DCIT, New Delhi V. M/s Power Grid Corporation of (I) Ltd, New Delhi

ITA 488/DEL/2009

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 53078 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 8 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Next Hearing Date: 20-10-2011
• Assessment Year: 2002-2003
• Appeal Filed On: 09-02-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Depreciation; Rectification of order; Earning of tax free income
• Section: 14A; 115JB; 147; 37; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI F BENC H BEFORE SHRI R.P. TOLANI, JM & SHRI A.N. PAHUJA, AM ITA NO.488/DEL/2009 [ASSESSMENT YEAR:2002-03] ITA NO.4208/DEL/2006 [ASSESSMENT YEAR:2003-04] ITA NO.2874/DEL/2007 [ASSESSMENT YEAR:2004-05 ITA NO.4688/DEL/2010 [ASSESSMENT YEAR:2007-08] DEPUTYC.I.T.,CIRCLE-14 (1), NEW DELHI V/S . POWER GRID CORPORATION OF INDIA LTD., B-9, QUTAB INSTITUTIONAL AREA, KATWARIA SARAI, NEW DELHI [PAN NO.: AAACP 0252 G] ASSESSEE BY S/SHRI VED JAIN, SMT. RANO JAIN &SHRI V. MOHAN, AR REVENUE BY SHRI SUDESH GARG, DR DATE OF HEARING 20-10-2011 DATE OF PRONOUNCEMENT 31-10-2011 O R D E R A.N.PAHUJA:- THESE FOUR APPEALS FILED BY THE REVENUE AGAINST SE PARATE ORDERS DATED 14.11.2008 FOR THE AY 2002-03; DATED 8 TH SEPTEMBER, 2006 FOR THE AY 2003-04; DATED 14.03.2007 FOR THE AY 2004-05 AND D ATED 25 TH AUGUST, 2010 FOR THE AY 2007-08 OF THE LEARNED CIT(A)-XVII, NEW DELH I, RAISE THE FOLLOWING GROUNDS:- ITA NO.488/DEL/2009 I) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN DELETING THE ADDITION OF ` `16.40,34,226/- WITHOUT APPRECIATING THAT THE SAID AMOUNT HAS BEEN EARNED A S INTEREST INCOME ON TAX-FREE BONDS [EXEMPT U/S 10(15)(1)] AND AS SUCH E XPENSES RELATING TO THAT INCOME WERE REQUIRED TO BE DISALLOWED U/S 14A AND WHEN THE ASSESSEE DELIBERATELY HAD NOT GIVEN THE DETAILS OF EXPENSES ATTRIBUTABLE TO THAT INCOME, THE ASSESSING OFFICER WAS ONLY RIGHT T O DISALLOW THE EXPENSES ON PROPORTIONATE BASIS. ITA NOS.488/DEL./2009 4208/DEL//2006 2874/DEL./2007 4688/DEL./2010 2 II) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) HAS ERRED IN MERELY RELYING UPON THE PREDECE SSORS DECISION IN ASSESSEES CASE FOR ASSESSMENT YEAR 2003-04 AND ASS ESSMENT YEAR 2002-03 (ORDER WAS U/S 154 OF THE ACT) WHERE AS THE ISSUE OF DETERMINATION OF THE EXPENSES IS A QUESTION OF FACT AND HAS TO BE DETERMINED/EXAMINED INDEPENDENTLY IN EACH ASSESSMEN T YEAR. III) THE CIT(A) FAILED TO TAKE COGNIZANCE OF A. THE RULE 8D OF IT RULES INSERTED BY THE IT(FIFTH AMENDMENT) RULE,2008,W.E.F. 24.3.2008 PRESCRIBED THE METHOD FO R DETERMINING AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDED I N TOTAL INCOME. B. THE ITAT SPECIAL BENCH MUMBAI HAS IN ITS JUDGM ENT REPORTED IN 2008- TIOL-ITAT-MUM-SB HAS HELD THAT THE PROVISIONS OF SE C. 14A ARE SPECIAL IN NATURE AND HAS OVER RIDING EFFECT OVER ALL OTHER SECTIONS ALLOWING DEDUCTION. IT HAS ALSO HELD RULE 8D TO BE RETROSPEC TIVE OF EXPENSES ATTRIBUTABLE TO EARN TAX FREE INCOME SHOULD BE APPL IED AS PER RULE 8D OF IT RULES. C. IN CASE OF KAPOOR CHAND,266 ITR 48(ITAT)ALL WH ILE INTERPRETING THE APPLICABILITY OF RULE 1BB OF THE WEALTH TAX RULE , THE ITAT HAS HELD THAT RULE TAKES THE CHARACTER OF RULE OF EVIDENCE, IT IS PROCEDURAL AND AS SUCH APPLICABLE TO ALL PENDING MATTERS, D. THE SUPREME COURT ALSO HAS IN THE CASE OF SHRAV AN KUMAR SWARUP,210 ITR 886(SC) HELD RULES ARE PROCEDURAL AN D AS SUCH APPLICABLE TO ALL PENDING MATTERS. E. IN THE CASE OF KASTURBHAI MAYABHAI,164 ITR 10 7(GUJ) THE HIGH COURT HAS HELD THAT RULES ARE APPLICABLE TO MATTERS PENDI NG EVEN BEFORE THE APPELLATE AUTHORITIES. IN THIS CASE IT IS CLEARLY S TATED WHEN A RULE SETS OUT A FORMULAE IT APPLIES TO ALL PENDING MATTERS. IV) THE APPELLANT CRAVES TO BE ALLOWED TO ADD, DEL ETE OR AMEND ANY OTHER GROUNDS OF APPEAL. ITA NO.4208/D/06 1. LD. CIT(A) HAS ERRED IN LAW AND IN FACTS AND CI RCUMSTANCES OF THE CASE IN DELETING THE DISALLOWANCE OF ` ``616/- LACS ON ACCOUNT OF PRIOR PERIOD EXPENSES. ITA NOS.488/DEL./2009 4208/DEL//2006 2874/DEL./2007 4688/DEL./2010 3 2. LD. CIT(A) HAS ERRED IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF THE CASE IN DELETING THE DISALLOWANCE OF ` ``2,31,57,500/- MADE ON ACCOUNT OF EXPENSES U/S 14A. 3 .LD. CIT(A) HAS ERRED IN LAW AND IN THE FACTS AN D CIRCUMSTANCES OF THE CASE IN DELETING THE ADDITION OF ` ``616/- LACS TO THE BOOK PROFIT ON ACCOUNT OF PRIOR PERIOD EXPENSES. 4. THE APPELLANT CRAVES TO BE ALLOWED TO AMEND, DEL ETE OR ADD ANY OTHER GROUND OF APPEAL DURING THE COURSE OF HEARING OF TH IS APPEAL. ITA NO.2874/DEL/2007 1. LEARNED CIT(A) HAS ERRED IN LAW AND IN FACTS A ND CIRCUMSTANCES OF THE CASE IN DELETING THE ADDITION OF ` ``6432 LACS MADE BY THE AO ON ACCOUNT OF PRIOR PERIOD EXPENSES. 2. LD. CIT(A) HAS ERRED IN LAW AND IN FACTS AND CIR CUMSTANCES OF THE CASE IN DELETING THE PROPORTIONATE EXPENSES AMOUNTING TO ` ``283 LACS DISALLOWED BY THE AO U/S 14A OF THE I.T. ACT. 3. LD. CIT(A) HAS ERRED IN LAW AND IN FACTS AND CIR CUMSTANCES OF THE CASE IN DELETING THE ADDITION OF ` ``382 LACS MADE BY THE AO ON ACCOUNT OF POST RETIREMENT MEDICAL EXPENSES. 4. LD. CIT(A) HAS ERRED IN LAW AND IN FACTS AND CIR CUMSTANCES OF THE CASE IN DELETING THE ADDITION MADE BY THE ASSESSING OFFI CER ON ACCOUNT OF PRIOR PAID EXPENSES, PROPORTIONATE EXPENSES U/S 14A OF TH E INCOME TAX ACT AND POST RETIREMENT MEDICAL EXPENSES WHILE COMPUTING TH E BOOK PROFIT U/S 115JB OF THE ACT. 5. THE APPELLANT CRAVES TO THE ALLOWED TO AMEND, DE LETE OR ADD ANY OTHER GROUNDS OF APPEAL DURING THE COURSE OF HEARING OF T HIS APPEAL. ITA NO.4688/DEL/2010 1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. CIT (A) ERRED IN DELETING THE DISALLOWANCE OF ` ``9,67,49,250/- MADE U/S 14A OF THE INCOME-TAX ACT, 1961 IN RESPECT OF EXPEN SES ATTRIBUTABLE TO INCOME NOT FORMING PART OF TOTAL INCOME. ITA NOS.488/DEL./2009 4208/DEL//2006 2874/DEL./2007 4688/DEL./2010 4 2) THE APPELLANT CRAVES TO THE ALLOWED TO AMEND, DE LETE OR ADD ANY OTHER GROUNDS OF APPEAL DURING THE COURSE OF HEARING OF T HIS APPEAL. 2. AT THE OUT SET, IT MAY BE POINTED OUT THAT INITI ALLY THE APPEAL FOR THE ASSESSMENT YEAR 2002-03 WAS DISMISSED BY THE ITAT V IDE THEIR ORDER DATED 27.7.2009 AND APPEALS FOR THE AYS 2003-04 AND 2004 -05 WERE ALSO DISMISSED VIDE ORDER DATED 18 TH DECEMBER, 2008, FOR WANT OF COD APPROVAL. SUBSEQUENTLY, THE REVENUE OBTAINED COD APPROVAL AND ACCORDINGLY, THE APPEAL FOR THE AY 2002-03 WAS RECALLED VIDE ORDER DATED 1 5.10.2010 IN MA NO.303/DEL./2010 WHILE APPEALS FOR THE AYS 2003-04 & 2004-05 WERE RECALLED VIDE ORDER DATED 25.6.2010 IN MA NOS. 146 & 147/D EL./2010 AFTER ORDER DATED 4.12.2009 OF THE HONBLE HIGH COURT IN ITA NO. 1276 /2009 . THIS IS HOW THESE APPEALS CAME UP FOR HEARING BEFORE US ALONG WITH AP PEAL FOR THE AY2007-08. 3. ADVERTING NOW TO GROUND NOS.1& 3 IN THE APPEAL O F THE REVENUE FOR THE AY 2003-04 , FACTS, IN BRIEF, AS PER RELEVANT ORDER S ARE THAT RETURN DECLARING BOOK PROFITS OF ` ` `8,23,45,49,017/- IN TERMS OF PROVISIONS OF SECTION 115JB OF THE INCOME-TAX ACT, 1961 (HEREINAFTER REFERRED TO AS TH E ACT) AND LOSS OF ` ` ` 11,75,04,96,562/- (BEFORE ADJUSTMENT OF BROUGHT FOR WARD LOSS ) FILED ON 25.11.2003 BY THE ASSESSEE COMPANY, WAS SELECTED F OR SCRUTINY WITH THE SERVICE OF A NOTICE U/S 143(2) OF THE ACT ISSUED ON 9 TH DECEMBER, 2003. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFF ICER (A.O. IN SHORT) NOTICED ON PERUSAL OF ITEM NO.22 OF TAX AUDIT REPORT THAT T HE ASSESSEE CLAIMED IN SCHEDULE 17 PRIOR PERIOD EXPENSES OF ` ` `616 LACS. THE BROAD BREAK UP OF THE AMOUNT FOR THE AY 2003-04 IS GIVEN HEREUNDER:- [IN ` `] POWER CHARGES : 316 LACS INTEREST 2 LACS TRANSMISSION CHARGES 98 LACS ITA NOS.488/DEL./2009 4208/DEL//2006 2874/DEL./2007 4688/DEL./2010 5 OTHERS 200 LACS TOTAL 61 6 LACS 3.1 THE DEPRECIATION OF ` ` 1065 LACS INCLUDED IN THE PRIOR PERIOD EXPENSES WAS SEPARATELY ADDED BACK IN THE STATEMENT OF COMPUTATI ON OF INCOME BY THE ASSESSEE. TO A QUERY BY THE AO REGARDING TRANSMISS ION CHARGES, THE ASSESSEE REPLIED THAT TARIFFS WERE FIXED BY CERC FROM TIME T O TIME BASED ON CAPITAL COST OF EACH PROJECT. THESE TARIFFS WHICH WERE PROVISIONA LLY FIXED , WERE REVISED ON COMPLETION OF EACH PROJECT, AND THE DIFFERENCE BETW EEN PROVISIONAL TARIFF AND FINALLY FIXED WAS TREATED AS PRIOR PERIOD EXPENSE. AFTER CONSIDERING THE REPLY OF THE ASSESSEE IN TERMS OF LETTER DATED 27 TH OCTOBER, 2006 ,THE AO DISALLOWED THE CLAIM FOR DEDUCTION OF PRIOR PERIOD EXPENSES OF ` ` `616 LACS, RELYING UPON HIS FINDINGS FOR THE AY 2001-02 ,ON THE GROUND THAT THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. 3.2 INTER ALIA, THE AMOUNT WAS ALSO ADDED BACK WH ILE COMPUTING BOOK PROFITS IN TERMS OF PROVISIONS OF SECTION 115JB OF THE ACT, RE JECTING THE CONTENTIONS OF THE ASSESSEE IN THE LIGHT OF DECISION OF HONBLE APEX COURT IN APOLLO TYRES VS. CIT, 225 ITR 273 (SC). 3.3 SIMILARLY IN THE AY 2004-05, AFTER CONSIDER ING THE SUBMISSIONS OF THE ASSESSEE , THE AO DISALLOWED THE CLAIM OF FOLLOWING PRIOR PERIOD EXPENSES WHILE REFERRING TO HIS FINDINGS IN THE AY 2001-02: [IN ` ` CRORES] POWER CHARGES 0.99 RATES AND TAXES 0.08 INSURANCE 1.13 DEPRECIATION 5.38 TRANSMISSION CHARGES WRITTEN BACK ON 11.90 ITA NOS.488/DEL./2009 4208/DEL//2006 2874/DEL./2007 4688/DEL./2010 6 ACCOUNT OF REVISION OF TARIFF INTEREST 15.17 BONDS INTEREST WRITTEN BACK 16.78 SURCHARGE WRITTEN BACK 4.38 OTHERS 7.93 TOTAL 64.34 3.4 IN THIS ASSESSMENT YEAR ALSO, THE AMOUNT WA S ALSO ADDED BACK WHILE COMPUTING BOOK PROFITS U/S 115JB OF THE ACT. 4. ON APPEAL, THE LEARNED CIT(A), MERELY FOLLOWING HIS DECISION FOR THE AYS 2001-02 AND 2002-03, DELETED THE DISALLOWANCE IN TH E FOLLOWING TERMS:- 4.3 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE AND HAVE GONE THROUGH THE ORDER OF THE AO AND THE DETAILED S UBMISSIONS MADE BY THE LD. AR APPEARING FOR THE APPELLANT. I FIND T HAT THIS VERY ISSUE HAD EARLIER COME UP BEFORE MY LD. PREDECESSORS IN APPEL LANTS OWN CASE FOR THE AY 2001-02 & 2002-03 WHEREIN ISSUE HAS BEEN DIS CUSSED IN DETAIL AND IT WAS HELD THAT THE ADDITION MADE BY THE AO WA S NOT SUSTAINABLE ON THE FACTS AND IN LAW. SINCE THE FACTS AND ISSUE INVOLVED REMAIN THE SAME IN THE YEAR UNDER CONSIDERATION ALSO, I WOULD CONCUR WITH THE ORDER OF MY LD. PREDECESSORS AND HOLD THAT THE ADDI TION OF 616 LACS ON ACCOUNT OF PRIOR PERIOD EXPENSES IS NOT JUSTIFIED. THE SAME, IS, THEREFORE, DELETED AND THE APPELLANT GETS A RELIEF OF RS. 616 LACS. 4.1 LIKEWISE, IN THE AY 2004-05, THE LD. CIT(A) C ONCLUDED AS UNDER: 4.3 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE AND HAVE GONE THROUGH THE ORDER OF THE AO AND THE DETAILED S UBMISSIONS MADE BY THE LD. AR APPEARING FOR THE APPELLANT. I FIND T HAT THIS VERY ISSUE HAD EARLIER COME UP BEFORE MY LD. PREDECESSORS IN APPEL LANTS OWN CASE FOR THE AY 2001-02 & 2002-03 WHEREIN ISSUE HAS BEEN DIS CUSSED IN DETAIL AND IT WAS HELD THAT THE ADDITION MADE BY THE AO WA S NOT SUSTAINABLE ON THE FACTS AND IN LAW. THE ISSUE HAS ALSO BEEN DE CIDED AGAINST THE APPELLANT IN AY 2003-04.SINCE THE FACTS AND ISSUE I NVOLVED REMAIN THE SAME IN THE YEAR UNDER CONSIDERATION ALSO, I WOULD CONCUR WITH THE ORDER OF MY LD. PREDECESSORS AND HOLD THAT THE ADDI TION OF 64.32 LACS ITA NOS.488/DEL./2009 4208/DEL//2006 2874/DEL./2007 4688/DEL./2010 7 ON ACCOUNT OF PRIOR PERIOD EXPENSES IS NOT JUSTIFIE D. THE SAME, IS, THEREFORE, DELETED AND THE APPELLANT GETS A RELIEF OF RS. 64.32 LACS. THE CLAIM OF THE APPELLANT IN REGARD TO ALLOWANCE OF RS . 216.23 LACS RELATING TO THIS YEAR BUT DEBITED IN NEXT YEAR IS NOT RELEVA NT IN VIEW OF AFORESAID DECISION ON THIS ISSUE. 4.2 FOLLOWING HIS DECISION FOR THE AY 2001-02, THE LD. CIT(A) DELETED THE AMOUNT OF PRIOR PERIOD EXPENSES ADDED WHILE COMPUT ING BOOK PROFITS U/S 115JB OF THE ACT IN THE AFORESAID TWO ASSESSMENT YEARS. 5. THE REVENUE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LEARNED CIT(A). THE LD. DR WHILE CARRYING US TH ROUGH THE FINDINGS OF THE AO AND THE LD. CIT(A) IN THE AYS 2003-04 & 2004-05 CON TENDED THAT PRIOR PERIOD EXPENDITURE COULD NOT BE ALLOWED IN THE YEARS UNDER CONSIDERATION. ON THE OTHER HAND, THE LD. AR ON BEHALF OF THE ASSESSEE SUBMITTE D THAT SINCE LIABILITY FOR TRANSMISSION CHARGES AND OTHER EXPENSES FORMING PAR T OF ` ` ` 616 LACS IN THE AY 2003-04 AND ` ` `6432 LACS IN AY 2004-05 CRYSTALLIZED IN THE YEARS UNDER CONSIDERATION, ACCORDINGLY, THE CLAIM WAS ALLOWABLE . 6. WE HAVE HEARD BOTH THE PARTIES AND THE FACTS OF THE CASE AS ALSO THE BREAK UP OF THE EXPENSES COMPRISING THE AFORESAID A MOUNT OF ` ` `616 LACS AND ` ` ` 6432 LACS AS ALSO THE DECISION OF THE ITAT IN THE A Y 2001-02. AT THE OUTSET, WE FIND THAT NEITHER THE AO NOR THE LD. CIT(A) ANAL YSED EACH ITEM OF EXPENDITURE, COMPRISING THE AFORESAID AMOUNTS IN THESE TWO ASSES SMENT YEARS IN ORDER TO ASCERTAIN AS TO WHETHER OR NOT THE LIABILITY FOR TH E VARIOUS ITEMS OF EXPENDITURE CRYSTALLIZED IN THE YEARS UNDER CONSIDERATION. WE F IND THAT THE AO MERELY FOLLOWED HIS FINDINGS FOR THE AY 2001-02 AND DISA LLOWED THE CLAIM FOR THE AFORESAID EXPENSES IN THESE TWO ASSESSMENT YEARS. O N APPEAL, THE LD. CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE ON THE BASIS OF H IS FINDINGS FOR THE ASSESSMENT YEAR 2001-02. THE LD. DR DID NOT ENLIG HTEN US TO AS TO WHETHER REVENUE PREFERRED ANY APPEAL AGAINST THE FINDINGS O F THE LD. CIT(A) IN THE AY 2001-02 . WE FIND THAT ON APPEAL BY THE ASSESSEE I N THE AY 2001-02 IN RELATION ITA NOS.488/DEL./2009 4208/DEL//2006 2874/DEL./2007 4688/DEL./2010 8 TO DISALLOWANCE OF RS. 2.60 CRORES ON ACCOUNT OF PR IOR PERIOD EXPENSES, THE ITAT VIDE THEIR ORDER DATED 27.3.2009 IN ITA NO.4525/DE L/2004 RESTORED THE ISSUE OF PRIOR PERIOD EXPENSES OF RS. 1.25 CRORES TO THE FIL E OF THE AO, THE REMAINING HAVING BEEN ALLOWED BY THE AO U/S 154 OF THE ACT. T HE AO ,SUBSEQUENTLY, ALLOWED THE CLAIM OF RS. 1.25 CRORES ALSO. 6.1 IN THE YEARS UNDER CONSIDERATION, AS IS APPARE NT ON A MERE GLANCE AT THE IMPUGNED ORDERS, THE LD. CIT(A) DID N OT CARE TO ANALYSE THE NATURE OF LIABILITIES UNDER THE RELEVA NT BILLS NOR RECORDED ANY FINDING AS TO WHETHER OR NOT THE LIABILITY ON A CCOUNT VARIOUS EXPENSES, COMPRISING THE AMOUNT OF ` ` 616 LACS AND ` ` 6432 LACS ,ACCRUED OR AROSE IN THE RESPECTIVE YEARS UNDER CONSIDERATION. ADMITTEDLY, T HE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. IT IS WELL SETTLED THAT ACCRUAL OF A STATUTORY LIABILITY DEPENDS UPON THE TERMS OF THE RELEVANT S TATUTE. THE QUANTIFICATION OR ASCERTAINMENT CANNOT POSTPONE ITS ACCRUAL TO THE EX TENT OF ADMITTED LIABILITY. ON THE OTHER HAND, CONTRACTUAL LIABILITY ACCRUES WHEN THE BASIS FOR ITS QUANTIFICATION IS SETTLED BY AN AGREEMENT OR OTHERWISE. AS HELD BY TH E HONBLE GUJRAT HIGH COURT IN THEIR DECISION IN SAURASHTRA CEMENT & CHEMICAL I NDUSTRIES LTD. VS. CIT, 213 ITR 523(GUJ) ,MERELY BECAUSE