Greater Mohali Area Development Authority, Mohali V. Addl. CIT, Mohali

ITA 628/CHANDI/2014

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7052 (ITAT-CHANDIGARH)
• Duration Of Justice: 2 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-09-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2011-2012
• Appeal Filed On: 19-06-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JYOTI KUMARI
• Assessee Lawyers: R K TREHAN
• Keywords: Gift; Depreciation; Business expenditure; Deemed to accrue or arise in india; Cost of acquisition; Revised return; Revenue expenditure
• Section: 43B; 145; 12; 28; 144; 10; 139

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH A, CHANDIGARH BEFORE SHRI T.R. SOOD, ACCOUNTANT MEMBER AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER ITA NO. 628/CHD/2014 ASSESSMENT YEARS : 2011-12 GREATER MOHALI AREA V ADDL CIT, R.VI DEVELOPMENT AUTHORITY MOHALI MOHALI AAALG 0872 G (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI R.K. TREHAN RESPONDENT BY: SMT. JYOTI KUM ARI DATE OF HEARING 8.9.2014 DATE OF PRONOUNCEMENT 1 5.9.2014 O R D E R PER T.R. SOOD, A.M THIS APPEAL IS DIRECTED AGAINST THE ORDER DATED 6.3.2014 OF THE LD CIT(A), CHANDIGARH. 2. IN THIS APPEAL THE ASSESSEE HAS RAISED THE FOLLO WING GROUNDS: 1 THAT THE ORDER OF THE LD. CIT(A) IS BAD IN LAW A ND AGAINST THE FACTS OF THE CASE. 2 THAT THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DIRECTING THE ASSESSING OFFICER TO TAX THE INSTALLM ENTS ON RECEIPT BASIS AND EXPENDITURE ON CONSTRUCTION RELAT ING TO HIRE PURCHASE SCHEME TO BE A LD. IN FACT DIRECTIONS ARE TO BE ISSUED TO THE ASSESSING OFFICER BY LD. CIT(A) BEFORE DISPO SING OF THE APPEAL. 3 THAT THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW S IN DIRECTING THE ASSESSING OFFICER TO VERIFY WHETHER T HE PROVIDENT FUND IS INDEPENDENTLY MONITORED AND INVESTMENT IN F DR ARE MADE FOR ONE YEAR OR MORE. IN FACT DIRECTIONS ARE T O BE ISSUED TO THE ASSESSING OFFICER BY LD. CIT(A) BEFORE DISPOSIN G OF EH APPEAL. 2 3 GROUND NO. 1 IS OF GENERAL NATURE AND THEREFORE N O SEPARATE ADJUDICATION IS REQUIRED. 4 GROUND NO. 2 - BOTH THE PARTIES AGREED THAT THIS ISSUE HAS ALREADY BEEN DECIDED BY THE TRIBUNAL IN CASE OF PUNJAB URBAN DEVELOPMENT AUTHORITY AND THAT ORDER MAY BE FOLLOWED. 5 AFTER CONSIDERING THE RIVAL SUBMISSIONS WE FIND T HAT IDENTICAL ISSUE CAME UP FOR CONSIDERATION OF THE TR IBUNAL IN CASE OF PUNJAB URBAN DEVELOPMENT AUTHORITY IN ITAS NO. 762/CHD/2007 AND OTHERS AND THIS ISSUE WAS DECIDED VIDE FOLLOWING PARAS NO. 62 TO 72 WHICH ARE AS UNDER: 62 WE HAVE HEARD THE RIVAL SUBMISSIONS CAREFULLY. SECTION 145 OF INCOME TAX ACT READS AS UNDER: SECTION 145 (1) INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' OR 'INCOME FROM OTHER SOURCES' SHALL, SUBJECT TO THE PROVISIONS OF SUB-SECTION (2), BE COMPUTED IN ACCORDANCE WITH EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. (2) THE CENTRAL GOVERNMENT MAY NOTIFY IN THE OFFICIA L GAZETTE FROM TIME TO TIME ACCOUNTING STANDARDS TO BE FOLLOWED BY ANY CLASS OF ASSE SSEES OR IN RESPECT OF ANY CLASS OF INCOME. (3) WHERE THE ASSESSING OFFICER IS NOT SATISFIED AB OUT THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE, OR WHERE THE METHOD OF ACCOUNTING PROVIDED IN SUB-SECTION (1) OR ACCOUNTING STANDARDS AS NOTIFIED UNDER SUB-SECTION (2), HAVE N OT BEEN REGULARLY FOLLOWED BY THE ASSESSEE, THE ASSESSING OFFICER MAY MAKE AN ASSESSMENT IN THE MANNER PROVIDED IN SECTION 144 . THE ABOVE PROVISION WAS SUBSTITUTED BY FINANCE ACT ,1995 W.E.F. 1.4.1997. BEFORE THIS SUBSTITUTION THE ASSE SSEE HAD CHOICE TO FOLLOW MERCANTILE OR CASH OR EVEN HYBRID SYSTEM OF ACCOUNTING I.E. THE ASSESSEE COULD CHOOSE CASH SYST EM OF ACCOUNTING FOR ONE SOURCE OF INCOME AND MERCANTILE SYSTEM OF ACCOUNTING FOR OTHER SOURCES. THIS CHOICE HAVE BEE N REMOVED AND NOW THE ASSESSEE COULD FOLLOW EITHER CASH SYSTE M OF ACCOUNTING OR MERCANTILE SYSTEM OF ACCOUNTING. PLAI N READING OF THE PROVISION SHOWS THAT THE ASSESSEE COULD FOLLOW ONLY ONE SYSTEM OF ACCOUNTING IN RESPECT OF INCOME UNDER TH E HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION OR IN COME FROM 3 OTHER SOURCES. THESE RESTRICTIONS HAVE NOT BEEN P RESCRIBED FOR OTHER HEADS OF BUSINESS. IN CASE BEFORE US, INCOME OF THE ASSESSEE IS CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS THEREFORE, THE ASSESSEE COULD HAVE ADOPT ED ONLY ONE SYSTEM OF ACCOUNTING. BEFORE THE PRESENT ASSESSMEN T YEAR THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNT ING AND IN THIS YEAR SYSTEM HAS BEEN CHANGED FROM MERCANTILE S YSTEM OF ACCOUNTING TO CASH SYSTEM OF ACCOUNTING. THOUGH IT IS VERY SURPRISING HOW A LARGE ORGANIZATION SUCH AS THE ASS ESSEE, COULD FOLLOW CASH SYSTEM OF ACCOUNTING BUT IT IS ADMITTED FACT THAT THE ASSESSEE FOLLOWED CASH SYSTEM OF ACCOUNTING. IN FA CT IN RESPECT OF OTHER ADDITIONS LIKE RECEIPT OF INTERES T FROM BANK AND RECEIPT OF INTEREST FROM GOVERNMENT OF PUNJAB, IT W AS VEHEMENTLY ARGUED ON BEHALF OF THE ASSESSEE THAT TH ESE RECEIPTS CAN BE TAXED ONLY WHEN THE SAME HAVE BEEN ACTUALLY RECEIVED BY THE ASSESSEE BECAUSE THE ASSESSEE WAS F OLLOWING CASH SYSTEM OF ACCOUNTING. THEREFORE, ADMITTED PO SITION IS THAT THE ASSESSEE IS FOLLOWING CASH SYSTEM OF ACCOU NTING. 63 NORMALLY PEOPLE OTHER THAN THE TRADERS KEEP ACCO UNTS IN CASH SYSTEM I.E. PEOPLE LIKE DOCTORS, ADVOCATES OR OTHER PROFESSIONALS KEEP THEIR ACCOUNTS IN CASH BASIS BEC AUSE THEY ARE NOT SELLING ANY MERCHANDISE AND IT IS VERY EASY TO FOLLOW CASH SYSTEM FOR THEM. AS WE HAVE ALREADY OBSERVED THAT IT IS SURPRISING THAT THE ASSESSEE HAD FOLLOWED CASH SYST EM OF ACCOUNTING. THEREFORE, WHEN THE TRADERS FOLLOW CAS H SYSTEM AND WHENEVER SUCH TRADERS SELL ANY MERCHANDISE ON C REDIT HE WOULD ENTER THE TRANSACTION ONLY IN A MEMORANDUM AC COUNT OR IN SOME OTHER ROUGH ACCOUNT AS A RECORD SO THAT HE DOE S NOT FORGET THE SAME. THIS IS THE REASON WE ARE SURPRIS ED THAT ASSESSEE IS FOLLOWING CASH SYSTEM OF ACCOUNTING WHE N IN ASSESSEES CASE LARGE NUMBER OF TRANSACTIONS ARE IN VOLVED THEN HOW CAN AN ORGANIZATION FOLLOW CASH SYSTEM BECAUSE IN THE TRANSACTION WHERE NO CASH IS INCOMING OR OUTGOING S UCH TRANSACTIONS ARE NOT RECORDED UNDER THIS SYSTEM AND THEY ARE ONLY NOTED AS MEMORANDUM ENTRIES OR IN ROUGH JOTTIN G. UNDER THE CASH SYSTEM OF ACCOUNTING SUCH TRADER WOULD NOT ENTER THE SALE PROCEEDS ON THE INCOME SIDE IN HIS BOOKS OF AC COUNT OR CASH BOOK UNTIL THE SAME IS ACTUALLY RECEIVED. SIM ILARLY AN ITEM OF EXPENDITURE WILL BE BOOKED ONLY WHEN ACTUAL CASH PAYMENT IS MADE. IN CASE OF MERCANTILE SYSTEM OF A CCOUNTING INCOME AS WELL AS EXPENDITURE WOULD BE RECOGNIZED O N THE PRINCIPLE OF ACCRUAL. IN FACT THIS ISSUE WAS CONSI DERED BY THE HON'BLE SUPREME COURT IN CASE OF RAJA MOHAN RAJA BA HADUR VS. CIT, 66 ITR 378 (S.C). IN THAT CASE THE ASSESSEE W AS A MONEY LENDER AND HAD GIVEN LOAN TO ONE SHRI NISAR AHMAD KHAN, TALUQDAR OF MOHANA ESTATE. THE ASSESSEE WAS MAINTA INING BOOKS OF ACCOUNT ON CASH SYSTEM OF ACCOUNTING. THE ASSESSEE COMMENCED AN ACTION IN CIVIL COURT FOR A DECREE FOR RECOVERY OF RS. 