCE THE ASSESSEE HAS ADOPTED CASH SYSTEM, SALE WI LL BE SHOWN AT RS. 37,500/- FOR THE YEAR. THE VALUE OF CLOSING STOCK OF THAT PLOT W ILL BE NIL AS THE PLOT HAS BEEN SOLD AND IS IN THE POSSESSION OF THE PURCHASER. SO THIS WILL RESULT INTO LOSS OF RS. 62,500/- FOR THAT YEAR. NOW IN THE NEXT YEAR, THERE WILL BE NO OPENING STOCK IN RESPECT OF THAT PLOT BUT IF THE BALANCE AMOUNT OF SALE CONSIDERATIO N I.E. RS. 1,12,500/- IS ACTUALLY RECEIVED IN THAT YEAR THAT WILL BE SHOWN AS THE AMO UNT OF SALE FOR WHICH THERE WILL BE NO OPENING STOCK OR CORRESPONDING PURCHASE AND THE SAME, ALREADY-SOLD PLOT WILL GIVE A PROFIT OF RS. 1,12,500/- IN THAT NEXT YEAR. THIS IS THE REASON THAT THERE IS STEEP RISE IN THE PROFIT FROM SALE OF PLOTS IN THE NEXT YEAR. THE ASSESSEES COUNSEL REFERRED TO THE ORIGINAL AND REVISED RETURN FOR THE SUCCEEDING ASSE SSMENT YEAR 2004-05. PERUSAL OF THESE RETURNS SHOWS THAT IN THE ORIGINAL RETURN FOR THE ASSESSMENT YEAR 2004-05, THE INCOME AS PER THE PROFIT AND LOSS ACCOUNT AND AFTER DEDUCTING DEPRECIATION AS PER INCOME TAX RULES HAS BEEN SHOWN AT RS. 7,67,61,289/ -, IN THE REVISED RETURN, THE INCOME AS PER THE PROFIT AND LOSS ACCOUNT AND AFTER DEDUCTING DEPRECIATION AS PER THE INCOME TAX RULES HAS BEEN SHOWN AT RS. 39,50,14,907 /-. THERE IS A STEEP RISE OF RS. 31,82,53,618/- IN THE INCOME FOR THE ASSESSMENT YEA R 2004-05 WHICH IS MAINLY ON ACCOUNT OF RECOGNIZING REVENUE ON PURCHASE AND SALE OF PLOTS ON CASH METHOD OF ACCOUNTING. THIS EXPLANATION OF THE ASSESSEE WAS FOUND TO BE CO NVINCING AND ACCEPTED. THUS IT IS CLEAR THAT THE ASSESSEE ITSEL F CONTENDED THAT SALE OF PLOTS HAS TO BE ACCEPTED ON THE BASIS OF A CTUAL CASH RECEIPT ON SALE EFFECTED DURING THE YEAR. THEREFOR E, THE ASSESSEE COULD NOT TAKE A DIFFERENT STAND IN RESPEC T OF SALE OF HOUSES AND FLATS. 67 COMING TO THE FACTS OF THE CASE, THE ASSESSEE SO LD CERTAIN HOUSES AND FLATS UNDER THE HIRE PURCHASE AGREEMENT. THE 77 ALLOTTEES WERE TREATED AS TENANT DURING THE COMPLE TION OF SUCH HIRE PURCHASE AGREEMENT TILL ALL THE INSTALLMENTS W ERE PAID BY SUCH ALLOTTEES. THE INSTALLMENTS AS WELL AS EXPEND ITURE INCURRED BY THE ASSESSEE, WAS BEING ACCUMULATED IN VARIOUS S CHEMES AND WAS REFLECTED IN THE BALANCE SHEET BECAUSE THE ASSE SSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING TILL ASSE SSMENT YEAR 2002-03. HOWEVER, IN THIS YEAR THE ASSESSEE HAS CH ANGED ACCOUNTING SYSTEM AND NOW ADOPTED CASH SYSTEM OF AC COUNTING. WE HAVE ALREADY EXPRESSED OUR SURPRISE ON ADOPTION OF CASH SYSTEM BY THE ASSESSEE BUT ADMITTEDLY THIS SYSTEM H AS BEEN ADOPTED AND THEREFORE, THE ASSESSEE HAS TO BEAR TH E CONSEQUENCES. FIRST CONTENTION WAS THAT HOUSES AND FLATS WERE SOLD ON HIRE PURCHASE BASIS AND UNDER THE HIRE PURC HASE ACT, 1972 THE BUYER DOES NOT GET THE OWNERSHIP RIGHT TIL L THE COMPLETION OF THE PURCHASE AS PROVIDED IN THE AGREE MENT AND AS PER THE AGREEMENT TILL ALL THE INSTALLMENTS ARE PAI D SUCH BUYER OR ALLOTTEES WILL NOT BECOME THE OWNERS. HOWEVER, WE FIND NO FORCE IN THIS CONTENTION BECAUSE NO OTHER ACT CAN OVER RI DE THE PROVISIONS OF THE ACT AND THIS HAS BEEN CLARIFIED B Y THE HON'BLE SUPREME COURT IN CASE OF SOUTHERN TECHNOLOGIES LTD. VS. JCIT (SUPRA). THEREFORE, THE INSTALLMENTS RECEIVED AGAI SNT SUCH SALES WHICH ARE IN THE NATURE OF REVENUE RECEIPTS, ARE R EQUIRED TO BE TAKEN INTO CONSIDERATION FOR DETERMINATION OF INCOM E IN THIS YEAR BECAUSE THE ASSESSEE HAS ADOPTED CASH SYSTEM OF ACC OUNTING DURING THE YEAR. NEXT CONTENTION WAS THAT THE ASSE SSEE WAS FOLLOWING CONTINUOUSLY PROJECT COMPLETION METHOD AN D THEREFORE, NO INCOME CAN BE DETERMINED UNLESS THE PROJECTS ARE COMPLETED. AGAIN AS DISCUSSED ABOVE IN DETAIL THE ISSUE OF SYS TEM OF ACCOUNTING AND THE MEANING OF CASH SYSTEM OF ACCOUN TING, THIS CONTENTION CANNOT BE ACCEPTED BECAUSE THE ASSESSEE CAN NOT FOLLOW TWO DIFFERENT SYSTEMS OF ACCOUNTING UNDER TH E SAME HEAD. THEREFORE, IN OUR OPINION, THE ASSESSING OFFICER HA S CORRECTLY INCLUDED ALL THE INSTALLMENTS RECEIVED FROM THE ALL OTTEES OF THE HOUSES AND FLATS IN THE INCOME OF THE ASSESSEE. 68 HOWEVER, WE FIND THAT THE SUBMISSIONS OF THE LD. COUNSEL OF THE ASSESSEE THAT IF SUCH INSTALLMENTS ARE INCLU DED THEN THE CORRESPONDING EXPENDITURE WHICH HAS BEEN INCURRED S HOULD ALSO BE ALLOWED ON MATCHING PRINCIPLE. THE LD. COUNSEL OF THE ASSESSEE HAD RELIED ON THE DECISION OF CIT VS. BILA HARI INVESTMENT P LTD. (SUPRA). IN THAT CASE THE ASSESS EE SUBSCRIBED TO CHITS AS THEIR BUSINESS ACTIVITIES. THEY MAINTAINED THEIR ACCOUNTS ON THE MERCANTILE 78 BASIS AND COMPUTED THE PROFIT/LOSS AT THE END OF TH E CHIT PERIOD FOLLOWING THE COMPLETED CONTRACT METHOD. THIS WAS ACCEPTED BY THE DEPARTMENT, BUT FOR THE ASSESSMENT YEARS 1991-92 TO 1997-98 THE ASSESSING O FFICER CAME TO THE CONCLUSION THAT THE COMPLETED CONTRACT METHOD FOR CHIT DISCOUN T WAS NOT ACCURATE IN RECOGNIZING /IDENTIFYING INCOME AND THAT THE PERCENTAGE OF COMP LETION METHOD WAS TO BE PREFERRED. THE HIGH COURT HELD THAT THE COMPLETED C ONTRACT METHOD OF ACCOUNTING ADOPTED BY THE ASSESSES FOR CHIT DISCOUNT WAS VALID AND THE DEPARTMENT ERRED IN SPREADING THE DISCOUNT OVER THE REMAINING PERIOD OF THE CHIT UNDER THE PERCENTAGE OF COMPLETION METHOD ON PROPORTIONATE BASIS. ON APPEAL BY THE DEPARTMENT TO THE SUPREME COURT. IT WAS HELD AS UNDER: HELD ACCORDINGLY, AFFIRMING THE DECISION OF THE HI GH COURT, THAT, SINCE, FROM THE VARIOUS STATEMENTS PRODUCED, THE ENTIRE EXERCISE AR ISING OUT OF THE CHANGE OF METHOD FROM THE COMPLETED CONTRACT METHOD TO DEFERRED REVE NUE EXPENDITURE WAS REVENUE NEUTRAL, THE COMPLETED CONTRACT METHOD WAS NOT REQU IRED TO BE SUBSTITUTED BY THE PERCENTAGE OF COMPLETION METHOD. 