AN EXPENSE RELATES TO A TRANSACTION OF AN EARLIER YEAR IT DOES NOT BECOME A LIABILITY PAYABLE IN THE EARLIER YEAR UNLESS IT CAN BE SAID THAT THE LIABILITY WAS DETERMINED AND CRYSTALLIZED IN THE YEAR IN QUESTION ON THE BASIS OF MAINTAINING ACCOUNTS ON THE MERCANTILE BAS IS. IN EACH CASE WHERE THE ACCOUNTS ARE MAINTAINED ON THE MERCANTILE BASIS IT HAS TO BE FOUND IN RESPECT OF ANY CLAIM, WHETHER SUCH LIABILITY WAS CRYSTALLIZED AND QUANTIFIED DURING THE PREVIOUS YEAR SO AS TO BE REQUIRED TO BE ADJUSTED I N THE BOOKS OF ACCOUNT OF THAT PREVIOUS YEAR. IF ANY LIABILITY, THOUGH RELATING TO THE EARLIER YEAR, DEPENDS UPON MAKING A DEMAND AND ITS ACCEPTANCE BY THE ASSESSEE AND SUCH LIABILITY HAS BEEN ACTUALLY CLAIMED AND PAID IN THE LATER PREVIOU S YEARS IT CANNOT BE DISALLOWED AS DEDUCTION MERELY ON THE BASIS THE ACCOUNTS ARE M AINTAINED ON MERCANTILE BASIS AND THAT IT RELATED TO A TRANSACTION OF THE P REVIOUS YEAR, THE HONBLE HIGH COURT OBSERVED. IT WAS FURTHER CONCLUDED THAT IT I S ACTUALLY KNOWN INCOME OR ITA NOS.488/DEL./2009 4208/DEL//2006 2874/DEL./2007 4688/DEL./2010 9 EXPENSES, THE RIGHT TO RECEIVE OR THE LIABILITY TO PAY WHICH HAS COME TO BE CRYSTALLIZED, WHICH IS TO BE TAKEN INTO ACCOUNT UND ER THE MERCANTILE SYSTEM OF MAINTAINING BOOKS OF ACCOUNT. AN ESTIMATED INCOME O R LIABILITY, WHICH IS YET TO BE CRYSTALLIZED, CAN ONLY BE ADJUSTED AS A CONTINGENCY ITEM BUT NOT AS AN ACCRUED INCOME OR LIABILITY OF THAT YEAR. IN VIEW OF THE FOREGOING AND IN THE LIGHT OF VIEW TAKEN BY THE HONBLE GUJRAT HIGH COURT IN THE AFORE CITED DECISION, ESPECIALLY WHEN THE LD. CIT(A) HAVE NOT RECORDED ANY FINDINGS AS TO WHETHER OR NOT THE LIABILITY IN RESPECT OF EACH OF THE CLAIM MADE BY T HE ASSESSEE IN THE AMOUNT OF ` ` 616 LACS AND ` ` 64.32 LACS ,CRYSTALLIZED IN THE YEAR UNDER CONSIDE RATION, WE CONSIDER IT FAIR AND APPROPRIATE TO SET ASIDE THE O RDER OF THE LD. CIT(A) AND RESTORE THE MATTER TO HIS FILE FOR DECIDING THE ISSUE RAIS ED IN THE GROUND NO.1 IN THE APPEALS FOR THE AYS 2003-04 & 2004-05, AFRESH IN AC CORDANCE WITH LAW IN THE LIGHT OF VARIOUS JUDICIAL PRONOUNCEMENTS, INCLU DING THOSE REFERRED TO ABOVE, AFTER ALLOWING SUFFICIENT OPPORTUNITY TO BOTH THE P ARTIES. NEEDLESS TO SAY THAT WHILE REDECIDING THE ISSUE, THE LEARNED CIT(A) SHALL PASS A SPEAKING ORDER, KEEPING IN MIND, INTER ALIA, THE MANDATE OF PROVISIONS OF SEC. 250(6) OF THE ACT, BRINGING OUT CLEARLY AS TO WHETHER OR NOT THE LIABILITY FOR EAC H ITEM OF THE EXPENDITURE COMPRISING THE AMOUNT OF ` ` 616 LACS AND ` ` 64.32 LACS REALLY CRYSTALLIZED IN THE HANDS OF THE ASSESSEE DURING THE RESPECTIVE YEARS UNDER CONSIDERATION. WITH THESE OBSERVATIONS, GROUND NO.1 IN THE APPEALS OF THE REVENUE FOR THE AYS 2003-04 & 2004-05,IS DISPOSED OF. 6.2 AS REGARDS GROUND NO. 3 IN THE APPEAL FOR T HE AY 2003-04 & A PORTION OF GROUND NO.4 IN THE APPEAL FOR THE AY 2004-05, RELAT ING TO ADDITION OF PRIOR PERIOD EXPENSES WHILE DETERMINING BOOK PROFITS U/S 115JB O F THE ACT, WE FIND THAT THE LD. CIT(A) FOLLOWED HIS OWN ORDER FOR THE PRECEDIN G ASSESSMENT YEAR. THERE IS NOTHING TO SUGGEST AS TO WHETHER OR NOT THE REVENU E DISPUTED THE ISSUE IN FURTHER APPEAL BEFORE THE ITAT IN THE AY 2001-02. T HOUGH THE ASSESSEE IN THEIR APPEAL FOR THE AY 2002-03 IN ITA NO.1629/DEL/2006 R AISED THE ISSUE, HOWEVER AT THE TIME OF HEARING OF THE APPEAL, ISSUE WAS NOT P RESSED. THE LD. AR OR THE LD. ITA NOS.488/DEL./2009 4208/DEL//2006 2874/DEL./2007 4688/DEL./2010 10 DR DID NOT POINT OUT AS TO WHETHER OR NOT THE ISSUE WAS ADJUDICATED IN THE AY 2001-02 OR ANY OTHER ASSESSMENT YEAR BY THE ITAT . 6.21 WE FIND THAT HONBLE JURISDICTIONAL HIGH COU RT IN THEIR DECISION IN CIT VS. KHAITAN CHEMICALS AND FERTILIZERS LIMITED, 307 ITR 150(DELHI) WHILE ADJUDICATING A SIMILAR ISSUE IN THE CONTEXT OF PROVISIONS OF SEC . 115JA OF THE ACT ,CONCLUDED AS UNDER: HAVING HEARD COUNSEL FOR THE PARTIES, WE ARE OF TH E VIEW THAT THE QUESTION WHICH ARISES IN THIS APPEAL HAS TO BE DECIDED IN THE AFFI RMATIVE. THIS MEANS THAT THE INCOME-TAX APPELLATE TRIBUNAL WAS CORRECT IN LAW IN HOLDING THAT THE ASSESSING OFFICER HAD FAILED TO APPRECIATE THAT THE NET PROFI T FOR THE PURPOSES OF SECTION 115JA OF THE SAID ACT WAS TO BE COMPUTED ONLY AFTER DEDUCTING THE PRIOR PERIOD EXPENSES/EXTRAORDINARY ITEMS. WE FEEL THAT THE FUND AMENTAL FLAW THAT ENTERED INTO THE ASSESSING OFFICER'S APPROACH WAS THAT HE WAS UN DER AN IMPRESSION THAT THE ASSESSEE WAS CLAIMING A REDUCTION IN THE NET PROFIT IN TERMS OF CLAUSES (I) TO (IX) OF THE EXPLANATION TO SECTION 115JA(2). THE ASSESSE E HAD ALL ALONG CONTENDED THAT THE NET PROFIT WAS TO BE COMPUTED ON THE BASIS OF THE PROFIT AND LOSS ACCOUNT WHICH, IN TURN, WAS TO BE IN ACCORDANCE WITH THE PR OVISIONS OF PARTS II AND III OF SCHEDULE VI TO THE COMPANIES ACT. SUCH A COMPUTATIO N OF NET PROFIT, IN VIEW OF THE PRESCRIBED ACCOUNTING STANDARD (AS-5), REQUIRED THE PRIOR PERIOD EXPENSES/EXTRAORDINARY ITEMS TO BE SHOWN SEPARATELY . THIS DID NOT MEAN THAT BECAUSE THESE ITEMS WERE SHOWN SEPARATELY, THEY DID NOT CONSTITUTE PART OF NET PROFIT. PARAGRAPH 5 OF THE ACCOUNTING STANDARD (AS- 5), WHICH HAS BEEN EXTRACTED ABOVE, SPECIFICALLY REQUIRES THAT ALL ITEMS OF INCO ME AND EXPENSES WHICH ARE 'RECOGNISED IN A PERIOD' SHOULD BE INCLUDED IN THE DETERMINATION OF NET PROFIT OR LOSS FOR THE PERIOD UNLESS AN ACCOUNTING STANDARD R EQUIRES OR PERMITS OTHERWISE. WE HAVE ALREADY EXTRACTED THE DEFINITION OF PRIOR P ERIOD ITEMS AS GIVEN IN AS 5. IT CLEARLY STIPULATES THAT PRIOR PERIOD ITEMS ARE INCO ME OR EXPENSES WHICH ARISE 'IN THE CURRENT PERIOD' AS A RESULT OF ERRORS OR OMISSI ONS IN THE PREPARATION OF THE FINANCIAL STATEMENTS OF ONE OR MORE PRIOR PERIODS. THEREFORE, THE INCOME OR EXPENSES RELATABLE TO PRIOR PERIOD ITEMS ARE THOSE WHICH ARISE IN THE CURRENT PERIOD, I.E., THE PERIOD RELEVANT FOR THE PURPOSES OF COMPUTING THE NET PROFIT OR LOSS. CLEARLY, PRIOR PERIOD ITEMS ARE TO BE INCLUDE D IN THE DETERMINATION OF NET PROFIT OR LOSS. FURTHERMORE, PARAGRAPH 7 OF AS 5 ST IPULATES THAT THE NET PROFIT OR LOSS, INTER ALIA, COMPRISES OF EXTRAORDINARY ITEMS AND THE SAME SHOULD BE DISCLOSED ON THE FACE OF THE STATEMENT OF PROFIT AN D LOSS. FROM THIS, IT IS CLEAR THAT BOTH, 'PRIOR PERIOD ITEMS' AS WELL AS 'EXTRAORDINAR Y ITEMS' ARE TO BE INCLUDED IN THE DETERMINATION OF NET PROFIT OR LOSS. IF A PRIOR PERIOD ITEM IS AN EXPENSE, IT IS OBVIOUS THAT IT WILL GO TOWARDS REDUCING THE NET PR OFIT OR INCREASING THE LOSS, AS THE CASE MAY BE. ON THE OTHER HAND, IF THE PRIOR PERIOD ITEM IS AN INCOME, IT WOULD GO TOWARDS INCREASING THE NET PROFIT OR REDUCING THE L OSS, AS THE CASE MAY BE. THE ITA NOS.488/DEL./2009 4208/DEL//2006 2874/DEL./2007 4688/DEL./2010 11 SAME IS THE POSITION WITH EXTRAORDINARY ITEMS WHICH MAY BE INCOME OR EXPENSES. THE CONCLUSION THAT ONE CAN ARRIVE AT FROM THIS DIS CUSSION IS THAT PRIOR PERIOD ITEMS AND EXTRAORDINARY ITEMS FORM PART OF THE NET PROFIT OR LOSS. PARAGRAPH 15 OF AS 5, WHICH HAS BEEN EXTRACTED EARL IER, MAKES IT CLEAR THAT THE NATURE AND AMOUNT OF PRIOR PERIOD ITEMS SHOULD BE S EPARATELY DISCLOSED IN THE STATEMENT OF PROFIT AND LOSS IN A MANNER THAT THEIR IMPACT ON THE 'CURRENT' PROFIT OR LOSS CAN BE PERCEIVED. TWO APPROACHES HAVE BEEN IND ICATED IN PARAGRAPH 19 OF THE SAID ACCOUNTING STANDARD (AS 5). THE NORMAL APP ROACH IS TO INCLUDE PRIOR PERIOD ITEMS IN THE DETERMINATION OF NET PROFIT OR LOSS FOR THE CURRENT PERIOD. THE