2,58,000/-. ULTIMATELY JUDICIAL COMMITTEE OF T HE PRIVY COUNCIL DECREED IN FAVOUR OF THE ASSESSEE. SHRI NI SAR AHMAD KHAN OBTAINED UNDER THE UP ENCUMBERED ESTATES ACT, 25 OF 1934 AN ORDER APPLYING THE PROVISION OF THE ACT TO HIM. THE SPECIAL JUDGE, SULTANPUR, PASSED AN ORDER FOR PAYME NT OF RS. 5,00,992/- TO THE ASSESSEE. PURSUANCE TO THE ORDER THE ASSESSEE RECEIVED IN 1946, RS. 1,54,692/- FROM THE DEBTOR AND FOR THE BALANCE THE GOVERNMENT OF THE UNITED PROVIN CES GAVE TO THE ASSESSEE ENCUMBERED ESTATE BONDS OF THE FACE V ALUE OF RS. 3,46,300. THE AMOUNT RECEIVED IN THE YEAR 1946 WAS 4 APPROPRIATED BY THE ASSESSEE TOWARDS THE PRINCIPAL DUE. THE ASSESSEE SPLIT UP THE AMOUNT OF THE FACE VALUE OF T HE BONDS INTO TWO SUMS OF RS. 2,22,097-9-11 AND RS. 1,24,202-6-1 AND CREDITED THE FIRST AMOUNT IN THE BOOKS OF ACCOUNT T OWARDS THE BALANCE OF PRINCIPAL AND THE SECOND AMOUNT TO AN AC COUNT STYLED INTEREST ACCRUED. IN SUBMITTING THE RETUR N OF HIS TAXABLE INCOME FOR THE ASSESSMENT YEAR 1948-49 THE ASSESSEE DID NOT DISCLOSE ANY RECEIPT OF INCOME FROM INTERES T DUE ON THE LOANS ADVANCED TO NISAR AHMAD KHAN. THE ASSESSEE W AS DULY ASSESSED TO TAX ON THE INCOME DISCLOSED BY HIM. IN OCT 1948, THE ASSESSEE SOLD THE ENCUMBERED ESTATES BONDS AND REALIZED A TOTAL SUM OF INTEREST RECEIVED DURING THE YEAR ON ACCOUNT THE DIFFERENCE BETWEEN THE AMOUNT REALIZED BY SALE OF T HE BONDS AND THE AMOUNT DUE AS PRINCIPAL. THE ITO ISSUED A NOTICE U/S 34(1)(A) OF THE INDIAN INCOME TAX ACT AND BROUGHT TO TAX THE DIFFERENCE BETWEEN THE FACE VALUE OF THE BONDS AND THE AMOUNT DUE AS PRINCIPAL AS ESCAPED INCOME OF THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 1948-49. THE ORDER WAS CONFIRMED BY THE APPELLATE ASSISTANT COMMISSIONER A ND THE INCOME-TAX APPELLATE TRIBUNAL. THE HIGH COURT ALSO DECIDED THE ISSUE AGAINST THE ASSESSEE. ON FURTHER APPEAL BEFO RE THE HON'BLE SUPREME COURT IT WAS MAINLY CONTENDED THAT THE ASSESSEE WAS MAINTAINING BOOKS OF ACCOUNT ON CASH S YSTEM OF ACCOUNTING AND UNTIL THE ASSESSEE REALIZED THE VALU E OF BONDS, NO INTEREST CAN BE SAID TO HAVE BEEN RECEIVED BY TH E ASSESSEE BECAUSE IT WAS FURTHER SUBMITTED THAT WHEN THE ACCO UNTS ARE MAINTAINED ON CASH SYSTEM OF ACCOUNTING, RECEIPT OF MONEY ALONE MAY BE TAKEN INTO ACCOUNT IN DETERMINING THE TAXABLE INCOME. THE HON'BLE APEX COURT MAINLY OBSERVED AT PAGE 382 AS UNDER: UNDER SECTION 4 OF THE INCOME-TAX ACT, 1922, THE TOTA L INCOME OF ANY PREVIOUS YEAR OF A RESIDENT ASSESSEE INCLUDES ALL INCOME, PROFITS AND GAINS FROM WHATEVER SOURCES DERIVED WHICH ARE RECEIVED OR ARE DEEMED TO BE RECEIVE D IN THE TAXABLE TERRITORIES IN SUCH YEAR BY OR ON BEHALF OF SUCH PERSON, OR ACCRUE OR ARISE OR ARE DEEMED TO ACCRUE OR ARISE TO HIM IN THE TAXABLE TERRITORIES DURING SUCH YEAR, OR ACCRUE OR ARISE TO HIM WITHOUT THE TAXABLE TERRITORIES DURING SUCH YEAR, OR HAVING ACCRUED OR ARISEN TO HIM WITHOUT THE TAXABLE TERRITORIES BEFORE THE BEGINNING OF SUCH YEAR AND AFTER THE 1 ST DAY OF APRIL, 1933, ARE BROUGHT INTO OR RECEIVED IN THE T AXABLE TERRITORIES BY HIM DURING SUCH YEAR. THE ACT DOES NOT CONTAIN MUCH GUIDANCE AS T O CASES IN WHICH TAX IS TO BE LEVIED ON INCOME RECEIVED, AND CASES IN WHICH TAX IS TO BE LEVIED ON INCOME ACCRUED OR ARISEN. SECTION 13 HOWEVER REQUIRES THAT INCOME, PROFITS AND GAINS FOR THE PURPOSES OF SECTIONS 10 AND 12 SHALL BE COMPUTED IN ACCOR DANCE WITH THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. IF ACC OUNTS ARE MAINTAINED ACCORDING TO THE MERCANTILE SYSTEM, WHENEVER THE RIGH T TO RECEIVE MONEY IN THE COURSE OF A TRADING TRANSACTION ACCRUES OR ARISES, EVE N THOUGH INCOME IS NOT REALIZED, INCOME EMBEDDED IN THE RECEIPT IS DEEMED TO ARISE OR ACCRUE. WHERE THE ACCOUNTS ARE MAINTAINED ON CASH BASIS RECEIPT OF MONEY OR MON EYS WORTH AND NOT THE ACCRUAL OF THE RIGHT TO RECEIVE IS THE DETERMINING FACTOR. TH EREFORE, IF COMMERCIAL ASSETS ARE RECEIVED BY A TRADER MAINTAINING ACCOUNTS ON CASH BASI S IN SATISFACTION OF AN OBLIGATION, INCOME WHICH IS EMBEDDED IN THE VALUE O F THE ASSETS IS DEEMED TO BE RECEIVED: THE RECEIPT OF INCOME IS NOT DEFERRED TILL TH E ASSET IS REALIZED IN TERMS OF CASH OR MONEY. IT MAKES NO DIFFERENCE WHETHER THE REC EIPT OF ASSETS IS IN PURSUANCE OF AN AGREEMENT OR THAT THE TRADER IS COMPELLED BY L AW TO ACCEPT THE ASSETS FROM THE DEBTOR. ONCE TITLE OF THE TRADER TO AN ASSET RECEIVED IS COMPLETE, WHETHER BY A CONSENSUAL ARRANGEMENT OR BY OPERATION OF LAW, HE R ECEIVES THE INCOME EMBEDDED IN THE VALUE OF THE ASSET. IN CALIFORNIAN COPPER SYNDICAT E V. HARRIS LORD TRAYNER IN DEALING WITH A CASE OF ASSESSEEMENT TO INCOME-TAX OF A COMPANY, FORMED FOR THE PURPOSE, INTER ALIA, OF ACQUIRING AND RE-SELLING MIN ING PROPERTY, WHICH RESOLD THE WHOLE 5 OF ITS ASSETS TO A SECOND COMPANY AND RECEIVED PAYMENT IN FULLY PAID SHARES OF THE PURCHASING COMPANY, OBSERVED: A PROFIT IS REALIZED WHEN THE SELLER GETS THE PRICE HE HAS BARGAINED FOR. NO DOUBT HERE THE PRICE TOOK THE FORM OF FULLY PAID SHARES IN ANOTHER COMPANY, BUT, IF THERE CAN BE NO REALIZED PROFIT, EXCEPT WHEN THAT IS PAID IN CAS H, THE SHARES WERE REALIZABLE AND COULD HAVE BEEN TURNED INTO CASH, IF THE APPELLANTS HAD BEEN PLEASED TO DO SO. I CANNOT THINK THAT INCOME-TAX IS DUE OR NOT ACCORDING T O THE MANNER IN WHICH THE PERSON MAKING THE PROFIT PLEASES TO DEAL WITH IT. THE OTHER OBSERVATIONS HAVE BEEN SUMMARIZED IN THE HEAD NOTE WHICH READ AS UNDER: IF ACCOUNTS ARE MAINTAINED ACCORDING TO THE MERCAN TILE SYSTEM, WHENEVER THE RIGHT TO RECEIVE MONEY IN THE COURSE O F A TRADING TRANSACTION ACCRUES OR ARISES, EVEN THOUGH INCOME I S NOT REALIZED, INCOME EMBEDDED IN THE RECEIPT IS DEEMED TO ACCRUE OR ARISE. WHERE THE ACCOUNTS ARE MAINTAINED ON CASH BASIS, RECEIPT OF MONEY OR MONEYS WORTH AND NOT THE ACCRUAL OF THE RIGHT TO R ECEIVE IS THE DETERMINING FACTOR. THEREFORE, IF COMMERCIAL ASSETS ARE RECEIVED BY A TRADER MAINTAINING ACCOUNTS ON CASH BASIS IN SATISF ACTION OF AN OBLIGATION, INCOME WHICH IS EMBEDDED IN THE VALUE O F THE ASSETS IS DEEMED TO BE RECEIVED; THE RECEIPT OF INCOME IS NOT DEFERRED TILL THE ASSET IS REALIZED IN TERMS OF CASH OR MONEY. IT MAK ES NO DIFFERENCE WHETHER THE RECEIPT OF ASSETS IS IN PURSUANCE OF AN AGREEMENT OR THAT THE TRADER IS COMPELLED BY LAW TO ACCEPT THE ASSETS FROM THE DEBTOR. ONCE TITLE OF THE TRADER TO AN ASSET RECEIVED IS CO MPLETE WHETHER BY A CONSENSUAL ARRANGEMENT OR BY OPERATION OF LAW, HE R ECEIVES THE INCOME EMBEDDED IN THE VALUE OF THE ASSET. THEREFORE, IN CASH SYSTEM OF ACCOUNTING FOR DETERMI NATION OF THE INCOME RECEIPT ON MONEY (CASH) OR MONEYS WORTH IN STRUMENTS ARE DETERMINING FACTOR AND IN ACCRUAL OF RIGHT TO RECEIVE SUCH MONEY IS A MATERIAL. IN OTHER WORDS, WHENEVER THE CASH IS RECEIVED ON INCOME SIDE THE SAME HAS TO BE TAXED IF THE CASH IS RECEIVED ON CAPITAL SIDE FOR EXAMPLE LOAN FROM BANK THEN THE SAME WOULD NOT BE REQUIRED TO BE TAXED. HOWEVER, I F THERE IS SIMPLY A RIGHT TO RECEIVE SUCH CASH THE SAME CANNOT BE TAXED IN THE CASH SYSTEM OF ACCOUNTING. IN OUR OPINION, THI S WOULD ANSWER THE QUESTION AND OR CONTENTION RAISED BY THE LD. COUNSEL OF THE ASSESSEE THAT BEFORE TAXING AN ITEM THE SAME HAS TO PASS THROUGH THE TEST OF CHARGING SECTION. SECTION 4 OF THE ACT WHICH IS CHARGING SECTION, READS AS UNDER: SECTION 4 - (1) WHERE ANY CENTRAL ACT ENACTS THAT I NCOME-TAX SHALL BE CHARGED FOR ANY ASSESSMENT YEAR AT ANY RATE OR RATES, INCOME-TA X AT THAT RATE OR THOSE RATES SHALL BE CHARGED FOR THAT YEAR IN ACCORDANCE WITH, AND [SUBJECT TO THE PROVISIONS (INCLUDING PROVISIONS FOR THE LEVY OF ADDITIONAL INCOM E-TAX) OF, THIS ACT] IN RESPECT OF THE TOTAL INCOME OF THE PREVIOUS YEAR [* * *] OF EVER Y PERSON : PROVIDED THAT WHERE BY VIRTUE OF ANY PROVISION OF THIS ACT INCOM E-TAX IS TO BE CHARGED IN RESPECT OF THE INCOME OF A PERIOD OTHER THAN THE P REVIOUS YEAR, INCOME-TAX SHALL BE CHARGED ACCORDINGLY. 