69 IN OUR OPINION, THE ABOVE CASE IS NOT VERY RELEV ANT BECAUSE IN THIS CASE THE ASSESSEE WAS CONTINUOUSLY FOLLOWING THE METHOD OF COMPLETED CONTRACT UNDER MERCANTILE SYSTE M OF ACCOUNTING WHICH WAS FOUND TO BE CORRECT. HOWEVER, THE MATCHING PRINCIPLE WAS LAID DOWN IN CASE OF CALCUTT A COMPANY LTD. VS. CIT, 37 ITR 1 BY THE HON'BLE SUPREME COURT . IN THAT CASE THE ASSESSEE PURCHASED CERTAIN LANDS AND DEVEL OPED THE SAME FOR BUILDING PURPOSES BY LAYING ROADS, PROVIDI NG DRAINS SYSTEM AND INSTALLING LIGHTS ETC. THE FLATS WERE S OLD ON INSTALLMENT BASIS. AT THE TIME OF SALE THE ASSESSE E UNDERTOOK TO CARRY OUT MORE DEVELOPMENTS. IN THE RELEVANT YEAR THE ASSESSEE RECEIVED A SUM OF RS. 29,392/- TOWARDS SALE PRICE O F LAND. HOWEVER, THE ASSESSEE WAS FOLLOWING MERCANTILE SYST EM OF ACCOUNTS AND CREDITED TO ITS ACCOUNT A SUM OF RS. 4 3,692/- REPRESENTING FULL SALE PRICE OF THE LAND. AT THE S AME TIME THE ASSESSEE ALSO DEBITED AN ESTIMATED SUM OF RS. 24,80 9 AS EXPENDITURE FOR THE DEVELOPMENTS. THIS WAS DISALLO WED BY THE REVENUE. ON APPEAL IT WAS HELD AS UNDER: HELD,(I) THAT THE UNDERTAKING TO CARRY OUT THE DEV ELOPMENTS WITHIN SIX MONTHS FROM THE DATES OF THE DEEDS OF SALE (WHICH, IN VIEW OF THE FACT THAT TIME WAS NOT OF THE ESSENCE OF THE CONTRACT, MEANT A REASONABLE TIME) WAS UNCONDITIONAL, THE APPELLANT BINDING ITSELF ABSOLUT ELY TO CARRY OUT THE SAME. THAT UNDERTAKING IMPORTED A LIABILITY ON THE APPELL ANT WHICH ACCRUED ON THE DATES OF THE DEEDS OF SALE, THOUGH THAT LIABILITY W AS TO BE DISCHARGED AT A FUTURE DATE. IT WAS THUS AN ACCRUED LIABILITY AND T HE ESTIMATED EXPENDITURE WHICH WOULD BE INCURRED IN DISCHARGING THE SAME COU LD BE DEDUCTED FROM THE PROFITS AND GAINS OF THE BUSINESS, AND THE AMOUNT T O BE EXPENDED COULD BE DEBITED IN ACCOUNTS MAINTAINED IN THE MERCANTILE SY STEM OF ACCOUNTING BEFORE IT WAS ACTUALLY DISBURSED. THE DIFFICULTY IN THE ESTIMATION THEREOF DID NOT CONVERT THE ACCRUED LIABILITY INTO A CONDITIONA L ONE, BECAUSE IT WAS ALWAYS OPEN TO THE INCOME-TAX AUTHORITIES CONCERNED TO ARR IVE AT A PROPER ESTIMATE THEREOF HAVING REGARD TO ALL THE CIRCUMSTANCES OF T HE CASE. 79 (II) THAT THE SUM OF RS. 24,809 REPRESENTED THE EST IMATED AMOUNT WHICH WOULD HAVE TO BE EXPENDED BY THE ASSESSEE IN THE CO URSE OF CARRYING ON ITS BUSINESS AND WAS INCIDENTAL TO THE BUSINESS AND, HA VING REGARD TO THE ACCEPTED COMMERCIAL PRACTICE AND TRADING PRINCIPLES , WAS A DEDUCTION WHICH, IF THERE WAS NO SPECIFIC PROVISION FOR IT UNDER SEC TION 10(2) OF THE INCOME-TAX ACT, WAS CERTAINLY AN ALLOWABLE DEDUCTION, ARRIVING AT THE PROFITS AND GAINS OF THE BUSINESS OF THE APPELLANT, UNDER SECTION 10(I) OF THE ACT, THERE BEING NO PROHIBITION AGAINST IT, EXPRESS OR IMPLIED, IN THE ACT. THE EXPRESSION PROFITS OR GAINS IN SECTION 10(I) OF THE INCOME-TAX ACT HAS TO BE UNDERSTOOD IN ITS COMMERCIAL SENSE AND THERE CAN BE NO COMPUTATION OF SUCH PROFITS AND GAINS UNTIL THE EXPENDITURE WHICH IS NECESSARY FOR THE PURPOSE OF EARNING THE RECEIPTS IS DEDUCTED THERE F ROM- WHETHER THE EXPENDITURE IS ACTUALLY INCURRED OR THE LIABILITY I N RESPECT THEREOF HAS ACCRUED EVEN THOUGH IT MAY HAVE TO BE DISCHARGED AT SOME FU TURE DATE. 70 THUS FROM ABOVE IT IS CLEAR THAT FOR DETERMINING TRUE PROFITS COST INCURRED BY THE ASSESSEE TOWARDS THE CONSTRUCT ION OF THE HOUSES AND FLATS WHICH HAS BEEN ACCUMULATED IN THE SCHEMES IS ALSO TO BE RECOGNISED. HOWEVER, IT HAS TO BE NOTED THAT IN CASE OF CALCUTTA COMPANY LTD VS. CIT (SUPRA) THE ASSESSE E WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND HAD C REDITED WHOLE AMOUNT RECEIVED OR RECEIVABLE TOWARDS SALE OF PROCE EDS I.E. WHY THE AMOUNT STILL TO BE INCURRED ON DEVELOPMENT WAS ALLOWED AS EXPENDITURE BUT STILL THE PRINCIPLE IS THERE. THER EFORE, IN CASE WERE CASH SYSTEM OF ACCOUNTING IS FOLLOWED THEN WHA T EVER EXPENDITURE HAS BEEN INCURRED IN CASH DURING THE YE AR, HAS TO BE ALLOWED. IN THE CASE BEFORE US, THE ASSESSEE HAS N EITHER OFFERED THE INSTALLMENTS AS INCOME NOR CLAIMED EXPENDITURE INCURRED. SINCE WE HAVE ALREADY HELD THAT INSTALLMENTS RECEIV ED HAVE BEEN RIGHTLY INCLUDED IN THE INCOME OF THE ASSESSEE, THE REFORE, CORRESPONDING EXPENDITURE WHICH HAS BEEN INCURRED I NC CASH TOWARDS CONSTRUCTION OF SUCH HOUSES AND FLATS SOLD UNDER HIRE PURCHASE IS ALSO TO BE ALLOWED. 71 ONE MORE ANGLE NEEDS TO BE CONSIDERED THAT IS WH AT WOULD HAPPEN TO THE OPENING STOCK AS WELL AS CLOSING STOC K. IN THE CASH SYSTEM OF ACCOUNTING CLOSING STOCK IS NOT CONSIDERE D, THEREFORE, WHAT HAS BEEN ACCUMULATED IN THE SCHEMES IS ALSO RE QUIRED TO BE CONSIDERED. CONSIDERING THE CONTENTIONS OF THE PAR TIES AND THE PRINCIPLES WE HAVE ALREADY DISCUSSED, WE ARE OF THE OPINION THAT WHATEVER INSTALLMENTS WERE ACCUMULATED IN THE SCHEM ES NEEDS TO BE CONSIDERED ALONG WITH THE OPENING STOCK WHENEVER A PARTICULAR SCHEME WAS COMPLETED. THIS IS SO BECAUSE IT WAS PO INTED OUT BY THE LD. COUNSEL OF THE ASSESSEE THAT THE PROFIT IN EACH OF THE SCHEME WAS OFFERED FOR TAXATION WHEN A PARTICULAR S CHEME WAS 80 COMPLETED. THEREFORE, THE RESULTS OF INDIVIDUAL SC HEMES HAVE TO BE RECALCULATED AND INSTALLMENTS ACCUMULATED SHOULD BE TAKEN AS INCOME AND EXPENDITURE INCURRED AFTER REDUCING THE EXPENDITURE INCURRED IN CASH WHICH HAS BEEN ALLOWED IN VARIOUS YEARS, SHOULD BE REDUCED FROM THE SUCH INSTALLMENTS AND NET RESUL TS SHOULD BE CONSIDERED IN THE YEAR OF COMPLETION OF EACH OF THE HOUSING SCHEMES IN THE YEAR IN WHICH PROFITS OF SUCH COMPLE TED SCHEME WERE ACTUALLY OFFERED BY THE ASSESSEE. 72 IN THESE CIRCUMSTANCES WE SET ASIDE THE ORDER O F THE LD. CIT(A) AND DIRECT THE AO TO INCLUDE INSTALLMENTS R ECEIVED ON SALE OF VARIOUS HOUSES AND FLATS UNDER HIRE PURCHASE AGR EEMENT AND AT THE SAME TIME ALLOW CORRESPONDING EXPENDITURE WHICH HAS BEEN EXPENDED BY THE ASSESSEE IN CASH (INCLUDING THROUGH CHEQUE). FURTHER IN THE YEAR OF COMPLETION OF A PARTICULAR S CHEME EFFECT HAS TO BE GIVEN IN RESPECT OF ACCUMULATED INSTALLM ENTS AS WELL AS ACCUMULATED EXPENDITURE WHICH HAS NOT BEEN ALREADY CONSIDERED IN A PARTICULAR YEAR ON CASH BASIS AS OBSERVED EARL IER. WE HAVE OBSERVED RIGHT IN BEGINNING THAT THIS ISSUE IS INVO LVED IN ALL THE YEARS BEFORE US THEREFORE, SIMILAR TREATMENT AS OB SERVED BY US, SHOULD BE GIVEN IN EACH OF THE YEAR. 89. BY FOLLOWING THE ABOVE ORDER, ASSESSING OFFICER IS DIRECTED TO FOLLOW THE ABOVE ORDER FOR THE PURPOSE OF MAKING ADDITION AGAINST THE ASSESSEE. IN THE RESULT, THIS GROUND O F APPEAL OF THE ASSESSEE IS, THEREFORE, DISPOSED OF ACCORDINGLY IN VIEW OF THE FINDINGS GIVEN IN THE CASE OF PUNJAB URBAN DEVELOPM ENT AUTHORITY (SUPRA). 