ALTERNATIVE APPROACH IS TO SHOW SUCH ITEMS IN THE S TATEMENT OF PROFIT AND LOSS AFTER DETERMINATION OF CURRENT NET PROFIT OR LOSS. AS INDICATED IN THE ACCOUNTING STANDARD, IN EITHER CASE, THE OBJECTIVE IS TO INDIC ATE THE EFFECT OF SUCH ITEMS ON THE CURRENT PROFIT OR LOSS. IT IS OBVIOUS THAT BECA USE OF THE PRESCRIBED ACCOUNTING STANDARD WHICH HAS TO BE FOLLOWED BY THE ASSESSEE I N VIEW OF THE PROVISIONS OF SECTION 115JA(2) READ WITH SECTION 211 OF THE COMPA NIES ACT, 1956, THE ASSESSEE WAS REQUIRED TO SHOW THE PRIOR PERIOD ITEM S/EXTRAORDINARY ITEMS SEPARATELY SO THAT THEIR IMPACT ON THE CURRENT PROF IT OR LOSS COULD BE PERCEIVED. THE FACT THAT THE ASSESSEE ADOPTED THE ALTERNATIVE APPROACH OF SHOWING SUCH ITEMS IN THE STATEMENT OF PROFIT AND LOSS AFTER DET ERMINATION OF CURRENT NET PROFIT OR LOSS, DOES NOT MEAN THAT THESE ITEMS ARE NOT TO BE TAKEN INTO ACCOUNT IN COMPUTING NET PROFIT AS ENVISAGED IN SECTION 115JA OF THE SAID ACT. THUS, WHAT THE ASSESSEE HAD DONE WAS ONLY TO INDICATE PRIOR PE RIOD ITEMS/EXTRAORDINARY ITEMS SEPARATELY. THIS DID NOT MEAN THAT THE FIGURE OF NET PROFIT WAS TO BE ARRIVED AT DE HORS THESE ITEMS. THE FOREGOING DISCUSSION MAKES IT CLEAR THAT THESE ITEMS WERE COMPONENTS OF NET PROFIT AS SHOWN IN THE PROFIT AND LOSS ACCOUNT PREP ARED UNDER SECTION 115JA(2). THE ASSESSEE WAS NOT CLAIMING ANY REDUCTION IN THE NET PROFIT ON THE BASIS OF ANY OF THE CLAUSES APPEARING IN THE EXPLANATION. THE AS SESSEE'S CLAIM WAS THAT THE PRIOR PERIOD ITEMS/EXTRAORDINARY ITEMS WERE, IN ANY EVENT, SUBSUMED IN THE COMPUTATION OF NET PROFIT. IT IS ONLY THAT THEY WER E TO BE SHOWN SEPARATELY SO THAT THEIR IMPACT ON THE CURRENT NET PROFIT OR LOSS COUL D BE PERCEIVED. 6.22 SINCE THE LD. CIT(A) DID NOT EXAMINE THE FA CTS OF THE INSTANT CASE IN THE LIGHT OF AFORESAID DECISION WHILE WE HAVE RESTORE D THE ISSUE OF DISALLOWANCE OF PRIOR PERIOD EXPENSES IN GROUND NO.1 IN THE APPE ALS OF THE REVENUE FOR THE AYS 2003-04 & 2004-05, TO THE FILE OF THE LD. C IT(A), WE CONSIDER IT FAIR AND APPROPRIATE TO RESTORE THE ISSUE RAISE D IN GROUND NO. 3 IN THE APPEAL FOR THE AY 2003-04 & A PORTION OF GROUND NO.4 IN THE APPEAL FOR THE AY 2004-05, RELATING TO ADDITION OF PRIOR PERIOD EXPEN SES WHILE DETERMINING BOOK PROFITS , ALSO TO HIS FILE WITH THE DIRECTIONS TO EXAMINE THE ISSUE IN THE LIGHT OF ITA NOS.488/DEL./2009 4208/DEL//2006 2874/DEL./2007 4688/DEL./2010 12 VARIOUS JUDICIAL PRONOUNCEMENTS INCLUDING THAT REFE RRED TO ABOVE AND THEREAFTER PASS A SPEAKING ORDER IN ACCORDANCE WITH LAW AFTER ALLOWING SUFFICIENT OPPORTUNITY TO THE ASSESSEE. WITH THESE DIRECTIONS, GROUND NO. 3 IN THE APPEAL FOR THE AY 2003-04 & A PORTION OF GROUND NO.4 IN TH E APPEAL FOR THE AY 2004-05, ARE DISPOSED OF. 7. COMING NOW TO GROUND NO.2 IN THE APPEAL OF THE R EVENUE FOR THE AY 2003-04 RELATING TO DISALLOWANCE U/S 14A OF THE ACT , THE AO NOTICED DURING THE COURSE OF ASSESSMENT PROCEEDINGS THAT THE ASSESSEE CLAIMED EXEMPTION OF ` `60,96,45,500/- ON ACCOUNT OF INTEREST ON TAX FREE BONDS. TO A QUERY BY THE AO, THE ASSESSEE REPLIED THAT THE ASSESSEE DID NOT USE LOAN FUNDS FOR INVESTMENT/CURRENT ASSETS NOR THE ASSESSEE OBTAINE D ANY OVERDRAFT OR CASH CREDIT LIMIT FOR CREATING SUNDRY DEBTORS. SINCE NO INTEREST WAS PAID FOR ACQUISITION OF TAX FREE BONDS, NO DISALLOWANCE BY WAY OF INTERE ST COULD BE MADE, THE ASSESSEE ADDED. AS REGARDS SUBSCRIPTION TO BONDS, THE ASSESSEE SUBMITTED THAT THE ASSESSEE CONVERTED SUNDRY DEBTORS INTO TAX FREE BONDS ON THE DIRECTIONS OF GOVERNMENT OF INDIA IN ORDER TO MITIGATE THE FINANC IAL CRUNCH OF STATE ELECTRICITY BOARDS W.E.F. 01.10.2001. THEREAFTER, NO FURTHER T AX FREE BONDS HAVE BEEN ACQUIRED BY WAY OF FRESH INVESTMENT OR SECURITISATI ON OF SUNDRY DEBTORS. THE ASSESSEE ALSO POINTED OUT THAT ADMINISTRATION EXPEN SES OF ` ` `9263 LACS INCURRED BY IT WERE NOT IN RELATION TO EITHER SUNDRY DEBTORS OR FOR INVESTMENT IN TAX FREE BONDS OR MANAGING THEM. HOWEVER, THE AO DID NOT AC CEPT THE SUBMISSIONS OF THE ASSESSEE ON THE GROUND THAT THERE HAS TO BE EST ABLISHMENT TO LOOK AFTER VARIOUS INVESTMENTS MADE BY THE ASSESSEE AND TAKE D ECISIONS ACCORDING TO MARKET CONDITIONS. SINCE CLEAR CUT DEMARCATION OF E XPENSES INCURRED ON DIVIDEND INCOME WAS NOT AVAILABLE , THE AO DISALLOWED AN AMO UNT @ 2.5% OF THE ADMINISTRATIVE EXPENSES, RESULTING IN DISALLOWANCE OF ` ` ` 2,31,57,500/ IN TERMS OF PROVISIONS OF SEC. 14A OF THE ACT. BESIDES THE AO ADDED THE AMOUNT WHILE DETERMINING BOOK PROFITS IN TERMS OF PROVISIONS OF SEC. 115JB OF THE ACT.. ITA NOS.488/DEL./2009 4208/DEL//2006 2874/DEL./2007 4688/DEL./2010 13 7.1 BASED ON HIS FINDINGS IN THE AY 2003-04, THE AO REOPENED THE ASSESSMENT FOR THE AY 2002-03 U/S 147 OF THE ACT A ND DISALLOWED AN AMOUNT OF ` ` 16,40,34,228/- HAVING RECOURSE THE PROVISIONS OF SECTION 14A OF THE ACT. INTER ALIA, THE AMOUNT WAS ADDED WHILE DETERMINING BOOK PROFITS U/S 115JB OF THE ACT. 7.2 LIKEWISE, THE AO DISALLOWED AN AMOUNT @2.5% OF THE ADMINISTRATIVE EXPENSES ATTRIBUTABLE TO TAX FREE INCOME OF ` ` `263.30 CRORES ON ACCOUNT OF INTEREST FREE TAX FREE BONDS IN THE AY 2004-05, RE SULTING IN DISALLOWANCE OF ` `2.83 CRORES BESIDES ADDING THE AMOUNT WHILE COMPUT ING BOOK PROFITS U/S 115JB OF THE ACT. 7.3 IN ASSESSMENT YEAR 2007-08, THE AO HAVING RECOU RSE TO PROVISIONS OF RULE 8D OF THE INCOME-TAX RULES, 1962 DISALLOWED AN AMOUNT OF ` ` `96,74,920/- IN TERMS OF PROVISIONS OF SECTION 14A OF THE ACT BE SIDES ADDING THE AMOUNT WHILE COMPUTING BOOK PROFITS U/S 115JB OF THE ACT. 8 ON APPEAL, THE LEARNED CIT(A) ALLOWED THE CLAIM O F THE ASSESSEE IN THE AY 2003-04 WHILE RELYING UPON DECISION OF A CO-ORDINA TE BENCH IN ACIT VS. EICHER LTD.,101 TTJ 369(DELHI) AND CONCLUDED THAT THE ASS ESSEE COMPANY DID NOT MAKE ANY FURTHER INVESTMENT DECISIONS DURING THE YE AR,AS EVIDENT FROM ITS BALANCE SHEET NOR ENGAGED IN ANY TRADING ACTIVITY IN THE BONDS HELD BY IT. MOREOVER, BORROWED FUNDS WERE NOT UTILIZED IN ACQU IRING THESE BONDS AND THE COMPANY CAME TO OWN THE SAME BY VIRTUE OF SOVEREIGN DECISION OF THE GOVERNMENT OF INDIA..SINCE THERE WAS NO MATERIAL O N THE BASIS OF WHICH THE AO ESTIMATED THE DISALLOWANCE @ 2.5% OF THE ADMINISTRA TIVE EXPENSES, THE LD. CIT(A) DELETED THE DISALLOWANCE AS ALSO THE ADDITIO N MADE WHILE DETERMINING BOOK PROFITS U/S 115JB OF THE ACT. 8.1 LIKEWISE IN ASSESSMENT YEAR 2002-03, THE LD. CI T(A) DELETED THE DISALLOWANCE, RELYING UPON HIS ORDER FOR THE ASSESS MENT YEAR 2003-04 IN THE FOLLOWING TERMS:- ITA NOS.488/DEL./2009 4208/DEL//2006 2874/DEL./2007 4688/DEL./2010 14 4.3 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE AND HAVE GONE THROUGH THE ORDER OF THE AO AND THE SUBMISSION S MADE ON BEHALF OF THE APPELLANT COMPANY. THE UNDISPUTED FA CTS ARE THAT THE APPELLANT COMPANY EARNED TAX FREE INTEREST INCOME O F RS.30,17,15,010/- AND THE OVERALL BUSINESS RECEIPT S AMOUNTED TO RS.2831 CORES. I FIND THAT THE AO HAS DISALLOWED P ROPORTIONATE EXPENSES IN RELATION TO EXEMPT INCOME, WHICH IS WOR KED OUT TO RS.16,40,34,228/-. I ALSO FIND THAT THIS VERY ISSU E HAS ALSO BEEN DECIDED BY MY PREDECESSOR IN FAVOUR OF THE APPELLAN T WHILE DECIDING AN APPEAL FOR AY 2003-04 VIDE ORDER IN AP PEAL NO.79/2005-06 DATED 8.9.2006. FURTHER, IN THE INST ANT YEAR I.E., AY 2002-03, A SIMILAR ADDITION WAS MADE BY THE AO BY P ASSING A RECTIFICATION ORDER U/S 154/155 OF THE ACT. AGAINS T THE ORDER U/S 154/155, MY LD. PREDECESSOR AGAIN ALLOWED RELIEF TO THE APPELLANT VIDE ORDER IN APL.NO.38/2006-07 DATED 31.1.2007. T HE RELEVANT EXTRACTS OF THE ORDER PASSED BY MY LD. PREDECESSOR IN LATER ORDER ARE AS UNDER:- 5. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE AND HAVE GONE THROUGH THE ORDER OF THE AO AND THE SUBMISSIONS MADE ON BEHALF OF THE APPELLANT. THE UNDISPUTED FACTS ARE THAT THE ISSUE RELATING TO THE DISALLOWANCE OF EXPENSES U/S 14A OF THE ACT DOES NO T FORM PART OF THE ORIGINAL ASSESSMENT ORDER PASSED BY THE AO U/S 143( 3) OF THE ACT. IT IS, ACCORDINGLY, EVIDENT THAT THIS ISSUE HAS NOT BEEN TH E SUBJECT MATTER OF THE ORIGINAL ASSESSMENT PROCEEDINGS AND NO QUESTION AS TO THE SAME HAS BEEN RAISED IN THE ASSESSMENT ORDER ORIGINALLY PASSE D BY THE AO. PERUSAL OF THE IMPUGNED ORDER U/S 154 OF THE ACT SHOWS THAT THE ISSUE ON WHICH THE ORDER HAS BEEN PASSED IS NOT A MISTAKE APPARENT FROM RECORD, AS THE SAME IS A MATTER OF DELIBERATION. I ALSO FIND THAT THE ADDITION HAS BEEN MADE BY THE AO U/S 14A OF THE ACT BASED ENTIRELY ON ESTIMATE ON AD HOC BASIS FOR WHICH RECTIFICATION PROCEEDINGS CANNOT BE SAID TO LIE. THERE IS MERIT IN THE CONTENTION OF THE APPELLANT THAT A MIS TAKE APPARENT FROM RECORD MUST BE AN OBVIOUS AND PATENT MISTAKE AND NOT SOMETHING, WHICH CAN BE ESTABLISHED BY A LONG DRAWN PROCESS OF R EASONING ON POINTS WHERE THERE ARE TWO OPINIONS POSSIBLE. AN APPARENT ERROR MUST BE FROM THE RECORD OF THE ASSESSEE AND NOT AN ERROR DISCOVE RED FROM OTHER SOURCES. THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE APPELLANT BY THE HONBLE APEX COURTS DECISION IN THE CASE OF T.S. BA LARAM, ITO VS. VOLKART BROTHERS (82 ITR 50). 5.1 COMING TO THE MERITS OF THE DISALLOWANCE MADE B Y THE AO, I FIND THAT SIMILAR ADDITION WAS MADE IN THE CASE OF THE A PPELLANT IN AY 2003- ITA NOS.488/DEL./2009 4208/DEL//2006 2874/DEL./2007 4688/DEL./2010 15 04 BASED ON ESTIMATION OF EXPENSES IN REGARD TO THE EARNING OF EXEMPT INCOME. THE SAID ADDITION MADE IN AY 2003-04 STAND S DELETED VIDE MY ORDER IN APPEAL NO.79/05-06 DATED 8.9.2006, WHEREIN IT HAS BEEN HELD AS UNDER:- I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE AND HA VE GONE THROUGH THE ORDER OF THE AO AND THE SUBMISSIONS MADE ON BEHALF OF THE APPELLANT COMPANY. THE UNDISPU TED FACTS ARE THAT THE APPELLANT COMPANY EARNED TAX FREE INTEREST INCOME OF RS.60.96 CRORES AND THE OVERALL BUSIN ESS RECEIPTS AMOUNTED TO RS.2533 CRORES. I FIND THAT THE AO HAS DISALLOWED ON AN ESTIMATE BASIS EXPENSES @ 2.5% OF ADMINISTRATIVE EXPENSES, WHICH WORKED OUT TO RS.2,31,57,500/-. THE UNDISPUTED FACTS ARE THAT THE APPELLANT COMPANY DID NOT MAKE ANY FURTHER INVESTMENT DECISIONS DURING THE YEAR, AS IS EVIDENT FROM ITS BALANCE SHEET; IT IS ALSO UNDISPUTED THAT IT DID NOT ENGAGE I N ANY TRADING ACTIVITY IN THE BONDS HELD BY IT. THE APPEL LANT DID NOT BORROW ANY FUNDS FOR ACQUIRING THESE BONDS WHICH HAV E YIELDED THE TAX FREE INCOME AND, ACCORDINGLY, NO AMOUN T OF INTEREST PAID WAS UTILISED FOR ACQUIRING THE TAX FREE INVESTMENTS. I HAVE ALSO TAKEN NOTE OF THE FACT THAT THE APPELLANT COMPANY DID NOT EVEN PURCHASE THESE BONDS ON ITS OWN AND CAME TO OWN THE SAME BY VIRTUE OF SOVEREIGN DECISION OF THE GOVERNMENT OF INDIA. 5.3.1 BASED ON THE ABOVE FACTS, I FIND SUFFICIENT ME RIT IN THE CONTENTION OF THE APPELLANT THAT THE AO HAS NOT AT ALL INDICAT ED RELATIONSHIP OF ANY ITEM OF EXPENDITURE WITH THE EXEMPT INTEREST INCOME WITH A VIEW TO MAKING THE DISALLOWANCE U/S 14A OF THE ACT. THE DI SALLOWANCE HAS BEEN MADE BY THE AO ON AN ESTIMATE BASIS @ 2.5% OF ADMINI STRATIVE EXPENSES ON THE PRESUMPTION THAT SOME EXPENSES MUST HAVE BEEN INCURRED IN RELATION TO THE EARNING OF THE TAX FREE INCOME. TH E CASE OF THE APPELLANT FINDS SUPPORT FROM THE ABOVE CITED DECISIONS, ESPECI ALLY THE CASE OF EICHER LTD. (SUPRA). I HAVE GONE THROUGH THE SAID DECISION IN THE CASE OF EICHER LTD. AND I FIND THAT IT HAS BEEN CLEARLY HELD THAT THE AO CAN DISALLOW ONLY THE EXPENDITURE INCURRED BY AN ASSE SSEE IN RELATION TO THE EXEMPT INCOME; IT HAS BEEN HELD THAT IMPLICITLY IN T HE EXPRESSION IN RELATION TO IS THE CONCEPT THAT THE AO SHOULD BE IN A POSITION TO PIN- POINT WITH AN ACCEPTABLE DEGREE OF ACCURACY, THE EXP ENDITURE WHICH WAS ITA NOS.488/DEL./2009 4208/DEL//2006 2874/DEL./2007 4688/DEL./2010 16 INCURRED BY AN ASSESSEE TO PRODUCE NON-TAXABLE INCOM E; THE WORD INCURRED SIGNIFIES THAT THE EXPENDITURE MUST HAVE BEEN ACTUALLY INCURRED, NOT NOTIONALLY. THE RELEVANT OBSERVATION S OF THE TRIBUNAL IN THE SAID CASE ARE AS UNDER:- SEC.14A GIVES THE AO THE POWER TO DISALLOW EXPEND ITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE PRECISE QUESTION THAT AR ISES FOR CONSIDERATION IS WHETHER IT IS NECESSARY FOR THE AO TO SHOW ON TH E BASIS OF MATERIAL ON RECORD THAT THE ASSESSEE IN FACT INCURRED EXPENDITU RE TO PRODUCE NON- TAXABLE INCOME WHICH HE MAY DISALLOW OR WHETHER HE CAN ESTIMATE A PART OF THE EXPENDITURE INCURRED BY THE ASSESSEE AS EXPE NDITURE INCURRED TO PRODUCE NON-TAXABLE NON-TAXABLE INCOME ON THE ASSUM PTION THAT A PART OF THE EXPENDITURE MUST HAVE NECESSARILY BEEN INCUR RED TO PRODUCE NON- TAXABLE INCOME. A LOOK AT THE LANGUAGE OF THE SECT ION SHOWS THAT THE AO CAN DISALLOW ONLY EXPENDITURE INCURRED BY THE ASS ESSEE IN RELATION TO THE EXEMPT INCOME. THE WORD INCURRED CLEARLY IMPLIES THAT IT MUST BE SHOWN AS A FACT THAT SOME EXPENDITURE WAS IN FACT I NCURRED BY THE ASSESSEE TO PRODUCE EXEMPTED INCOME. IT WAS OPEN T O THE LEGISLATURE TO CONFER POWER UPON THE AO TO ASSUME THAT A PART OF T HE EXPENDITURE MUST HAVE NECESSARILY BEEN INCURRED TO PRODUCE EXEMPTED INCOME WHICH THE AO CAN ESTIMATE AND DISALLOW AND ACCORDINGLY, USE SUITABLE EXPRESSIONS IN THE SECTION CONFERRING SUCH POWER UPON THE AO .. BUT WHEN SEC.14A HAS NOT GIVEN SUCH SPECIFIC POWER TO THE AO , HE HAS NO AUTHORITY TO ESTIMATE THE EXPENDITURE WHICH THE ASSESSEE WOUL D HAVE IN THE OPINION OF THE AO INCURRED IN RELATION TO THE EXEMPTED INCO ME. THE WORDS IN RELATION TO INCOME WHICH IS EXEMPT UNDER THE ACT, NO DOUBT, APPEAR TO BE BROAD AT FIRST IMPRESSION, BUT ON DEEPER EXAMINATIO N, AND READ IN CONJUNCTION WITH THE WORD INCURRED, IT SEEMS TO U S THAT THESE ARE RESTRICTIVE WORDS, RESTRICTING THE POWER OF THE AO TO ESTIMATE E A PART OF THE EXPENDITURE INCURRED BY THE ASSESSEE AS RELATAB LE TO THE EXEMPTED INCOME. IT SEEMS TO US THAT IMPLICIT IN THE EXPRES SION IN RELATION TO IS THE CONCEPT THAT THE AO BE IN A POSITION TO PIN-POINT, WITH AN ACCEPTABLE DEGREE OF ACCURACY, THE EXPENDITURE WHICH WAS INCUR RED BY AN ASSESSEE TO PRODUCE NON-TAXABLE INCOME; THE WORD INCURRED SIG NIFIES THAT THE EXPENDITURE MUST HAVE BEEN ACTUALLY INCURRED, NOT N OTIONALLY. ITA NOS.488/DEL./2009 4208/DEL//2006 2874/DEL./2007 4688/DEL./2010 17 5.3.2 THE CASE OF THE APPELLANT IS SQUARELY COVERED BY THE ABOVE CITED DECISION IN THE CASE OF EICHER LTD. AS DISCUSSED H EREINABOVE, THERE IS NO EVIDENCE OR MATERIAL ON RECORD IN THE PRESENT CASE AUTHORISING THE AO TO INVOKE SECTION 14A FOR THE PURPOSE OF DISALLOWIN G EXPENDITURE ON AN ESTIMATE BASIS. THE AO HAS NOT MADE OUT A CASE THAT ANY EXPENDITURE WAS ACTUALLY INCURRED TO EARN THE TAX FREE INCOME; IN FACT, IT APPEARS THAT HE HAS PROCEEDED ON THE PRESUMPTION THAT SOME EXPENDITURE MUST HAVE BEEN INCURRED IN RELATION TO THE EARNING OF SUC H TAX FREE INCOME. AS DISCUSSED ABOVE, NO DISALLOWANCE IS PERMISSIBLE ON PR ESUMPTION OR ESTIMATE BASIS; DISALLOWANCE CAN ONLY BE MADE IF IT IS ESTABLISHED BY THE AO, WITH AN ACCEPTABLE DEGREE OF ACCURACY, THAT CERT AIN EXPENDITURE HAS BEEN INCURRED IN RELATION TO THE EARNING OF TAX FREE INCOME. ON OVERALL CONSIDERATION OF THE FACTS AND THE RATIO OF VARIOUS DECISIONS CITED ABOVE IT IS HELD THAT THERE IS NO MATERIAL ON THE BASIS OF WHICH THE AO COULD HAVE ESTIMATED AND DISALLOWED EXPENSES @ 2.5% OF A DMINISTRATIVE EXPENSES. THE SAID ADDITION IS, ACCORDINGLY DELETE D AND THE APPELLANT GETS A RELIEF OF RS.2,31,57,500/- THE FACTS OF THE CASE REMAINING THE SAME IN THE ASS ESSMENT YEAR UNDER CONSIDERATION, THE ADDITION MADE BY THE AO CANNOT B E UPHELD AND DESERVES TO BE DELETED. 