6 (2) IN RESPECT OF INCOME CHARGEABLE UNDER SUB-SECTION (1), INCOME-TAX SHALL BE DEDUCTED AT THE SOURCE OR PAID IN ADVANCE, WHERE IT I S SO DEDUCTIBLE OR PAYABLE UNDER ANY PROVISION OF THIS ACT. PLAIN READING OF THIS PROVISION WOULD SHOW THAT TAX CAN BE CHARGED AT THE RATE PRESCRIBED BY ANY CENTRAL ACT W HICH IS PRACTICALLY DONE THROUGH PASSING OF FINANCE ACT IN EVERY YEAR BY THE PARLIAMENT. SUCH TAX CAN BE CHARGED IN RESP ECT OF TOTAL INCOME OF THE PREVIOUS YEAR. TOTAL INCOME HAS BEEN DEFINED IN SECTION 5 OF THE ACT. THE WORD INCOME HAS BEEN DE FINED IN SECTION 2(24) SO THEREFORE, BEFORE CHARGING TAX IT HAS TO BE SEEN THAT AN ITEM IS IN THE NATURE OF INCOME AND COVERED BY THE DEFINITION OF INCOME GIVEN IN SECTION 2(24) OF THE ACT. IT IS FURTHER TO BE NOTED THAT INCOME HAS BEEN DEFINED IN INCLUSIVE MANNER. THIS IS VERY COMPLEX ISSUE AND WITHOUT GOI NG INTO THE DETAILS WE WOULD SIMPLY TAKE THE SIMPLE MEANING OF THE INCOME. IN THE NORMAL COMMERCIAL PARLANCE AN ITE M WHICH IS OF REVENUE NATURE, IS TAKEN AS INCOME. NOW IN A CA SE WHERE AN ORGANIZATION WHICH IS CARRYING OUT THE BUSINESS OF CONSTRUCTION AND DEVELOPMENT OF HOUSES AND IF SUCH ORGANIZATION SELLS THE SAME OUTRIGHTLY OR ON INSTALLMENTS BASIS THEN SUCH INSTALLMENTS WOULD BE IN NATURE OF INCOME. THEREFORE, THERE I S NO FORCE IN THE SUBMISSIONS OF THE LD. COUNSEL OF THE ASSESSEE THAT INSTALLMENTS RECEIVED BY THE ASSESSEE DO NOT COME U NDER THE CHARGING SECTION AND THEREFORE, SAME CANNOT BE TAX ED SIMPLY BECAUSE U/S 145 THE RECEIPT UNDER CASH SYSTEM HAS T O BE TAXED. NO DOUBT SECTION 145 IS A MACHINERY SECTION BUT MAC HINERY SECTION ALSO HAVE LOT OF BEARING ON DETERMINATION O F INCOME AND CANNOT BE IGNORED LIGHTLY. IN THIS CONNECTION WE W OULD LIKE TO REFER TO ONE OF THE CELEBRATED JUDGMENT OF HON'BLE SUPREME COURT IN CASE OF CIT VS. B.C. SRINIVASA SETTY, 128 ITR 294 (S.C). IN THAT CASE THE ASSESSEE WAS A REGD FIRM. CLAUSE 13 OF THE INSTRUMENT OF PARTNERSHIP DEED SHOWED THAT G OODWILL OF THE FIRM HAVE NOT BEEN VALUED AND VALUATION WOULD B E MADE AT THE DISSOLUTION OF THE PARTNERSHIP. PERIOD OF THE PARTNERSHIP WAS EXTENDED AND SUBSEQUENTLY PARTNERSHIP WAS DISSO LVED ON 31.12.1965. AT THE TIME OF DISSOLUTION GOODWILL WA S VALUED AT RS. 1,50,000/-. THE NEW PARTNERSHIP WITH THE SAME NAME WAS CONSTITUTED THROUGH ANOTHER DEED OF PARTNERSHIP. NEW FIRM BOOKED OVER ALL THE ASSETS INCLUDING GOODWILL AND L IABILITY OF THE DISSOLVED FIRM. ORIGINALLY NO ADDITION WAS MADE O N ACCOUNT OF GAIN ARISING OUT OF TRANSFER OF GOODWILL BUT THIS A SSESSMENT ORDER WAS FOUND ERRONEOUS AND PREJUDICIAL TO THE IN TEREST OF THE REVENUE AND THEREFORE, LD. COMMISSIONER PASSED REV ISIONARY ORDER DIRECTING THE ASSESSING OFFICER TO MAKE FRESH ASSESSMENT AFTER TAKING INTO ACCOUNT THE CAPITAL GAIN ARISING OUT OF SALE OF GOODWILL. THE ASSESSEE MAINTAINED THAT NO SALE TOO K PLACE TO ATTRACT THE TAX ON CAPITAL GAIN U/S 45 OF THE INCO ME TAX ACT . THE TRIBUNAL ALLOWED THE APPEAL. WHEN THE MATTER T RAVELED TO THE HON'BLE SUPREME COURT THE MATTER WAS ARGUED IN GREAT DETAIL. ONE OF THE ISSUE AROSE WHETHER THERE WAS T RANSFER AND IT WAS HELD YES IT WAS A TRANSFER. ANOTHER ISSUE AROS E WHETHER THE GAIN OF SUCH TRANSFER OF GOODWILL WOULD BE TAXE D U/S 45 OF THE ACT. IT WAS FOUND THAT GOODWILL IS A SELF GENE RATED ASSET AND NO COST OF ACQUISITION CAN BE ATTRIBUTED TO SE LF GENERATED ASSETS. SINCE SECTION 48 WHICH IS MODE OF COMPUTAT ION OF CAPITAL GAIN PRESCRIBES REDUCTION OF COST OF ACQUIS ITION FROM THE SALE CONSIDERATION IT WAS HELD THAT IN THE ABSENCE OF COST OF ACQUISITION COMPUTATION OF CAPITAL GAIN, WAS NOT P OSSIBLE. 7 THEREFORE, SAME WAS HELD TO BE NOT TAXABLE. THIS CLEARLY SHOWS THAT COMPUTATION PROVISION WHICH IS AGAIN A M ACHINERY PROVISION, HAD LOT OF BEARING ON THE TAXABILITY OF GAIN RECEIVED ON TRANSFER OF GOODWILL. THEREFORE, EVEN IF SECTI ON 145 BEING MACHINERY SECTION HAS ITS OWN IMPLICATIONS. IMPLIC ATIONS ARE VERY CLEAR THAT THE ASSESSEE HAS A RIGHT TO FOLLOW EITHER MERCANTILE SYSTEM OF ACCOUNTING OR CASH SYSTEM OF A CCOUNTING FOR DETERMINATION OF THE INCOME. THE ASSESSEE HAS BEEN GIVEN A CHOICE AND IN THE CASE BEFORE US, THE ASSESSEE HA S DELIBERATELY AND AFTER APPLYING ITS MIND DECIDED TO FOLLOW CASH SYSTEM OF ACCOUNTING, THEREFORE, THE ASSESSEE HAS TO BEAR THE CONSEQUENCES OF SUCH SYSTEM OF ACCOUNTING. 64 THE LD. COUNSEL OF THE ASSESSEE HAS STRONGLY REL IED ON THE DECISION OF K.K. KHULLAR VS. DCIT (SUPRA). IN THIS CASE THE ASSESSEE WAS AN ADVOCATE AND RECEIVED CERTAIN AMOUN TS FOR SERVICES TO BE PERFORMED OVER A PERIOD OF TIME. TH E AMOUNT RECEIVED FROM THE CLIENT IN RESPECT OF SERVICES REN DERED IN THE YEAR UNDER CONSIDERATION , WAS SHOWN AS INCOME AND THE BALANCE AMOUNT WAS SHOWN AS ADVANCE. THE ASSESSING OFFICER HELD THAT AS PER THE PROVISIONS OF SECTION 145 THE ASSESSEE WAS FOLLOWING CASH SYSTEM OF ACCOUNTING AND THEREFORE, WHOLE AMOUNT WAS TAXABLE. THE TRIBUNAL DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE VIDE FOLLOWING PARAS: WE HAVE CONSIDERED THE FACTS OF THE CASE AND RIVAL SUBMISSIONS. WE MAY REFER TO THE CHARGING SECTION 4 OF THE ACT TO T HE EFFECT THAT INCOME-TAX SHALL BE CHARGED FOR ANY ASSESSMENT YEAR AT THE RATE OR RATES PROVIDED IN ANY CENTRAL ACTS IN RESPECT OF TH E TOTAL INCOME OF THE PREVIOUS YEAR OF EVERY PERSON. SECTION 5 DEALS WITH THE SCOPE OF TOTAL INCOME, WHICH IS DEFINED IN RESPECT OF ANY P REVIOUS YEAR IN TERMS OF ACCRUAL, DEEMED ACCRUAL, RECEIPT AND DEEME D RECEIPT ETC. SECTION 145 DEALS WITH THE METHOD OF ACCOUNTING IN RESPECT OF PROFITS AND GAINS OF BUSINESS OR PROFESSION OR INCOME FRO M OTHER SOURCES. THUS, WHILE SECTIONS 4 AND 5 DEAL WITH THE SCOPE OF INCOME AND ITS CHARGE TO INCOME-TAX, SECTION 145 IS A PROCEDURAL S ECTION REGARDING THE METHOD TO BE FOLLOWED FOR RECORDING OF INCOME I N THE BOOKS OF ACCOUNT. IT IS NO DOUBT TRUE THAT FOR THE ASSESSMEN T YEAR 1997-98 AND ONWARDS, THE ASSESSEE CAN FOLLOW EITHER THE CASH OR THE MERCANTILE SYSTEM OF ACCOUNTING AND THE HYBRID SYSTEM OF ACCOU NTING IS PROHIBITED. HOWEVER, WHAT IS TO BE TAXED IS INCOME AND RECEIPT OF AN AMOUNT IS NOT TO BE THE BASIS FOR THE LEVY OF THE T AX. IN THE CASE OF MESSRS. SHOORJI VALLABHDAS AND CO. [1962] 46 ITR 14 4, THE HONBLE SUPREME COURT POINTED OUT THAT THE INCOME-TAX ACT T AKES INTO ACCOUNT TWO POINTS OF TIME ON WHICH THE LIABILITY TO TAX IS ATTRACTED, NAMELY,-(I) ACCRUAL OF INCOME OR (II) RECEIPT OF INCOME. IT IS FURTHER MENTIONED THAT THE SUBSTANCE OF THE MATTER IS INCOME. IT MAY BE EMPHASIZED THAT IT IS ACCRUAL OF INCOME OR RECEIPT OF INCOME THAT CAN BECOME THE SUBJECT-MATTER OF TAX AND IT IS THE INCOME WHICH HA S TO BE RECORDED AS PER SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE I N VIEW OF SECTION 145 OF THE ACT, BECAUSE THE SUBSTANCE OF THE MATTER IS INCOME. THEREFORE, THERE IS AN INFIRMITY IN THE ORDER OF TH E LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) IN PARAGRAPH 4 .7 WHERE IT WAS STATED THAT THE ENTIRE AMOUNT RECEIVED, WHETHER ARR EARS OR ADVANCE, IS TO BE SHOWN AS INCOME UNDER THE CASH SYSTEM OF ACCO UNTING. THE CORRECT POSITION WOULD BE THAT THE ENTIRE INCOME RE CEIVED, WHETHER ARREAR OR ADVANCE OF INCOME, HAS TO BE SHOW N AS INCOME UNDER THE CASH SYSTEM OF ACCOUNTING. 