90. ON GROUND NO. 11, ASSESSEE CHALLENGED ORDER OF THE LD. CIT(APPEALS) IN CONFIRMING THE CONTENTION OF THE AS SESSING OFFICER IN REJECTING THE METHOD OF ACCOUNTING REGUL ARLY FOLLOWED BY THE ASSESSEE, WHICH HAS BEEN ACCEPTED BY THE DEP ARTMENT IN PREVIOUS YEARS. THIS ISSUE IS CONNECTED WITH GROUND NO. 10 OF THE APPEAL OF THE ASSESSEE IN WHICH THE LD. CIT(APP EALS) HAS GIVEN A CATEGORICAL FINDING THAT ASSESSEE WAS FOLLO WING THE CASH SYSTEM OF ACCOUNTING, THEREFORE, INCOME IS TO BE CO MPUTED 81 ACCORDINGLY. SINCE, GROUND NO. 10 IS DISPOSED OF I N TERMS OF THE ORDER OF THE TRIBUNAL IN THE CASE OF PUDA, MOHALI ( SUPRA), THEREFORE, THIS GROUND STANDS DISPOSED OF ACCORDING LY AND NO FURTHER INTERFERENCE IS REQUIRED. 91. ON GROUND NO. 12, ASSESSEE CHALLENGED THE ADDIT ION OF RS. 61,41,511/- BEING AMOUNT PAID BY ASSESSEE AUTHORITY ON ACCOUNT OF CONTRIBUTION OF PROVIDENT FUND. 92. ON GROUND NO. 13, ASSESSEE CHALLENGED THE ORDER OF THE LD. CIT(APPEALS) IN CONFIRMING THE CONTENTION OF THE AS SESSING OFFICER IN TREATING SHARE OF EMPLOYEES TO PROVIDENT FUND OF RS. 61,41,511/- AS INCOME OF THE ASSESSEE UNDER SECTION 2(24)(X) OF THE INCOME TAX ACT. 93. THE BRIEF FACTS ARE THAT THE ASSESSING OFFICER NOTED THAT ASSESSEE HAD DEBITED EXPENDITURE AMOUNTING TO RS.61 ,41,511/- IN ITS INCOME AND EXPENDITURE ACCOUNT UNDER THE HEA D 'ESTABLISHMENT AND PERSONAL EXPENSES' ON ACCOUNT OF CONTRIBUTION TO CONTRIBUTORY PENSION FUND. THE AO N OTED THAT THE PROVIDENT FUND WAS NOT APPROVED BY THE CIT/CCIT OR UNDER ANY SCHEME FRAMED BY THE EMPLOYEES PROVIDENT FUND A CT, 1952. THE AO ASKED THE APPELLANT TO EXPLAIN WHY THE CONTR IBUTION MADE TO PROVIDENT FUND MAY NOT BE DISALLOWED. THE A PPELLANT SUBMITTED THAT AS PER POWERS OF NOTIFICATION ISSUED BY HOUSING DEPARTMENT ON 12.08.1983, PUDA/GLADA CAN MANAGE ITS PROVIDENT FUND INDEPENDENTLY. THIS NOTIFICATION HAD BEEN CHALLENGED BY THE REGIONAL PROVIDENT FUND COMMISSIO NER AND THE MINISTRY OF LABOUR, GOVT. OF INDIA IN THE COUR T. THE FIRST AUTHORITY HAD DECIDED IN THE FAVOUR OF REGIONAL PRO VIDENT FUND 82 COMMISSIONER THAT THE PROVIDENT FUND SHALL BE MANAG ED BY THE REGIONAL PROVIDENT FUND COMMISSIONER. THE PUDA HAS CHALLENGED THIS ORDER IN THE HON'BLE PUNJAB AND HAR YANA HIGH COURT. PENDING THE DISPOSAL OF THIS CASE, THE AMOUN T CONTRIBUTED BY GLADA AND THE SHARE OF EMPLOYEES WAS BEING DEPOS ITED IN SEPARATE BANK ACCOUNT. THE ASSESSEE FURTHER SUBMITT ED THAT VARIOUS COURTS HAVE HELD THAT CONTRIBUTION TO UNREC OGNIZED PROVIDENT FUND IS ALLOWABLE DEDUCTION U/S 37(1) OF THE INCOME TAX ACT. THE ASSESSING OFFICER REFERRED TO THE PROV ISIONS OF SECTION 36(1)(IV) OF THE INCOME TAX ACT AND HELD TH AT THE CONTRIBUTIONS MADE BY THE APPELLANT TO CPF WERE NOT ALLOWABLE. THE ASSESSING OFFICER ALSO REFERRED TO THE FACT TH AT THE REGIONAL PROVIDENT FUND COMMISSIONER WHO IS STATUTORY AUTHOR ITY FOR THE PURPOSES HAS ALSO FILED A SUIT AGAINST THE APPELLAN T FOR NOT FOLLOWING THE PROVIDENT FUND LAW. THE ASSESSING OFF ICER FURTHER HELD THAT JUDICIAL PRONOUNCEMENTS CITED BY THE APPE LLANT ARE NOT APPLICABLE AS THE ASSESSEE WAS VIRTUALLY KEEPING AN D INVESTING THE PROVIDENT FUND CONTRIBUTION AT ITS WILL. THE CO NTRIBUTION OF RS.61,41,511/- MADE BY THE APPELLANT TO THE CONTRIB UTORY PENSION FUND WAS ACCORDINGLY DISALLOWED BY THE ASSE SSING OFFICER. ON SIMILAR GROUND, AN AMOUNT OF RS.61,41,5 11/- BEING PROVIDENT FUND DEDUCTED FROM THE EMPLOYEES WAS ADDE D TO THE TOTAL INCOME OF THE ASSESSEE. 94. THE ASSESSEE VIDE WRITTEN SUBMISSIONS DATED 01. 07.2013, ONCE AGAIN REITERATED SUBMISSIONS MADE DURING THE COURSE OF ASSESSMENT PROCEEDINGS. THE ASSESSEE SUBMITTED THA T: 1. IN THIS REGARD, IT IS SUBMITTED THAT GLADA IS A STATUTORY BODY CONSTITUTED UNDER THE PUNJAB REGIONAL & TOWN 83 PLANNING & DEVELOPMENT ACT, 1995 IN THE YEAR 2006. EARLIER, IT WAS A PART OF PUNJAB URBAN PLANNING & DEVELOPMENT AUTHORITY WHICH WAS MANAGED BY THE DEPARTMENT OF HOUSING & URBAN DEVELOPMENT OF PUNJAB GOVT. AS PER POWERS OF NOTIFICATION ISSUED BY THE H OUSING DEPARTMENT ON 12.08.1983, PUDA/GLADA CAN MANAGE ITS PROVIDENT FUND INDEPENDENTLY BUT THIS NOTIFICATION HAS BEEN CHALLENGED BY THE REGIONAL PROVIDENT FUND COMMISSIONER & THE MINISTRY OF LABOUR, GOVT. OF IND IA IN THE COURT. THE FIRST AUTHORITY HAS DECIDED IN THE F AVOUR OF REGIONAL PROVIDENT FUND COMMISSIONER THAT THE PROVI DENT FUND SHALL BE MANAGED BY THE REGIONAL PROVIDENT FUN D COMMISSIONER. THE PUDA HAS CHALLENGED THIS ORDER IN PUNJAB & HARYANA HIGH COURT. TILL THE DISPOSAL OF T HE CASE, THE AMOUNT CONTRIBUTED BY GLADA & THE SHARE O F EMPLOYEES IS BEING DEPOSITED IN A SEPARATE BANK ACC OUNT. THE REGIONAL PROVIDENT FUND COMMISSIONER HAS ALSO APPLIED FOR THE RECOVERY OF ALL THE FUNDS FROM THE PUDA BUT THE PUNJAB & HARYANA HIGH COURT HAS STAYED THE SAME . COPY OF THE ORDER OF PUNJAB & HARYANA HIGH COURT IS ENCLOSED HEREWITH. THE ABOVE CONTRIBUTIONS ARE STATUTORY CONTRIBUTIONS WHICH HAVE BEEN CONTRIBUTED AS PER THE DIRECTIONS OF THE STATE GOVT. 2. RELIANCE IS PLACED UPON THE JUDGMENT OF PUNJAB & HARYANA HIGH COURT IN THE CASE OF PUNJAB FINANCE CORPORATION LIMITED, 295 ITR 51 WHEREIN IT HAS BEEN HELD THAT THE CONTRIBUTION TO THE PROVIDENT FUND IS ALLO WABLE EVEN IT IS NOT RECOGNIZED THE HIGH COURT HELD AS UN DER:- APPLYING THE ABOVE PRINCIPLES IN THE PRESENT CASE, IT IS NOT DISPUTED THAT THE ASSESSES HAD CONTRIBUTED THE PROVIDENT FUND FOR ITS EMPLOYEES UNDER THE PROVIDEN T FUNDS ACT, 1925. FURTHER, IT CANNOT BE DISPUTED THA T THE EXPENSE WAS MADE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND WAS NEITHER CAPITAL IN NATU RE NOR PERSONAL EXPENSE OF THE ASSESSEE. SECTION 36(1) (IV) OF THE ACT DOES NOT DEBAR SPECIFICALLY DEDUCTION ON ACCOUNT OF CONTRIBUTION MADE UNDER THE PROVIDENT FUNDS ACT, 1925. IT ONLY TALKS ABOUT GRANT OF DEDUC TION IN RESPECT OF RECOGNIZED PROVIDENT FUND. KEEPING TH IS IN VIEW, WE DO NOT FIND THAT ANY ILLEGANCY HAS BEEN COMMITTED BY THE TRIBUNAL IN REJECTING THE APPEAL O F THE REVENUE SUSTAINING THE DELETION OF DISALLOWANCE OF 84 RS.29,402 REPRESENTS CONTRIBUTION MADE BY THE ASSESSEE TOWARDS PROVIDENT FUND. THEREFORE, THE CONTRIBUTION OF RS.61,41,511/- IS ALLOWABLE. 