4.3.1 I FIND IN THE PRESENT CASE A PROPORTIONA TE DISALLOWANCE WAS MADE IN RELATION TO THE EXEMPTED INCOME WHEREAS IN THE A.YS 2003-04 AND 2002-03 (ORDER U/S 154), ADDITIONS WERE MADE ON ESTIMATE BASIS. THE REASONS FOR DISALLOWANCE WERE, HOWEVER, IDENTICAL IN ALL THE ASSESSMENT YEARS. IN VIEW OF THE DISCUSSION IN THE FOREGOING PARAS, I CONCUR WITH THE FINDINGS GIV EN BY MY PREDECESSOR IN APPELLATE ORDERS FOR A.YS 2003-04 AN D 2002-03 (SUPRA) HOLDING THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE THERE IS APPARENTLY NO DIRECT OR INDIRECT EXPENDITU RE, WHICH COULD BE LINKED WITH THE EARNING OF EXEMPT INCOME. DURING T HIS YEAR TWO FACTS ARE SAME AND THE AO HAS NOT POINTED OUT ANY F RESH FACT/MATERIAL, WHICH COULD INDICATE OTHERWISE. ACC ORDINGLY, DISALLOWANCE OF RS.16,40,34,228/- MADE BY THE AO U/ S 14A IS DELETED. 8.2 IN THE AY 2004-05 ALSO, THE LD. CIT(A) DELETE D THE DISALLOWANCE FOLLOWING THE DECISION OF THE ITAT IN EICHER LTD.(S UPRA) IN THE FOLLOWING TERMS: ITA NOS.488/DEL./2009 4208/DEL//2006 2874/DEL./2007 4688/DEL./2010 18 5.3.2 THE CASE OF THE APPELLANT IS SQUARELY COVERE D BY THE ABOVE CITED DECISION IN THE CASE OF EICHER LTD. AS DISCU SSED HEREINABOVE, THERE IS NO EVIDENCE OR MATERIAL ON RECORD IN THE P RESENT CASE AUTHORIZING THE AO TO INVOKE SECTION 14A FOR THE PU RPOSE OF DISALLOWING EXPENDITURE ON AN ESTIMATE BASIS. THE AO HAS NOT MADE OUT A CASE THAT ANY EXPENDITURE WAS ACTUALLY I NCURRED TO EARN THE TAX FREE INCOME; IN FACT, IT APPEARS THAT HE HA S PROCEEDED ON THE PRESUMPTION THAT SOME EXPENDITURE MUST HAVE BEEN IN CURRED IN RELATION TO THE EARNING OF SUCH TAX FREE INCOME. A S DISCUSSED ABOVE, NO DISALLOWANCE IS PERMISSIBLE ON PRESUMPTIO N OR ESTIMATE BASIS; DISALLOWANCE CAN ONLY BE MADE IF IT IS ESTAB LISHED BY THE AO, WITH AN ACCEPTABLE DEGREE OF ACCURACY, THAT CERTAIN EXPENDITURE HAS BEEN INCURRED IN RELATION TO THE EARNING OF TAX FRE E INCOME. ON OVERALL CONSIDERATION OF THE FACTS AND THE RATIO OF VARIOUS DECISIONS CITED ABOVE IT IS HELD THAT THERE IS NO MATERIAL ON THE BASIS OF WHICH THE AO COULD HAVE ESTIMATED AND DISALLOWED EXPENSES @ 2.5% OF ADMINISTRATIVE EXPENSES. THE SAID ADDITION IS, ACC ORDINGLY DELETED AND THE APPELLANT GETS A RELIEF OF RS.2.83 CRORE. 8.3 IN ASSESSMENT YEAR 2007-08, THE LEARNED CIT(A) FOLLOWING HIS DECISION IN THE AYS 2005-06 AND 2006-07 DELETED THE DISALLOWANC E AS UNDER:- 2.2 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE LEANED AR AND PERUSED THE ORDER PASSED BY THE ASSESSING OFFIC ER. THE ASSESSING OFFICER HAS MADE DISALLOWANCE OF RS. `6,9 7,49,250/- AS THE APPELLANT HAS EARNED DIVIDEND INCOME OF `RS.1,2 0,00,004/-. IT IS NOTICED THAT THIS ISSUE HAS BEEN CONSISTENTLY DE CIDED IN THE FAVOUR OF THE APPELLANT BY MY LEARNED PREDECESSORS IN THE EARLIER YEARS. MY LEARNED PREDECESSOR VIDE HIS APPEAL ORDE R DATED 08 05.2009 FOR ASSESSMENT YEAR 2006-07 HAS DECIDED THE ISSUE IN THE FAVOUR OF THE APPELLANT BY FOLLOWING THE APPEAL ORD ERS OF EARLIER YEARS. SINCE THE FACTS AND CIRCUMSTANCES IN THIS Y EAR ARE ALSO SIMILAR TO THE FACTS AND CIRCUMSTANCES OF THE CASE IN ASSESSMENT YEAR 2005-06 AND 2006-07, I DO NOT FIND ANY SCOPE T O DEVIATE FROM THE ORDERS OF MY LEARNED PREDECESSOR. THUS, WITH A VIEW TO MAINTAIN CONSISTENCY, THE ISSUE IS DECIDED IN THE F AVOUR OF THE APPELLANT. ACCORDINGLY, THE ADDITION OF RS. `9,67, 49,250/- MADE BY THE ASSESSING OFFICER IS DELETED. THESE GROUNDS OF APPEAL ARE ALLOWED. 9. THE REVENUE IS NOW IN APPEAL BEFORE US AGAINST T HE AFORESAID FINDINGS OF LEARNED CIT(A) IN THESE FOUR ASSESSMENT YEARS 2002 -03 TO 2004-05 AND 2007- 08. THE LEARNED DR WHILE CARRYING US THROUGH THE A NNUAL REPORT OF THE COMPANY ITA NOS.488/DEL./2009 4208/DEL//2006 2874/DEL./2007 4688/DEL./2010 19 FOR THE AY 2003-04 AND THE IMPUGNED ORDERS CONTEND ED THAT DUE TO FINANCIAL CRUNCH FACED BY THE STATE ELECTRICITY BOARDS, THE A SSESSEE CONVERTED SUNDRY DEBTORS INTO TAX FREE BONDS AT THE BEHEST OF THE GO VERNMENT OF INDIA. IN ORDER TO MANAGE THE BONDS, THE ASSESSEE MUST HAVE INCURRED S OME EXPENDITURE IN ORDER TO EARN THE EXEMPT INCOME BY WAY OF INTEREST. THER EFORE, DISALLOWANCE MADE BY THE AO WAS JUSTIFIED, THE LD. DR ADDED. ON THE LEAR NED HAND, LEARNED AR ON BEHALF OF THE ASSESSEE WHILE SUPPORTING THE FINDING S OF THE LD. CIT(A) IN THESE FOUR ASSESSMENT YEARS SUBMITTED THAT THERE IS NOTHI NG TO SUGGEST THAT THE ASSESSEE INCURRED ANY EXPENDITURE IN EARNING INTERE ST INCOME FROM THE AFORESAID TAX FREE BONDS. WHILE RELYING UPON THE DECISION IN THE CASE OF CIT VS. CATHOLIC BANK LTD. & OTHERS 237 CTR (KER..) 164; CIT VS. PRI NTERS HOUSE (P) LTD.,188 TAXMAN 70(DEL.),MINDA INVESTMENTS LTD. VS. DCIT 138 TTJ (DEL.) 240 AND STATE BANK OF TRAVANCORE VS. ACIT,318 ITR(AT)171 (COCHIN. ) AND CIT VS. HERO CYCLES LTD., 323 ITR 518 (P&H); THE LD. AR ADDED THAT NO D ISALLOWANCE COULD BE MADE OUT OF ADMINISTRATIVE EXPENSES, HAVING RECOURSE TO PROVISIONS OF SEC. 14A OF THE ACT. 10. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE AS ALSO THE AFORECITED DECISIONS RELIED ON BY THE LD. AR ON BEHALF OF THE ASSESSEE. INDISPUTABLY, THE ASSESSEE DID NOT INCUR ANY EXPEND ITURE BY WAY OF INTEREST FOR INVESTMENT IN TAX FREE BONDS. IN FACT, THE TAX FRE E BONDS WERE ACQUIRED ON THE ORDERS OF THE GOVERNMENT ON CONVERSION OF SUNDRY DE BTORS OF STATE ELECTRICITY BOARDS, FACING FINANCIAL CRUNCH. THE AO DISALLOWE D 2.5% OF THE ADMINISTRATIVE EXPENSES FOR EARNING INTEREST INCOME FROM TAX FREE BONDS IN THE ASSESSMENT YEARS 2002-03 TO 2004-05 WHILE IN ASSESSMENT YEAR 2 007-08 DISALLOWANCE HAS BEEN MADE HAVING RECOURSE TO PROVISIONS OF RULE 8D OF THE I.T. RULES, 1962. THERE IS NO MATERIAL BEFORE US, SUGGESTING THAT THE ASSESSEE INCURRED ANY EXPENDITURE BY WAY OF ADMINISTRATIVE EXPENSES FOR EARNING INTEREST INCOME IN THESE FOUR ASSESSMENT YEARS NOR THE AO IDENTIFIED A NY ITEM OF SUCH EXPENDITURE FOR EARNING THE INTEREST INCOME. IN THESE CIRCUMST ANCES, THE ESTIMATED DISALLOWANCE MADE BY THE AO ,WITHOUT ESTABLISHING T HE NEXUS BETWEEN ITA NOS.488/DEL./2009 4208/DEL//2006 2874/DEL./2007 4688/DEL./2010 20 ADMINISTRATIVE EXPENSES AND INTEREST INCOME FROM TA X FREE BONDS, CANNOT BE SUSTAINED. 11. WE FIND THAT THE HONBLE BOMBAY HIGH COURT IN THE IR DECISION DATED 12.8.2010 IN CASE OF GODREJ & BOYCE MFG.CO.LT D. MUMBAI WHILE HOLDING THAT RULE 8D, INSERTED W.E.F 24.3.200 8 CANNOT BE REGARDED AS RETROSPECTIVE BECAUSE IT ENACTS AN ARTI FICIAL METHOD OF ESTIMATING EXPENDITURE RELATABLE TO TAX-FREE INCOME AND IS APPLICABLE ONLY W.E.F AY 2008-09, CONCLUDED THAT FOR THE ASSES SMENT YEARS WHERE RULE 8D DOES NOT APPLY, THE AO WILL HAVE TO D ETERMINE THE QUANTUM OF DISALLOWABLE EXPENDITURE BY A REASONABLE METHOD HAVING REGARD TO ALL THE FACTS AND CIRCUMSTANCES. THUS, TH E DISALLOWANCE MADE BY THE AO ,INVOKING RULE 8D OF THE IT RULES, 1 962 IN THE AY 2007-08, IS NOT JUSTIFIED. 