ACIT, New Delhi V. M/s. Housing & Urban Development Corporation Ltd., New Delhi

ITA 6151/DEL/2014

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 9267 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 1 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-12-2018
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2007-2008
• Appeal Filed On: 10-11-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: K J SINGH
• Keywords: Opportunity of being heard; Earning of tax free income; Retrospective amendment; Competent authority; Revised return
• Section: 142(1); 14A; 145; 263

Judgement Text

ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 1 OF 39 IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH: C: NEW DELHI) BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI ANADEE NATH MISSHRA, ACCOUNTANT MEMBER ITA NO:- 5705/DEL/2014 (ASSESSMENT YEAR: 2007-08) M/S HOUSING & URBAN DEVELOPMENT CORPORATION LTD., (HUDCO), HUDCO BHAWAN, LODHI ROAD, NEW DELHI-110003. VS. ADDL. COMMISSIONER OF INCOME TAX, RANGE-12, NEW DELHI. PAN NO: AAACH0632A APPELLANT RESPONDENT ITA NO:- 6151/DEL/2014 ( ASSESSMENT YEAR: 2007-08) ACIT, CIRCLE 12(1), NEW DELHI. VS. M/S HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAN NO: AAACH0632A APPELLANT RESPONDENT ASSESSEE BY : SH. GAGAN KUMAR, ADV. & SH. AMIT KAUSHIK, ADV. REVENUE BY : SH. K.J. SINGH, CIT (DR) ORDER PER: ANADEE NATH MISSHRA, AM THESE TWO CROSS APPEALS ARE FILED AGAINST THE ORDER DATED 28.08.2014 OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-XV NEW DELHI F OR ASSESSMENT YEAR 2007-08. THE GROUNDS OF THE TWO APPEALS VIDE ITA NO. 5705/DE L/2014 FILED BY ASSESSEE AND VIDE ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 2 OF 39 ITA NO. 6151/DEL/2014 FILED BY ASSESSEE, ARE AS UND ER:- ITA NO.-5705/DEL/2014 I. THE LD. CIT(A) HAS ERRED IN FACT AND IN LAW BY NOT DELETING THE ADDITION MADE BY LD. ASSESSING OFFICER AN AMOUNT OF RS. 1,60 ,00,000/- ON ACCOUNT OF ADDITION OF DISALLOWANCE OF AD-HOC PROVISION OF SALARY. II. THE LD. CIT(A) HAS ERRED IN FACTS AND IN LAW BY NOT DELETING THE ADDITION MADE BY LD. ASSESSING OFFICER AN AMOUNT OF RS. 1,28 ,00,000/- ON ACCOUNT OF ADDITION OF DENIAL OF CHANGE IN THE ACCOUNTING P OLICY. III. THAT THE APPELLANT CRAVES TO ADD, DELETE OR MO DIFY ANY GROUNDS OF APPEAL AT THE TIME OF HEARING. (ITA NO.-6151/DEL/2014) I. WHETHER LD. CIT(A) IS CORRECT IN INCORPORATING INCO RRECT FACT IN HIS ORDER THAT THE LD. CIT(A) XXVIII HAD ALLOWED THE ASSESSEE S GROUND OF APPEAL HAD ALLOWED THE ASSESSEES GROUND OF APPEAL IN HIS ORDER, DATED 11.01.2012 AGAINST THE DISALLOWANCE OF RS. 5406554/ - U/S 14A WHEREAS THE LD. CIT(A) XXVIII HAD IN FACT, CONFIRMED THE AB OVE NOTED ADDITION & HAD DISMISSED THE ASSESSEES GROUND OF APPEAL. II. WHETHER THE ORDER OF THE LD. CIT(A)XV IS NOT PERVER SE ON ACCOUNT OF THE INCORRECT FACTS INCORPORATED IN HIS ORDER, AS STATE D IN GROUND (1) ABOVE. III. THE APPELLANT CRAVES LEAVE, TO ADD, ALTER OR AMEND ANY GROUND OF APPEAL RAISED ABOVE AT THE TIME OF HEARING. (1.1) IN THIS ORDER, THE FOLLOWING ABBREVIATIONS HAVE BE EN USED: ASSESSING OFFICER AS AO COMMISSIONER OF INCOME TAX AS CIT COMMISSIONER OF INCOME TAX (APPEALS) AS CIT(A) COMMISSIONER OF INCOME TAX (DEPARTMENTAL REPRESENTATIVE) AS CIT (DR) DEPARTMENTAL REPRESENTATIVE AS DR DATED AS DTD. INCOME TAX ACT AS I.T. ACT INCOME TAX APPELLATE TRIBUNAL AS ITAT LEARNED AS LD. UNDER SECTION AS U/S ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 3 OF 39 (2) RETURN OF INCOME WAS FILED BY ASSESSEE ON 30.10.200 7 DECLARING TOTAL INCOME OF RS. 3,51,93,26,019, WHICH WAS FURTHER REVISED VIDE REVISED RETURN DATED 24.10.2008 DECLARING INCOME OF RS. 3,31,58,74,360. SUBSEQUENTL Y, VIDE THE ASSESSMENT ORDER UNDER SECTION 143(3), THE INCOME WAS ASSESSED AT RS . 3,55,28,96,515. AGAINST THIS, APPEAL WAS FILED BEFORE LD. CIT(A)-XXVIII. THIS APP EAL WAS DISPOSED OFF BY THE LD. CIT(A)-XVIIII VIDE ORDER DATED 11.01.2012. MEANWHIL E, THE ISSUE WAS EXAMINED BY THE LD. CIT-IV ALSO, WHO OBSERVED THAT THE DISALLOW ANCE BY THE AO UNDER RULE 8D OF AN AMOUNT OF RS. 54,06,554 UNDER SECTION 14A WAS ER RONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE. FURTHER, IT WAS ALSO OBSERVED BY HIM THAT THE APPELLANT HAD MADE AN AD HOC PROVISION OF RS. 1.60 CRORES ON ACCO UNT OF REVISION OF PAY CONSEQUENT UPON 6 TH PAY COMMISSION RECOMMENDATIONS DEBITED TO P&L A/C, WHICH, IN HIS OBSERVATION, WAS NOT AN ASCERTAINED LIABILIT Y AND THE AOS ORDER ALLOWING THE SAME WAS PREJUDICIAL TO THE INTERESTS OF REVENUE. T HIRDLY, THE CIT-IV ALSO OBSERVED THAT THE AO HAD ERRONEOUSLY ASSESSED LOWER PROFITS BY 1.28 CRORES, BY NOT EXAMINING THE EFFECT OF CHANGE OF ACCOUNTING POLICY EFFECTED BY THE APPELLANT BY WHICH REVENUE IN RESPECT OF APPLICATION FEES, PROCESSING FEES, FRONT END FEES, ADMINISTRATION FEES AND PROCESSING FEES WAS RECOGNI ZED ON REALIZATION BASIS INSTEAD OF ACCRUAL BASIS. BASED ON THE ABOVE OBSERVATIONS, THE LD. CIT-IV INITIATED PROCEEDINGS UNDER SECTION 263 VIDE ISSUE OF NOTICE DATED 04.02.2011. LATER, WHILE PASSING ORDER UNDER SECTION 263 DATED 24.02.2012, O N EXAMINATION OF PLEA OF THE APPELLANT, THE LD. CIT-IV HELD THAT EVEN THOUGH THE APPELLANT HAD WORKED OUT THE DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D AT RS. 42,69,731, THE AO FAILED TO EXAMINE WHETHER THE EXEMPT INCOME INCLUDED INCOME O N INVESTMENTS IN LONG TERM ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 4 OF 39 EQUITY SHARES AND BONDS AND ACCORDINGLY SET ASIDE T HE ISSUE FOR THE EXAMINATION IN ACCORDANCE WITH THE PROVISIONS OF THE ACT. SIMILARL Y, REGARDING THE REVISION OF PAY OF RS. 1.60 CRORES, THE CIT-IV HELD THAT AS THE REPORT OF THE 6 TH CENTRAL PAY COMMISSION WAS RECEIVED ONLY IN SEPTEMBER, 2008, THOUGH IT WAS MADE EFFECTIVE FROM 01.01.2006, THEREFORE, THE PROVISION MADE IN RESPEC T THEREOF IN THE PREVIOUS YEAR 2006-07 WAS IN THE NATURE OF AN UNASCERTAINED LIABI LITY AT THAT POINT OF TIME. AS THIS ISSUE WAS NOT EXAMINED BY THE AO, THE LD. CIT-IV AG AIN SET ASIDE THIS ISSUE TO THE AO. LASTLY, THE ISSUE REGARDING UNDER-STATEMENT OF PROFIT TO THE TUNE OF RS. 1.28 CRORES, WHICH WAS RECOGNIZED ON ACTUAL REALIZATION BASIS THAN ON MERCANTILE BASIS, WAS ALSO SET ASIDE TO THE AO. THE AO SUBSEQUENTLY I SSUED NOTICE TO THE APPELLANT AND AFTER ALLOWING DUE OPPORTUNITY TO THE APPELLANT , HELD THAT THE CONTENTIONS OF THE APPELLANT WITH REGARD TO THE NON-APPLICABILITY OF R ULE 8D IN THE CURRENT YEAR WAS NOT ACCEPTABLE ON THE GROUNDS THAT THE APPELLANT HAD NO T MAINTAINED SEPARATE ACCOUNTS FOR INVESTMENTS AND OTHER BUSINESS ACTIVITIES AND T HE CLAIM OF THE APPELLANT THAT INVESTMENTS WERE MADE OUT OF OWN SURPLUS FUND, WAS NOT SUPPORTED BY THE FIGURES SHOWN BY THE APPELLANT. THE LD. AO HELD THAT SUBSEQ UENT TO THE DECISION OF BOMBAY HIGH COURT THE CASE OF GODREJ AND BOYCE MFG. CO. LT D. VS CIT 328 ITR 81 (BOM), AND EVEN PRIOR TO INTRODUCTION OF SECTION 14A(2) AN D (3), THE AO WAS DUTY BOUND TO ENFORCE THE PROVISIONS OF SECTION 14A(1) ON A REASO NABLE BASIS CONSISTENT WITH ALL THE RELEVANT FACTS AND CIRCUMSTANCES. ACCORDINGLY, BY INVOKING THE PROVISIONS OF RULE 8D, THE LD. AO ESTIMATED DISALLOWANCE UNDER SECTION 14A AT RS. 1,90,27,57,705 AND MADE ADDITION OF RS. 1,89,73,51,151 BY GIVING ALLOW ANCE FOR DISALLOWANCE OF RS. 54,06,554 MADE EARLIER IN THE ORIGINAL ASSESSMENT R ECORD. SECONDLY, THE LD. AO ALSO ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 5 OF 39 HELD THAT THE PROVISION OF RS. 1.60 CRORES MADE TOW ARDS PAY REVISION SUBSEQUENT TO THE RECOMMENDATIONS OF THE 6 TH PAY COMMISSION WAS IN THE NATURE OF AN UNASCERTAINED LIABILITY IN THE CURRENT YEAR AS THE DECISION TO PAY 60% ARREARS WAS TAKEN BY THE CENTRAL GOVT. IN F.Y. 2008-09. ACCORDI NGLY, AN ADDITION ON IDENTICAL GROUND WAS MADE TO THE TOTAL INCOME. THE LD. AO ON PERUSAL OF AN INTERNAL NOTE OF THE COMPANY MARKED AS PROVISION AGAINST PAY REVISI ON OF EXECUTIVES HELD THAT THE LANGUAGE OF THE SAME SHOWED THAT THE PROVISION WAS AN AD HOC PROVISION AND THE LIABILITY FOR SUCH PROVISION HAD NOT CRYSTALLIZED B EFORE 31.03.2007. REGARDING THE THIRD ISSUE RELATING TO UNDER-STATEMENT OF PROFIT O F RS. 1.28 CRORES AS REPORTED IN CLAUSE 11(D) OF FORM NO. 3CD REPORT, THE LD. AO OBS ERVED THAT FOR APPROVING THE CHANGE IN ACCOUNTING POLICIES, A BOARD MEETING WAS HELD ON 27.09.2007, WHICH WAS BEYOND THE PREVIOUS YEAR AND HENCE HE HELD THAT SUC H A LIABILITY HAD NOT EVEN CRYSTALLIZED DURING THE CURRENT YEAR. ACCORDINGLY, ADDITION OF RS. 1.28 CRORES WAS ALSO MADE. THE LD. CIT(A) IN HIS IMPUGNED ORDER DATED 28 .2.2014 CONFIRMED THE AFORESAID ADDITIONS OF RS. 1,60,00,000 AND RS. 1,28 ,00,000 BUT HE DELETED THE DISALLOWANCE MADE U/S 14A OF I.T. ACT. THE PRESENT TWO APPEALS BEFORE US HAVE BEEN FILED BY ASSESSEE AND BY REVENUE AGAINST THE A FORESAID ORDER OF LD. CIT(A) DATED 28.8.2014. (2.1) IN THE ASSESSEES APPEAL VIDE ITA NO. 5705/DEL/2014 THE 1 ST GROUND