8 THE HIGHLIGHTED PORTION OF THE ABOVE PARAGRAPH CLEA RLY SHOWS THAT IN CASH SYSTEM OF ACCOUNTING THE RECEIPT OF MO NEY WHETHER ARREARS OR ADVANCE, HAS TO BE SHOWN AS INCOME, THER EFORE, THIS DECISION IS TOTALLY DISTINGUISHABLE. 65 ANOTHER DECISION RELIED ON WAS THAT OF CIT VS. M ESSRS, SHOORJI VALLABHDAS AND CO. (SUPRA). IN THAT CASE T HE ASSESSEE FIRM WAS THE MANAGING AGENT OF TWO SHIPPING COMPANI ES AND UNDER THE MANAGING AGENCY AGREEMENT, THE ASSESSEE W AS ENTITLED FOR COMMISSION @ 10% OF THE FREIGHT CHARGE S. BETWEEN APRIL 1, 1947 AND DECEMBER 31, 1947 AN AMOUNT OF RS . 1,71,885/- FROM ONE COMPANY AND RS. 2,56,815/- FROM OTHER COMPANY BECAME DUE TO THE ASSESSEE AS COMMISSION @ 10%. THIS AMOUNT WAS CREDITED IN THE BOOKS OF ACCOUNT AN D DEBITED TO MANAGING AGENT. IN NOVEMBER 1947 THE ASSESSEE D ESIRED TO HAVE MANAGING AGENCY TRANSFERRED TO TWO PRIVATE COM PANIES AND IN THIS CONNECTION AGREED IN DECEMBER, 1948 TO ACCEPT 2% AS COMMISSION AND GAVE UP 7% OF ITS EARNINGS. THE REVENUE SOUGHT TO ASSESS THE AMOUNTS TO RS. 1,36,903/- AND RS. 2,00,625/- BEING 7% OF THE FOREGONE AMOUNT AS INCO ME. ON THESE FACTS IT WAS HELD AS UNDER: HELD, THAT THE SUBSEQUENT AGREEMENT HAD ALTERED TH E RATE OF COMMISSION IN SUCH A WAY AS TO MAKE THE INCOME WHIC H REALLY ACCRUED TO THE ASSESSEE DIFFERENT FROM WHAT HAD BEE N ENTERED IN THE BOOKS OF ACCOUNT. THIS WAS NOT A CASE OF A GIFT BY THE ASSESSEE TO THE MANAGED COMPANIES OF A PORTION OF INCOME WHICH HAD ALREADY ACCRUED, BUT AN AGREEMENT TO RECEIVE A LESSER REMUN ERATION THAN WHAT HAD BEEN AGREED UPON. THE ASSESSEE HAD IN FACT RECE IVED ONLY THE LESSER AMOUNT IN SPITE OF THE ENTRIES IN THE ACCOUN T BOOKS, AND THIS LESSER AMOUNT ALONE WAS TAXABLE. INCOME-TAX IS A LEVY ON INCOME. THOUGH THE INCOME-T AX ACT TAKES INTO ACCOUNT TWO POINTS OF TIME AT WHICH THE LIABILITY T O TAX IS ATTRACTED, VIZ., THE ACCRUAL OF THE INCOME OR ITS RECEIPT, YET THE SUBSTANCE OF THE MATTER IS THE INCOME. IF INCOME DOES NOT RESULT AT ALL, THERE CANNOT BE A TAX, EVEN THOUGH IN BOOK-KEEPING, AN ENTRY IS MAD E ABOUT A HYPOTHETICAL INCOME, WHICH DOES NOT MATERIALIZE. WHERE INCOME HAS, IN FACT, BEEN RECEIVED AND IS SUBSEQUENTLY GIVEN UP IN SUCH CIRCUMSTANCES THAT IT REMAINS THE INCOME OF THE REC IPIENT, EVEN THOUGH GIVEN UP, THE TAX MAY BE PAYABLE. WHERE, HOW EVER, THE INCOME CAN BE SAID NOT TO HAVE RESULTED AT ALL, THE RE IS OBVIOUSLY NEITHER ACCRUAL NOR RECEIPT OF INCOME, EVEN THOUGH AN ENTRY TO THAT EFFECT MIGHT, IN CERTAIN CIRCUMSTANCES, HAVE BEEN M ADE IN THE BOOKS OF ACCOUNT. THUS IT IS CLEAR FROM ABOVE THAT THE AMOUNT WHICH W AS SOUGHT TO BE ASSESSED WAS NOT IN NATURE OF INCOME BECAUSE TH E ASSESSEE HAS CLEARLY AGREED TO REDUCE THE RATE OF COMMISSION ON CONVERSION OF THE AGENCY IN THE NAME OF PRIVATE COM PANIES. IN CASE BEFORE US, NOWHERE IT HAS BEEN DENIED THAT INS TALLMENTS RECEIVED BY THE ASSESSEE FIRM FROM THE ALLOTTEES OF THE HOUSES IS NOT IN THE NATURE OF THE INCOME. THEREFORE, TH E PROPOSITION LAID DOWN IN CASE OF CIT V MESSRS SHOOROJI VALLABHD AS AND CO. SUPRA) ARE NOT APPLICABLE. 9 66 WE WOULD ALSO LIKE TO NOTE THAT IN ORIGINAL RETU RN FILED BY THE ASSESSEE, WAS FOR INCOME OF RS. 21.19 CRORES WH EREAS IN THE REVISED RETURN A LOSS OF RS. 19.12 CRORES WAS C LAIMED. THE ASSESSING OFFICER EXAMINED THE REASONS FOR LOSS AND HE FOUND THAT MAIN REASON WAS THAT EXPENDITURE ACCOUNTS SHOW THE FIGURES OF COST OF PLOTS AND THEREFORE, SALE WHICH WAS NOT THERE IN THE ORIGINAL INCOME AND EXPENDITURE ACCOUNT. RE SULT OF THESE FIGURES IS AS UNDER: COST OF PLOTS RS. 105,42,88,169/- SALE OF PLOTS RS. 65,18,29,803/- LOSS RS. 40,24,58,366/- RS. 105,43,88,169/- RS. 105,42,88,169/- THIS MATTER WAS INVESTIGATED IN DETAIL AND ULTIMATE LY THE REASON FOR THESE ENTRIES WAS ANALYZED AND DISCUSSED BY THE ASSESSING OFFICER AS MENTIONED IN THE ASSESSMENT ORDER AS UND ER: AS REGARDS THE REASON FOR HUGE LOSS FROM PURCHASE A ND SALE OF PLOTS, IT WAS EXPLAINED BY THE COUNSEL, DURING DISCUSSION AND ALSO EXPLAINED BY THE ASSESSEE IN ITS LETTER NO. 1567 DATED 08.03. 2006 THAT SINCE THE ASSESSEE HAS CHANGED ITS SYSTEM TO CASH SYSTEM OF A CCOUNTING, ONLY THE AMOUNT ACTUALLY RECEIVED OUT OF TOTAL SALE AMOU NT HAS BEEN SHOWN AS SALE WHEREAS THE PLOTS WHICH HAVE BEEN SOLD BUT ONLY A PART OF THE SALE AMOUNT OF WHICH HAS BEEN RECEIVED ARE NOT REFL ECTED IN THE CLOSING STOCK WHICH IS THE REASON FOR THE LOSS IN T HE PURCHASE AND SALE OF PLOTS FOR THE ASSESSMENT YEAR 2003-04. BUT IN THE SUBSEQUENT YEARS I.E. ASSESSMENT YEAR 2004-05 ONWARDS, THERE I S PROFIT FROM PURCHASE AND SALE OF PLOTS. DURING DISCUSSION, IT W AS EXPLAINED BY THE COUNSEL BY GIVING AN EXAMPLE. SUPPOSE, THE COST OF PLOT IS RS. 1,00,000/- AND IT IS SOLD FOR RS. 1,50,000/- DURING THIS YEAR BUT ONLY 25% OF THE COST OF THE PLOT I.E., RS. 37,500/- IS A CTUALLY RECEIVED DURING THE YEAR. ACTUALLY, THE PROFIT EARNED IS RS. 50,000/. BUT SINCE THE ASSESSEE HAS ADOPTED CASH SYSTEM, SALE WILL BE SHOWN AT RS. 37,500/- FOR THE YEAR. THE VALUE OF CLOSING STOCK O F THAT PLOT WILL BE NIL AS THE PLOT HAS BEEN SOLD AND IS IN THE POSSESSION OF THE PURCHASER. SO THIS WILL RESULT INTO LOSS OF RS. 62,500/- FOR T HAT YEAR. NOW IN THE NEXT YEAR, THERE WILL BE NO OPENING STOCK IN RESPEC T OF THAT PLOT BUT IF THE BALANCE AMOUNT OF SALE CONSIDERATION I.E. RS. 1 ,12,500/- IS ACTUALLY RECEIVED IN THAT YEAR THAT WILL BE SHOWN A S THE AMOUNT OF SALE FOR WHICH THERE WILL BE NO OPENING STOCK OR CORRESP ONDING PURCHASE AND THE SAME, ALREADY-SOLD PLOT WILL GIVE A PROFIT OF RS. 1,12,500/- IN THAT NEXT YEAR. THIS IS THE REASON THAT THERE IS ST EEP RISE IN THE PROFIT FROM SALE OF PLOTS IN THE NEXT YEAR. THE ASSESSEES COUNSEL REFERRED TO THE ORIGINAL AND REVISED RETURN FOR THE SUCCEEDI NG ASSESSMENT YEAR 2004-05. PERUSAL OF THESE RETURNS SHOWS THAT IN THE ORIGINAL RETURN FOR THE ASSESSMENT YEAR 2004-05, THE INCOME AS PER THE PROFIT AND LOSS ACCOUNT AND AFTER DEDUCTING DEPRECIATION AS PER INC OME TAX RULES HAS BEEN SHOWN AT RS. 7,67,61,289/-, IN THE REVISED RETURN, THE INCOME AS PER THE PROFIT AND LOSS ACCOUNT AND AFTER DEDUCTING DEPRECIATION AS PER THE INCOME TAX RULES HAS BEEN S HOWN AT RS. 10 39,50,14,907/-. THERE IS A STEEP RISE OF RS. 31,82, 53,618/- IN THE INCOME FOR THE ASSESSMENT YEAR 2004-05 WHICH IS MAI NLY ON ACCOUNT OF RECOGNIZING REVENUE ON PURCHASE AND SALE OF PLOT S ON CASH METHOD OF ACCOUNTING. THIS EXPLANATION OF THE ASSESSEE WAS FOUND TO BE CO NVINCING AND ACCEPTED. THUS IT IS CLEAR THAT THE ASSESSEE I TSELF CONTENDED THAT SALE OF PLOTS HAS TO BE ACCEPTED ON THE BASIS OF ACTUAL CASH RECEIPT ON SALE EFFECTED DURING THE YEA R. THEREFORE, THE ASSESSEE COULD NOT TAKE A DIFFERENT STAND IN RE SPECT OF SALE OF HOUSES AND FLATS. 