94(I). COPY OF THE APPELLANT'S SUBMISSIONS WAS PRO VIDED TO THE ASSESSING OFFICER, WHO WAS PRESENT DURING THE COURS E OF APPELLATE PROCEEDINGS. THE ASSESSING OFFICER VIDE R EPORT DATED 23.09.2013, SUBMITTED AS UNDER:- 'THE REPLY OF THE ASSESSEE HAS BEEN PERUSED. THE CONTRIBUTIONS MADE BY THE ASSESSEE TO THE CONTRIBUT ED PROVIDENT FUND ARE NOT ALLOWABLE KEEPING IN VIEW TH E PROVISIONS OF SECTION 36(1 )(IV) OF THE INCOME TAX ACT, 1961 WHICH READS AS UNDER: ' ANY SUM PAID BY THE ASSESSEE AS AN EMPLOYER BY WAY OF CONTRIBUTION TOWARDS A RECOGNIZED PROVIDENT FUND OR AN APPROVED SUPERANNUATION FUND, SUBJECT TO SUCH LIMITS AS MAY BE PRESCRIBED FOR THE PURPOSE OF RECOGNIZING THE PROVIDENT FUND OR APPROVING THE SUPERANNUATION FUND, AS THE CASE MAY BE; AND SUBJEC T TO SUCH CONDITIONS AS THE BOARD MAY THINK FIT TO SP ECIFY IN CASES WHERE THE CONTRIBUTIONS ARE NOT IN THE NAT URE OF ANNUAL CONTRIBUTIONS OF FIXED AMOUNTS OR ANNUAL CONTRIBUTIONS FIXED ON SOME DEFINITE BASIS BY REFER ENCE TO THE INCOME CHARGEABLE UNDER THE HEAD SALARIES OR TO THE CONTRIBUTIONS OR TO THE NUMBER OF MEMBERS OF THE FUND. IN THE CASE OF THE ASSESSEE, THE CONDITIONS REQUIRED UNDER THE PROVISIONS OF SECTION 36(1) (IV) OF THE IT ACT, 1961 ARE NOT BEING FULFILLED, AS THE PROVID ENT FUND IS NEITHER APPROVED BY THE CHIEF COMMISSIONER NOR BY COMMISSIONER OF INCOME TAX NOR IT IS A PROVIDENT FUND ESTABLISHED UNDER A SCHEME FRAMED UNDER THE EMPLOYEES PROVIDENT FUNDS ACT, 1952. IT I S ALSO NOTEWORTHY THAT THE REGIONAL PROVIDENT FUND COMMISSIONER WHO IS STATUTORY AUTHORITY FOR THE PURPOSES HAS ALSO FILED A SUIT AGAINST THE ASSESSEE , FOR NOT FOLLOWING THE PROVIDENT FUND LAW AND THE CANE IS STATED TO BE PENDING BEFORE THE HON'BLE PUNJAB & HARYANA HIGH COURT. 85 SO FAR AS THE JUDICIAL PRONOUNCEMENTS CITED BY THE ASSESSEE ON THIS ISSUE, AS ABOVE ARE CONCERNED THES E ARE NOT APPLICABLE IN FACTS OF THE ASSESSEE'S CASE AS TIN ASSESSEE IS VIRTUALLY KEEPING AND INVESTING THE PF CONTRIBUTIONS AT ITS WILL THIN THE EXPENSES OF RS.61,41,511/- BEING INCURRED BY THE ASSESSEE TOWAR DS THE CONTRIBUTORY PROVIDENT FUND WHICH IS NOT RECOGN IZED UNDER ANY LAW AS STATED ABOVE SHOULD BE DISALLOWED AND ADDED BACK TO THE INCOME OF THE ASSESSEE. ADDITION ON ACCOUNT OF EMPLOYEES' SHARE TO PROVIDENT FUND OF RS. 61,41,511/- IN THIS REGARD, IT IS SUBMITTED THAT SINCE THE PROV IDENT FUND OF THE ASSESSEE IS NEITHER APPROVED BY THE CHI EF COMMISSIONER NOR BY COMMISSIONER OF INCOME TAX NOR IT IS A PROVIDENT FUND ESTABLISHED UNDER A SCHEME FRAMED UNDER THE EMPLOYEES PROVIDENT FUNDS ACT, 1952 AND ALSO KEEPING IN VIEW THE FACT THAT THE PROVIDENT FUND COMMISSIONER HAS FILED A SUIT AGAINS T THE ASSESSEE, THE AMOUNT DEDUCTED BY THE ASSESSEE FROM ITS EMPLOYEES, IS TO BE TREATED AS INCOME OF T HE ASSESSEE U/S 2(24)(X) OF IT.ACT, 1961. THE SECTION 2(24)(X) IS REPRODUCED AS UNDER:- (24) INCOME INCLUDES ------------------- [(X) ANY SUM RECEIVED BY THE ASSESSEE FROM HIS EMPLOYEES AS CONTRIBUTIONS TO ANY PROVIDENT FUND O R SUPERANNUATION FUND OR ANY FUND SET UP UNDER THE PROVISIONS OF THE EMPLOYEES' STATE INSURANCE ACT, 1948 (34 OF 1948), OR ANY OTHER FUND FOR THE WELFARE OF SUCH EMPLOYEES;] ' THEREFORE THE PROVIDENT FUND DEDUCTED FROM THE EMPLOYEES I.E. EQUAL TO RS.61,41,511/- (I.E. EQUAL TO ASSESSEE'S CONTRIBUTION) SHOULD BE DISALLOWED AND ADDED BACK TO HIS INCOME. 94(II) COPY OF THE ASSESSING OFFICER'S REPORT WAS P ROVIDED TO THE APPELLANT. THE APPELLANT RELIED ON THE ORDER OF CIT(A) CHANDIGARH IN THE CASE OF PUDA FOR AY 2009-10 WHERE IN A SIMILAR ADDITION HAD BEEN DELETED BY CIT(A) CHANDIG ARH RELYING 86 ON THE DECISION IN THE CASE OF PUNJAB FINANCIAL COR PORATION LTD. 295 ITR 510 (P&H). 95. THE LD. CIT(APPEALS) CONSIDERING THE MATERIAL O N RECORD CONFIRMED THE ADDITION. HIS FINDINGS IN PARA 11.5 TO 11.10 ARE REPRODUCED AS UNDER : 11.5 I HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS. WHETHER SUCH CONTRIBUTIONS ARE ALLOWABLE AS DEDUCTION OR NOT IS GOVER NED BY THE PROVISIONS OF SECTION 40A AND SECTION 36(L)(IV) OF TH E IT ACT. SECTION 40A(9) READS AS UNDER: '(9) NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF ANY SUM PAID BY THE ASSESSEE AS AN EMPLOYER TOWARDS THE SETTING UP OR FO RMATION OF, OR AS CONTRIBUTION TO, ANY FUND, TRUST, COMPANY, ASSOCIAT ION OF PERSONS, BODY OF INDIVIDUALS, SOCIETY REGISTERED UNDER THE SOCIETIES REGISTRATION ACT, 1860 (21 OF I860), OR OTHER INSTITUTION FOR ANY PURPOSE, EXCEPT WHERE SUCH SUM IS SO PAID, FOR THE PURPOSES AND TO THE EXTENT PROV IDED BY OR UNDER CLAUSE (IV) OR CLAUSE (V) OF SUB-SECTION (1) OF SECTION 36, OR AS REQUIRED BY OR UNDER ANY OTHER LAW FOR THE TIME BEING IN FORCE.' THEREFORE, IT IS EVIDENT THAT CONDITIONS PRESCRIBED UND ER SECTION 36(1 )(IV) HAVE TO BE FULFILLED IN ORDER TO CLAIM THE DE DUCTION ON ACCOUNT OF CONTRIBUTION TO PF. 11.6 IT IS SEEN FROM THE FACTS ON RECORD THAT IN THE CASE OF THE APPELLANT, THE CONDITIONS REQUIRED UNDER THE PROVISI ONS OF SECTION 36(1) (IV) OF THE IT ACT, 1961 ARE NOT BE FULFILLED, AS TH E PROVIDENT FUND IS NEITHER APPROVED BY THE CHIEF COMMISSIONER NOR BY C OMMISSIONER OF INCOME TAX NOR IT IS A PROVIDENT FUND ESTABLISHE D UNDER A SCHEME FRAMED UNDER THE EMPLOYEES PROVIDENT FUNDS A CT, 1952. RECOGNIZED PROVIDENT FUND HAS BEEN DEFINED IN