OF APPEAL IS RELATED TO ASSESSEES CLAIM FOR DEDUCTION ON ACCOUN T OF AD HOC PROVISION OF SALARY AMOUNTING TO RS. 1,60,00,000. THIS DEDUCTION WAS CL AIMED BY THE ASSESSEE ON ACCOUNT OF PROVISION FOR REVISION OF PAY IN THE BOO KS OF ACCOUNTS. THIS CLAIM FOR DEDUCTION WAS MADE BY THE ASSESSEE IN THE LIGHT OF PAY REVISION COMMITTEE ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 6 OF 39 APPOINTED BY GOVT. OF INDIA, THE REPORT OF WHICH WA S PENDING. THE AO DISALLOWED THIS CLAIM, HOLDING THAT THE EXPENDITURE WAS PURELY A PROVISION AGAINST UNASCERTAINED LIABILITY AND THAT THIS PROVISION COULD NOT BE CLAI MED AS EXPENDITURE FOR AY 2007-08. IN THE WORDS OF THE AO, NEITHER, THE SAID LIABILITY ACCRUED NOR CRYSTALLIZ ED DURING THE YEAR UNDER CONSIDERATION. AS PER THE RECOMMENDATION S OF THE CENTRAL SIXTH PAY COMMISSION/MINISTRY OF FINANCE ETC. IT WAS DECIDED THAT 60% OF ARREARS WORKED OUT ON THE IMPLEMENTATION OF SIXTH CENTRAL PAY COMMISSI ON WAS ORDERED BY THE CENTRAL GOVT. TO BE PAID IN FINANCIAL YEAR 2008-09 RELEVANT TO A.Y. 2009-10 AND BALANCE 40% WAS ORDERED TO BE PAID IN F.Y. 2009-10 RELEVANT TO A.Y. 2010-11. ACCORDINGLY, THE ASSESSEE COULD HAVE CLAIMED THE EXPENDITURE ON ACCOUNT OF REVISION OF PAY IN THE A.Y. 2009-10 AND THE BALANCE AMOUNT OF EXPENDIT URE W.E.F. 1-4-2008 TO THE IMPLEMENTATION OF SIXTH PAY COMMISSION SHOULD HAVE BEEN CLAIMED IN A.Y. 2010-11. EVEN THE LD. CIT-IV AFTER CAREFUL CONSIDERATION OF T HE ISSUE IN QUESTION, HAS OBSERVED THAT THE LIABILITY ON ACCOUNT OF REVISION OF PAY IN CONSEQUENCE OF REPORT OF SIXTH CENTRAL PAY COMMISSION HAS NOT ACCRUED AND CR YSTALLIZED DURING THE F.Y. 2..6- 07 RELEVANT TO A.Y. 2007-08 BECAUSE THE IMPLEMENTAT ION OF THE SAID REPORT IN RESPECT OF PUBLIC SECTOR UNDERTAKING AND STATE GOVT . EMPLOYEES HAS BEEN CARRIED OUT ONLY AFTER SEPTEMBER, 2008 BEYOND THE CLOSE OF THE INSTANT FINANCIAL YEAR RELEVANT TO A.Y. 2007-08 AND ACCORDINGLY, THE PROVISION OF SUCH REVISION OF PAY AMOUNTING TO RS. 1,60,00,000/- IS UNASCERTAINED LIABILITY WHICH IS N OT ELIGIBLE FOR DEDUCTION FOR THE YEAR UNDER CONSIDERATION. EVEN FROM THE DOCUMENTS FILED DURING FRESH PROCEEDIN GS ALONG WITH ITS REPLY DATED 30.11.2012 IN THE FORM OF A NOTE MARKED AS ANNEXURE -III AND FURTHER MARKED AS ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 7 OF 39 FINANCE WING WITH THE SUBJECT: PROVISION AGAINST PAY REVISION OF EXECUTIVES, CLEARLY STATES THAT DURING DISCUSSIONS REGARDING ANNUAL AC COUNT FOR THE YEAR 2006-07 ON 10.10.2007 IN CMDS CHAMBER WHEN DF WAS ALSO PRESEN T, IT WAS DECIDED THAT SUITABLE PROVISION ON ACCOUNT OF PAY REVISION OF EXE CUTIVES W.E.F. 01.01.2007 SHOULD ALSO BE MADE IN THE ANNUAL ACCOUNTS FOR THE YEAR 20 06-07. ACCORDINGLY, AN ADHOC PROVISION OF RS. 1.60 CRORES IS PROPOSED TO BE MADE IN THE ACCOUNTS FOR THE PERIOD OF THREE MONTHS FOR EXECUTIVES ONLY FROM 01.01.2007 TO 31.3.2007. ON THE BACK SIDE OF THE SAID NOTE IT IS MENTIONED AS UNDER:- NOTE NO. EXISTING NOTE SUGGESTED NOTE II(B) THE PAY REVISION OF PUBLIC SECTOR EXECUTIVE WAS DUE W.E.F. 01.01.2007 AND A PAY REVISION COMMITTEE HAS BEEN APPOINTED BY GOVT. OF INDIA, THE REPORT OF WHICH IS PENDING. IN VIEW OF THIS NO PROVISION FOR REVISED PAY HAS BEEN MADE IN ACCOUNT OF 2006- 07. THE PAY REVISION OF PUBLIC SECTOR EXECUTIVES WAS DUE W.E.F. 01.01.2007 AND A PAY REVISION COMMITTEE HAS BEEN APPOINTED BY GOVT. OF INDIA, THE REPORT OF WHICH IS PENDING. ADHOC PROVISION OF RS. 1.60 CRORES HAS BEEN MADE IN THE ACCOUNTS FOR THE FINANCIAL YEAR 2006-07. SUBMITTED FOR APPROVAL PLEASE. SD/- ACF(S) 13.10.2007 THIS NOTE WAS FINALLY APPROVED ON 15.10.2007. ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 8 OF 39 THE ACCOUNTS FOR THE YEAR UNDER CONSIDERATION ARE F ROM 1.4.2006 TO 31.3.2007 AND ARE CLOSED ON 31.3.2007. THAT THE DEDUCTION CLAIMED IS ON ACCOUNT OF CREATION OF PROVISION. ADDITIONALLY, THE PROVISION IS AN AN ADHOC PROVISION. NEITHER THE LIABILITY FOR REVISION OF PAY ACCRUED DURING THE YEAR BEFORE 31.3.2007 NOR CRYSTALLIZED BEFORE 31.3.2007. ADDITIONALLY, NO PAYMENT OF THE SAME WAS MADE BEFORE 31.3.2007. ALL PROPOSALS WERE MADE IN THE MONTH OF OCTOBER 2007 AF TER THE CLOSE OF THE ACCOUNTING YEAR. AS PER THE RECOMMENDATIONS OF THE CENTRAL SIX TH PAY COMMISSION THE ASSESSEE SHOULD HAVE CLAIMED SUCH EXPENSES OF REVISED PAY OF ITS EMPLOYEES ONLY IN THE ASSESSMENT YEAR 2009-10 AND 2010-11. HENCE, THE PRO VISION, RATHER ADHOC PROVISION OF RS. 1,60,00,000/- IS HEREBY DISALLOWED. THE ASSESSEE FILED APPEAL BEFORE LD. CIT(A), WHO DI SMISSED ASSESSEES APPEAL ON THIS ISSUE VIDE IMPUGNED ORDER DATED 28.8.2014. THE RELEVANT PORTION OF THE IMPUGNED ORDER OF LD. CIT(A) IS REPRODUCED AS UNDER: 6.8 REGARDING THE GROUND NO.3 OF THE APPEAL RELATI NG TO ADDITION OF RS.1.60 CRORES ON ACCOUNT OF DISALLOWANCE OF PROVISION OF REVISION OF PAY, I FIND THAT IN THE CURRENT FINANCIAL YEAR, NO DECISION OF THE CENT RAL GOVT. WAS AVAILABLE, WHICH MAY HAVE A BEARING ON REVISION OF PAY OF EXECUTIVES OF THE APPELLANT COMPANY, THEREFORE, IT CANNOT BE HELD THAT SUCH LIABILITY HA D CRYSTALLIZED IN THE CURRENT YEAR. FOR THE CENTRAL GOVT. MINISTRIES AND DEPARTMENTS, T HE RECOMMENDATIONS OF THE 6 TH CENTRAL PAY COMMISSION WERE ANNOUNCED IN F.Y. 2008 -09. SUBSEQUENTLY, IT WAS DECIDED THAT 60% OF THE ARREARS WILL BE PAID IN 2008-09 WHILE THE BALANCE 40% WILL BE PAID IN 2009-10. THEREFORE, IN THE ABSE NCE OF HAPPENING OF ANY GERMANE EVENT DURING THE F.Y.2006-07, THERE WAS NO GROUND TO HOLD THAT LIABILITY FOR MAKING REVISED PAY TO THE EXECUTIVES OF THE COM PANY HAD CRYSTALLIZED DURING THE CURRENT YEAR. I, HOWEVER HOLD THAT THE AMOUNT O F PROVISION CREATED BY THE ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 9 OF 39 COMPANY, AS A RESULT OF THE DECISION OF THE BOARD O F THE COMPANY DATED 15.08.2007, WHICH WAS BASED ON THE CALCULATION OF T HE SALARY OF THE EXECUTIVES OF THE COMPANY, WAS COMPUTED ON A SCIENTIFIC BASIS, TH OUGH ERRONEOUSLY TERMED AS AD HOC PROVISION IN THE BOARD RESOLUTION. HOWEVER , AS HELD BY ME ABOVE, SINCE THE LIABILITY IN RESPECT OF SUCH EXPENSES HAD NOT C RYSTALLIZED DURING THE CURRENT YEAR, THERE WAS NO JUSTIFICATION ON THE PART OF THE APPELLANT COMPANY TO HAVE MADE A PROVISION IN THE CURRENT YEAR, WHEN SUCH A L IABILITY WOULD HAVE BEEN ACTUALLY ALLOWABLE IN THE SUBSEQUENT A.YRS I.E. A.Y . 2009-10 AND A.Y. 2010-11. ACCORDINGLY, ADDITION MADE ON THIS GROUND IS UPHELD . (2.2) IN THE COURSE OF HEARING BEFORE US, THE LD. COUNSEL FOR ASSESSEE SUBMITTED THAT THE ASSESSEE COMPANY IS A PUBLIC SECTOR UNDERTAKING (PSU FOR SHORT) UNDER GOVERNMENT OF INDIA. HE FURTHER SUBMITTED THAT A PA Y REVISION COMMITTEE (PRC FOR SHORT) WAS CONSTITUTED BY MINISTRY OF HEAVY INDUSTR IES AND PUBLIC ENTERPRISES VIDE RESOLUTION NO. 2(10)/06/DPE-WC DATED 30.11.2006. TH E RELEVANT PORTION OF THE RESOLUTION IS REPRODUCED AS UNDER: NEW DELHI, THE 30 TH NOVEMBER, 2006 NO. 2(10)/06/DPE-WC.---THE GOVERNMENT OF INDIA HAVE BEEN CONSIDERING FOR SOME TIME PAST THE CHANGES THAT HAVE TAKEN PLACE IN THE STRUCTURE OF EMOLUMENTS OF PUBLIC SECTOR EXECUTIVES OVER THE YEA RS. CONDITIONS HAVE ALSO CHANGED IN SEVERAL RESPECTS SINCE THE LAST PAY REVI SION MADE WITH EFFECT FROM 1- 1-1997. 2.1 THE COMPETENT AUTHORITY HAS DECIDED TO APPOINT THE PAY REVISION COMMITTEE WHICH COMPRISES OF THE FOLLOWING: CHAIRMAN MR. JUSTICE M.J. RAO (RETIRED JUDGE, SUPREME COURT OF INDIA) MEMBERS (1) DR. NITISH SEN GUPTA ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 10 OF 39 (ECONOMIST & FORMER MEMBER SECRETARY, PLANNING COMMISSION, GOVERNMENT OF INDIA) (2) SHRI P.C. PARAKH (FORMER SECRETARY, DEPARTMENT OF COAL, GOVERNMENT OF INDIA) (3) SHRI R.S.S.L.N. BHASKARADU (FORMER MANAGING DIRECTOR, MARUTI UDYOG LTD. & EX-CHAIRMAN, PUBLIC ENTERPRISES SELECTION BOARD) EX-OFFICIO MEMBER (4) SECRETARY, DEPARTMENT OF PUBLI C ENTERPRISES, GOVERNMENT OF INDIA SECRETARY JOINT SECRETARY, DEPARTMENT OF PUBLIC ENTERPRISES, GOVERNMENT OF INDIA 2.2 THE TERMS OF REFERENCE OF THE COMMITTEE WILL BE AS FOLLOWS. 2.2.1 THE COMMITTEE WILL EXAMINE THE PRINCIPLES THA T SHOULD GOVERN PRESENT STRUCTURE OF PAY, ALLOWANCES, PERQUISITES, AND BENEFITS FOR THE FOLLOWING CATEGORIES OF CENTRAL GOVERNMENT PUBLIC S ECTOR ENTERPRISES (CPSES) EXECUTIVES, TAKING INTO ACCOUNT THE TOTAL PA CKAGE OF BENEFITS AVAILABLE TO THEM INCLUDING NON-MONETARY ONES, AND SUGGEST CHANGES THEREIN WHICH MAY BE DESIRABLE AND FEASIBLE: (I) BOARD LEVEL FUNCTIONARIES (II) BELOW BOARD LEVEL EXECUTIVES (III) NON-UNIONIZED SUPERVISORY STAFF 2.2.2 THE COMMITTEE WILL MAKE RECOMMENDATIONS SO AS TO TRANSFORM THE CPSES INTO MODERN, PROFESSIONAL, CITIZEN-FRIENDLY AN D SUCCESSFUL COMMERCIAL ENTITIES THAT ARE ALSO DEDICATED TO THE SERVICE OF THE PEOPLE. 