67 COMING TO THE FACTS OF THE CASE, THE ASSESSEE SO LD CERTAIN HOUSES AND FLATS UNDER THE HIRE PURCHASE AGREEMENT. THE ALLOTTEES WERE TREATED AS TENANT DURING THE COMPLE TION OF SUCH HIRE PURCHASE AGREEMENT TILL ALL THE INSTALLMENTS W ERE PAID BY SUCH ALLOTTEES. THE INSTALLMENTS AS WELL AS EXPEND ITURE INCURRED BY THE ASSESSEE, WAS BEING ACCUMULATED IN VARIOUS SCHEMES AND WAS REFLECTED IN THE BALANCE SHEET BECA USE THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNT ING TILL ASSESSMENT YEAR 2002-03. HOWEVER, IN THIS YEAR THE ASSESSEE HAS CHANGED ACCOUNTING SYSTEM AND NOW ADOPTED CASH SYSTEM OF ACCOUNTING. WE HAVE ALREADY EXPRESSED OUR SURPR ISE ON ADOPTION OF CASH SYSTEM BY THE ASSESSEE BUT ADMITTE DLY THIS SYSTEM HAS BEEN ADOPTED AND THEREFORE, THE ASSESSE E HAS TO BEAR THE CONSEQUENCES. FIRST CONTENTION WAS THAT H OUSES AND FLATS WERE SOLD ON HIRE PURCHASE BASIS AND UNDER TH E HIRE PURCHASE ACT, 1972 THE BUYER DOES NOT GET THE OWNE RSHIP RIGHT TILL THE COMPLETION OF THE PURCHASE AS PROVIDED IN THE AGREEMENT AND AS PER THE AGREEMENT TILL ALL THE INSTALLMENTS ARE PAID SUCH BUYER OR ALLOTTEES WILL NOT BECOME THE OWNERS. HOW EVER, WE FIND NO FORCE IN THIS CONTENTION BECAUSE NO OTHER A CT CAN OVER RIDE THE PROVISIONS OF THE ACT AND THIS HAS BEEN CL ARIFIED BY THE HON'BLE SUPREME COURT IN CASE OF SOUTHERN TECHNOLOG IES LTD. VS. JCIT (SUPRA). THEREFORE, THE INSTALLMENTS RECE IVED AGAISNT SUCH SALES WHICH ARE IN THE NATURE OF REVENUE RECE IPTS, ARE REQUIRED TO BE TAKEN INTO CONSIDERATION FOR DETERMI NATION OF INCOME IN THIS YEAR BECAUSE THE ASSESSEE HAS ADOPTE D CASH SYSTEM OF ACCOUNTING DURING THE YEAR. NEXT CONTENT ION WAS THAT THE ASSESSEE WAS FOLLOWING CONTINUOUSLY PROJECT COM PLETION METHOD AND THEREFORE, NO INCOME CAN BE DETERMINED UNLESS THE PROJECTS ARE COMPLETED. AGAIN AS DISCUSSED ABOVE I N DETAIL THE ISSUE OF SYSTEM OF ACCOUNTING AND THE MEANING OF CA SH SYSTEM OF ACCOUNTING, THIS CONTENTION CANNOT BE ACCEPTED B ECAUSE THE ASSESSEE CAN NOT FOLLOW TWO DIFFERENT SYSTEMS OF AC COUNTING UNDER THE SAME HEAD. THEREFORE, IN OUR OPINION, TH E ASSESSING OFFICER HAS CORRECTLY INCLUDED ALL THE INSTALLMENTS RECEIVED FROM THE ALLOTTEES OF THE HOUSES AND FLATS IN THE INCOME OF THE ASSESSEE. 68 HOWEVER, WE FIND THAT THE SUBMISSIONS OF THE LD. COUNSEL OF THE ASSESSEE THAT IF SUCH INSTALLMENTS ARE INCLU DED THEN THE CORRESPONDING EXPENDITURE WHICH HAS BEEN INCURRED S HOULD ALSO BE ALLOWED ON MATCHING PRINCIPLE. THE LD. COUNSEL OF THE ASSESSEE HAD RELIED ON THE DECISION OF CIT VS. BILA HARI INVESTMENT P LTD. (SUPRA). IN THAT CASE THE ASSESS EE SUBSCRIBED 11 TO CHITS AS THEIR BUSINESS ACTIVITIES. THEY MAINTAI NED THEIR ACCOUNTS ON THE MERCANTILE BASIS AND COMPUTED THE PROFIT/LOS S AT THE END OF THE CHIT PERIOD FOLLOWING THE COMPLETED CONTRACT METHOD . THIS WAS ACCEPTED BY THE DEPARTMENT, BUT FOR THE ASSESSMENT YEARS 1991-92 TO 1997-98 THE ASSESSING OFFICER CAME TO THE CONCLUSIO N THAT THE COMPLETED CONTRACT METHOD FOR CHIT DISCOUNT WAS NOT ACCURATE IN RECOGNIZING /IDENTIFYING INCOME AND THAT THE PERCEN TAGE OF COMPLETION METHOD WAS TO BE PREFERRED. THE HIGH COURT HELD THA T THE COMPLETED CONTRACT METHOD OF ACCOUNTING ADOPTED BY THE ASSESS ES FOR CHIT DISCOUNT WAS VALID AND THE DEPARTMENT ERRED IN SPRE ADING THE DISCOUNT OVER THE REMAINING PERIOD OF THE CHIT UNDE R THE PERCENTAGE OF COMPLETION METHOD ON PROPORTIONATE BASIS. ON APPEAL BY THE DEPARTMENT TO THE SUPREME COURT. IT WAS HELD AS UND ER: HELD ACCORDINGLY, AFFIRMING THE DECISION OF THE HI GH COURT, THAT, SINCE, FROM THE VARIOUS STATEMENTS PRODUCED, THE EN TIRE EXERCISE ARISING OUT OF THE CHANGE OF METHOD FROM THE COMPLE TED CONTRACT METHOD TO DEFERRED REVENUE EXPENDITURE WAS REVENUE NEUTRAL, THE COMPLETED CONTRACT METHOD WAS NOT REQUIRED TO BE SU BSTITUTED BY THE PERCENTAGE OF COMPLETION METHOD. 69 IN OUR OPINION, THE ABOVE CASE IS NOT VERY RELEV ANT BECAUSE IN THIS CASE THE ASSESSEE WAS CONTINUOUSLY FOLLOWING THE METHOD OF COMPLETED CONTRACT UNDER MERCANTILE S YSTEM OF ACCOUNTING WHICH WAS FOUND TO BE CORRECT. HOWEVER, THE MATCHING PRINCIPLE WAS LAID DOWN IN CASE OF CALCUTT A COMPANY LTD. VS. CIT, 37 ITR 1 BY THE HON'BLE SUPREME COURT . IN THAT CASE THE ASSESSEE PURCHASED CERTAIN LANDS AND DEVEL OPED THE SAME FOR BUILDING PURPOSES BY LAYING ROADS, PROVIDI NG DRAINS SYSTEM AND INSTALLING LIGHTS ETC. THE FLATS WERE S OLD ON INSTALLMENT BASIS. AT THE TIME OF SALE THE ASSESSE E UNDERTOOK TO CARRY OUT MORE DEVELOPMENTS. IN THE RELEVANT YE AR THE ASSESSEE RECEIVED A SUM OF RS. 29,392/- TOWARDS SAL E PRICE OF LAND. HOWEVER, THE ASSESSEE WAS FOLLOWING MERCANTI LE SYSTEM OF ACCOUNTS AND CREDITED TO ITS ACCOUNT A SUM OF RS . 43,692/- REPRESENTING FULL SALE PRICE OF THE LAND. AT THE S AME TIME THE ASSESSEE ALSO DEBITED AN ESTIMATED SUM OF RS. 24,80 9 AS EXPENDITURE FOR THE DEVELOPMENTS. THIS WAS DISALLO WED BY THE REVENUE. ON APPEAL IT WAS HELD AS UNDER: HELD,(I) THAT THE UNDERTAKING TO CARRY OUT THE DEV ELOPMENTS WITHIN SIX MONTHS FROM THE DATES OF THE DEEDS OF SALE (WHICH, IN VIEW OF THE FACT THAT TIME WAS NOT OF THE ESSENCE OF THE CONTRACT, M EANT A REASONABLE TIME) WAS UNCONDITIONAL, THE APPELLANT BINDING ITSE LF ABSOLUTELY TO CARRY OUT THE SAME. THAT UNDERTAKING IMPORTED A LIA BILITY ON THE APPELLANT WHICH ACCRUED ON THE DATES OF THE DEEDS O F SALE, THOUGH THAT LIABILITY WAS TO BE DISCHARGED AT A FUTURE DAT E. IT WAS THUS AN ACCRUED LIABILITY AND THE ESTIMATED EXPENDITURE WHI CH WOULD BE INCURRED IN DISCHARGING THE SAME COULD BE DEDUCTED FROM THE PROFITS AND GAINS OF THE BUSINESS, AND THE AMOUNT TO BE EXP ENDED COULD BE DEBITED IN ACCOUNTS MAINTAINED IN THE MERCANTILE SY STEM OF ACCOUNTING BEFORE IT WAS ACTUALLY DISBURSED. THE DI FFICULTY IN THE ESTIMATION THEREOF DID NOT CONVERT THE ACCRUED LIAB ILITY INTO A CONDITIONAL ONE, BECAUSE IT WAS ALWAYS OPEN TO THE INCOME-TAX AUTHORITIES CONCERNED TO ARRIVE AT A PROPER ESTIMAT E THEREOF HAVING REGARD TO ALL THE CIRCUMSTANCES OF THE CASE. (II) THAT THE SUM OF RS. 24,809 REPRESENTED THE EST IMATED AMOUNT WHICH WOULD HAVE TO BE EXPENDED BY THE ASSESSEE IN THE COURSE OF CARRYING ON ITS BUSINESS AND WAS INCIDENTAL TO THE BUSINESS AND, 12 HAVING REGARD TO THE ACCEPTED COMMERCIAL PRACTICE A ND TRADING PRINCIPLES, WAS A DEDUCTION WHICH, IF THERE WAS NO SPECIFIC PROVISION FOR IT UNDER SECTION 10(2) OF THE INCOME-TAX ACT, W AS CERTAINLY AN ALLOWABLE DEDUCTION, ARRIVING AT THE PROFITS AND GA INS OF THE BUSINESS OF THE APPELLANT, UNDER SECTION 10(I) OF THE ACT, T