SECTI ON 2(38) OF THE I.T. ACT, 1961 WHICH IS REPRODUCED UNDER: RECOGNIZED PROVIDENT FUND' MEANS A PROVIDENT FUND WHICH HAS BEEN AND CONTINUES TO BE RECOGNIZED BY THE CHIEF COMMISS IONER OR COMMISSIONER OF INCOME TAX IN ACCORDANCE WITH THE R ULES CONTAINED IN PART A OF THE FOURTH SCHEME AND INCLUDES A PROVI DENT FUND ESTABLISHED UNDER A SCHEME FRAMED UNDER THE EMPLOYE ES'S PROVIDENT FUND ACT, 1952 ' 87 11.7 IN THIS CASE CONTRIBUTIONS HAVE NEITHER BEEN M ADE TO CPF APPROVED BY CIT NOR TO A PF FUND ESTABLISHED UNDER A SCHEME FRAMED UNDER THE EMPLOYEES PROVIDENT FUND ACT, 1952. MOREOVER, THE CONSTITUTION OF THE PROVIDENT FUND IS NOT IN ACCORDANCE WITH THE LAW OF THE LAND AND THE REGIONAL PROVIDENT FUND COMMISSIONER WHO IS STATUTO RY AUTHORITY FOR THE PURPOSES HAS ALSO FILED A SUIT AGAINST THE APPELLANT, FOR NOT FOLLOWING THE PROVIDENT FUND LAW. FURTHER, THE APPE LLANT HAS LOST THE CASE IN THE LOWER COURT AND THE CASE IS STATED TO B E PENDING BEFORE THE HON'BLE PUNJAB & HARYANA HIGH COURT. THE APPELL ANT IS MANAGING THE FUND ON ITS OWN AND VIRTUALLY KEEPING AND INVESTING THE PF CONTRIBUTIONS AT ITS V HON'BLE SUPREME COURT IN THE CASE OF CIT VS. M/S TEXTOOL CO. LTD IN CIVIL APPEAL NO. 447 OF 2003 VIDE ORDER DATED 9 TH SEP 2009 HAS HELD AS UNDER: 'TRUE THAT A FISCAL STATUTE IS TO BE CONSTRUED STRI CTLY AND NOTHING SHOULD BE ADDED OR SUBTRACTED TO THE LANGUA GE EMPLOYED IN THE SECTION, YET A STRICT CONSTRUCTION OF A PROVISION DOES NOT RULE OUT THE APPLICATION OF THE PRINCIPLES OF REASONABLE CONSTRUCTION TO GIVE EFFECT TO THE PURPO SE AND INTENTION OF ANY PARTICULAR PROVISION OF THE ACT. ( SEE: SHRI SAJJAN MILLS LTD. VS. COMMISSIONER OF INCOME TAX, M .P. & ANR. (1985) 156ITR 585). FROM A BARE READING OF SECTION 3 6(L)(V) OF THE ACT, IT IS MANIFEST THAT THE REAL INTENTION BEH IND THE PROVISION IS THAT THE EMPLOYER SHOULD NOT HAVE ANY CONTROL OVER THE FUNDS OF THE IRREVOCABLE TRUST CREATED EXC LUSIVELY FOR THE BENEFIT OF THE EMPLOYEES. ' IN THIS CASE, APPELLANT IS IN CONTROL OF THE AMOUNT OF PF CONTRIBUTION OF BOTH EMPLOYERS AND EMPLOYEES AND IT S INTEREST. THEREFORE, THE CONDITIONS OF SECTION 36 (1)(IV) ARE NOT FULFILLED. THE APPELLANT IS THEREFORE NOT ELIGIBLE FOR DEDUCTION CLAIMED ON THIS ACCOUNT. 11.8 RELIANCE IS PLACED ON THE FOLLOWING JUDGMENT S: 1. RASSL CEMENT LTD VS. CIT (275 ITR 579) (APH ASPINWALL & CO (TRAVANCORE) LTD VS. DCIT 295 ITR 553. (KERALA): ONLY CONTRIBUTION TOWARDS REORGANIZED PF FOR THE PU RPOSE AND TO THE EXTENT PROVIDED U/S 36(1 )(IV) OR (V) OR AS REQUIRED BY ANY LAW ARE ALLOWABLE AS DEDUCTION U/S 40A(9). IN VIEW OF SECTION 40A(9) NO DEDUCTION CAN BE ALLOWED UNDER SECTION 37 . 2. BROOKE BOND INDIA LTD.VS JCIT 337 ITR 482 (CAL) 88 ON A CONJOINT READING OF THE PROVISIONS CONTAINED I N SEC. 36 AND 40A(9), THE AMOUNT OF LIABILITY ALLEGED TO HAVE ACCRUED TO THE EMPLOYER TOWARDS AN UNAPPROVED SCHEME OF SUPERANNUATION FUND FOR THE PAYMENT OF THE EMPLOYEE S WOULD NOT BE ENTITLED TO DEDUCTION - SEC. 40A(9) OVERRIDE S PROVISIONS OF SEC. 36 - IT IS PREPOSTEROUS TO SUGGEST THAT AN EXPENDITURE OF THE NATURE PROVIDED IN ANY OF THE PROVISIONS OF SECTION 30 TO 36 WOULD BE ALLOWED U/S 37 I.E. THE RESIDUARY SECTI ON. IN THAT EVENT, THE PURPOSE OF PUTTING VARIOUS RESTRICTIONS IN SEC. 30 TO 36 OF THE ACT WOULD BECOME INEFFECTIVE AND AN ASSES SEE CAN EASILY BYPASS THOSE RESTRICTIONS BY CLAIMING THE BE NEFIT UNDER THE RESIDUARY SECTION. 11.9 THE JUDGMENT OF PUNJAB FINANCIAL CORPORATION, 295 ITR 510 (P&H) RELIED BY THE APPELLANT IS DISTINGUISHABL E ON FACTS. THIS JUDGMENT IS W.R.T. A.Y. 1977-78 WHEREIN SECTIO N 40A(9) WAS INSERTED BY FINANCE ACT, 1984 W.R.E.F. 01.04.19 80. THEREFORE, THIS JUDGMENT PERTAINS TO THE PERIOD BEF ORE THE INSERTION OF PROVISIONS OF SECTION 40A(9). FURTHER, THE JUDGMENT IS IN THE CONTEXT OF PF ACT, 1925 WHEREAS SECTION 2(38) WHICH DEFINES RECOGNISED PF SPECIFIES ONLY 2 TYPE OF PF SCHEME ONE CREATED UNDER PF ACT, 1952 OR THOSE APPR OVED BY THE CHIEF COMMISSIONER OF COMMISSIONER OF INCOME TA X. 11.10 KEEPING IN VIEW THE AFORESAID FACTS THE AO WAS FULLY JUSTIFIED IN OF RS.61,41,511/- BEING AMOUNT PAID ON ACCOUNT OF CONTRIBUTION TO PROVIDENT FUND AND ADDI TION OF RS.61,41,511/- AS INCOME OF THE APPELLANT UNDER SEC TION 2(24) OF THE INCOME TAX ACT. THIS GROUND OF APPEAL IS ACCORDINGLY DISMISSED. 96. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT ASS ESSEE AUTHORITY IS A STATUTORY BODY CONSTITUTED UNDER PR TPD ACT. EARLIER IT WAS A PART OF PUDA. AS PER NOTIFICATION ISSUED BY HOUSING DEPARTMENT ON 12.08.1983, PUDA/GLADA CAN MA NAGE ITS PF INDEPENDENTLY. THE COPY OF THE RELEVANT DOC UMENT IS FILED AT PAGE 114 TO 121. IT IS SUBMITTED THAT WHERE AN ASSESSEE IS STATUTORY CORPORATION, IS OBLIGED TO PAY PENSION TO ITS EMPLOYEES UNDER THE RULES GOVERNING IT AND PROVISIONS BY THE ASSESSEE HAVE BEEN MADE FOR THE SAME AND IN CASE THERE IS NO EXISTENCE OF 89 ANY APPROVED PENSION FUND, THE ASSESSEE CAN CLAIM S UCH EXPENDITURE UNDER SECTION 37 OF THE ACT INSTEAD OF SECTION 36(1)(IV) OF THE ACT AND THE SAME WAS INCURRED WHOL LY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THE LD. C OUNSEL FOR THE ASSESSEE SUBMITTED THAT THE SIMILAR ISSUE HAS BEEN DECIDED BY ITAT CHANDIGARH BENCH IN THE CASE OF PUDA, MOHALI ( SUPRA) DATED 06.12.2013 IN PARA 84 TO 86 OF THE ORDER. TH EREFORE, ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE. 97. THE LD. DR ALSO STATED THAT ISSUE IS DECIDED NO W IN THE CASE OF PUDA MOHALI (SUPRA). 