2.2.3 THE COMMITTEE WILL WORK OUT A COMPREHENSIVE P AY PACKAGE FOR THE CATEGORIES OF EMPLOYEES OF CPSES MENTIONED AT SUB-PA RA 2.2.1 THAT IS SUITABLY LINKED TO PROMOTING EFFICIENCY, PRODUCTIVI TY AND ECONOMY THROUGH RATIONALIZATION OF STRUCTURES, ORGANIZATIONS, SYSTE MS AND PROCESSES AS WELL ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 11 OF 39 AS PROMOTING FUNCTIONAL AND OPERATIONAL AUTONOMY WI THIN THE PUBLIC SECTOR ENTERPRISES WITH A VIEW TO LEVERAGING ECONOMY, RESPO NSIBILITY, TRANSPARENCY, DISCIPLINE, ACCOUNTABILITY, ASSIMILAT ION OF TECHNOLOGY AND RESEARCH AND DEVELOPMENT. THE EXISTING PATTERNS OF SCALES BASED ON CENTRAL DEARNESS ALLOWANCE (CDA) PATTERN OR INDUSTR IAL DEARNESS ALLOWANCE (IDA) PATTERN, CATEGORIZATION OF CPSES SUC H AS SCHEDULE A, B, C', D. MINIRATNA, NAVRATNA, LOSS, PROFIT MAKING CPSES AND CPSES REFERRED TO BIFR OR BRPSE MAY ALSO BE TAKEN INTO ACCOUNT WHIL E EVOLVING SUITABLE PAY PACKAGES. THE COMMITTEE WILL ALSO EXAMINE THE I SSUE CONCERNING SEPARATE PAY REVISION GUIDELINES IN RESPECT OF NAVR ATNA CPSES. 2.2.4 THE COMMITTEE WILL MAKE RECOMMENDATIONS TO HA RMONIZE THE FUNCTIONING OF THE CPSES WITH THE DEMANDS OF THE EME RGING NATIONAL AND GLOBAL ECONOMIC SCENARIO. THIS WOULD ALSO TAKE INTO ACCOUNT, AMONG OTHER RELEVANT FACTORS, THE TOTALITY OF BENEFITS AVAILABL E TO THE EMPLOYEES, NEED OF RATIONALIZATION AND SIMPLIFICATION THEREOF, THE PREVAILING PAY STRUCTURE AND RETIREMENT BENEFITS AVAILABLE UNDER THE CENTRAL PUBLIC SECTOR ENTERPRISES, THE ECONOMIC CONDITIONS IN THE COUNTRY, THE NEED TO OBSERVE FINANCIAL PRUDENCE IN THE MANAGEMENT OF THE CPSES, T HE RESOURCES OF THE CPSES AND THE DEMANDS THEREON ON ACCOUNT OF ECONOMIC AND SOCIAL DEVELOPMENT AND THE GLOBAL ECONOMIC SCENARIO AND CO MPETITIVE ENVIRONMENT. 2.2.5 THE COMMITTEE WILL EXAMINE AND MAKE RECOMMEND ATIONS WITH RESPECT TO THE GENERAL PRINCIPLES, FINANCIAL PARAME TERS AND CONDITIONS WHICH SHOULD GOVERN THE DESIRABILITY, FEASIBILITY A ND CONTINUATION/MODIFICATION OF THE PRODUCTIVITY LINKE D INCENTIVES SCHEME AND PERFORMANCE RELATED PAYMENTS. 2.2.6 WHILE FINALIZING ITS REPORT, THE COMMITTEE WI LL ALSO TAKE INTO ACCOUNT THE REPORT OF THE SIXTH PAY COMMISSION. 3. THE COMMITTEE WILL DEVISE ITS OWN PROCEDURES AS IT MAY CONSIDER NECESSARY. MINISTRIES AND DEPARTMENTS OF THE GOVERNMENT OF IND IA AND STATE GOVERNMENTS ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 12 OF 39 WILL FURNISH SUCH RELEVANT INFORMATION AND DOCUMENT S AS MAY BE REQUIRED BY THE COMMITTEE AND WHICH THEY ARE IN A POSITION AND AT L IBERTY TO GIVE, AND EXTEND THE NECESSARY COOPERATION AND ASSISTANCE TO IT. 4. THE COMMITTEE WILL MAKE ITS RECOMMENDATIONS TO T HE GOVERNMENT WITHIN A PERIOD OF 18 MONTHS AND IT WILL HAVE ITS HEADQUARTE RS IN DELHI. 5. THE DECISION OF THE GOVERNMENT ON THE RECOMMENDA TIONS OF THE COMMITTEE WILL TAKE EFFECT FROM 1.1.2007. 6. THE COMMITTEE WILL BE SERVICED BY THE DEPARTMENT OF PUBLIC ENTERPRISES. (2.2.1) THE LD. COUNSEL FOR ASSESSEE FURTHER SUBMITTED THA T PAY REVISION FINALLY TOOK PLACE VIDE OFFICE MEMORANDUM DATED 26.11.2008 IN NO .2(70)/08-DPE(WC) OF MINISTRY OF HEAVY INDUSTRIES & PUBLIC ENTERPRISES, AFTER CONS IDERING THE REPORT OF THE AFORESAID PAY REVISION COMMITTEE. THE LD. COUNSEL FOR ASSESSE E SUBMITTED THAT IN VIEW OF THE GOVERNMENT APPOINTING AFORESAID PAY REVISION COMMIT TEE, THE ASSESSEE MADE AN AD HOC PROVISION OF RS. 1,60,00,000 ON ACCOUNT OF ANTI CIPATED PAY REVISION IN FY 2006-07 (AY 2007-08) ITSELF, ALTHOUGH THE FINAL DECISION RE GARDING PAY REVISION WAS TAKEN IN FY 2008-09 (AY 2009-10), VIDE THE AFORESAID OFFICE MEM ORANDUM DATED 26.11.2008. THE LD. COUNSEL FOR ASSESSEE ALSO PLACED RELIANCE ON GAIL INDIA LTD. V. CIT [2016] 69 TAXMANN.COM 50 (DELHI TRIB.)/[2015] 42 ITR(T) 265 (DELHI TRIB.); CIT V. KERALA STATE FINANCIAL ENTERPRISES LTD. [2009] 178 TAXMANN 449 (KERALA)/[2008] 219 CTR 147 (KERALA) AND BHARAT EARTH MOVERS V. CIT [2000] 112 TAXMAN 61 (SC)/[2000] 245 ITR 428 (SC)/[2000] 162 CTR 325 (SC). THE LD. COUNSEL F OR ASSESSEE ALSO SUBMITTED THAT IF THIS CLAIM IS NOT ALLOWED IN THIS YEAR, IT WILL CAU SE HARDSHIP TO THE ASSESSEE BECAUSE THE AFORESAID CLAIM OF RS. 1,60,00,000 TOWARDS AD HOC P ROVISION ON ACCOUNT OF PAY REVISION HAS NOT BEEN CLAIMED BY THE ASSESSEE IN THE SUBSEQU ENT YEARS. ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 13 OF 39 (2.3) THE LD. CIT (DR) APPEARING FOR REVENUE STRONGLY RE LIED ON THE ASSESSMENT ORDER AS WELL AS THE IMPUGNED ORDER OF THE LD. CIT(A). (3) WE HAVE HEARD BOTH SIDES PATIENTLY. WE HAVE ALSO P ERUSED THE MATERIALS ON RECORD CAREFULLY. WE HAVE CONSIDERED THE JUDICIAL P RECEDENTS BROUGHT TO OUR NOTICE AT THE TIME OF HEARING BEFORE US AND THE JUDICIAL PREC EDENTS REFERRED TO IN THE MATERIALS ON OUR RECORDS. AS FAR AS THE PRECEDENT IN THE CASE OF GAIL INDIA LTD. V. CIT (SUPRA) IS CONCERNED, WE NOTICED THAT THIS WAS AN ORDER IN THE CONTEXT OF WHETHER THE ASSUMPTION OF JURISDICTION BY THE COMMISSIONER OF INCOME TAX U /S 263 OF I.T. ACT WAS PROPER. IT WAS NOT A CASE ON THE MERITS OF THE ADDITION MADE B Y THE AO, AND INSTEAD ON WHETHER THE ASSUMPTION OF JURISDICTION BY THE COMMISSIONER OF INCOME TAX U/S 263 OF I.T. ACT WAS PROPER. MOREOVER, THE CASE OF GAIL INDIA LTD. V. CIT (SUPRA) IS DISTINGUISHABLE ON FACTS. IN THE CASE OF GAIL INDIA LTD. V. CIT (SUPRA) , WHICH PERTAINED TO FY 1998-99 (AY 1999-2000) A COMMITTEE WAS CONSTITUTED FOR HOLDING DISCUSSIONS WITH THE REPRESENTATIVES OF EMPLOYEES FOR FORMULATING AN APPR OACH OF THE BOARD OF DIRECTORS, TOWARDS THE PENDING PAY REVISION W.E.F. 1.1.1997. T HE DEPARTMENT OF PUBLIC ENTERPRISES ISSUED AN OFFICE MEMO ON 14.1.1999, AUTHORIZING THE PUBLIC SECTOR UNDERTAKING TO START WAGE REVISION NEGOTIATIONS WITH THE WORKERS. IT WAS THERE AFTER ON 17.8.1999, THAT THE ANNUAL ACCOUNTS OF THE COMPANY WERE CERTIFIED BY TH E DIRECTORS, WHEREIN A PROVISION FOR THE ABOVE PAY REVISION LIABILITY, WAS MADE IN THE A CCOUNTS. THOUGH THE DATE OF SIGNING OF THE M.O.U. I.E. 24.09.2000, WHICH IS DONE AFTER THE APPROVAL OF THE DEPARTMENT OF PUBLIC ENTERPRISES, THE NEGOTIATIONS WERE COMPLETED DURING THE YEAR AND THE LIABILITY ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 14 OF 39 WAS KNOWN AS LIABILITY ACCRUED FROM THE EFFECTIVE D ATE OF COMMENCEMENT. IT IS ALSO TO BE NOTED THAT THE PROVISION FOR SALARY WAS NOT A CO NTINGENT LIABILITY. IT WAS IN RESPECT OF THE OUTCOME OF THE DECISION OF THE DPE. THUS THE PRO VISION WAS MADE BY THE ASSESSEE AFTER THE NEGOTIATIONS WERE COMPLETED DURING THE YEA R AND THE LIABILITY WAS KNOWN. HOWEVER, IN THE CASE BEFORE US, THE PAY REVISION CO MMITTEE HAD NOT COMPLETED ITS DELIBERATIONS BEFORE THE END OF THE FY 2006-07 AND W AS YET TO SUBMIT ITS REPORT AT THE TIME WHEN THE FY 2006-07 CAME TO AN END. IN VIEW OF THE FOREGOING, THE CASE OF GAIL INDIA LTD. V. CIT (SUPRA) DOES NOT ADVANCE THE CASE OF THE ASSESSEE; AND, IN STEAD, IT GOES AGAINST THE ASSESSEE. NOW, WE COME TO THE CASE OF BHARAT EARTH MOVERS V. CIT (SUPRA). IN THIS CASE, THE HONBLE SUPREME COURT, AFTER CON SIDERING METAL BOX CO. OF INDIA LTD. V. THEIR WORKMEN[1969] 73 ITR 53 (SC) AND CALCUTTA CO. LTD. V. CIT[1959] 37 ITR 1 (SC) STATED, AT PARAGRAPH 4 OF THE ORDER, THE WELL SETT LED LAW IN THESE WORDS: THE LAW IS SETTLED: IF A BUSINESS LIABILITY HAS DE FINITELY ARISEN IN THE ACCOUNTING YEAR, THE DEDUCTION SHOULD BE ALLOWED ALTHOUGH THE LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. WHAT SHOULD BE CERTAIN IS THE INCURRING OF THE LIABILITY . IT SHOULD ALSO BE CAPABLE OF BEING ESTIMATED WITH R EASONABLE CERTAINTY THOUGH THE ACTUAL QUANTIFICATION MAY NOT BE POSSIB LE. IF THESE REQUIREMENTS ARE SATISFIED, THE LIABILITY IS NOT A CONTINGENT ON E. THE LIABILITY IS IN PRAESENTI THOUGH IT WILL BE DISCHARGED AT A FUTURE DATE. IT DOES NOT MA KE ANY DIFFERENCE IF THE FUTURE DATE ON WHICH THE LIABILITY SHALL HAVE TO BE DISCHARGED IS NOT CERTAIN. THUS, THE QUESTION TO BE DECIDED IS WHETHER ANY PRESENT LIABILITY HAS ACC RUED AGAINST THE ASSESSEE DURING THE RELEVANT FY I.E. IN 2006-07. IN THIS CONTEXT, FOR A FULLER UNDERSTANDING, IT IS USEFUL TO REFER TO THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF INDIAN MOLASSES CO. ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 15 OF 39 PVT. LTD. V/S CIT 37 ITR 66 (SC) IN WHICH IT WAS HELD: INCOME TAX LAW MAKES A DISTINCTION BETWEEN THE ACTUAL LIABILITY IN PRAESEN TI AND A LIABILITY DE FUTURO WHICH FOR THE TIME BEING, IS ONLY CONTINGENT. THE F ORMER IS DEDUCTION, BUT NOT THE LATER. A LIABILITY, NOT ACTUALLY PRESENT BU T ONLY CONTINGENT CANNOT BEAR THE CHARACTER OF EXPENSE TILL THE LIABILITY BECOMES REAL. (EMPHASIS ADDED BY US). SIMILAR VIEW WAS TAKEN IN INDIAN SMELTING AND REFINING CO. LTD. V/S CIT 248 ITR 4 (SC); STANDARD MILLS V/S CIT 229 ITR 366 (BOM BAY) AND CIT V/S MORARJI GOCULDAS 243 ITR 37 (BOMBAY). THE DECISIONS IN STANDARD MILLS V/S CIT (SUPRA) AND CIT V/S MORARJI GOCULDAS (SUPRA) WERE DELIVERED AFTER DUE CONSIDERATION OF KEDARNATH JUTE MANUFACTURING CO. LTD. V/S CIT [1971 ] 82 ITR 363 (SC) AND OTHER JUDICIAL PRECEDENTS. (3.1) IN THE FACTS OF THE CASE BEFORE US, WE HAVE ALREAD Y NOTICED THAT THAT THE PAY REVISION COMMITTEE HAD NOT COMPLETED ITS DELIBERATI ONS BEFORE THE END OF THE FY 2006- 07 AND WAS YET TO SUBMIT ITS REPORT AT THE TIME WHE N THE FY 2006-07 CAME TO AN END; AND FURTHERMORE, THAT THE PAY REVISION WAS FINALLY IMPLEMENTED IN PURSUANCE OF AFORESAID OFFICE MEMORANDUM DATED 26.11.2008 IN NO. 2(70)/08-DPE(WC) OF MINISTRY OF HEAVY INDUSTRIES & PUBLIC ENTERPRISES. UNDER THESE F ACTS AND CIRCUMSTANCES, WE CONCLUDE THAT THE LIABILITY FOR RS. 1,60,00,000 DED UCTION FOR WHICH WAS CLAIMED BY THE ASSESSEE ON ACCOUNT OF AD HOC PROVISION FOR PAY REV ISION, HAD NOT ACCRUED DURING THE RELEVANT FY I.E. 2006-07 (AY 2007-08). MERELY BECAU SE PAY REVISION COMMITTEE WAS CONSTITUTED DURING THE YEAR, IT CANNOT BE SAID THAT LIABILITY TOWARDS PAY REVISION HAD ACCRUED DURING THE YEAR, WHEN WE CONSIDER THE FACTS THAT THE PAY REVISION COMMITTEE ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 16 OF 39 HAD NOT COMPLETED ITS DELIBERATIONS BEFORE THE END OF THE FY 2006-07 AND WAS YET TO SUBMIT ITS REPORT AT THE TIME WHEN THE FY 2006-07 C AME TO AN END; AND FURTHERMORE, THAT THE PAY REVISION WAS FINALLY IMPLEMENTED IN PU RSUANCE OF AFORESAID OFFICE MEMORANDUM DATED 26.11.2008 IN NO.2(70)/08-DPE(WC) O F MINISTRY OF HEAVY INDUSTRIES & PUBLIC ENTERPRISES. DURING FY 2006-07 ( AY 2007-08), THERE WAS NEITHER ANY STATUTORY LIABILITY NOR ANY LEGALLY ENFORCEABLE LIA BILITY AGAINST THE ASSESSEE IN RESPECT OF THE ASSESSEES CLAIM FOR RS. 1,60,00,000 DEDUCTION FOR WHICH WAS CLAIMED BY THE ASSESSEE ON ACCOUNT OF AD HOC PROVISION FOR PAY REV ISION. IN FACT, THERE WAS NO SUCH LIABILITY AT ALL. EVEN IF THERE WAS A LIABILITY, IT WAS PURELY A CONTINGENT LIABILITY WHICH IS NOT DEDUCTIBLE FOR INCOME TAX PURPOSES. (3.2) WE HAVE GIVEN ANXIOUS CONSIDERATION TO THE SUBMISS ION MADE BY THE LD. AR OF THE ASSESSEE THAT IF THIS CLAIM IS NOT ALLOWED IN T HIS YEAR, IT WILL CAUSE HARDSHIP TO THE ASSESSEE BECAUSE THE AFORESAID CLAIM OF RS. 1,60,00 ,000 TOWARDS AD HOC PROVISION ON ACCOUNT OF PAY REVISION HAS NOT BEEN CLAIMED BY THE ASSESSEE IN THE SUBSEQUENT YEARS. HOWEVER, IN VIEW OF KIKABHAI PREMCHAND V/S CIT 24 ITR 506 (SC), ITO V/S MURLIDHAR BHAGWAN DAS [1964] 52 ITR 335 (SC), CIT V /S BRITISH PAINTS INDIA LTD. 188 ITR 44 (SC) AND CIT V/S BASANT RAI TAKHT SINGH 1 ITR 197 (SC) , IT IS WELL SETTLED THAT EACH YEAR IS SEPARATE AND SELF-CO NTAINED PERIOD, INCOME TAX IS ANNUAL IN ITS STRUCTURE AND ORGANIZATION. THUS, EACH PREVIOUS YEAR IS A DISTINCT UNIT OF TIME FOR THE PURPOSES OF ASSESSMENT. THE PROFITS MA DE; AND THE LIABILITIES OR LOSSES MADE BEFORE OR AFTER THE RELEVANT PREVIOUS Y EAR ARE IMMATERIAL IN ASSESSING INCOME OF A PARTICULAR YEAR; UNLESS IN AC CORDANCE WITH PROVISO TO ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 17 OF 39 SECTION 4(1) OF I.T. ACT, THERE IS STATUTORY PROVIS ION TO THE CONTRARY. MOREOVER, IT WAS HELD IN CIT V/S KASTURI 237 ITR 24(SC); FED OF APCCI V/S ST ATE OF AP 247 ITR 36(SC); CIT V/S TRIVEDI 183 ITR 420; GREATW AY V/S CIT 199 ITR 391; BM PARMAR V/S CIT 235 ITR 679; MODIPON V/S CIT 247 ITR 40; CIT V/S RAJAN 252 ITR 126; CWT V/S TULSI DASS 256 ITR 73; VIVEK J AIN V/S ACIT 337 ITR 74 THAT THE COURTS OR THE TRIBUNAL CANNOT EXTEND RELIEF WHE N THE LEGISLATIVE INTENT IS OTHERWISE. IT WAS HELD IN TARULATA SHYAM V/S CIT (1977) 108 ITR 345, 357 (SC) THAT ONCE IT IS SHOWN THAT THE CASE OF THE ASSESSEE COMES WITHIN THE LETTER OF THE LAW, HE MUST BE TAXED, HOWEVER, GREAT THE HARDS HIP MAY APPEAR TO THE JUDICIAL MIND. MOREOVER, IT WAS HELD IN STATE BANK OF TRAVANCORE V/S CIT (1986) 158 ITR 102 (SC) THAT CONSIDERATIONS OF HARDSHIP, INJUSTICE OR ANOM ALIES DO NOT PLAY ANY USEFUL ROLE IN CONSTRUING TAXING STATUTES UNLESS THERE BE SOME REAL AMBIGUITY. ALSO, THE OBSERVATION THAT IN A TAXING ACT ONE HAS TO LOOK MERELY AT WHAT IS CLEARLY SAID. THERE IS NO ROOM FOR ANY INTENDMENT. THERE IS NO EQ UITY ABOUT A TAX. THERE IS NO PRESUMPTION AS TO TAX. NOTHING IS TO BE READ IN, NOTHING IS TO BE IMPLIED. WAS APPROVED BY HONBLE SUPREME COURT IN CIT V/S AJAX PRODUCTS LTD. (1965) 55 ITR 741, 747 (SC) AND CIT V/S SHAHZADA NAND & SONS (1966) 60 ITR 392, 400 (SC) . IN VIEW OF THE FOREGOING, THE CONTENTION OF THE AS SESSEE; THAT IF THIS CLAIM IS NOT ALLOWED IN THIS YEAR, IT WILL CAUSE HARDSHIP TO THE ASSESSEE BECAUSE THE AFORESAID CLAIM OF RS. 1,60,00,000 TOWARDS AD HOC PROVISION O N ACCOUNT OF PAY REVISION HAS NOT BEEN CLAIMED BY THE ASSESSEE IN THE SUBSEQUENT YEAR S; DOES NOT MERIT ANY FAVOURABLE CONSIDERATION. A CLAIM WRONGLY MADE BY AN ASSESSEE IN AN EARLIER Y EAR CANNOT BE ALLOWED IN THAT YEAR, MERELY BECAUSE THE ASSESSE E DID NOT MAKE THE CLAIM ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 18 OF 39 CORRECTLY IN A SUBSEQUENT YEAR . DURING THE PENDENCY OF A DISPUTE AS TO THE YEAR IN WHICH A CLAIM OF THE ASSESSEE IS TO BE ALLO WED; A PRUDENT ASSESSEE CAN MAKE THE CLAIM IN OTHER YEAR(S), ON PROTECTIVE BASIS, SUBJECT TO FINAL OUTCOME OF SUCH A DISPUTE, BY EXPLAINING SUCH A PRO TECTIVE CLAIM IN OTHER YEAR(S) . THE ASSESSEE, HAVING FAILED TO MAKE PROTECTIVE CLAI M IN SUBSEQUENT YEAR(S) IN WHICH IT WAS LAWFULLY ALLOWABLE, CANNOT FORCE THE CLAIM IN AN EARLIER YEAR IN WHICH IT WAS NOT LAWFULLY ALLOWABLE. HOWEVE R, THE ASSESSEE IS FREE TO EXERCISE ITS LEGAL OPTIONS IN RESPECT OF THE SUBSEQ UENT YEAR(S) IN WHICH THE CLAIM WAS LAWFULLY ALLOWABLE; SUCH AS U/S 264 OF I. T. ACT WITH PARTICULAR REFERENCE TO PROVISO TO SECTION 264(3) OF I.T. ACT. AS THE PRESENT APPEAL BEFORE US PERTAINS TO AY 2007-08; BY WAY OF ABUNDANT CAUTION, WE CLARIFY, HOWEVER, THAT WE PRESENTLY DECLINE TO GIVE ANY DIRECTIONS TO REVENUE FOR ANY SUBSEQUENT YEAR ; AND THAT ALL QUESTIONS OF LAW, FACT, AND MIXED QU ESTIONS ARE LEFT OPEN IN CASE THE ASSESSEE EXERCISES. (3.3) THEREFORE, IN THE FACTS AND CIRCUMSTANCES OF THIS C ASE, AS DISCUSSED EARLIER; AND RESPECTFULLY FOLLOWING BHARAT EARTH MOVERS V. CIT (SUPRA), INDIAN MOLASSES CO. PVT. LTD. V/S CIT (SUPRA), INDIAN SMELTING AND REFI NING CO. LTD. V/S CIT (SUPRA), STANDARD MILLS V/S CIT (SUPRA) AND CIT V/S MORARJI GOCULDAS (SUPRA) ; AND MOREOVER, IN VIEW OF THE FOREGOING DISCUSSION, WE DISMISS THE FIRST GROUND OF APPEAL FILED BY THE ASSESSEE (IN ITA NO. 5705/DEL/2014) AND CONFIRM THE IMPUGNED ORDER OF THE LD. CIT(A) ON THIS ISSUE, SUS TAINING THE DISALLOWANCE OF RS. 1,60,00,000 ON ACCOUNT OF AD HOC PROVISION FOR PAY REVISION. ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 19 OF 39 (4) THE SECOND GROUND OF APPEAL, IN APPEAL FILED BY TH E ASSESSEE IN ITA NO. 5705/DEL/2014 IS RELATED TO THE ADDITION MADE BY TH E AO, AMOUNTING TO RS. 1,28,00,000 ON ACCOUNT OF DENIAL OF CHANGE IN ACCOUNTING POLICY . THE RELEVANT PORTION OF THE ASSESSMENT ORDER IS REPRODUCED AS UNDER: UPTO THE CLOSE OF THE ACCOUNTING YEAR I.E. 31.3.20 07, THE POLICY OF ACCOUNTING THE APPLICATION FEES, FRONT END FEES, ADMINISTRATIV E FEES AND PROCESSING FEES WAS BEING ACCOUNTED FOR ON ACCRUAL BASIS. BUT IN TH E REVISED POLICY SUCH RECEIPTS HAVE BEEN PROPOSED AND APPROVED TO BE ACCOUNTED FOR ON RECEIPT BASIS. THIS HAS THE EFFECT OF LOWERING THE PROFIT BY RS.1.28 CRORES . EVEN AT PAGE 8 OF THE SAID ACCOUNTING POLICY NOTE IT IS MENTIONED THAT THE S TATUTORY AUDITORS HAVE BEEN QUALIFYING THIS POLICY IN THEIR AUDIT REPORT STATIN G THAT THIS ACCOUNTING POLICY IS NOT IN COMPLIANCE OF ACCOUNTING STANDARD-9 ON REVEN UE RECOGNITION ISSUED BY ICAI. MOREOVER, THE CHANGES HAVE BEEN MADE AFTER TH E CLOSING OF THE ACCOUNTING YEAR, WHICH WERE APPROVED IN THE BOARD/COD MEETING HELD ON 27.9.2007. HENCE, THE AMOUNT OF RS.1,28,00,000/- IS ADDED TO THE INCO ME OF THE ASSESSEE. (4.1) THE ASSESSEE APPEALED BEFORE THE LD. CIT(A) AGAINST THE AFORESAID ADDITION. THE LD. CIT(A), IN IMPUGNED ORDER DATED 28.8.2014 DISMI SSED ASSESSEES APPEAL ON THIS ISSUE. THE RELEVANT PORTION OF THE IMPUGNED ORDER O F THE LD. CIT(A) IS AS UNDER: REGARDING THE GROUND NO.2 OF THE APPEAL RELATING T O DISALLOWANCE OF RS.1.28 CRORES ON ACCOUNT OF UNDER-STATEMENT OF PROFIT DUE TO CHANGE IN ACCOUNTING POLICY OF REVENUE RECOGNITION IN RESPECT OF PROCESS ING FEES OF LOANS ETC., I FIND THAT THE APPELLANT WAS REGULARLY FOLLOWING THE ACCO UNTING PRACTICE UPTO 31.03.2007 BY WHICH SUCH INCOMES WERE ACCOUNTED FOR ON ACCRUAL BASIS. SUBSEQUENTLY, IN VIEW OF ITS BOARD'S DECISION IN TH E MEETING DATED 27.09.2007, THE APPELLANT COMPANY REVISED ITS ACCOUNTS IN THE L IGHT OF THE ADVICE FROM THE STATUTORY AUDITORS AND THEREBY CHANGED THE ACCOUNTI NG POLICY AND RECOGNIZED THE ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 20 OF 39 REVENUE IN RESPECT THEREOF ON RECEIPT BASIS. I FIND THAT THE CAG AUDIT PARTY HAD RAISED THE OBSERVATION THAT ACCOUNTING OF SUCH RECE IPTS AT THE TIME OF SIGNING OF LOAN AGREEMENT WAS NOT IN CONFORMITY WITH THE ACCOU NTING STANDARD 9 TO WHICH THE APPELLANT COMPANY HAD ASSURED VIDE LETTER DATED 06.11.2006 THAT THE ACCOUNTING POLICY SHALL BE REVIEWED IN F.Y.2006-07. SUBSEQUENTLY, IN