HERE BEING NO PROHIBITION AGAINST IT, EXPRESS OR IMPLIED, IN THE ACT. THE EXPRESSION PROFITS OR GAINS IN SECTION 10(I) OF THE INCOME-TAX ACT HAS TO BE UNDERSTOOD IN ITS COMMERCIAL SENSE AN D THERE CAN BE NO COMPUTATION OF SUCH PROFITS AND GAINS UNTIL THE EXP ENDITURE WHICH IS NECESSARY FOR THE PURPOSE OF EARNING THE RECEIPTS I S DEDUCTED THERE FROM- WHETHER THE EXPENDITURE IS ACTUALLY INCURRED OR THE LIABILITY IN RESPECT THEREOF HAS ACCRUED EVEN THOUGH IT MAY HAVE TO BE DISCHARGED AT SOME FUTURE DATE. 70 THUS FROM ABOVE IT IS CLEAR THAT FOR DETERMINING TRUE PROFITS COST INCURRED BY THE ASSESSEE TOWARDS THE C ONSTRUCTION OF THE HOUSES AND FLATS WHICH HAS BEEN ACCUMULATED IN THE SCHEMES IS ALSO TO BE RECOGNISED. HOWEVER, IT HAS TO BE NOTED THAT IN CASE OF CALCUTTA COMPANY LTD VS. CIT (SUPR A) THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNT ING AND HAD CREDITED WHOLE AMOUNT RECEIVED OR RECEIVABLE TO WARDS SALE OF PROCEEDS I.E. WHY THE AMOUNT STILL TO BE INCURRE D ON DEVELOPMENT WAS ALLOWED AS EXPENDITURE BUT STILL TH E PRINCIPLE IS THERE. THEREFORE, IN CASE WERE CASH SYSTEM OF A CCOUNTING IS FOLLOWED THEN WHAT EVER EXPENDITURE HAS BEEN INCURR ED IN CASH DURING THE YEAR, HAS TO BE ALLOWED. IN THE CASE BE FORE US, THE ASSESSEE HAS NEITHER OFFERED THE INSTALLMENTS AS IN COME NOR CLAIMED EXPENDITURE INCURRED. SINCE WE HAVE ALREAD Y HELD THAT INSTALLMENTS RECEIVED HAVE BEEN RIGHTLY INCLUDED IN THE INCOME OF THE ASSESSEE, THEREFORE, CORRESPONDING EXPENDITU RE WHICH HAS BEEN INCURRED INC CASH TOWARDS CONSTRUCTION OF SUCH HOUSES AND FLATS SOLD UNDER HIRE PURCHASE IS ALSO TO BE AL LOWED. 71 ONE MORE ANGLE NEEDS TO BE CONSIDERED THAT IS WH AT WOULD HAPPEN TO THE OPENING STOCK AS WELL AS CLOSIN G STOCK. IN THE CASH SYSTEM OF ACCOUNTING CLOSING STOCK IS NOT CONSIDERED, THEREFORE, WHAT HAS BEEN ACCUMULATED IN THE SCHEME S IS ALSO REQUIRED TO BE CONSIDERED. CONSIDERING THE CONTENT IONS OF THE PARTIES AND THE PRINCIPLES WE HAVE ALREADY DISCUSSE D, WE ARE OF THE OPINION THAT WHATEVER INSTALLMENTS WERE ACCUMUL ATED IN THE SCHEMES NEEDS TO BE CONSIDERED ALONG WITH THE OPENI NG STOCK WHENEVER A PARTICULAR SCHEME WAS COMPLETED. THIS I S SO BECAUSE IT WAS POINTED OUT BY THE LD. COUNSEL OF TH E ASSESSEE THAT THE PROFIT IN EACH OF THE SCHEME WAS OFFERED F OR TAXATION WHEN A PARTICULAR SCHEME WAS COMPLETED. THEREFORE, THE RESULTS OF INDIVIDUAL SCHEMES HAVE TO BE RECALCULAT ED AND INSTALLMENTS ACCUMULATED SHOULD BE TAKEN AS INCOME AND EXPENDITURE INCURRED AFTER REDUCING THE EXPENDITURE INCURRED IN CASH WHICH HAS BEEN ALLOWED IN VARIOUS YEARS, SHOUL D BE REDUCED FROM THE SUCH INSTALLMENTS AND NET RESULTS SHOULD BE CONSIDERED IN THE YEAR OF COMPLETION OF EACH OF THE HOUSING SCHEMES IN THE YEAR IN WHICH PROFITS OF SUCH COMPLE TED SCHEME WERE ACTUALLY OFFERED BY THE ASSESSEE. 72 IN THESE CIRCUMSTANCES WE SET ASIDE THE ORDER O F THE LD. CIT(A) AND DIRECT THE AO TO INCLUDE INSTALLMENTS R ECEIVED ON SALE OF VARIOUS HOUSES AND FLATS UNDER HIRE PURCHAS E AGREEMENT 13 AND AT THE SAME TIME ALLOW CORRESPONDING EXPENDITUR E WHICH HAS BEEN EXPENDED BY THE ASSESSEE IN CASH (INCLUDIN G THROUGH CHEQUE). FURTHER IN THE YEAR OF COMPLETION OF A PAR TICULAR SCHEME EFFECT HAS TO BE GIVEN IN RESPECT OF ACCUMU LATED INSTALLMENTS AS WELL AS ACCUMULATED EXPENDITURE WHI CH HAS NOT BEEN ALREADY CONSIDERED IN A PARTICULAR YEAR ON CAS H BASIS AS OBSERVED EARLIER. WE HAVE OBSERVED RIGHT IN BEGINNI NG THAT THIS ISSUE IS INVOLVED IN ALL THE YEARS BEFORE US THEREF ORE, SIMILAR TREATMENT AS OBSERVED BY US, SHOULD BE GIVEN IN EAC H OF THE YEAR. FOLLOWING THAT ORDER WE DECIDE THIS ISSUE AGAINST THE ASSESSEE WITH SAME OBSERVATIONS AS IN PARA 71 ABOVE . 6 GROUND NO. 3 REGARDING THIS ISSUE ALSO BOTH THE PARTIES AGREED THAT SAME ISSUE HAS BEEN CONSIDERED BY THE TRIBUNAL IN CASE OF PUNJAB URBAN DEVELOPMENT AUTHOR ITY (SUPRA) THE SAME ORDER MAY BE FOLLOWED. 7 AFTER CONSIDERING THE RIVAL SUBMISSIONS WE FIND T HAT IN CASE OF PUNJAB URBAN DEVELOPMENT AUTHORITY (SUPRA) IDENTICAL ISSUE HAS BEEN DECIDED BY THE TRIBUNAL IN CASE OF PUNJAB URBAN DEVELOPMENT AUTHORITY (SUPRA) VIDE PAR A 84 TO 86 WHICH ARE AS UNDER: 84 WE HAVE HEARD THE RIVAL SUBMISSIONS CAREFULLY. FIRST OF ALL WE WOULD LIKE TO POINT OUT THAT THIS ISSUE IS A RISING IN ALL THE YEARS IN WHICH THE APPEALS WERE HEARD BY US, THEREF ORE, THE DECISION IN THESE PARAS WOULD BE APPLICABLE IN ALL THE YEARS WHEREIN APPEALS ARE BEING ADJUDICATED THROUGH THIS ORDER. THE ASSESSEE AUTHORITY WAS FORMED IN 1995 PRIOR TO WHIC H THIS ORGANIZATION WAS KNOWN AS PUNJAB HOUSING DEVELOPME NT BOARD WHICH WAS STATED TO HAVE BEEN FORMED IN 1972 . THROUGH A GAZETTE NOTIFICATION DATED 12TH AUGUST 1983 (COPY PLACED AT PAPER BOOK AT PAGES 135-136) GOVERNMENT OF PUNJAB M ADE CERTAIN RULES FOR PUNJAB HOUSING DEVELOPMENT BOARD THROUGH GSR NO. 70/PA6Z/73/S/98/83.RULE 16 OF THIS NOTIFICA TION READS AS UNDER: PROVIDENT FUND-(1) THE STATE GOVERNMENT SHALL ESTAB LISH A PROVIDENT FUND FOR THE EMPLOYEES OF THE BOARD AND SUCH PROVID ENT FUND SHALL BE DEEMED TO BE A GOVERNMENT PROVIDENT FUND FOR THE PU RPOSE OF THE PROVIDENT FUND ACT, 1925(CENTRAL ACT XIV OF 1925) A ND NOTWITHSTANDING ANYTHING CONTAINED IN SECTION 8 THE REOF, SUCH FUND MAY BE ADMINISTERED BY SUCH OFFICERS OF THE STATE G OVERNMENT OR OF THE BOARD AS THE STATE GOVERNMENT MAY SPECIFY IN TH AT BEHALF. 14 THE ABOVE CLEARLY SHOWS THAT GOVERNMENT THROUGH THI S NOTIFICATION WAS MANDATED TO ESTABLISH A GOVERNMENT PROVIDENT FUND UNDER PROVIDENT FUND ACT, 1925. FURTHER PAGE 1 52 OF THE PAPER BOOK IS COPY OF ANOTHER ORDER OF THE GOVERNME NT OF PUNJAB SHOWING THAT ON CONSTITUTION OF PUNJAB URBA N PLANNING AND DEVELOPMENT AUTHORITY VARIOUS TERMS IN PUNJAB H OUSING DEVELOPMENT BOARD RULES, 1983 WOULD STAND AMENDED BY SUBSTITUTION OF THE WORDS PUNJAB HOUSING DEVELOPME NT BOARD TO PUNJAB URBAN PLANNING DEVELOPMENT AUTHORITY T HIS SHOWS THAT SAME RULES WHICH WERE MADE FOR PUNJAB HOUSING DEVELOPMENT BOARD WERE ADOPTED FOR THE ASSESSEE AUT HORITY ALSO. THEREFORE, IT BECOMES CLEAR THAT PROVIDENT FUND ESTABLISHED BY THE ASSESSEE IS GOVERNED BY THE PROV ISIONS OF PROVIDENT FUND ACT, 1925. RULE (1) OF PART A TO THE FOURTH SCHEDULE OF THE ACT READS AS UNDER: APPLICATION OF THE PART THIS PART WAS NOT APPLIED TO ANY PROVIDENT FUND TO WHICH THE PROVIDENT FUND ACT, 1925 (19 OF 1925) APPLIES. THE ABOVE MAKES IT CLEAR THAT PROVIDENT FUND WHICH ARE GOVERNED BY PROVIDENT FUND ACT, 1925 ARE NOT COVERE D BY THE RULES MADE UNDER THE FOURTH SCHEDULE. IN OTHER WOR DS, THE PROVISIONS REGARDING RECOGNITION OF THE PROVIDENT F UND WOULD NOT BE APPLICATION TO SUCH FUNDS, THEREFORE, IT DOES N OT MAKE ANY DIFFERENCE WHETHER ASSESSEES PROVIDENT FUND IS REC OGNIZED OR NOT RECOGNIZED. THEREFORE, THERE IS NO FORCE IN T HE SUBMISSIONS OF THE LD. DR FOR THE REVENUE THAT THE CONTRIBUTION SHOULD NOT BE ALLOWED BECAUSE THE ASSESSEE HAS NOT GOT ITS FUNDS RECOGNIZED OR CONTRIBUTION WAS NOT MADE TOWAR DS RECOGNIZED PROVIDENT FUND. THIS ALSO LEADS TO THE CONCLUSION THAT SECTION 36(1)(IV) WHICH WAS FOR CONTRIBUTION T OWARDS