11.1. MOREOVER, HONBLE SUPREME COURT IN THEI R DECISION DATED 6.7.2010 IN CIT V. WALFORT SHARE & STOCK BROKERS ( P.) LTD.,326 ITR 1, INTER ALIA, OBSERVED THAT FOR ATTRACTING SECTION 14A OF THE ACT THERE HAS TO BE A PROXIMATE CAUSE FOR DISALLOWANCE , WHICH IS ITS RELATIONSHIP WITH THE TAX EXEMPT INCOME. HONBLE AP EX COURT OBSERVED IN THE CONTEXT OF PROVISIONS SEC.14A OF T HE ACT IN THE FOLLOWING TERMS: 17. THE INSERTION OF SECTION 14A WITH RETROSPECTIV E EFFECT IS THE SERIOUS ATTEMPT ON THE PART OF THE PARLIAMENT NOT TO ALLOW DEDUCTION IN RESPECT OF ANY EXPENDITURE INCURRED BY THE ASSES SEE IN RELATION TO INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOM E UNDER THE ACT AGAINST THE TAXABLE INCOME (SEE CIRCULAR NO. 14 OF 2001, DATED 22- 11-2001). IN OTHER WORDS, SECTION 14A CLARIFIES THA T EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME. IN MANY CASES THE NATURE OF EXPENSES INCURRED BY THE ASSESSEE MAY BE RELATABLE PARTLY TO THE EXEMPT INCOME AND PARTLY TO THE TAXABLE INCOME. IN THE ABS ENCE OF SECTION 14A, THE EXPENDITURE INCURRED IN RESPECT OF EXEMPT INCOME WAS ITA NOS.488/DEL./2009 4208/DEL//2006 2874/DEL./2007 4688/DEL./2010 21 BEING CLAIMED AGAINST TAXABLE INCOME. THE MANDATE O F SECTION 14A IS CLEAR. IT DESIRES TO CURB THE PRACTICE TO CLAIM DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME AGAI NST TAXABLE INCOME AND AT THE SAME TIME AVAIL THE TAX INCENTIVE BY WAY OF EXEMPTION OF EXEMPT INCOME WITHOUT MAKING ANY APPOR TIONMENT OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME. THE BASIC REASON FOR INSERTION OF SECTION 14A IS THAT CERTAIN INCOME S ARE NOT INCLUDIBLE WHILE COMPUTING TOTAL INCOME AS THESE ARE EXEMPT UN DER CERTAIN PROVISIONS OF THE ACT. IN THE PAST, THERE HAVE BEEN CASES IN WHICH DEDUCTION HAS BEEN SOUGHT IN RESPECT OF SUCH INCOME S WHICH IN EFFECT WOULD MEAN THAT TAX INCENTIVES TO CERTAIN IN COMES WAS BEING USED TO REDUCE THE TAX PAYABLE ON THE NON-EXEMPT IN COME BY DEBITING THE EXPENSES, INCURRED TO EARN THE EXEMPT INCOME, AGAINST TAXABLE INCOME. THE BASIC PRINCIPLE OF TAXATION IS TO TAX THE NET INCOME, I.E., GROSS INCOME MINUS THE EXPENDITURE. O N THE SAME ANALOGY THE EXEMPTION IS ALSO IN RESPECT OF NET INC OME. EXPENSES ALLOWED CAN ONLY BE IN RESPECT OF EARNING OF TAXABL E INCOME. THIS IS THE PURPORT OF SECTION 14A. IN SECTION 14A, THE FIR ST PHRASE IS 'FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS C HAPTER' WHICH MAKES IT CLEAR THAT VARIOUS HEADS OF INCOME AS PRES CRIBED UNDER CHAPTER IV WOULD FALL WITHIN SECTION 14A. THE NEXT PHRASE IS, 'IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTA L INCOME UNDER THE ACT'. IT MEANS THAT IF AN INCOME DOES NOT FORM PART OF TOTAL INCOME, THEN THE RELATED EXPENDITURE IS OUTSIDE THE AMBIT OF THE APPLICABILITY OF SECTION 14A. FURTHER, SECTION 14 S PECIFIES FIVE HEADS OF INCOME WHICH ARE CHARGEABLE TO TAX. IN ORDER TO BE CHARGEABLE, AN INCOME HAS TO BE BROUGHT UNDER ONE OF THE FIVE HEAD S. SECTIONS 15 TO 59 LAY DOWN THE RULES FOR COMPUTING INCOME FOR T HE PURPOSE OF CHARGEABILITY TO TAX UNDER THOSE HEADS. SECTIONS 15 TO 59 QUANTIFY THE TOTAL INCOME CHARGEABLE TO TAX. THE PERMISSIBLE DEDUCTIONS ENUMERATED IN SECTIONS 15 TO 59 ARE NOW TO BE ALLOW ED ONLY WITH, REFERENCE TO INCOME WHICH IS BROUGHT UNDER ONE OF T HE ABOVE HEADS AND IS CHARGEABLE TO TAX. IF AN INCOME LIKE DIVIDEN D INCOME IS NOT A PART OF THE TOTAL INCOME, THE EXPENDITURE/DEDUCTION THOUGH OF THE NATURE SPECIFIED IN SECTIONS 15 TO 59 BUT RELATED T O THE INCOME NOT FORMING PART OF TOTAL INCOME COULD NOT BE ALLOWED A GAINST OTHER INCOME INCLUDIBLE IN THE TOTAL INCOME FOR THE PURPO SE OF CHARGEABILITY TO TAX. THE THEORY OF APPORTIONMENT OF EXPENDITURES BETWEEN TAXABLE AND NON-TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDER SECTION 14A. READING SECTION 14 IN JUXTAPOSITION WITH SECT IONS 15 TO 59, IT IS CLEAR THAT THE WORDS 'EXPENDITURE INCURRED' IN SECT ION 14A REFERS TO EXPENDITURE ON RENT, TAXES, SALARIES, INTEREST, ETC . IN RESPECT OF WHICH ALLOWANCES ARE PROVIDED FOR (SEE SECTIONS 30 TO 37) ITA NOS.488/DEL./2009 4208/DEL//2006 2874/DEL./2007 4688/DEL./2010 22 11.2 HONBLE PUNJAB & HARYANA HIGH COURT IN THEI R DECISION IN CIT VS. HERO CYCLES LTD.,323 ITR 518 HAVE OBSERVED THAT DISALLOWANCE UNDER SECTION 14A REQUIRES FINDING OF INCURRING OF EXPENDITURE AND WHERE IT IS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAS BEEN INCURRED, DISALLOWANCE UNDER SECTION 14A C ANNOT STAND. 11.3 HONBLE KERALA HIGH COURT IN THEIR DECISION I N CATHOLIC SYRIAN BANK LTD.(SUPRA) HELD THAT THEREBEING NO PRECISE FORMULA FOR PROPORTIONATE DISALLOWANCE, NO DISALLOWANCE IS CALLED FOR OUT OF ADMINISTRATIVE EXPENSES UNTIL RULE 8D CAME IN TO FORCE. 11.4 HONBLE JURISDICTIONAL HIGH COURT IN THEIR D ECISION IN PRINTERS HOUSE (P) LTD. (SUPRA) UPHELD THE FINDINGS OF THE ITAT ,HOLDING T HAT EXPENDITURE CAN NOT BE DISALLOWED ON THE BASIS OF A MERE ESTIMATE AS TO WH AT POSSIBLY COULD HAVE BEEN INCURRED TO EARN INCOME EXEMPTED FROM TAX. 11.5 IN THE LIGHT OF VIEW TAKEN IN THE AFORESAID DECISIONS, ESPECIALLY WHEN THE REVENUE HAS NOT PLACED BEFORE US ANY MATERIAL IN O RDER TO CONTROVERT THE AFORESAID FINDINGS OF THE LD. CIT(A) SO AS TO ENABL E US TO TAKE A DIFFERENT VIEW IN THE MATTER NOR EVEN REFERRED TO US ANY MATERIAL THA T IMPUGNED EXPENDITURE WAS INCURRED TO EARN TAX FREE INTEREST INCOME, WE ARE N OT INCLINED TO INTERFERE WITH THE FINDINGS OF THE LD. CIT(A). IN VIEW THEREOF, GRO UND NO.2 IN THE APPEAL FOR ASSESSMENT YEAR 2003-04, GROUND NOS. I TO III IN TH E APPEAL FOR THE AY 2002-03, GROUND NO.2 IN THE APPEAL FOR ASSESSMENT YEAR 2004- 05 AND GROUND NO.1 IN THE APPEAL FOR THE AY 2007-08, ARE DISMISSED. 12. GROUND NO.3 IN THE APPEAL OF THE REVENUE FOR TH E ASSESSMENT YEAR 2004- 05, RELATED TO DISALLOWANCE OF ` ` 3.82 CRORES . THE AO NOTICED THAT THE ASSESSEE CLAIMED AN AMOUNT OF ` ` 3.82 CRORES BY WAY OF PROVISION FOR MEDICAL BENEF ITS POST RETIREMENT. TO A QUERY BY THE AO, THE ASSESSEE REP LIED THAT THE PROVISION FOR THE ITA NOS.488/DEL./2009 4208/DEL//2006 2874/DEL./2007 4688/DEL./2010 23 POST RETIREMENT MEDICAL BENEFITS WAS AN ASCERTAINED LIABILITY. SINCE THE ASSESSEE WAS UNDER OBLIGATION IN TERMS OF EMPLOYMENT TO PROV IDE ITS EMPLOYEES THE BENEFIT OF MEDICAL FACILITIES FOR POST RETIREMENT AND THE L IABILITY WAS BASED ON ACTUARIAL VALUATION OF THE PRESENT VALUE OF FUTURE LIABILITY IN TERMS OF ACCOUNTING STANDARD- 15 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA ON ACCOUNTING OF RETIREMENT BENEFITS ETC. , THE CLAIM WAS ALLOWABLE, THE ASSESSEE PLEADED. INTER ALIA, THE ASSESSEE RELIED UPON DECISIONS IN METAL B OX COMPANY OF INDIA LIMITED VS. ITS WORKMEN (1969) 73 ITR 53 (SC),BHARAT EARTH MOVERS LIMITED VS. CIT (245 ITR 428 (SC),PROTOS ENG. CO. PRIVATE LIMITED VS. CI T (282 ITR 550) (BOM.),CIT VS. MAHINDRA AND MAHINDRA LIMITED 150 TAXMAN 451 AN D NATIONAL ALUMINIUM COMPANY LIMITED VS. DCIT 101 TTJ 948. HOWEVER, THE AO DID NOT ACCEPT THE SUBMISSIONS OF THE ASSESSEE ON THE GROUND THAT THE PROVISION FOR POST RETIREMENT MEDICAL BENEFITS WAS TOTALLY OF DIFFERENT NATURE AN D THERE WERE MANY VARIABLES WHICH MADE SUCH PROVISION OF AN UNASCERTAINED NATUR E LIKE HOW MANY EMPLOYEES WOULD WORK TILL RETIREMENT, HOW MANY OF THEM WOULD REQUIRE MEDICAL INTERVENTIONS, WHAT WOULD BE THE KIND OF AILMENTS WHICH WOULD REQU IRE MEDICAL TREATMENT, HOW MANY EMPLOYEES WOULD ACTUALLY USE THESE BENEFITS AN D SO ON. THERE WAS HARDLY ANY SCIENTIFIC MECHANISM BY WHICH SUCH POST RETIREM ENT MEDICAL EXPENDITURE COULD BE ESTIMATED, THE AO OBSERVED.. WHILE HOLDIN G THAT THE DECISION IN NALCO VS. DCIT 101 ITJ 948 WAS NOT BINDING NOR DEC ISION IN APOLLO TYRES(SUPRA) WAS APPLICABLE , THE AO ADDED THE AM OUNT OF ` ` 3.82 CRORES WHILE DETERMINING NORMAL INCOME AS ALSO WHILE DETERMINING BOOK PROFITS U/S 115JB OF THE ACT. 13. ON APPEAL, THE LEARNED CIT(A) ALLOWED THE CLAIM OF ASSESSEE , HOLDING AS UNDER : 6.3 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE, ORDER OF THE ASSESSING OFFICER AND SUBMISSIONS MADE BY THE ASSES SING OFFICER. THE UNDISPUTED FACTS ARE THAT THE APPELLANT COMPANY HAS CLAIMED DEDUCTION IN RESPECT OF THE PROVISION MADE FOR POST RETIREMENT BENEFITS ON THE BASIS OF ACTUARIAL VALUATION AS PER THE ACCOUNTING POLICY OF THE APPELLANT COMPANY. THE ACCOUNTS OF T HE APPELLANT ITA NOS.488/DEL./2009 4208/DEL//2006 2874/DEL./2007 4688/DEL./2010 24 HAVE BEEN DRAWN AS PER ACCOUNTING STANDARD 15 ISS UED BY THE INSTITUTE OF CHARTERED ACCOUNTS OF INDIA (ICAI) AND THERE IS NO CHANGE IN THE ACCOUNTING POLICY OF THE COMPANY, WHI CH REMAINS THE SAME AS IN EARLIER YEARS. I ALSO FIND THAT THE SYS TEM OF ACCOUNTING FOLLOWED BY THE APPELLANT DURING /THE YEAR HAS BEEN ACCEPTED IN THE PAST WITHOUT MAKING ANY DISALLOWANCE IN THIS REGARD . THE CRUX OF THE REASONING GIVEN BY THE ASSESSING OFFICER FOR MA KING THIS DISALLOWANCE IS THAT THERE ARE MANY VARIABLES WHICH MAKE SUCH PROVISION UNCERTAIN, WHICH IS DIFFERENT FROM THE CA SE OF PROVISION FOR GRATUITY MADE ON THE BASIS OF ACTUARIAL VALUATION. ON THE OTHER HAND, THE CASE OF THE APPELLANT IS THAT THE PROVISI ONS FOR GRATUITY AND RETIREMENT BENEFITS ARE ON THE SAME FOOTING AND HAVE SAME UNCERTAINTIES, FOR WHICH REASON ACTUARIAL VALUATION S ARE MADE AND CONSIDERED TO BE A SCIENTIFIC METHOD OF PROVIDING F OR THESE LIABILITIES. ON CAREFUL CONSIDERATION OF THE VIEW OF THE ASSESS ING OFFICER AND /THE SUBMISSIONS OF THE LEARNED AR, I FIND SUFF ICIENT MERIT IN THE CONTENTIONS OF THE APPELLANT THAT/THE PROVISION MAD E FOR RETIREMENT BENEFITS ON THE BASIS OF ACTUARIAL VALUATION IS NOT A CONTINGENT LIABILITY AND IS ALLOWABLE AS A DEDUCTION. I HAVE TAKEN NOTE OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF METAL BOX CO. OF INDIA LTD.(SUPRA),WHEREIN IT HAS BEEN HELD T HAT THE PROVISION FOR GRATUITY ON ACTUARIAL VARIATION REPRESENTS REAL LIABILITY AND CAN NOT BE SAID TO BE A CONTINGENT LIABILITY. THE APPELLANT S CASE IS ALSO FOUND TO BE SUPPORTED BY THE DECISIONS RENDERED BY THE HONBLE SUPREME COURT IN THE CASE OF BHARAT EARTH MOVERS LT D.(SUPRA),BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF PROTOS ENGG. CO.(P) LTD.(SUPRA) AND IN THE CASE OF MAHINDRA & MAHINDRA LTD.(SUPRA).THE APPELLANTS CASE,IN PARTICULAR, IS COVERED BY THE D ECISION OF THE ITAT,CUTTACK BENCH IN THE CASE OF NALCO VS. DCIT(10 1 TTJ 948),WHICH HAS SPECIFICALLY CONSIDERED THE QUESTION OF ALLOWABILITY OF PROVISION MADE IN RESPECT OF POST RETIREMENT MED ICAL BENEFITS BASED ON ACTUARIAL VALUATION. IT HAS BEEN HELD THAT SUCH A PROVISION FOR POST RETIREMENT MEDICAL BENEFIT MADE ON ACTUARI AL VALUATION IS ALLOWABLE AS A DEDUCTION SINCE THE SAME IS NOT A CO NTINGENT LIABILITY BUT REPRESENTS REAL LIABILITY OF THE ASSESSEE. IN V IEW OF THE ABOVE, THIS GROUND OF APPEAL IS DECIDED IN FAVOUR OF THE A PPELLANT WHO GETSA RELIEF OF RS.3.82 CRORES. 13.1 IN VIEW OF AFORESAID REASONS, THE LD. CIT(A) DELETED THE ADDITION WHILE DETERMINING BOOK PROFITS U/S 115JB OF THE ACT. 14. THE REVENUE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF LEARNED CIT(A).THE LEARNED DR CONTENDED THAT PROVIS ION FOR MEDICAL BENEFITS ITA NOS.488/DEL./2009 4208/DEL//2006 2874/DEL./2007 4688/DEL./2010 25 POST RETIREMENT COULD NOT BE EQUATED WITH PROVISIO N FOR GRATUITY OR OTHER POST RETIREMENT BENEFITS. SINCE POST RETIREMENT MEDICAL BENEFITS COULD NOT BE ASCERTAINED WITH ACCURACY IN THE CASE OF EACH EMPLO YEE NOR THE ASSESSEE INDICATED ANY BASIS, THE LD. DR CONTENDED THAT METH OD ADOPTED BY THE ASSESSEE FOR MAKING PROVISION FOR MEDICAL RETIREMENT BENEF ITS BEING NOT SCIENTIFIC , CLAIM COULD NOT BE ALLOWED. ON THE OTHER HAND, LEARNED A R ON BEHALF OF THE ASSESSEE CONTENDED THAT THE ASSESSEE MADE THE CLAIM IN TERMS OF PROVISIONS OF SECTION 37 OF THE ACT AND THE PROVISION HAVING BEEN MADE ON ACTUARIAL VALUATION, IS ALLOWABLE. 15. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE FACTS OF THE CASE. INDISPUTABLY, SIMILAR PROVISION FOR MEDICAL BENEFI TS POST RETIREMENT IN THE PRECEDING AS WELL AS SUCCEEDING YEARS ,HAVE BEEN AL LOWED BY THE AO HIMSELF. IN THE YEAR UNDER CONSIDERATION, WITHOUT BRINGING ANY MATERIAL ON RECORD, THE AO CONCLUDED THAT PROVISION MADE ON ACTUARIAL VALUATI ON WAS NOT SCIENTIFIC. ON THE OTHER HAND, THE LD. CIT(A) ,FOLLOWING THE DECISION OF A CO-ORDINATE BENCH IN NALCO (SUPRA) CONCLUDED THAT SUCH A PROVISION FOR P OST RETIREMENT MEDICAL BENEFITS MADE ON ACTUARIAL VALUATION IS ALLOWABLE A S A DEDUCTION, THE SAME BEING NOT A CONTINGENT LIABILITY BUT REPRESENTED REAL LIA BILITY OF THE ASSESSEE. THE REVENUE HAVE NOT PLACED BEFORE US ANY MATERIAL IN ORDER TO CONTROVERT THE FINDINGS OF THE LD. CIT(A) SO AS TO ENABLE US TO T AKE A DIFFERENT VIEW IN THE MATTER NOR BROUGHT TO OUR NOTICE ANY CONTRARY DECISION. IN THE ABSENCE OF ANY BASIS, ESPECIALLY WHEN SIMILAR CLAIMS HAVE BEEN ALLOWED BY THE AO IN THE PRECEDING AS WELL AS SUCCEEDING ASSESSMENT YEARS, WE HAVE NO HES ITATION IN UPHOLDING THE FINDINGS OF THE LD. CIT(A) ARRIVED AT WHILE FOLLOW ING THE DECISION OF A CO-ORDINATE BENCH IN NALCO(SUPRA). THEREFORE, GROUND NO. 3 IN T HE APPEAL FOR THE AY 2004- 05 IS DISMISSED. 16. AS REGARDS PORTION OF GROUND NO..4 IN THE APPE AL FOR THE AY 2004-05, SINCE WE HAVE ALREADY UPHELD THE FINDINGS OF THE LD . CIT(A),DELETING THE DISALLOWANCE ON ACCOUNT OF DISALLOWANCE U/S 14A AN D DISALLOWANCE ON ACCOUNT ITA NOS.488/DEL./2009 4208/DEL//2006 2874/DEL./2007 4688/DEL./2010 26 OF PROVISION FOR POST RETIREMENT MEDICAL BENEFITS, THERE IS NO QUESTION OF ADDING THESE AMOUNTS IN TERMS OF PROVISION OF SECTION 115J B OF THE ACT. IT MAY BE POINTED OUT THAT SIMILAR ADDITION ON ACCOUNT OF DI SALLOWANCE U/S 14A OF THE ACT IN THE AYS 2002-03,2003-04 AND 2007-08 , DELETED BY T HE LD. CIT(A) , HAVE NOT BEEN DISPUTED IN FURTHER APPEAL BY THE REVENUE. ACC ORDINGLY, THIS GROUND IN THE AY 2004-05 IS DISMISSED. 17. NO ADDITIONAL GROUNDS HAVING BEEN IN TERMS OF R ESIDUARY GROUND NO.IV) IN THE APPEAL OF THE REVENUE FOR ASSESSMENT YEAR 2002- 03; GROUND NO.4 IN THE APPEAL FOR THE AY 2003-04,GROUND NO.5 IN THE APPEAL FOR THE AY 2004-05 & GROUND NO.2 IN THE APPEAL FOR THE AY 2007-08, THER EFORE, ALL THESE GROUNDS ARE DISMISSED. 18. IN RESULT, APPEALS FOR THE AY 2002-03 & 2007-0 8 ARE DISMISSED WHILE THOSE FOR THE AYS 2003-04 & 2004-05 ARE PARTLY ALLO WED FOR STATISTICAL PURPOSES.. SD/- SD/- (R.P. TOLANI) (A.N. PAHUJA ) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) COPY OF THE ORDER FORWARDED TO :- 1. D.C.I.T., CIRCLE 14(1), NEW DELHI. 2. POWER GRID CORPORATION OF INDIA LIMITED, B-9, QU TAB INSTITUTIONAL AREA, KATWARIA SARAI, NEW DELHI-16. 3. CIT(A)-XVII, NEW DELHI. 4. CIT CONCERNED. 5. DR, ITAT,F BENCH, NEW DELHI 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, DELHI ORDER PRONOUNCED IN OPEN COURT