THE BOARD MEETING OF THE APPELLANT COMPANY OF SEPTEMBER, 2007 , THE FOLLOWING RESOLUTION WAS PASSED: 'RESOLVED THAT THE CHANGES IN ACCOUNTING POLICY FRO M THE YEAR 2006-07 BE AND ARE HEREBY APPROVED AS DETAILED IN THE AGENDA ITEM' THE DETAILED NOTE FOR COMPARING EXISTING POLICY AND THE REVISED POLICY SHOWS THAT THE BOARD OF THE COMPANY TOOK THIS DECISION BY ASSU MING THAT THERE WAS NO FINANCIAL IMPACT AND THERE WAS ONLY CHANGE IN LANGU AGE. HOWEVER, THE VERY BASIS OF THIS DECISION THAT THERE WAS NO FINANCIAL IMPACT WAS INCORRECT, AS THE PROPOSED CHANGE HAD RESULTED IN REDUCTION IN THE TAXABLE PRO FIT UNDER THE INCOME TAX ACT, 1961. FURTHER, AOS OBSERVATION THAT THE DECISION W AS TAKEN ONLY AFTER THE F.Y. IS OVER WAS ALSO NOTE-WORTHY, EVEN THOUGH SUCH DECISIO N WAS TAKEN WITH RETROSPECTIVE EFFECT. EVIDENTLY, THE APPELLANT IS A COMPANY INCORPORATED U NDER COMPANIES ACT 1956. AS PER ACCOUNTING STANDARDS, IT FOLLOWS MERCANTILE SYSTEM OF ACCOUNTING. THEREFORE, EVEN THOUGH THE COMPANY MAY HAVE CHANGED THE ACCOUNTING POLICY, WHICH AS MENTIONED WAS ON A FAULTY PREMISE THAT IT DID NOT HAVE FINANCIAL IMPACT, IN LINE WITH THE ACCOUNTING STANDARDS AS PER SECTIO N 145 A OF THE ACT, IT COULD HAVE ADDED BACK THE AMOUNT OF RS.1.28 CRORES ON ACC OUNT OF SUCH RECEIPTS IN THE COMPUTATION OF INCOME. THIS WOULD HAVE ENSURED COMP LIANCE WITH THE CAG OBJECTIONS AS ALSO COMPLIANCE WITH THE PROVISIONS O F THE ACT. MOREOVER, THE DECISION OF THE COMPANY'S BOARD CANNOT OVERRIDE THE PROVISIONS OF THE STATUTE. KEEPING IN VIEW THE ABOVE, THE ADDITION MADE ON THI S GROUND IS UPHELD AND THIS GROUND IS ACCORDINGLY DISMISSED. ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 21 OF 39 (4.1.1) THE ASSESSEE IS NOW IN APPEAL AGAINST THE AFORESAI D ORDER DATED 28.8.2014 OF THE LD. CIT(A). AT THE TIME OF HEARING BEFORE US, T HE LD. AR OF THE ASSESSEE SUBMITTED THAT THE CHANGE IN THE ACCOUNTING POLICY WAS MADE I N ORDER TO COMPLY WITH OBJECTION/OBSERVATION OF THE AUDIT PARTY OF COMPTRO LLER & AUDITOR GENERAL. THE LD. CIT (DR) RELIED ON THE ORDERS OF THE AO AND THE LD. CIT (A). (4.2) THE POSITION IN LAW IS UNAMBIGUOUS. U/S 145(1) OF I.T. ACT, IT IS PROVIDED THAT INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION OR INCOME FROM OTHER SOURCES SHALL, SUBJECT TO THE P ROVISIONS OF SUB-SECTION (2), BE COMPUTED IN ACCORDANCE WITH EITHER CASH OR MERCANTI LE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. THE ASSESSEE IS NOT PERMITTED TO FOLLOW CASH SYSTE M OF ACCOUNTING FOR SOME OF THE ITEMS WHILE FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING FOR REST OF THE ITEMS IN COMPUTATION OF INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSI ON OR INCOME FROM OTHER SOURCES AS THE MIXED SYSTEM OF ACCOUNTING HAS LOST STATUTORY MANDATE W.E.F. AY 1989-90 IN VIEW OF THE AMENDMENT TO SECTION 145 OF I.T. ACT. THUS, THE ASSESSEE WAS IN CLEAR ERROR OF LAW IN CHANGING THE METHOD OF ACCOUNTING TO SELECTIVELY ADOPT CASH SYSTEM OF ACCOUNTING FOR CER TAIN ITEMS, WHILE FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING FOR REST OF THE ITE MS . EVEN IF THE ACCOUNTING POLICY WAS CHANGED IN PURSUANCE OF OBSERVATION OF A UDIT PARTY OF COMPTROLLER & AUDITOR GENERAL (CAG FOR SHORT), EVEN THEN, STA TUTORY PROVISIONS UNDER I.T. ACT WILL PREVAIL OVER ANY OBSERVATION/OBJECTIO N/REMARK OF AUDIT PARTY OF CAG. MOREOVER, DESPITE HAVING CHANGED THE ACCOUNTING PO LICY, IN PURSUANCE OF ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 22 OF 39 OBSERVATION OF AUDIT PARTY & CAG, THE ASSESSEE WOUL D HAVE ADDED BACK THE AFORESAID AMOUNT OF RS. 1.28 CRORES IN THE COMPUTATION OF TOT AL INCOME FOR INCOME TAX PURPOSES. THAT WOULD HAVE ENSURED COMPLIANCE WITH S TATUTORY PROVISIONS UNDER I.T. ACT, AS WELL AS WITH OBSERVATION OF AUDIT PARTY & CAG. T HE ASSESSEE IS A COMPANY INCORPORATED UNDER THE COMPANIES ACT, 1956 AND FOLL OWS MERCANTILE SYSTEM OF ACCOUNTING. AN ASSESSEE COMPANY REGISTERED UNDER THE COMPANIES ACT, 1956 IS REQUIRED TO MAINTAIN ACCOUNTS IN ACCORDANCE WITH PR OVISIONS OF THE COMPANIES ACT, 1956. HOWEVER, THE PROFITS COMPUTED IN THIS MANNER NEED NOT NECESSARILY BE THE SAME AS TOTAL INCOME FOR THE PURPOSES OF I.T. ACT. THE COMPUTATION OF TOTAL INCOME FOR THE PURPOSES OF INC OME TAX ACT REQUIRES GIVING EFFECT TO STATUTORY PROVISIONS UNDER I.T. AC T, BY MAKING NECESSARY ADJUSTMENTS/MODIFICATIONS/ALTERATIONS/VARIATIONS TO PROFITS COMPOUNDED IN ACCORDANCE WITH PROVISIONS OF THE COMPANIES ACT, 19 56. IN VIEW OF THIS, THE ASSESSEE WAS IN CLEAR ERROR OF LAW BY NOT ADDING BA CK THE AFORESAID AMOUNT OF RS. 1.28 CRORES IN THE COMPUTATION OF TOTAL INCOME FOR THE P URPOSES OF I.T. ACT. THIS ERROR OF LAW IS FURTHER AGGRAVATED BY THE ERROR OF FACT, IN THAT THE CHANGE OF ACCOUNTING POLICY WAS BASED ON FAULTY PREMISE (I.E. ERROR OF FACT) THAT T HERE WAS NO FINANCIAL IMPACT. THE FACT IS, THERE WAS FINANCIAL IMPACT TO THE EXTENT OF AFO RESAID AMOUNT OF RS. 1.28 CRORES. IN VIEW OF THE FOREGOING DISCUSSION AND UNAMBIGUOUS PO SITION IN LAW; AND THE CLEAR ERRORS OF LAW AND FACT ON THE PART OF THE ASSESSEE, WE UPH OLD THE ADDITION OF AFORESAID AMOUNT OF RS. 1.28 CRORES. THE LD. AR OF THE ASSESSEE FAIL ED TO BRING TO OUR NOTICE ANY SPECIFIC PROVISIONS OF LAW OR ANY JUDICIAL PRECEDENTS TO SUP PORT THIS GROUND OF APPEAL. WE FIND THAT THE ORDER OF THE LD. CIT(A) IS WELL REASONED A ND IN ACCORDANCE WITH LAW IN THE FACTS ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 23 OF 39 AND CIRCUMSTANCES OF THIS CASE. THE ASSESSEE HAS FA ILED TO MAKE ANY CASE FOR INFERENCE WITH THE IMPUGNED ORDER OF THE LD. CIT(A) ON THIS I SSUE. THEREFORE, THE SECOND GROUND OF APPEAL IN THE APPEAL FILED BY THE ASSESSEE IN TH E ITA NO. 5705/DEL/2014 IS DISMISSED AND THE IMPUGNED ORDER OF THE LD. CIT(A) ON THIS IS SUE, SUSTAINING THE AFORESAID ADDITION OF RS. 1,28,00,000. (5) NOW, WE COME TO THE APPEAL FILED BY REVENUE VIDE I TA NO. 6151/DEL/2014. THE ONLY ISSUE IN THIS APPEAL IS REGARDING THE DISALLOW ANCE MADE BY THE AO U/S 14A OF I.T. ACT READ WITH RULE 8D OF I.T. RULES. THE RELEVANT P ORTIONS FROM THE ORDER OF THE AO AND THE IMPUGNED ORDER OF THE LD. CIT(A) ARE AS UNDER: RELEVANT PORTIONS OF ASSESSMENT ORDER : A) DISALLOWANCE U/S 14A/RULE 8D AFTER PERUSAL OF THE REPLY FILED BY THE ASSESSEE, I T IS NOTICED THAT IN REGARD TO DISALLOWANCE U/S 14A, THE ASSESSEE HAS STATED THAT THE INVESTMENT IN BONDS HAS NOT BEEN TAKEN INTO ACCOUNT WHILE WORKING OUT AVERA GE VALUE OF INVESTMENTS FOR THE PURPOSE OF DISALLOWANCE U/S 14A/RULE8D BECAUSE INTEREST INCOME ON BONDS IS A TAXABLE INCOME AND THE SAME IS ALREADY OFFERED TO TAX PURPOSES I.E. ALREADY FORM THE PART OF TOTAL INCOME OF THE ASSESSEE. HOWE VER, DETAILS OF SUCH BONDS AND INCOME OFFERED ON THE SAME WAS NOT FILED WITH T HE REPLY. ACCORDINGLY, VIDE THIS OFFICE QUESTIONNAIRE/NOTICE U/S 142(1) DATED 6.2.2013 TIE ASSESSEE WAS APPRISED THAT 'VIDE S.NO.2 OF THIS OFF ICE QUESTIONNAIRE DATED 22.11.2012 YOU WERE ASKED TO FILE COMPLETE DETAILS OF EXEMPT INCOME GIVING THE NAME OF THE INVESTMENT AND THE AMOUNT OF EXEMPT INC OME OR TAXABLE INCOME EARNED FROM THE INVESTMENTS IN LONG TERM/SHORT TERM EQUITY OF GIVING THE SAID DETAILS, YOU HAVE SIMPLY STATED THAT INTEREST INCOM E ON BONDS IS TAXABLE INCOME ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 24 OF 39 AND THE SAME IS ALREADY OFFICERED TO TAX PURPOSES I .E. ALREADY FORM THE PART OF TOTAL INCOME OF THE ASSESSEE. HENCE, THE ASSESSEE WAS ASKED TO GIVE COMPLETE DETAILS OF EXEMPT INCOME GIVING NAME OF THE INVESTM ENTS AND THE AMOUNT OF EXEMPT INCOME OR TAXABLE INCOME EARNED FROM THE INV ESTMENTS IN LONG TERM/SHORT TERM EQUITY SHARES OR BONDS. THE ASSESSE E SOUGHT ADJOURNMENT. A FURTHER OPPORTUNITY WAS PROVIDED TO THE ASSESSEE VI DE THIS OFFICE QUESTIONNAIRE DATED 28.2.2013. THE ASSESSEE FILED THE DETAILS IN A TABULAR FORM SH OWING THE INTEREST INCOME OF RS.242,&3,41,868/- ON INVESTMENTS IN BONDS OF 14 ENT ITIES AND TAX FREE J DIVIDEND INCOME OF RS. 1,20,000/- HAS BEEN SHOWN ON INVESTMENTS IN EQUITY SHARES OF TAMILNADU URBAN FINANCE & INF. DEV. CORPO N. LTD. AS REGARDS THE CONTENTION OF THE ASSESSEE THAT NO D ISALLOWANCE IS CALLED FOR AND RULE 8D IS APPLICABLE FROM ASSESSMENT YEAR 2008-09, THE SAME IS NOT ACCEPTABLE BECAUSE OF THE FOLLOWING FACTUAL AND LEGAL POSITION :- A) AS PER BALANCE-SHEET THE TOTAL INVESTMENTS HAVE BEEN SHOWN AT RS.24,50,49,75,000/- (WHICH ALSO INCLUDES INVESTMEN TS OF RS.24,(16,14,50,000/- IN VARIOUS BONDS, INTEREST INCOME FROM WHICH HAS BE EN SHOWN AT RS.2,42,83,41,868/-). B) THE ASSESSEE HAS NOWHERE STATED THAT IT HAS MAI NTAINED SEPARATE ACCOUNTS FOR INVESTMENTS AND FOR OTHER BUSINESS ACT IVITIES CARRIED ON BY THE ASSESSEE. THERE IS COMMON POOL OF FUNDS FOR MAKING INVESTMENTS AND OTHER BUSINESS ACTIVITIES. C) THE CONTENTION OF THE ASSESSEE THAT INVESTMENTS WERE MADE OUT OF ITS OWN SURPLUS FUNDS DEMONSTRATING TIE FIGURES AS PER ANNEXURE-II(A) OF ITS REPLY