98. ON CONSIDERATION OF THE RIVAL SUBMISSIONS, WE F IND THAT ISSUE IS NOW DECIDED BY ITAT CHANDIGARH BENCH IN TH E CASE OF PUDA, MOHALI (SUPRA) IN WHICH IN PARAS 84 TO 86 THE ISSUE IS DECIDED THAT ASSESSEE IS ENTITLED TO CLAIM DEDUCTIO N IN RESPECT OF CONTRIBUTIONS MADE TOWARDS PF EVEN IF SUCH FUND IS NOT RECOGNIZED. HOWEVER, ASSESSING OFFICER WAS DIRECTE D TO EXAMINE THIS ISSUE CLEARLY AND ALLOW THE PAYMENT ON CASH BA SIS. THE FINDINGS OF THE TRIBUNAL IN THIS CASE IN PARAS 84 T O 86 ARE REPRODUCED AS UNDER : 84 WE HAVE HEARD THE RIVAL SUBMISSIONS CAREFULLY. FIRST OF ALL WE WOULD LIKE TO POINT OUT THAT THIS ISSUE I S ARISING IN ALL THE YEARS IN WHICH THE APPEALS WERE HEARD BY US , THEREFORE, THE DECISION IN THESE PARAS WOULD BE APP LICABLE IN ALL THE YEARS WHEREIN APPEALS ARE BEING ADJUDICATED THROUGH THIS ORDER. THE ASSESSEE AUTHORITY WAS FORMED IN 1 995 PRIOR TO WHICH THIS ORGANIZATION WAS KNOWN AS PUNJAB HOU SING DEVELOPMENT BOARD WHICH WAS STATED TO HAVE BEEN FO RMED IN 1972. THROUGH A GAZETTE NOTIFICATION DATED 12TH AUGUST 1983 (COPY PLACED AT PAPER BOOK AT PAGES 135-136) GOVERNMENT OF PUNJAB MADE CERTAIN RULES FOR PUNJAB 90 HOUSING DEVELOPMENT BOARD THROUGH GSR NO. 70/PA6Z/73/S/98/83.RULE 16 OF THIS NOTIFICATION REA DS AS UNDER: PROVIDENT FUND-(1) THE STATE GOVERNMENT SHALL ESTAB LISH A PROVIDENT FUND FOR THE EMPLOYEES OF THE BOARD AND SUCH PROVIDENT FUND SHALL BE DEEME D TO BE A GOVERNMENT PROVIDENT FUND FOR THE PURPOSE OF THE PROVIDENT FUND ACT, 1925(CEN TRAL ACT XIV OF 1925) AND NOTWITHSTANDING ANYTHING CONTAINED IN SECTION 8 THE REOF, SUCH FUND MAY BE ADMINISTERED BY SUCH OFFICERS OF THE STATE GOVERNMENT OR OF THE BOA RD AS THE STATE GOVERNMENT MAY SPECIFY IN THAT BEHALF. THE ABOVE CLEARLY SHOWS THAT GOVERNMENT THROUGH THI S NOTIFICATION WAS MANDATED TO ESTABLISH A GOVERNMENT PROVIDENT FUND UNDER PROVIDENT FUND ACT, 1925. FURT HER PAGE 152 OF THE PAPER BOOK IS COPY OF ANOTHER ORDER OF THE GOVERNMENT OF PUNJAB SHOWING THAT ON CONSTITUTION OF PUNJAB URBAN PLANNING AND DEVELOPMENT AUTHORITY VAR IOUS TERMS IN PUNJAB HOUSING DEVELOPMENT BOARD RULES, 19 83 WOULD STAND AMENDED BY SUBSTITUTION OF THE WORDS PUNJAB HOUSING DEVELOPMENT BOARD TO PUNJAB URBAN PLANNIN G DEVELOPMENT AUTHORITY THIS SHOWS THAT SAME RULES WHICH WERE MADE FOR PUNJAB HOUSING DEVELOPMENT BOARD WERE ADOPTED FOR THE ASSESSEE AUTHORITY ALSO. THEREFORE , IT BECOMES CLEAR THAT PROVIDENT FUND ESTABLISHED BY TH E ASSESSEE IS GOVERNED BY THE PROVISIONS OF PROVIDENT FUND ACT, 1925. RULE (1) OF PART A TO THE FOURTH SCHE DULE OF THE ACT READS AS UNDER: APPLICATION OF THE PART THIS PART WAS NOT APPLIED TO ANY PROVIDENT FUND TO WHICH THE PROVIDENT FUND ACT, 1925 (19 OF 1925) APPLIES. THE ABOVE MAKES IT CLEAR THAT PROVIDENT FUND WHICH ARE GOVERNED BY PROVIDENT FUND ACT, 1925 ARE NOT COVERE D BY THE RULES MADE UNDER THE FOURTH SCHEDULE. IN OTHER WORDS, THE PROVISIONS REGARDING RECOGNITION OF THE PROVIDE NT FUND WOULD NOT BE APPLICATION TO SUCH FUNDS, THEREFORE, IT DOES NOT MAKE ANY DIFFERENCE WHETHER ASSESSEES PROVIDEN T FUND IS RECOGNIZED OR NOT RECOGNIZED. THEREFORE, THERE IS NO FORCE IN THE SUBMISSIONS OF THE LD. DR FOR THE REVE NUE THAT THE CONTRIBUTION SHOULD NOT BE ALLOWED BECAUSE THE ASSESSEE HAS NOT GOT ITS FUNDS RECOGNIZED OR CONTRI BUTION WAS NOT MADE TOWARDS RECOGNIZED PROVIDENT FUND. TH IS ALSO LEADS TO THE CONCLUSION THAT SECTION 36(1)(IV) WHIC H WAS FOR 91 CONTRIBUTION TOWARDS RECOGNIZED PROVIDENT FUND, IS NOT APPLICABLE. HOWEVER, AS FAR AS SECTION 36(1)(VA) I S CONCERNED, THE SAME IS STILL APPLICABLE BECAUSE SEC TION 36(1)(VA) READS AS UNDER: 36. (1) THE DEDUCTIONS PROVIDED FOR IN THE FOLLOWING CL AUSES SHALL BE ALLOWED IN RESPECT OF THE MATTERS DEALT WITH THEREIN, IN COMPUTING THE IN COME REFERRED TO IN SECTION 28 (I) TO (V) - NOT RELEVANT [(VA) ANY SUM RECEIVED BY THE ASSESSEE FROM ANY O F HIS EMPLOYEES TO WHICH THE PROVISIONS OF SUB-CLAUSE (X) OF CLAUSE (24) OF SECTION 2 APPLY, IF SUCH SUM IS CREDITED BY THE ASSESSEE TO THE EMPLOYEE'S ACCOUNT IN THE RELEVANT FUND OR FUND S ON OR BEFORE THE DUE DATE. EXPLANATION.FOR THE PURPOSES OF THIS CLAUSE, 'DUE DATE' MEANS THE DATE BY WHICH THE ASSESSEE IS REQUIRED AS AN EMPLOYER TO CREDIT AN EM PLOYEE'S CONTRIBUTION TO THE EMPLOYEE'S ACCOUNT IN THE RELEVANT FUND UNDER ANY ACT, RULE, O RDER OR NOTIFICATION ISSUED THEREUNDER OR UNDER ANY STANDING ORDER, AWARD, CONTRACT OF SERVIC E OR OTHERWISE;] THE ABOVE PROVISION DEALS WITH EMPLOYEES SHARE OF T HE CONTRIBUTION. ACCORDING TO THE SCHEME OF THE ACT T HE EMPLOYEES SHARE IS TREATED AS INCOME WHEN SOME CONTRIBUTION IS RECEIVED BY THE ASSESSEE AND WHEN S AME IS CONTRIBUTED TO PROVIDENT FUND THEN SAME IS ALLOWED AS DEDUCTION UNDER THIS PROVISION. AT THE SAME TIME R ECEIPT OF SUCH CONTRIBUTION IS TREATED AS DEEMED INCOME U/S 2 (24)(X) WHICH READS AS UNDER: ANY SUM RECEIVED BY THE ASSESSEE FROM HIS EMPLOYEES AS CONTRIBUTIONS TO ANY PROVIDENT FUND OR SUPERANNUATION FUND OR ANY FUND SET UP UNDE R THE PROVISIONS OF THE EMPLOYEES' STATE INSURANCE ACT, 1948 (34 OF 1948), OR ANY OTHER FUND FOR THE WELFARE OF SUCH EMPLOYEES ; IN THIS CLAUSE WHICH IS PART OF THE DEFINITION OF I NCOME, THERE IS NO MENTION OF THE WORD RECOGNIZED PROVIDENT FUN D THEREFORE, ANY CONTRIBUTION RAISED FROM THE EMPLOY EE TOWARDS ANY PROVIDENT FUND WOULD FORM PART OF THE D EEMED INCOME UNDER THIS PROVISION. IN OUR OPINION, THIS HAS BEEN DELIBERATELY DONE BY THE LEGISLATURE BECAUSE AS FAR AS EMPLOYEES CONTRIBUTION IS CONCERNED, THE PARLIAMENT WANTED THAT THE SAME SHOULD NOT BE USED BY THE BUSINESS PE OPLE AND SHOULD BE DEPOSITED WITH THE PROVIDENT FUND AUT HORITIES AND OR TRUST AT THE EARLIEST AND THAT IS WHY NO DIF FERENCE HAS BEEN MADE BETWEEN RECOGNIZED PROVIDENT FUND OR OTHE R FUNDS. FROM THIS IT BECOMES CLEAR THAT AS FAR AS E MPLOYEES CONTRIBUTION IS CONCERNED, THE SAME IS NOT COVERED BY 92 SECTION 36(1)(IV). HOWEVER, AT THE SAME TIME IT CA NNOT BE DENIED THAT THE CONTRIBUTION MADE BY THE ASSESSEE T OWARDS PROVIDENT FUND IS CLEARLY IN THE NATURE OF BUSINESS EXPENDITURE AND THEREFORE, SAME IS ALLOWABLE U/S 37 OF THE ACT WHICH IS RESIDUARY PROVISION. SINCE THE CONTRI BUTION OF EMPLOYER SHARE TOWARDS PROVIDENT FUND IS IN NATURE OF REVENUE EXPENDITURE AND NOT COVERED BY ANY OTHER PR OVISION AS EXPLAINED ABOVE, SAME IS COVERED BY SECTION 37 O F THE ACT. THIS ANALYSIS LEADS TO THE