RECOGNIZED PROVIDENT FUND, IS NOT APPLICABLE. HOWE VER, AS FAR AS SECTION 36(1)(VA) IS CONCERNED, THE SAME IS STIL L APPLICABLE BECAUSE SECTION 36(1)(VA) READS AS UNDER: 36. (1) THE DEDUCTIONS PROVIDED FOR IN THE FOLLOWING CLAU SES SHALL BE ALLOWED IN RESPECT OF THE MATTERS DEALT WITH THEREIN, IN COMPUTIN G THE INCOME REFERRED TO IN SECTION 28 ( I ) TO (V) - NOT RELEVANT [( VA ) ANY SUM RECEIVED BY THE ASSESSEE FROM ANY OF HIS EM PLOYEES TO WHICH THE PROVISIONS OF SUB-CLAUSE ( X ) OF CLAUSE ( 24 ) OF SECTION 2 APPLY, IF SUCH SUM IS CREDITED BY THE ASSESSEE TO THE EMPLOYEE'S ACCOUNT IN THE RELE VANT FUND OR FUNDS ON OR BEFORE THE DUE DATE. EXPLANATION . FOR THE PURPOSES OF THIS CLAUSE, 'DUE DATE' MEANS TH E DATE BY WHICH THE ASSESSEE IS REQUIRED AS AN EMPLOYER TO CREDIT AN EMPLOYEE'S CONTRIBUTION TO THE EMPLOYEE'S ACCOUNT IN THE RELEVANT FUND UNDER ANY ACT, RULE, ORDER OR NOTIFICATION ISSUED THEREUNDER OR UNDER ANY STANDING ORDER, AWARD, CONTRACT OF SERVICE OR OTHERWISE;] THE ABOVE PROVISION DEALS WITH EMPLOYEES SHARE OF T HE CONTRIBUTION. ACCORDING TO THE SCHEME OF THE ACT T HE 15 EMPLOYEES SHARE IS TREATED AS INCOME WHEN SOME CON TRIBUTION IS RECEIVED BY THE ASSESSEE AND WHEN SAME IS CONTRI BUTED TO PROVIDENT FUND THEN SAME IS ALLOWED AS DEDUCTION UN DER THIS PROVISION. AT THE SAME TIME RECEIPT OF SUCH CONTRI BUTION IS TREATED AS DEEMED INCOME U/S 2(24)(X) WHICH READS A S UNDER: ANY SUM RECEIVED BY THE ASSESSEE FROM HIS EMPLOYEES AS CO NTRIBUTIONS TO ANY PROVIDENT FUND OR SUPERANNUATION FUND OR ANY FUND SE T UP UNDER THE PROVISIONS OF THE EMPLOYEES' STATE INSURANCE ACT, 1948 (34 OF 1948), O R ANY OTHER FUND FOR THE WELFARE OF SUCH EMPLOYEES ; IN THIS CLAUSE WHICH IS PART OF THE DEFINITION OF I NCOME, THERE IS NO MENTION OF THE WORD RECOGNIZED PROVIDENT FUND THEREFORE, ANY CONTRIBUTION RAISED FROM THE EMPLOYEE TOWARDS A NY PROVIDENT FUND WOULD FORM PART OF THE DEEMED INCOME UNDER THIS PROVISION. IN OUR OPINION, THIS HAS BEEN DELIBERAT ELY DONE BY THE LEGISLATURE BECAUSE AS FAR AS EMPLOYEES CONTRIB UTION IS CONCERNED, THE PARLIAMENT WANTED THAT THE SAME SHOU LD NOT BE USED BY THE BUSINESS PEOPLE AND SHOULD BE DEPOSITED WITH THE PROVIDENT FUND AUTHORITIES AND OR TRUST AT THE EARL IEST AND THAT IS WHY NO DIFFERENCE HAS BEEN MADE BETWEEN RECOGNIZED PROVIDENT FUND OR OTHER FUNDS. FROM THIS IT BECOMES CLEAR TH AT AS FAR AS EMPLOYEES CONTRIBUTION IS CONCERNED, THE SAME IS N OT COVERED BY SECTION 36(1)(IV). HOWEVER, AT THE SAME TIME IT CANNOT BE DENIED THAT THE CONTRIBUTION MADE BY THE ASSESSEE T OWARDS PROVIDENT FUND IS CLEARLY IN THE NATURE OF BUSINESS EXPENDITURE AND THEREFORE, SAME IS ALLOWABLE U/S 37 OF THE ACT WHICH IS RESIDUARY PROVISION. SINCE THE CONTRIBUTION OF EMP LOYER SHARE TOWARDS PROVIDENT FUND IS IN NATURE OF REVENUE EXP ENDITURE AND NOT COVERED BY ANY OTHER PROVISION AS EXPLAINED ABO VE, SAME IS COVERED BY SECTION 37 OF THE ACT. THIS ANALYSIS LE ADS TO THE CONCLUSION THAT AS FAR AS EMPLOYER SHARE IS CONCERN ED, THE SAME IS ALLOWABLE U/S 37 AND AS FAR AS EMPLOYEES S HARE IS CONCERNED, THE SAME IS ALLOWABLE U/S 36(1)(VA). LO T OF ARGUMENTS HAVE BEEN MADE BY BOTH THE PARTIES IN RES PECT OF SECTION 40A(9) WHICH READS AS UNDER: (9) NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF ANY SUM PAID BY THE ASSESSEE AS AN EMPLOYER TOWARDS THE SETTING UP OR FORMATION OF, OR A S CONTRIBUTION TO, ANY FUND, TRUST, COMPANY, ASSOCIATION OF PERSONS, BODY OF INDIVIDUALS, S OCIETY REGISTERED UNDER THE SOCIETIES REGISTRATION ACT, 1860 (21 OF 1860), OR OTH ER INSTITUTION FOR ANY PURPOSE, EXCEPT WHERE SUCH SUM IS SO PAID, FOR THE PURPOSES AND TO THE EXTENT PROVIDED BY OR UNDER CLAUSE (IV) [OR CLAUSE (IVA)] OR CLAUSE (V) OF SUB-SECTION (1) OF SECTION 36 , OR AS REQUIRED BY OR UNDER ANY OTHER LAW FOR THE TIME BEIN G IN FORCE. PLAIN READING OF THIS PROVISIONS SHOWS THAT THE CON TRIBUTION MADE BY AN ASSESSEE AS A EMPLOYER TOWARDS VARIOUS F UNDS FOR THE BENEFIT OF THE EMPLOYEES ARE NOT ALLOWABLE EXCE PT FOR CONTRIBUTION PROVIDED IN THIS SECTION ITSELF. THER EFORE, THE LD. DR FOR THE REVENUE IS CORRECT THAT CONTRIBUTION WHI CH ARE NOT MENTIONED IN THIS SECTION CANNOT BE ALLOWED BECAUSE THIS PROVISIONS STARTS WITH NON OBSTANTE CLAUSE WHICH IS MADE CLEAR BY STARTING OF SECTION 40A(1) WHICH READS AS UNDER: 16 40A. (1) THE PROVISIONS OF THIS SECTION SHALL HAVE EFFE CT NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN ANY OTHER PROVISION OF THIS ACT RELATING TO THE COMPUTATION O F INCOME UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION'. HOWEVER, CAREFUL READING CLEARLY SHOWS THAT EXCEPTI ON PROVIDED IN THIS SECTION ARE IN RESPECT OF DEDUCTION ALLOWE D U/S 36(1)(IV) OR 36(1)(IVA) OR 36(1)(V). THERE IS ANOTHER EXCEPT ION WHICH READS AS UNDER: OR AS REQUIRED BY OR UNDER ANY OTHER LAW FOR THE TIME BEING IN FORCE THEREFORE, THE LD. COUNSEL OF THE ASSESSEE IS CORR ECT THAT SINCE PROVIDENT FUND ESTABLISHED BY THE ASSESSEE WAS IN T ERMS OF INDIAN PROVIDENT FUND ACT, 1925, THEREFORE, THIS H AS TO BE READ INTO THE EXCEPTIONS AND ACCORDINGLY FETTER FOR NOT ALLOWING THE DEDUCTION U/S 40A(9) WOULD NOT BE APPLICABLE FOR TH E FUNDS CONTRIBUTED TOWARDS PROVIDENT FUND AS THE EMPLOYE R SHARE IN TERMS OF INDIAN PROVIDENT FUND ACT, 1925 WHICH WAS ADOPTED BY THE ASSESSEE. THEREFORE, WE HOLD THAT THE ASSESSE E IS ENTITLED TO CLAIM DEDUCTION IN RESPECT OF CONTRIBUTIONS MAD E TOWARDS PROVIDENT FUND EVEN IF SUCH FUND IS NOT RECOGNIZED. 85 THE NEXT CONTENTION RAISED IS WHETHER DEDUCTION CAN BE ALLOWED EVEN IF THE CONTRIBUTION WAS PAID AFTER THE END OF THE YEAR. THE CLAIM OF THE ASSESSEE IS THAT THE PAYMEN TS HAVE BEEN MADE BEFORE THE DUE DATE OF FILING OF RETURN A S PROVIDED IN SECTION 43B. RELEVANT PORTION OF SECTION 43B READS AS UNDER: 43B. NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER PR OVISION OF THIS ACT, A DEDUCTION OTHERWISE ALLOWABLE UNDER THIS ACT IN RESPE CT OF [(A) ANY SUM PAYABLE BY THE ASSESSEE BY WAY OF TAX, DU TY, CESS OR FEE, BY WHATEVER NAME CALLED, UNDER ANY LAW FOR THE TIME BEING IN FOR CE, OR] (B) ANY SUM PAYABLE BY THE ASSESSEE AS AN EMPLOYER BY W AY OF CONTRIBUTION TO ANY PROVIDENT FUND OR SUPERANNUATION FUND OR GRATUITY FU ND OR ANY OTHER FUND FOR THE WELFARE OF EMPLOYEES, [OR] [(C) TO (F) NOT RELEVANT SHALL BE ALLOWED (IRRESPECTIVE OF THE YEAR IN WHICH T HE LIABILITY TO PAY SUCH SUM WAS INCURRED BY THE ASSESSEE ACCORDING TO THE METHOD OF A CCOUNTING REGULARLY EMPLOYED BY HIM) ONLY IN COMPUTING THE INCOME REFERRED TO IN SECTION 28 OF THAT PREVIOUS YEAR IN WHICH SUCH SUM IS ACTUALLY PAID BY HIM> [ PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SHALL APPLY I N RELATION TO ANY SUM [***] WHICH IS ACTUALLY PAID BY THE ASSESSEE ON OR BEFO RE THE DUE DATE APPLICABLE IN HIS CASE FOR FURNISHING THE RETURN OF INCOME UNDER SUB-SEC TION (1) OF SECTION 139 IN RESPECT OF THE PREVIOUS YEAR IN WHICH THE LIABILITY TO PAY SUCH SUM WAS INCURRED AS AFORESAID AND THE EVIDENCE OF SUCH PAYMENT IS FURNISHED BY THE ASSESSEE ALONG WITH SUCH RETURN. 