SHOWING THE DETAILS IN A TABULAR FORM FOR THE YEAR 1989-90 TO 1994-95 AND FOR THE YEAR 2005-06 TO 2007-08. IN THIS TABULAR FORM T HE ASSESSEE HAS ONLY SHOWN THE FIGURES OF INVESTMENTS MADE, OPENING RESERVES, NET PROFIT DURING THE YEAR, INCREASE IN EQUITY AND NET PROFIT AND CORRESPONDING INCREASE IN EQUITY. THE ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 25 OF 39 ASSESSEE HAS NOT TAKEN INTO ACCOUNT THE AMOUNT OF S ECURED AND UNSECURED LOANS RAISED FROM THE VERY BEGINNING (ON WHICH HUGE AMOUN T OF INTEREST IS BEING PAID FROM YEAR TO YEAR)) WHEN THESE INVESTMENTS WERE MAD E. NOR IT HAS GIVEN THE DETAILS OF LOANS AND ADVANCES GIVEN ON YEAR TO YEAR BASIS ON WHICH HUGE INTEREST IS BEING RECEIVED. E) BESIDES, THE INTEREST EXPENDITURE, OTHER EXPENSE S ARE ALSO TO BE CONSIDERED FOR DISALLOWANCE U/S 14A. THE FACT THAT DIVERSIFIED INVESTMENT IN MUTUAL FUND S, BONDS, SHARES HAVE BEEN MADE AND IT CLEARLY SUGGEST THAT CONSIDERABLE TIME, EFFORTS, APPLICATION OF SKILLS, TECHNICAL KNOWLEDGE, EXPERTISE ETC. HAVE GONE TOWAR DS SUCH INVESTMENTS AND THAT THE COMPANY HAS A LOT AT STAKE. A COMPANY CANNOT EARN DIVIDEND WITHOUT ITS EXISTENC E AND MANAGEMENT. INVESTMENT DECISIONS ARE GENERALLY COMPLICATED REQU IRING DAILY ANALYSIS OF MARKET TRENDS, RESEARCH AND ANALYSIS. DECISION RELATE TO A CQUISITION, HOLDING PERIOD AND REDEMPTION OF INVESTMENT AT THE OPPORTUNE TIME. THE SE DECISIONS ARE GENERALLY TAKEN IN THE MEETINGS OF BOARD OF DIRECTORS, FOR WH ICH ADMINISTRATIVE EXPENSES AND OTHER EXPENSES ARE INCURRED. AS HELD IN SOUTHER N PETROCHEMICALS INDS. VS. DCIT (2005) 3 SOT 157 (CHENNAI), IT IS NOT CORRECT TO SAY THAT DIVIDEND INCOME CAN BE EARNED BY INCURRING NO OR NOMINAL EXPENDITUR E. AFTER COMPREHENSIVE CONSIDERATION OF ALL THE RELEVANT ASPECTS OF THE CA SE INCLUDING THE PROVISIONS OF LAW, IT WAS HELD IN THE DECISION SUPRA THAT INVESTM ENT DECISION ARE VERY STRATEGIC DECISIONS IN WHICH TO MANAGEMENT IS INVOLVED AND TH EREFORE PROPORTIONATE MANAGEMENT EXPENSES ARE REQUIRED TO BE DEDUCTED WHI LE COMPUTING EXEMPT INCOME FROM DIVIDEND. IN HARISH KRISHNAKANT BHATT V S. ITO (2004) 91 ITD 311 (AHD.) THE TRIBUNAL HELD THAT DIVIDEND BEING EXEMPT U/S 10(34), INTEREST ON CAPITAL BORROWED FOR ACQUISITION OF RELEVANT SHARE YIELDING SUCH DIVIDEND CANNOT BE ALLOWED DEDUCTION BY OPERATION OF SECTION 14A OF THE ACT. IN DCIT VS. S.G. INVESTMENT AND INDS. LTD. (2004) 89 ITD 44 (CAL.), THE TRIBUNAL SAID THAT IN VIEW ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 26 OF 39 OF SECTION 14|A OF THE ACT, PRO-RATA EXPENSES ON AC COUNT OF INTEREST RELATABLE TO INVESTMENT IN SHARE FOR EARNING EXEMPT INCOME FROM DIVIDEND ARE TO BE DISALLOWED AGAINST TAXABLE INCOME AND ONLY THE NET DIVIDEND INCOME IS TO BE ALLOWED EXEMPTION AFTER DEDUCTING THE EXPENSES. SEC ONDLY IT WAS HELD THAT THE EXPRESSION 'EXPENSES INCURRED BY THE ASSESSEE IN RE LATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME IN SECTION 14A HAS T O BE GIVEN A WIDER MEANING AND WOULD INCLUDE BOTH DIRECT AND INDIRECT RELATION SHIP BETWEEN EXPENDITURE AND EXEMPT INCOME. FOLLOWING THE DECISION IN CIT VS. UN ITED GENERAL TRUST LTD. 200 ITR 488 (SC), IT WAS HELD IN THE CASE OF S .G. INVE STMENT AND INDS. LTD. (SUPRA) THAT INTEREST PAID BY THE ASSESSEE BEING ATTRIBUTAB LE TO THE MONEY BORROWED FOR THE PURPOSE OF MAKING INVESTMENT WHICH YIELDED THE DIVIDEND INCOME AND OTHER EXPENSES INCURRED IN CONNECTION WITH OR FOR MAKING OR EARNING THE DIVIDEND INCOME CAN BE REGARDED AS EXPENDITURE IN RELATION T O DIVIDEND INCOME. IN EVER PLUS SECURITIES AND FINANCE LTD. VS. DCIT (2006) 10 1 ITD 151 (DELHI), IT WAS HELD THAT MERELY BECAUSE THE ASSESSEE DID NOT EARN DIVID END OUT OF INVESTMENT IN CERTAIN SHARES DOES NOT IMPLY THAT THE PROVISIONS O F SECTION 14A WOULD NOT APPLY TO THAT EXTENT. IN ACIT VS. PREMIER CAPITAL TRUST ( INDIA) LTD. (2004) 83 TTJ (MUM), IT WAS HELD THAT THE A.O. WAS JUSTIFIED IN A TTRIBUTING A PART OF THE FINANCIAL AND ADMINISTRATIVE EXPENDITURE AND EXPENDITURE INCU RRED IN RELATION TO EXEMPT INCOME AND DISALLOWING THE SAME IN VIEW OF THE PROV ISIONS OF SECTION 14A OF THE ACT. THAT WITHOUT PREJUDICE, ARGUMENT OF THE ASSESSEE TH AT IN THE ABSENCE OF MACHINERY SECTION, THE SUBSTANTIVE PROVISIONS OF SE CTION 14A COULD NOT HAVE BEEN INVOKED, IS WITHOUT MERIT. SECTION 14A WAS INSERTED BY THE FINANCE ACT, 2001 W.E.F. 1.4.1962. 1ST PROVISO TO SECTION L4A WAS INS ERTED BY THE FINANCE ACT, 2002 W.E.F. 11.5.2001. HENCE, IT WAS WITHIN THE JURISDIC TION AND TECHNICAL COMPETENCE OF THE A.O. TO REFER TO THE PROVISIONS OF SECTION L 4A AS IT STOOD AT THE RELEVANT TIME AND DISALLOW SUCH EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DID NOT FORM PART OF TOTAL INCOME UNDE R THE ACT. ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 27 OF 39 VARIOUS INVESTMENT DECISIONS, BOTH FOR EARNING TAXA BLE INCOME AS WELL AS TAX-FREE INCOME ARE BEING MADE AT ITS HEAD OFFICE AND THE PE RSONNEL ENGAGED IN FINANCE AND ACCOUNTS DEPARTMENT AND THE MANAGEMENT MUST HAV E TO DEVOTE SOME TIME AND ENERGY ON TAKING DECISION ON WHICH SCHEMES OF M UTUAL FUNDS OR EQUITIES OF WHICH COMPANY ARE TO BE INVESTED IN. THERE ARE VARI OUS MUTUAL FUNDS OPERATING IN THE MARKET AND EACH MUTUAL FUND HOUSE IS RUNNING SEVERAL SCHEMES. OUT OF THE THOUSANDS OF MUTUAL FUNDS SCHEMES BEING OFFERED FOR SALE, IT REALLY TAKE SOME EFFORTS, TIME AND, ENERGY TO MAKE A DUE DILIGE NCE AND THEN SELECT RIGHT SCHEMES WHICH WOULD GIVE REASONABLE RETURN IN FUTUR E. THEREFORE, SOME PORTION OUT OF THE EXPENDITURE INCURRED ON DIRECTORS REMUN ERATION, SENIOR EXECUTIVES SALARIES AND OTHER OVERHEADS COULD DEFINITELY BE AT TRIBUTED TO TEAMING THE TAX FREE INCOME. THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. WA LFORT STOCK BROKERS PVT. LTD. (2010) 326-ITR-L (SC) HAS HELD THAT U/S 14A OF THE ACT ALL RELATABLE EXPENSES CLAIMED U/S 30 TO 37 OF THE I. T. ACT CAN BE SUBJEC TED TO DISALLOWANCE. THE RELEVANT PORTION OF THE SAID JUDGMENT IS REPRODUCED HEREUNDER:- 'THE MANDATE OF SECTION 14A IS CLEAR. IT DESIRES TO CURB THE PRACTICE TO CLAIM DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMP T INCOME AGAINST TAXABLE INCOME..... THE BASIS PRINCIPLE OF TAXATION IS TO T AX THE NET INCOME I.E. GROSS INCOME MINUS THE EXPENDITURE. ON THE SAME ANALOGY T HE EXEMPTION IS ALSO IN RESPECT OF NET INCOME. EXPENSES ALLOWED CAN ONLY BE IN RESPECT OF EARNING OF TAXABLE INCOME. THIS IS THE PURPOSE OF SECTION 14A' (PAGE 15-16) 'THE THEORY OF APPORTIONMENT OF /EXPENDITURE BETWEE N TAXABLE AND NON-TAXABLE INCOME HAS, IN PRINCIPLE, BEEN NOW WIDENED U/S 14A OF THE ACT. READING SECTION 14A IN JUXTAPOSITION WITH SECTION 15 TO 59, IT IS C LEAR THAT THE WORDS 'EXPENDITURE INCURRED' IN SECTION 14A REFERS TO EXPENDITURE ON R ENT, TAXES, SALARIES, INTEREST ETC. IN RESPECT OF WHICH ALLOWANCES ARE PROVIDED FO R (SEE SECTIONS 30 TO 37)'. (PAGE 17) (EMPHASIS MINE) ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 28 OF 39 IN A DETAILED JUDGEMENT, RECENTLY DELIVERED AFTER C ONSIDERING THE AFORESAID JUDGMENT OF HON'BLE SUPREME COURT, THE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCEE MFG. CO. LTD. VS. CIT 328 ITR 81 (BOM) HAS SIMILARLY HELD THAT EVEN PRIOR TO INTRODUCTION OF SECTION 14A(2) A ND (3) OF THE I. T. ACT., THE A.O. IS DUTY BOUND TO ENFORCE THE PROVISIONS OF SEC TION 14A(1) AND FOR THAT PURPOSE, HE MUST ADOPT A REASONABLE BASIS CONSISTEN T WITH ALL THE RELEVANT FACTS AND CIRCUMSTANCES. THE RELEVANT PORTION OF THE SAID JUDGMENT IS EXTRACTED AS UNDER:- 'EVEN PRIOR TO A.Y 2008-09, WHEN RULE 8D WAS NOT APP LICABLE, THE A.O. HAS TO ENFORCE THE PROVISIONS OF SECTION 14A(1). FOR THAT PURPOSE, THE A.O. IS DUTY BOUND TO DETERMINE THE EXPENDITURE WHICH HAS BEEN I NCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. HE MUST ADOPT A REASONABLE BASIS CONSISTENT WITH ALL THE RE LEVANT FACTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTUNITY TO THE AS SESSEE TO PLACE ALL GERMANE MATERIAL ON RECORD.' (PAGE 138) (EMPHASIS MINE) SIMILAR VIEWS HAVE BEEN EXPRESSED RECENTLY BY DELHI HIGH COURT IN THE CASE OF MAXOPP INVESTMENTS LTD. VS. CIT (2011) 247-CTR-162 (DELHI). THE HON'BLE HIGH COURT IN PARA 42 OF ITS ORDER HAS HELD AS UNDER:- '42. THUS, THE FACT THAT WE HAVE HELD THAT SUB-SECT ION (2) & (3) OF SECTION 14A AND RULE 8D WOULD OPERATE PROSPECTIVELY (AND NOT RE TROSPECTIVELY) DOES NOT MEAN THAT THE ASSESSING OFFICER IS NOT TO SATISFY H IMSELF WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE WITH REGARD TO SUCH EXPEN DITURE. .IF HIS IS SATISFIED ON AN OBJECTIVE ANALYSIS AND FOR COGENT REASONS THAT T HE AMOUNT OF SUCH EXPENDITURE AS CLAIMED BY THE ASSESSEE IS NOT CORRE CT, HE IS REQUIRED TO DETERMINE THE AMOUNT OF SUCH EXPENDITURE ON THE BAS IS OF REASONABLE AND ACCEPTABLE METHOD OF APPORTIONMENT. IT WOULD BE APP ROPRIATE TO RECALL THE WORDS OF THE SUPREME COURT IN WALFORT SHARE & STOCK BROKE RS P. LTD (SUPRA) TO THE FALLOWING