CONCLUSION THAT AS FAR AS EMPLOYER SHARE IS CONCERNED, THE SAME IS ALLOWABLE U/S 37 AND AS FAR AS EMPLOYEES SHARE IS CONCERNED, THE SA ME IS ALLOWABLE U/S 36(1)(VA). LOT OF ARGUMENTS HAVE BEE N MADE BY BOTH THE PARTIES IN RESPECT OF SECTION 40A(9) W HICH READS AS UNDER: (9) NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF ANY SUM PAID BY THE ASSESSEE AS AN EMPLOYER TOWARDS THE SETTING UP OR FORMATION OF, OR AS CONTRIBUTION TO, ANY FUND, TRUST, COMPANY, ASSOCIATION OF PERSONS, BODY OF INDIVIDUAL S, SOCIETY REGISTERED UNDER THE SOCIETIES REGISTRATION ACT, 1860 (21 OF 1860), OR OTHER INSTI TUTION FOR ANY PURPOSE, EXCEPT WHERE SUCH SUM IS SO PAID, FOR THE PURPOSES AND TO THE EXTENT PROVIDED BY OR UNDER CLAUSE (IV) [OR CLAUSE (IVA)] OR CLAUSE (V) OF SUB-SECTION (1) OF SECTION 36 , OR AS REQUIRED BY OR UNDER ANY OTHER LAW FOR THE TIME BEING IN FORCE. PLAIN READING OF THIS PROVISIONS SHOWS THAT THE CON TRIBUTION MADE BY AN ASSESSEE AS A EMPLOYER TOWARDS VARIOUS F UNDS FOR THE BENEFIT OF THE EMPLOYEES ARE NOT ALLOWABLE EXCEPT FOR CONTRIBUTION PROVIDED IN THIS SECTION ITSELF. THER EFORE, THE LD. DR FOR THE REVENUE IS CORRECT THAT CONTRIBUTION WHICH ARE NOT MENTIONED IN THIS SECTION CANNOT BE ALLOWED BEC AUSE THIS PROVISIONS STARTS WITH NON OBSTANTE CLAUSE WHI CH IS MADE CLEAR BY STARTING OF SECTION 40A(1) WHICH READ S AS UNDER: 40A. (1) THE PROVISIONS OF THIS SECTION SHALL HAVE EFFE CT NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN ANY OTHER PROVISION OF THIS A CT RELATING TO THE COMPUTATION OF INCOME UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PR OFESSION'. HOWEVER, CAREFUL READING CLEARLY SHOWS THAT EXCEPTI ON PROVIDED IN THIS SECTION ARE IN RESPECT OF DEDUCTI ON ALLOWED U/S 36(1)(IV) OR 36(1)(IVA) OR 36(1)(V). THERE IS ANOTHER EXCEPTION WHICH READS AS UNDER: 93 OR AS REQUIRED BY OR UNDER ANY OTHER LAW FOR THE TIME BEING IN FORCE THEREFORE, THE LD. COUNSEL OF THE ASSESSEE IS CORR ECT THAT SINCE PROVIDENT FUND ESTABLISHED BY THE ASSESSEE WA S IN TERMS OF INDIAN PROVIDENT FUND ACT, 1925, THEREFORE , THIS HAS TO BE READ INTO THE EXCEPTIONS AND ACCORDINGLY FETTER FOR NOT ALLOWING THE DEDUCTION U/S 40A(9) WOULD NOT BE APPLICABLE FOR THE FUNDS CONTRIBUTED TOWARDS PROVI DENT FUND AS THE EMPLOYER SHARE IN TERMS OF INDIAN PROVIDENT FUND ACT, 1925 WHICH WAS ADOPTED BY THE ASSESSEE. THER EFORE, WE HOLD THAT THE ASSESSEE IS ENTITLED TO CLAIM DEDU CTION IN RESPECT OF CONTRIBUTIONS MADE TOWARDS PROVIDENT FU ND EVEN IF SUCH FUND IS NOT RECOGNIZED. 85 THE NEXT CONTENTION RAISED IS WHETHER DEDUCTION CAN BE ALLOWED EVEN IF THE CONTRIBUTION WAS PAID AFTER THE END OF THE YEAR. THE CLAIM OF THE ASSESSEE IS THAT THE PA YMENTS HAVE BEEN MADE BEFORE THE DUE DATE OF FILING OF RET URN AS PROVIDED IN SECTION 43B. RELEVANT PORTION OF SECTI ON 43B READS AS UNDER: 43B. NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER P ROVISION OF THIS ACT, A DEDUCTION OTHERWISE ALLOWABLE UNDER THIS ACT IN RESPECT OF [(A) ANY SUM PAYABLE BY THE ASSESSEE BY WAY OF TAX , DUTY, CESS OR FEE, BY WHATEVER NAME CALLED, UNDER ANY LAW FOR THE TIME BEING IN FORCE, OR] (B) ANY SUM PAYABLE BY THE ASSESSEE AS AN EMPLOYER BY WAY OF CONTRIBUTION TO ANY PROVIDENT FUND OR SUPERANNUATION FUND OR GRATUITY F UND OR ANY OTHER FUND FOR THE WELFARE OF EMPLOYEES, [OR] [(C) TO (F) NOT RELEVANT SHALL BE ALLOWED (IRRESPECTIVE OF THE YEAR IN WHIC H THE LIABILITY TO PAY SUCH SUM WAS INCURRED BY THE ASSESSEE ACCORDING TO THE METHOD OF ACCOUNTI NG REGULARLY EMPLOYED BY HIM) ONLY IN COMPUTING THE INCOME REFERRED TO IN SECTION 28 OF T HAT PREVIOUS YEAR IN WHICH SUCH SUM IS ACTUALLY PAID BY HIM> [ PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SHALL APPLY IN RELATION TO ANY SUM [***] WHICH IS ACTUALLY PAID BY THE ASSESSEE ON OR BEFORE THE D UE DATE APPLICABLE IN HIS CASE FOR FURNISHING THE RETURN OF INCOME UNDER SUB-SECTION ( 1) OF SECTION 139 IN RESPECT OF THE PREVIOUS YEAR IN WHICH THE LIABILITY TO PAY SUCH SU M WAS INCURRED AS AFORESAID AND THE EVIDENCE OF SUCH PAYMENT IS FURNISHED BY THE ASSESS EE ALONG WITH SUCH RETURN. CAREFUL READING OF THE ABOVE PROVISION SHOW THAT A FETTER HAS BEEN PROVIDED FOR ALLOWABILITY OF CERTAIN EXPEN SES. THE EXPENDITURE EVEN IF IS ALLOWABLE BECAUSE OF THE MET HOD OF ACCOUNTING FOLLOWED BY HE ASSESSEE THE SAME IS STIL L NOT ALLOWABLE UNLESS AND UNTIL SUCH EXPENDITURE IS PAID . THIS 94 MEANS THAT THIS SECTION PROVIDES FURTHER RESTRICTIO N ON ALLOWABILITY OF AN EXPENDITURE WHICH ARE OTHERWISE ALLOWABLE U/S 30 TO 44. IN OTHER WORDS EVEN IF AN EXPENDITUR E IS ALLOWABLE UNDER VARIOUS PROVISIONS UNDER THE HEAD PROFITS AND GAINS OF BUSINESS AND PROFESSION THE SAME IS NOT ALLOWABLE BECAUSE OF SECTION 43B UNLESS SUCH EXPEND ITURE IS ACTUALLY PAID. IN CASE BEFORE US, THE ASSESSEE IS FOLLOWING THE CASH SYSTEM OF ACCOUNTING WHICH WE HA VE ALREADY DISCUSSED WHILE ADJUDICATED GROUND NO. 5. THEREFORE, ANY EXPENDITURE IN CASE OF THE ASSESSEE HAS TO BE ALLOWABLE ONLY IF ACTUAL CASH HAS BEEN PAID DURI NG THE YEAR. THEREFORE, IF NO CASH HAS BEEN PAID EXPENDIT URE IS NOT ALLOWABLE. NO DOUBT SECTION 43B HAS CARVED OUT AN EXCEPTION BY WAY OF PROVISO THAT EVEN IF EXPENDITUR E IS PAID BEFORE DUE DATE OF FILING OF RETURN THEN THE SAME S HALL BE ALLOWED AND THE HON'BLE PUNJAB & HARYANA HIGH COURT IN CASE OF CIT V. NUCHEM LTD. IN ITA NO. 323 OF 2009 F OLLOWING THE DECISION OF HON'BLE APEX COURT IN CIT V. ALOM EXTRUSIONS (2009) 227 CTR 417 HAS CLEARLY HELD THAT IF SUCH PAYMENTS ARE MADE BEFORE DUE DATE OF FILING OF RETU RN THEN THE SAME HAS TO BE ALLOWED. HOWEVER, AS OBSERVED E ARLIER THIS BENEFIT COULD NOT BE GIVEN TO THE ASSESSEE BEC AUSE THE ASSESSEE IS FOLLOWING THE CASH SYSTEM OF ACCOUNTING AND ALLOWABILITY OF EXPENDITURE ITSELF DEPENDS ON ACTUA L CASH PAYMENT. HOWEVER, WE WOULD LIKE TO OBSERVE THAT AT THE BEGINNING OF THIS ISSUE WE HAVE CLEARLY MENTIONED T HAT THIS ISSUE RELATES TO MANY YEARS, THEREFORE, IF