17 CAREFUL READING OF THE ABOVE PROVISION SHOW THAT A FETTER HAS BEEN PROVIDED FOR ALLOWABILITY OF CERTAIN EXPENSES. THE EXPENDITURE EVEN IF IS ALLOWABLE BECAUSE OF THE MET HOD OF ACCOUNTING FOLLOWED BY HE ASSESSEE THE SAME IS STIL L NOT ALLOWABLE UNLESS AND UNTIL SUCH EXPENDITURE IS PAID . THIS MEANS THAT THIS SECTION PROVIDES FURTHER RESTRICTIO N ON ALLOWABILITY OF AN EXPENDITURE WHICH ARE OTHERWISE ALLOWABLE U/S 30 TO 44. IN OTHER WORDS EVEN IF AN EXPENDITURE IS ALLOWABLE UNDER VARIOUS PROVISIONS UNDER THE HEAD PROFITS AN D GAINS OF BUSINESS AND PROFESSION THE SAME IS NOT ALLOWABLE BECAUSE OF SECTION 43B UNLESS SUCH EXPENDITURE IS ACTUALLY PAI D. IN CASE BEFORE US, THE ASSESSEE IS FOLLOWING THE CASH SYSTE M OF ACCOUNTING WHICH WE HAVE ALREADY DISCUSSED WHILE AD JUDICATED GROUND NO. 5. THEREFORE, ANY EXPENDITURE IN CASE OF THE ASSESSEE HAS TO BE ALLOWABLE ONLY IF ACTUAL CASH HA S BEEN PAID DURING THE YEAR. THEREFORE, IF NO CASH HAS BEEN PA ID EXPENDITURE IS NOT ALLOWABLE. NO DOUBT SECTION 43B HAS CARVED OUT AN EXCEPTION BY WAY OF PROVISO THAT EVEN IF EXP ENDITURE IS PAID BEFORE DUE DATE OF FILING OF RETURN THEN THE S AME SHALL BE ALLOWED AND THE HON'BLE PUNJAB & HARYANA HIGH COURT IN CASE OF CIT V. NUCHEM LTD. IN ITA NO. 323 OF 2009 FOLLOW ING THE DECISION OF HON'BLE APEX COURT IN CIT V. ALOM EXTRU SIONS (2009) 227 CTR 417 HAS CLEARLY HELD THAT IF SUCH PA YMENTS ARE MADE BEFORE DUE DATE OF FILING OF RETURN THEN THE S AME HAS TO BE ALLOWED. HOWEVER, AS OBSERVED EARLIER THIS BENEFIT COULD NOT BE GIVEN TO THE ASSESSEE BECAUSE THE ASSESSEE IS FOLLO WING THE CASH SYSTEM OF ACCOUNTING AND ALLOWABILITY OF EXPEN DITURE ITSELF DEPENDS ON ACTUAL CASH PAYMENT. HOWEVER, WE WOULD LIKE TO OBSERVE THAT AT THE BEGINNING OF THIS ISSUE WE HAVE CLEARLY MENTIONED THAT THIS ISSUE RELATES TO MANY YEARS, TH EREFORE, IF THE PAYMENT FOR THIS YEAR WAS MADE IN NEXT YEAR THE SAME WOULD BE CLEARLY ALLOWABLE IN THE NEXT YEAR. THEREFORE, THE ASSESSING OFFICER SHOULD EXAMINE THIS ISSUE CLEARLY AND ALLOW THE PAYMENTS ON CASH BASIS EVEN IF THEY RELATE TO EARLI ER YEARS. THE LAST DISPUTE RAISED BY THE REVENUE IS THAT THE ASSESSEE WAS NOT MAINTAINING SEPARATE BANK ACCOUNTS AND OR FDRS IN THE ACCOUNT IN RESPECT OF PROVIDENT FUND BECAUSE THE S AME HAVE BEEN SHOWN IN THE BALANCE SHEET. IN THIS REGARD TH E LD. DR FOR THE REVENUE HAS RELIED ON THE DECISION OF CIT VS. T EXTOOL CO. LTD (SUPRA). IN THAT CASE THE ASSESSEE HAD CLAIMED DEDUCTION OF RS. 92,06,978/- AS CONTRIBUTION TOWARDS APPROVED GRATUITY FUND. A SUM OF RS. 50 LAKHS WAS PAID AS INITIAL CO NTRIBUTION AND RS. 5,84,754/- WAS PAID TOWARDS ANNUAL PREMIUM. T HE BALANCE OF RS. 36,22,224/- WAS PROVIDED FOR INITIAL CONTRIB UTION. ALL THE SUMS WERE PAID TO LIC. THE QUESTION AROSE WHETHER DIRECT PAYMENT TO LIC WAS COVERED BY SECTION 36(1)(V). IN THIS CONNECTION THE HON'BLE SUPREME COURT OBSERVED AS UN DER: HAVING CONSIDERATION THE MATTER IN THE LIGHT OF TH E BACKGROUND FACTS, WE ARE OF THE OPINION THAT THERE IS NO MERIT IN THE APPEAL. TRUE THAT A FISCAL STATUTE IS TO BE CONSTRUCTED STR ICTLY AND NOTHING SHOULD BE ADDED OR SUBTRACTED TO THE LANGUA GE EMPLOYED IN THE SECTION, YET A STRICT CONSTRUCTION OF A PROVISION DOES NOT RULE OUT THE APPLICATION OF THE PRINCIPLES OF REASONABLE CONSTRUCTION TO GIVE EFFECT TO THE PURPOSE AND INT ENTION OF ANY PARTICULAR PROVISION OF THE ACT (SEE SHRI SAJJAN MI LLS LTD. VS. CIT, M.P. & ANR (1985) 156 ITR 585). FROM A BARE R EADING OF SECTION 36(1)(V) ;OF THE ACT, IT IS MANIFEST THAT T HE REAL INTENTION BEHIND THE PROVISION IS THAT THE EMPLOYER SHOULD NO T HAVE ANY 18 CONTROL OVER THE FUNDS OF THE IRREVOCABLE TRUST CRE ATED EXCLUSIVELY FOR THE BENEFIT OF THE EMPLOYEES. IT IS CLEAR THAT INTENTION BEHIND THE PROVISIONS FO R VARIOUS FUNDS FOR EMPLOYEES IS THAT EMPLOYER SHOULD NOT HAVE CONT ROL OVER THE FUNDS WHICH HAS BEEN CONTRIBUTED BY THE ASSESSEE OR THE WORKERS. IN THIS REGARD THE LD. COUNSEL OF THE ASS ESSEE REFERRED TO SECTION 3 OF THE NOTIFICATION WHICH READS AS UND ER: ALL MONEYS BELONGING TO THE FUND SHALL BE INVESTED EITHER IN SECURITIES OF THE NATURE SPECIFIED IN CLAUSE (A), ( B), (C), (D) OR (E) OF SECTION 20 OF THE INDIAN TRUSTS ACT, 1882 (C ENTRAL ACT 2 OF 1882) OR IN THE POST OFFICE SAVINGS BANK ACCOUN TS OR IN LONG TERM FIXED DEPOSITS WITH SCHEDULED BANKS. POST OFF ICE NATIONAL SAVING CERTIFICATES OR KEPT AS A DEPOSIT WITH THE S TATE GOVERNMENT BEATING INTEREST. FURTHER THE ASSESSEE ALSO ISSUED OFFICE ORDER COPY OF WHICH IS PLACED AT PAGE 70 OF THE PAPER BOOK WHICH READS AS UNDER: IN PURSUANCE TO RULE 3(1)(2) OF THE PUNJAB HOUSING DEVELOPMENT BOARD (PROVIDENT FUND) RULES 1983 AND FURTHER ADOPTED PUDA IN ITS MEE TING HELD ON 17 TH JULY 1995 VIDE AGENDA ITEM NO. 17 A COMMITTEE, IS HEREBY CONST ITUTED TO ADMINISTER AND MANAGE THE CONTRIBUTORY PROVIDENT FUND OF THE EMPLO YEES OF PUDA. THE COMMITTEE SHALL INCLUDE: (A) THE CHIEF ADMINISTRATOR AS EX-OFFICIO CHAIRMAN OF THE COMMITTEE OR HIS NOMINEE (B) ACCOUNTS OFFICER (PENSION) AS SECRETARY OF THE COM MITTEE (C) ADMINISTRATIVE OFFICER (ADMIN-I)- MEMBER (D) SH. KARAM CHAND, SENIOR ASSISTANT AND SH. SHISHU P AL, SENIOR ASSISTANT- MEMBERS (REPRESENTING THE EMPLOYEES OF PUDA, APPROVE D VIDE ITEM NO. 9,10 IN THE MEETING OF THE AUTHORITY HELD ON 29.11.02). RAKESH SINGH VICE CHAIRMAN, PUDA THUS IT IS CLEAR THAT SEPARATE COMMITTEE HAS BEEN C ONSTITUTED BUT IT IS NOT CLEAR WHETHER THIS COMMITTEE WAS MONITORING THE FUNDS OF THE PROVIDENT FUND. THE FDRS HAVE BEEN DEBITED AND MAD E IN THE NAME OF THE CPF FDRS WHICH MEANS SEPARATE FDRS HAVE BEEN MADE BUT HOW IT HAS CLEARLY BEEN CONTROLLED BY THE MANAGING COMMITTEE, IS NOT VERY CLEAR. THEREFORE, TO THIS EXTENT WE SET ASID E THE ORDER OF THE LD. CIT(A) AND DIRECT THE AO TO EXAMINE WHETHER PR OVIDENT FUND WAS INDEPENDENTLY MONITORED IN THE LIGHT OF THE DIRECTI ONS ISSUED BY HON'BLE SUPREME COURT IN CASE OF TEXTOOL CO.LTD (SU PRA). 86 ANOTHER CONTENTION WAS ALSO RAISED THAT THE FUND S HAVE NOT BEEN INVESTED IN THE LONG TERM FDRS. WE HAVE SEEN VARIOUS NOTES ISSUED BY THE COMMITTEE WHERE FDRS HAVE BEEN MADE ONLY FOR ONE YEAR AND JUSTIFICATION FOR THE SAME HAS BEEN GIVEN THAT PRESENTLY INTEREST IS ON LOWER SIDE AND INTEREST IS LIKELY TO GO UP THEREFORE, FDR WAS MADE FOR ONE YEAR. THIS ASPECT ALSO NEED F URTHER EXAMINATION BY THE ASSESSING OFFICER WHERE REGULARL Y FDRS HAVE BEEN MADE FOR A PERIOD OF ONE YEAR OR LONGER PERIO D AND WHERE NO JUSTIFICATION FOR SUCH SHORTER PERIOD IS THERE OR NOT? THEREFORE, THE ASSESSING OFFICER SHOULD EXAMINE THIS MATTER FURTHE R AND DECIDE THE 19 ISSUE IN ACCORDANCE WITH LAW. IN THE RESULT, THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES. FOLLOWING THE ABOVE WE SET ASIDE THE ORDER OF THE L D. CIT(A) AND REMIT THE MATTER TO THE ASSESSING OFFICER WITH THE SAME OBSERVATIONS AS IN CASE OF PUNJAB URBAN DEVELOPMENT AUTHORITY IN ABOVE NOTED PARAS. 8. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 15.9.2014 SD/- SD/- (SUSHMA CHOWLA) (T.R. SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 15.9.2014 SURESH COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT/THE C IT(A)/THE DR