EFFECT:- ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 29 OF 39 'THE THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON-TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDER SECTION 1 4A.' ALSO DECISION OF HON'BLE SUPREME COURT IN THE CASE OF UNITED GENERAL TRUST PVT. LTD. 200-ITR-488(SC) IS IN FAVOUR OF THE DEPARTMENT . (I) IN LIGHT OF THE ABOVE, THE CONTENTIONS OF THE ASSES SEE IS NOT ACCEPTABLE. ACCORDINGLY DISALLOWANCE UNDER SECTION 14A IS REWOR KED AS FOLLOWS: CLAUSE PARTICULARS AMOUNT (IN RS.) I. EXPENDITURE DIRECTLY RELATED TO EXEMPT INCOME NIL NIL NIL II. DISALLOWANCE OF INTEREST EXPENDITURE A) INTEREST EXPENDITUR E INCURRED DURING THE YEAR 17937819000 B) AVERAGE VALUE OF INVESTMENT INVESTMENT AS ON 31.3.06 24857307000 INVESTMENT AS ON 31.3.07 24504975000 TOTAL 49362282000 ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 30 OF 39 AVERAGE OF INVESTMENT (B) 24681141000 C) AVERAGE OF TOTAL ASSETS ASSETS AS ON 31.3.06 252605756000 CURRENT ASSETS AS ON 31.3.07 245020084000 TOTAL ASSETS 497625840000 AVERAGE VALUE OF TOTAL ASSETS 248812920000 DISALLOWANCE = AXB/CIT(A) 1779352000 1779352000 III. AGGREGATE OF OPENING AND CLOSING VALUE OF INVESTMENT (AVERAGE VALUE OF INVESTMENT 0.5% OF ABOVE AS PER RULE 8D 123405705 123405705 SAY 190,27,57,705 1902757705 (II) IN LIGHT OF THE ABOVE WORDING, AN AMOUNT OF RS . 190,27,57,705/-. IS BEING DISALLOWED AND ADDED BACK TO THE TOTAL INCOME OF TH E ASSESSEE. SINCE AN AMOUNT OF RS. 54,06,554/- HAS ALREADY BEEN CHARGED IN THE ASSESSMENT ORDER, NET ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 31 OF 39 ADDITIONS OF RS. 189,73,51,151/- IS BEING MADE TO T HE ASSESSED INCOME OF THE ASSESSEE. SINCE I AM SATISFIED THAT THE ASSESSEE HAS FILED IN ACCURATE PARTICULARS OF INCOME, PENALTY PROCEEDINGS UNDER SECTION 271 (1)(C) ARE BE ING SEPARATELY INITIATED. (ADDITION OF RS. 189,73,51,151/-) RELEVANT PORTIONS OF THE IMPUGNED ORDER OF LD. CIT( A): 6. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CA SE IN THE LIGHT OF THE SUBMISSION AND THE APPLICABLE LAW IN THIS REGARD. ACCORDINGLY, MY DECISION ON VARIOUS GROUNDS OF APPEAL IS AS UNDER: 6.2 THE GROUND NO.1 OF THE APPEAL IS AGAINST THE AD DITION OF RS.1,89,73,51,151 ON ACCOUNT OF DISALLOWANCE MADE UNDER SECTION 14A. I FIND THAT IN THE ORIGINAL ASSESSMENT ORDER, THE LD. AO HAD EXAMINED THE ISSUE RELATING TO DISALLOWANCE UNDER SECTION 14A AND DID NOT ACCEPT THE PLEA OF TH E APPELLANT BY HOLDING THAT THE PROVISION OF RULE 8D, BEING PROCEDURAL ARE RETR OSPECTIVE IN OPERATION. ACCORDINGLY, BY PASSING A SPEAKING ORDER, HE HAD IN VOKED THE PROVISIONS OF RULE 8D AND THEREBY MADE ADDITION OF RS.54,06,554. THIS ORDER WAS CHALLENGED BY THE APPELLANT BEFORE THE LD. CIT(A)-XXVIII. THE LD. CIT (A)-XXVIII, IN HER ORDER DATED 11.01.2012 PASSED UNDER SECTION 250, HAS HELD THAT THE PROVISIONS OF RULE 8D WERE NOT APPLICABLE TO THE CASE OF THE APPELLANT AND ACCORDINGLY DELETED THE ADDITION MADE UNDER SECTION 14A. IN HOLDING SO, THE LD. CIT(A)-XXVIII HAD ALSO GIVEN THE FINDING THAT THE INVESTMENTS MADE BY THE APPELLANT COMPANY WERE VERY OLD, MADE PRIOR TO F.Y.2005-06 FROM THE OWN FUNDS O F THE APPELLANT COMPANY AND THEREFORE HELD THAT NO EXPENDITURE INCURRED IN THE CURRENT YEAR COULD BE ATTRIBUTED TO MAKING OF SUCH INVESTMENTS. THE LD. C IT(A)-XVIII ALSO HELD THAT THE PROVISIONS OF RULE 8D CANNOT BE AUTOMATICALLY INVOK ED WITHOUT DISSATISFACTION OF THE AO, HAVING REGARD TO ACCOUNTS. ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 32 OF 39 6.2.3 SUBSEQUENTLY, THE LD. CIT-IV OBSERVED THAT TH E CALCULATION MADE BY THE AO UNDER RULE 8D WAS INCORRECT AND THEREFORE, PASSE D ORDER UNDER SECTION 263 DATED 24.02.2012, BY HOLDING AS UNDER: 'ON EXAMINATION OF THE ABOVE, IT APPEARS THAT THE A O HAS NOT INDICATED ANY BASIS FOR ARRIVING AT THE AVERAGE VALUE OF INVESTMENT, IN COME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF TOTAL INCOME, AS APPEARING I N THE BALANCE SHEET OF THE ASSESSEE AS ON THE FIRST DAY AND THE LAST DAY OF TH E PREVIOUS YEAR. ON THE OTHER HAND, THE AR OF THE ASSESSEE COMPANY WHILE ARRIVING AT THE OPENING VALUE OF INVESTMENTS AS WELL AS THE CLOSING VALUE OF INVESTM ENTS HAS TAKEN INTO CONSIDERATION ONLY THE EQUITY SHARE (LONG TERM) BEI NG TRADING INVESTMENT AND ALSO EQUITY SHARE (LONG TERM) BEING JOINT VENTURE. HOWEVER THE INVESTMENTS IN BONDS HAVE NOT BEEN CONSIDERED WHILE ARRIVING AT TH E OPENING AND THE CLOSING VALUE OF INVESTMENTS. THE AO HAS NOT CAUSED ANY INQ UIRIES TO ASCERTAIN AS TO WHETHER EXEMPT INCOME HAS BEEN EARNED BY WAY OF INV ESTMENTS IN LONG TERM EQUITY SHARES OR BONDS AND AS A RESULT, THE AVERAGE VALUE OF INVESTMENTS ARRIVED AT BY THE AO SUFFER FROM IRREGULARITIES RESULTING I N INCORRECT COMPUTATION OF DISALLOWANCE ARRIVED AT UNDER RULE 8D OF SECTION 14 A OF IT ACT, 1961. CONSEQUENTLY, THE ASSESSMENT ORDER TO THIS EFFECT P ASSED BY THE AO HAS BECOME ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENU E AND ACCORDINGLY SUCH ORDER PASSED BY THE AO ON THIS ISSUE IS HEREBY SET-ASIDE FOR RE-EXAMINATION IN ACCORDANCE WITH THE RELEVANT PROVISIONS OF THE ACT AFTER PROVIDING DUE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE COMPANY TO MEET THE ENDS OF JUSTICE.' 6.3 I FIND THAT THE ORDER OF THE CIT-IV DATED 24.02 .2012 IS BASED ON THE UNDERSTANDING THAT APPLICATION OF PROVISIONS OF RUL E 8D FOR MAKING DISALLOWANCE UNDER SECTION 14A ARE SIN QUA NON EVEN FOR THE CURR ENT YEAR AND THE SHORT PURPOSE FOR WHICH REVISION PROCEEDINGS WERE INITIAT ED, WAS TO ADDRESS THE COMPUTATIONAL ERROR THERE UNDER. THE LEGAL POSITION RELATING TO APPLICABILITY OF PROVISIONS OF RULE 8D FOR THE PURPOSE OF MAKING DIS ALLOWANCE UNDER SECTION 14A ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 33 OF 39 IS HOWEVER, WELL- SETTLED NOW. THE HON'BLE MUMBAI H IGH COURT IN THE CASE OF CIT VS GODREJ AND BOYCE MANUFACTURING CO. LTD. VS. DCIT (ITA NO.626 OF 2010) AND THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS MAXOPP INVESTMENT LTD.: 347 ITR 272 HAVE HELD THAT THE PROVISIONS OF RULE 8D AR E NOT APPLICABLE FOR THE A.Y.2007-08 AND EARLIER A.YRS. THESE ORDERS WERE PA SSED ON 13.04.2010 AND 18.11.2011 RESPECTIVELY BEFORE THE ORDER UNDER SECT ION 253 WAS PASSED BY THE LD. CIT-IV. I FIND THAT THE LD. AO, IN THE ORIGINAL ASSESSMENT ORDER DATED 30.12.2009 DISREGARDED THE PLEA OF THE APPELLANT IN THIS REGARD AND INVOKED THE PROVISIONS OF RULE 8D IN AN AUTOMATIC MANNER BY HOL DING THAT RULE 8D WILL HAVE RETROSPECTIVE OPERATION AND ACCORDINGLY COMPUTED TH E DISALLOWANCE UNDER SECTION 14A. THE LD. CIT(A)-XXVIII, WHILE PASSING T HE ORDER UNDER SECTION 250 DATED 11.01.2012 HAD EXAMINED THE ISSUE IN DETAIL A ND HELD THAT FOR EXAMINING THE CORRECTNESS OF THE CLAIM OF THE APPELLANT, THE AO MUST TAKE DUE REGARD TO THE ACCOUNTS AND THE DISALLOWANCE UNDER RULE 8D CAN BE MADE ONLY IF THE AO'S LACK OF SATISFACTION IS BASED ON SUCH EXAMINATION AND NO T IN AN AUTOMATIC MANNER. IN VIEW OF THIS, SHE HELD THAT THE DISALLOWANCE MADE B Y THE AO UNDER RULE 8D WITHOUT EXAMINING THE CLAIM OF THE APPELLANT WAS AR BITRARY AND ACCORDINGLY SHE DELETED THE ADDITION ON THIS GROUND WAS DELETED. TH E IMPUGNED REVISION PROCEEDINGS FOR REVISING THE CALCULATION OF DISALLO WANCE UNDER RULE 8D EMANATED FROM THE ORDER OF CIT-IV UNDER SECTION 263 DATED 24 .02.2012, WHICH IS SUBSEQUENT TO THE PASSING OF THE ORDER BY THE CIT(A )-XXVIII. 6.4 ON CAREFUL CONSIDERATION OF THE FACTS OF THE CA SE AND IN THE LIGHT OF THE HONBLE DELHI HIGH COURT'S DECISION IN THE CASE OF CIT VS MAXOPP INVESTMENT LTD. AND THE HON'BLE MUMBAI HIGH COURT IN THE CASE OF CI T VS GODREJ AND BOYCE MANUFACTURING CO. LTD. VS. DCIT, IT IS WELL SETTLED THAT THE PROVISIONS OF RULE 8D ARE NOT APPLICABLE TO THE A.Y.2007-08 TO WHICH THIS APPEAL RELATES TO. THE LD. CIT(A)- XXVIII BY PASSING A WELL-REASONED ORDER DAT ED 11.01.2012, ON EXAMINATION OF THE FACTS, HELD THAT EVEN IF THE PRO VISIONS OF RULE 8D WERE TO BE APPLICABLE FOR THE CURRENT YEAR, THE AO COULD NOT H AVE INVOKED THE PROVISIONS OF ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 34 OF 39 RULE 8D AUTOMATICALLY, WITHOUT EXAMINING THE CLAIM OF THE APPELLANT, KEEPING IN VIEW THE REQUIREMENTS OF SECTION 14A(2). MOREOVER, AS THE PROVISIONS OF RULE 8D WERE NOT APPLICABLE FOR THE CURRENT YEAR, NO DISALL OWANCE OR REVISION THEREOF COULD HAVE BEEN MADE. ACCORDINGLY, THERE IS NO MERI T IN THE ACTION OF THE AO. 6.5 ON THE FACTS OF THE CASE ALSO, IT IS EVIDENT TH AT ALL INVESTMENTS IN EQUITY SHARES (ON WHICH EXEMPT DIVIDEND INCOME COULD BE EA RNED) WERE MADE BY THE APPELLANT PRIOR TO 1995-96 OUT OF OWN FUNDS AND NO FINANCIAL EXPENSES INCURRED IN THE CURRENT YEAR CAN BE ATTRIBUTED TO SUCH INVES TMENTS. FURTHER, THE BULK OF THE DISALLOWANCE UNDER RULE 8D(2)(II)2(III) IS ON A CCOUNT OF INCLUSION OF THE VALUE OF BONDS AMOUNTING TO RS.2446.14 CRORES IN 'AVERAGE INVESTMENTS' ON WHICH THE APPELLANT HAD EARNED INTEREST