THE PAY MENT FOR THIS YEAR WAS MADE IN NEXT YEAR THE SAME WOULD BE C LEARLY ALLOWABLE IN THE NEXT YEAR. THEREFORE, THE ASSESS ING OFFICER SHOULD EXAMINE THIS ISSUE CLEARLY AND ALLOW THE PAYMENTS ON CASH BASIS EVEN IF THEY RELATE TO EARLI ER YEARS. THE LAST DISPUTE RAISED BY THE REVENUE IS THAT THE ASSESSEE WAS NOT MAINTAINING SEPARATE BANK ACCOUNTS AND OR F DRS IN THE ACCOUNT IN RESPECT OF PROVIDENT FUND BECAUSE T HE SAME HAVE BEEN SHOWN IN THE BALANCE SHEET. IN THIS REGA RD THE LD. DR FOR THE REVENUE HAS RELIED ON THE DECISION O F CIT VS. TEXTOOL CO. LTD (SUPRA). IN THAT CASE THE ASSESSEE HAD CLAIMED DEDUCTION OF RS. 92,06,978/- AS CONTRIBUTIO N 95 TOWARDS APPROVED GRATUITY FUND. A SUM OF RS. 50 LA KHS WAS PAID AS INITIAL CONTRIBUTION AND RS. 5,84,754/- WA S PAID TOWARDS ANNUAL PREMIUM. THE BALANCE OF RS. 36,22,2 24/- WAS PROVIDED FOR INITIAL CONTRIBUTION. ALL THE SUM S WERE PAID TO LIC. THE QUESTION AROSE WHETHER DIRECT PAYMENT TO LIC WAS COVERED BY SECTION 36(1)(V). IN THIS CONNECTIO N THE HON'BLE SUPREME COURT OBSERVED AS UNDER: HAVING CONSIDERATION THE MATTER IN THE LIGHT OF TH E BACKGROUND FACTS, WE ARE OF THE OPINION THAT THERE IS NO MERIT IN THE APPEAL. TRUE THAT A FISCAL STATUTE IS TO BE CONSTRUCTED STRICTLY AND NOTHING SHOULD BE ADDED OR SUBTRACTED TO THE LANGUAGE EMPLOYED IN THE SECTION, YET A STRICT CONSTRUCTION OF A PROVISION DOES NOT RULE OU T THE APPLICATION OF THE PRINCIPLES OF REASONABLE CONSTRUCTION TO GIVE E FFECT TO THE PURPOSE AND INTENTION OF ANY PARTICULAR PROVISION O F THE ACT (SEE SHRI SAJJAN MILLS LTD. VS. CIT, M.P. & ANR (1985) 156 IT R 585). FROM A BARE READING OF SECTION 36(1)(V) ;OF THE ACT, IT IS MANIFEST THAT THE REAL INTENTION BEHIND THE PROVISION IS THAT THE EMP LOYER SHOULD NOT HAVE ANY CONTROL OVER THE FUNDS OF THE IRREVOCABLE TRUST CREATED EXCLUSIVELY FOR THE BENEFIT OF THE EMPLOYEES. IT IS CLEAR THAT INTENTION BEHIND THE PROVISIONS FO R VARIOUS FUNDS FOR EMPLOYEES IS THAT EMPLOYER SHOULD NOT HAV E CONTROL OVER THE FUNDS WHICH HAS BEEN CONTRIBUTED B Y THE ASSESSEE OR THE WORKERS. IN THIS REGARD THE LD. CO UNSEL OF THE ASSESSEE REFERRED TO SECTION 3 OF THE NOTIFICAT ION WHICH READS AS UNDER: ALL MONEYS BELONGING TO THE FUND SHALL BE INVESTED EITHER IN SECURITIES OF THE NATURE SPECIFIED IN CLAUSE (A), ( B), (C), (D) OR (E) OF SECTION 20 OF THE INDIAN TRUSTS ACT, 1882 (CENTRAL ACT 2 OF 1882) OR IN THE POST OFFICE SAVINGS BANK ACCOUNTS OR IN LON G TERM FIXED DEPOSITS WITH SCHEDULED BANKS. POST OFFICE NATIONA L SAVING CERTIFICATES OR KEPT AS A DEPOSIT WITH THE STATE GO VERNMENT BEATING INTEREST. FURTHER THE ASSESSEE ALSO ISSUED OFFICE ORDER COPY OF WHICH IS PLACED AT PAGE 70 OF THE PAPER BOOK WHICH READS AS UNDER: IN PURSUANCE TO RULE 3(1)(2) OF THE PUNJAB HOUSING DEVELOPMENT BOARD (PROVIDENT FUND) RULES 1983 AND FURTHER ADOPTED PUDA IN ITS MEETING HELD ON 17 TH JULY 1995 VIDE AGENDA ITEM NO. 17 A COMMITTEE, IS HEREBY CONSTITUTED TO A DMINISTER AND MANAGE THE CONTRIBUTORY PROVIDENT FUND OF THE EMPLOYEES OF PUDA. THE COMMITTEE SHALL INCLUDE: (A) THE CHIEF ADMINISTRATOR AS EX-OFFICIO CHAIRMAN OF THE COMMITTEE OR HIS NOMINEE (B) ACCOUNTS OFFICER (PENSION) AS SECRETARY OF THE COMMITTEE (C) ADMINISTRATIVE OFFICER (ADMIN-I)- MEMBER (D) SH. KARAM CHAND, SENIOR ASSISTANT AND SH. SHISH U PAL, SENIOR ASSISTANT- MEMBERS (REPRESENTING THE EMPLOYEES OF PUDA, APPROV ED VIDE ITEM NO. 9,10 IN THE MEETING OF THE AUTHORITY HELD ON 29.11.02). 96 RAKESH SINGH VICE CHAIRMAN, PUDA THUS IT IS CLEAR THAT SEPARATE COMMITTEE HAS BEEN CONSTITUTED BUT IT IS NOT CLEAR WHETHER THIS COMMIT TEE WAS MONITORING THE FUNDS OF THE PROVIDENT FUND. THE FD RS HAVE BEEN DEBITED AND MADE IN THE NAME OF THE CPF FDRS W HICH MEANS SEPARATE FDRS HAVE BEEN MADE BUT HOW IT HAS CLEARLY BEEN CONTROLLED BY THE MANAGING COMMITTEE, IS NOT VERY CLEAR. THEREFORE, TO THIS EXTENT WE SET ASID E THE ORDER OF THE LD. CIT(A) AND DIRECT THE AO TO EXAMINE WHE THER PROVIDENT FUND WAS INDEPENDENTLY MONITORED IN THE L IGHT OF THE DIRECTIONS ISSUED BY HON'BLE SUPREME COURT IN C ASE OF TEXTOOL CO.LTD (SUPRA). 86 ANOTHER CONTENTION WAS ALSO RAISED THAT THE FUND S HAVE NOT BEEN INVESTED IN THE LONG TERM FDRS. WE HAVE S EEN VARIOUS NOTES ISSUED BY THE COMMITTEE WHERE FDRS H AVE BEEN MADE ONLY FOR ONE YEAR AND JUSTIFICATION FOR T HE SAME HAS BEEN GIVEN THAT PRESENTLY INTEREST IS ON LOWER SIDE AND INTEREST IS LIKELY TO GO UP THEREFORE, FDR WAS MAD E FOR ONE YEAR. THIS ASPECT ALSO NEED FURTHER EXAMINATION BY THE ASSESSING OFFICER WHERE REGULARLY FDRS HAVE BEEN MA DE FOR A PERIOD OF ONE YEAR OR LONGER PERIOD AND WHERE NO JUSTIFICATION FOR SUCH SHORTER PERIOD IS THERE OR NOT? THEREFORE, THE ASSESSING OFFICER SHOULD EXAMINE TH IS MATTER FURTHER AND DECIDE THE ISSUE IN ACCORDANCE W ITH LAW. IN THE RESULT, THIS GROUND IS ALLOWED FOR STATISTIC AL PURPOSES. 99. IN VIEW OF THE ABOVE JUDGEMENT, THE ASSESSING O FFICER IS DIRECTED TO FOLLOW THE ORDER OF THE TRIBUNAL IN THE CASE OF PUDA, MOHALI (SUPRA) AND PASS CONSEQUENTIAL ORDER ACCORDI NGLY. IN THE RESULT, GROUND NOS. 12 AND 13 STAND DISPOSED OFF IN TERMS OF THE ORDER PASSED BY THE TRIBUNAL IN CASE OF PUDA, MOHAL I (SUPRA). 97 100. GROUND NOS. 14, 15 AND 16 ARE NOT PRESSED BY T HE LD. COUNSEL FOR THE ASSESSEE BEING GENERAL IN NATURE AN D THE SAME ARE ACCORDINGLY, DISMISSED. 101. NO OTHER POINT IS ARGUED OR PRESSED. IN THE R ESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED AND PARTLY ALLOWE D FOR STATISTICAL PURPOSES. 102. IN THE RESULT, DEPARTMENTAL APPEAL IN ITA NO. 319/CHD/2013 IS DISMISSED AND APPEAL OF THE ASSESSE E IN ITA NOS. 252/CHD/2013 AND 1028/CHD/2013 ARE PARTLY ALLO WED. ORDER PRONOUNCED IN THE OPEN COURT ON 5 TH FEBRUARY,2015. SD/- SD/- (T.R.SOOD) (BHAVNESH SAINI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 5 TH FEBRUARY,2015. POONAM COPY TO: THE APPELLANT, THE RESPONDENT, THE CIT(A), THE CIT, DR ASSISTANT REGISTRAR, ITAT CHANDIGARH