INCOME, WHICH BEING T AXABLE, WAS OFFERED FOR TAX. THEREFORE, THE ACTION OF THE AO OF INCLUDING THE SA ME WITHOUT VERIFYING ITS NATURE IN THE LIGHT OF THE DIRECTION OF HON'BLE CIT-IV VID E HIS ORDER UNDER SECTION 263, WAS ARBITRARY AND NOT JUSTIFIED. THE PROVISIONS OF RULE 8D CALL FOR INCLUDING IN THE VALUE OF 'AVERAGE VALUE OF INVESTMENTS', SUCH INVES TMENTS FROM WHICH EXEMPT INCOME IS OR SHALL BE RECEIVED. EVEN IF RULE 8D WAS TO BE INVOKED, THE TOTAL DISALLOWANCE, TAKING INTO ACCOUNT THE VALUE OF INVE STMENTS IN SHARES AGGREGATING TO RS.7,36,19,000 (AFTER EXCLUDING TAXABLE BONDS) L EADS TO DISALLOWANCE OF RS.46,78,610, WHICH IS NOT HIGHER THAN THE DISALLOW ANCE OF RS.54,06,554 ORIGINALLY MADE BY THE AO UNDER RULE 8D IN THE ORIG INAL ASSESSMENT ORDER( WHICH WAS EVENTUALLY DELETED BY THE LD. CIT(A)-XXVIII),HE NCE THERE WAS NO SCOPE FOR FURTHER REVISION OF THE DISALLOWANCE UNDER RULE 8D. 6.6 KEEPING IN VIEW THE ABOVE AND RESPECTFULLY FOLL OWING THE ORDER OF DELHI HIGH COURT IN THE CASE OF CIT VS MAXOPP INVESTMENT LTD. AND THE HON'BLE MUMBAI HIGH COURT IN THE CASE OF CIT VS GODREJ AND BOYCE MANUFACTURING CO. LTD. VS. DCIT, THE ADDITION MADE BY THE AO WITHOUT VERIFYING THE NATURE OF INVESTMENTS AS DIRECTED BY THE LD. CIT-IV IN THE OR DER UNDER SECTION 263 IS UNSUSTAINABLE AS PROVISIONS OF RULE 8 D ARE NOT APP LICABLE TO THE CURRENT YEAR. ACCORDINGLY, THIS GROUND IS DECIDED IN FAVOUR OF TH E APPELLANT. ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 35 OF 39 (5.1) AT THE TIME OF HEARING BEFORE US, THE LD. CIT (DR) SUBMITTED THAT THE ORDER OF THE LD. CIT(A) ON THIS ISSUE WAS BASED ON THE ERRONEOUS CONSIDERATION THAT THE DISALLOWANCE U/S 14A OF I.T. ACT WAS DELETED BY THE LD. CIT(A) IN EARLIER ORDER DATED 11.01.2012 FOR THIS YEAR; WHEREAS, IN FACT, THE LD. CIT(A) HAD CONFIRMED THE DISALLOWANCE IN THE EARLIER ORDER DATED 11.01.2012. HE REFERRED TO THE COPY OF AFORESAID ORDER DATED 11.01.2012 WHICH FORMED PART OF THE PAP ER BOOK FILED BY THE ASSESSEE DURING APPELLATE PROCEEDINGS IN ITAT; TO HIGHLIGHT THIS FACT. THE LD. CIT(DR) FAIRLY ADMITTED THAT RULE 8D OF I.T. RULES, INSERTED BY TH E IT (FIFTH AMENDMENT) RULES, 2008, W.E.F. 24-3-2008; WAS NOT APPLICABLE BEFORE AY 2008 -09, AS HELD BY HONBLE SUPREME COURT IN CIT V/S ESSAR TELEHOLDINGS LTD. 401 ITR 445 (SC) ; SECTION 14A OF I.T. ACT MANDATING DISALLOWANCE OF EXPENDITURE INCURRED IN R ELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME WAS INSERTED BY FINANCE ACT, 2001 WITH RETROSPECTIVE EFFECT FROM 1.4.1962; AND IN THAT VIEW, THE DISALLOWANCE U/S 14A OF I.T. ACT WAS REQUIRED TO BE MADE. HE FURTHER SUBMITTED THAT ALTHOUGH THE LD. CIT(A), IN HIS IMPUGNED ORDER DATED 28.8.2014 MENTIONS THAT THE AO MADE ADDITION WITHOUT VERIFYIN G THE NATURE OF INVESTMENTS AS DIRECTED BY CIT IN THE ORDER U/S 263; THE LD. CIT(A ) ALSO HIMSELF FAILED TO CARRY OUT THIS VERIFICATION AND HE ALSO FAILED TO CAUSE THIS VERIF ICATION TO BE DONE BY THE AO. IN VIEW OF THESE SUBMISSIONS, THE LD. CIT(DR) CONTENDED THAT T HE ORDER OF THE LD. CIT(A) SHOULD BE SET ASIDE. ON THE OTHER SIDE, THE LD. AR OF THE ASSESSEE SUPPORTED THE ORDER OF THE LD. CIT(A) ON THIS ISSUE. HE FURTHER CONTENDED THAT THE DISALLOWANCE MADE BY THE AO UNDER RULE 8D OF I.T. RULES WAS UNSUSTAINABLE IN VI EW OF THE ORDER OF HONBLE SUPREME COURT IN THE CASE OF CIT V/S ESSAR TELEHOLDINGS LTD. (SUPRA) IN WHICH IT WAS HELD THAT RULE 8D OF I.T. RULES WAS APPLICABLE ONLY FROM AY 2 008-09. ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 36 OF 39 (5.2) WE HAVE HEARD BOTH SIDES ATTENTIVELY AND PATIENTLY . WE HAVE PERUSED THE MATERIALS ON OUR RECORDS. WE HAVE CONSIDERED THE JU DICIAL PRECEDENTS REFERRED TO IN OUR RECORDS AND ALSO THE JUDICIAL PRECEDENTS BROUGHT TO OUR ATTENTION AT THE TIME OF HEARING BEFORE US. WE HAVE CAREFULLY PERUSED THE RELEVANT P ROVISIONS OF LAW. IN CIT V/S ESSAR TELEHOLDINGS LTD. (SUPRA) , HONBLE SUPREME COURT HELD: . WHEN SECTION 14A WAS INSERTED BY THE FINANCE ACT, 2001, IT WAS WITH RETR OSPECTIVE EFFECT FROM APRIL 1, 1962 WHEREAS WHEN THE FINANCE ACT, 2006, INSERTED SUB-SE CTIONS (2) AND (3) OF SECTION 14A, IT WAS WITH EFFECT FROM APRIL 1, 2006 WHICH WAS MEN TIONED IN CLAUSE 1(2) OF THE FINANCE ACT, 2006. RULE 8D WAS BROUGHT INTO THE STATUTE BOO K WITH EFFECT FROM MARCH 24, 2008 TO IMPLEMENT SUB-SECTIONS (2) AND (3) OF SECTION 14 A. IT IS A CLEAR INDICATOR OF THE FACT THAT A NEW METHOD FOR COMPUTING THE EXPENDITURE WAS BROUGHT IN BY THE RULES WHICH WAS TO BE UTILIZED FOR COMPUTING EXPENDITURE FOR TH E ASSESSMENT YEAR 2007-08 AND ONWARDS. . THE PROVISIONS OF SECTION 14A AS INSERTED BY THE FI NANCE ACT, 2001 WERE FULLY WORKABLE WITHOUT THERE BEING ANY MECHANISM PROVIDED FOR COMPUTING THE EXPENDITURE.. .THUS, ALTHOUGH THE HONBLE SUPREME COURT HELD IN CIT V/S ESSAR TELEHOLDINGS LTD. (SUPRA) THAT RULE 8D OF I. T. RULES WAS PROSPECTIVE IN NAT URE; IT RECOGNIZED THAT SECTION 14A OF I.T. ACT WAS WORKABLE EVEN BEFORE RU LE 8D OF I.T. RULES CAME INTO EXISTENCE AND THAT 8D OF I. T. RULES WAS THE NEW MODE OF COMPUTATION OF DISALLOWANCE U/S 14A OF I.T. ACT. TH EREFORE, WE ARE OF THE VIEW THAT THE AO ERRED IN COMPUTING DISALLOWANCE U/S 14A OF I.T. ACT BY TAKING RECOURSE TO RULE 8D ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 37 OF 39 OF I.T. RULES AND HE SHOULD HAVE COMPUTED THE DISAL LOWANCE U/S 14A OF I.T. ACT WITHOUT THE HELP OF RULE 8D OF I.T. RULES. THE DISALLOWANCE U/S 14A OF I.T. ACT, FOR AYS PRIOR TO 2008-09, HAS THE MANDATE OF NUMEROUS JUDIC IAL PRECEDENTS INCLUDING CIT V/S ESSAR TELEHOLDINGS LTD. (SUPRA), GODREJ & BOYCE MANUFACTURING CO. LTD. V/S DCIT AND ANOTHER 394 ITR 449 (SC), CIT V/S WALFORT SHARE AND STOCK BROKERS P. LTD. 326 ITR 1 (SC) AND MAXOPP INVESTMENT LTD. V/S CIT 402 ITR 640 (SC). LD. CIT(A) HAS MENTIONED IN HIS IMPUGNED ORDER DATE D 28.8.2014, IN COMPUTING DISALLOWANCE U/S 14A OF I.T. ACT, THE AO SHOULD HAVE CARRIED OUT NECESSARY VERIFICATIONS REGARDING THE NATURE OF INV ESTMENTS AS DIRECTED BY CIT IN THE ORDER U/S 263 OF I.T. ACT; WHICH THE AO FAILED TO D O. HOWEVER, WE HAVE NOTICED THAT THE LD. CIT(A) ALSO NOT ONLY HIMSELF FAILED TO CARRY OU T THIS VERIFICATION; BUT ALSO, HE FAILED TO CAUSE THIS VERIFICATION TO BE DONE BY THE AO. IT IS WELL-SETTLED THAT POWERS OF LD. CIT(A) ARE CO-TERMINUS WITH POWERS OF THE AO. USEFUL REFERENCE MAY BE MADE TO ORDER OF APEX COURT DECISION IN CIT V/S KANPUR COAL SYNDICATE 53 ITR 225 (SC) IN WHICH IT WAS HELD THAT AAC HAS PLENARY POWERS IN DISPOSING OFF AN APPEAL; THAT THE SCOPE OF HIS POWER IS CO-TERMINUS WITH THAT OF THE ITO, THAT HE CAN DO WHAT THE ITO CAN DO AND ALSO DIRECT HIM TO DO WHAT HE FA ILED TO DO. THE LD. CIT(A), HAVING NOTICED LACK OF PROPER VERIFICATION AT THE E ND OF THE AO, SHOULD HAVE ENSURED THAT EFFECTIVE VERIFICATION WAS CARRIED OUT . THE LD. CIT(A) COULD HAVE MADE THE VERIFICATION HIMSELF, OR HE COULD HAVE CAU SED THE VERIFICATION BY WAY OF FURTHER INQUIRY IN EXERCISE OF POWERS U/S 25 0(4) OF I.T. ACT. MOREOVER, ON PERUSAL OF EARLIER ORDER DATED 11.01.2012 OF THE LD. CIT(A), IT IS FOUND THAT THE LD. CIT(A) HAD CONFIRMED THE DISALLOWANCE U/S 14A OF I. T. ACT IN THAT ORDER; AND THE ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 38 OF 39 OBSERVATION OF LD. CIT(A) IN HIS IMPUGNED ORDER DAT ED 28.8.2014 THAT THE DISALLOWANCE U/S 14A OF I.T. ACT HAD BEEN DELETED BY LD. CIT(A) IN AFORESAID ORDER DATED 11.1.2012; IS AN ERRONEOUS CONSIDERATION IN THE OUTCOME OF THE IMPUGNED ORDER DATED 28.8.2014 OF LD. CIT(A) ON THE DISPUTED ISSUE OF DISALLOWANCE U/ S 14A OF I.T. ACT. IN VIEW OF THE FOREGOING, WE ARE OF THE VIEW THAT THE LOWER AUTHOR ITIES, THE AO AS WELL AS THE LD. CIT(A), HAVE NOT CONSIDERED THE ISSUE REGARDING DIS ALLOWANCE U/S 14A OF I.T. ACT PROPERLY AND THE MATTER REQUIRES FRESH CONSIDERATIO N AT THE LEVEL OF THE AO. THEREFORE, WE RESTORE THE DISPUTED ISSUE REGARDING DISALLOWANC E U/S 14A OF I.T. ACT TO THE FILE OF THE AO FOR FRESH ORDER IN ACCORDANCE WITH LAW ON TH E LIMITED ISSUE OF DISALLOWANCE U/S 14A OF I.T. ACT. FOR STATISTICAL PURPOSES, THE APPE AL OF REVENUE VIDE ITA NO. 6151/DEL/2014 IS PARTLY ALLOWED. (6) IN THE RESULT, ASSESSEES APPEAL VIDE ITA NO. 5705/ DEL/2014 IS DISMISSED AND REVENUES APPEAL VIDE ITA NO. 6151/DEL/2014 IS PART LY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 21/12/2018. SD/- SD/- (AMIT SHUKLA) (ANADEE NATH MISSH RA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 21/12/2018 (BIDHAN) ITA NOS.-5705 & 6151/DEL/2014. HOUSING & URBAN DEVELOPMENT CORPORATION LTD. PAGE 39 OF 39 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR, ITAT, NEW DELHI DATE OF DICTATION DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. PS/PS DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. PS/PS DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WE BSITE OF ITAT DATE ON WHICH THE FILE GOES TO THE BENCH CLERK DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER