Amount paid for construction of railway underbridge for access to projects of assessee was revenue exp

By | October 6, 2015

Where an area development authority, made payment to Railway for construction of railway underbridge to overcome traffic problem and for creating access of projects undertaken by it, said expenditure was to be allowed as deduction under section 37(1)

IN THE ITAT CHANDIGARH BENCH ‘A’

Greater Ludhiana Area Development Authority

v.

Additional Commissioner of Income-tax

BHAVNESH SAINI, JUDICIAL MEMBER
AND T. R. SOOD, ACCOUNTANT MEMBER

IT APPEAL NOS. 252, 319 AND 1028 (CHD.) OF 2013
[ASSESSMENT YEARS 2009-10 AND 2010-11]

FEBRUARY  5, 2015

Sudhir Sehgal and Ashok Goyal for the Appellant. Smt. Jyoti Kumari for the Respondent.

ORDER

Bhavnesh Saini, Judicial Member – This order shall dispose of all the above appeals of the same assessee for different assessment years.

2. We have heard the learned representatives of both parties and perused the material available on record. The appeals are decided as under.

I.T.A. No. 319/CHD/2013 (Departmental appeal) (assessment year 2009-10)

3. This appeal by the Revenue is directed against the order of the learned Commissioner of Income-tax (Appeals)-I, Ludhiana, dated January 2, 2013, for the assessment year 2009-10.

4. On ground No. 1, the Revenue challenged the deletion of addition of Rs. 13.84 crores on account of payments made by the assessee to northern railways for construction of railway underbridge near Lodhi Club, Ludhiana. In the same ground, the Revenue also challenged the deletion of addition of Rs. 1.57 crores on account of payment made by the assessee to Punjab Mandi Board, Ludhiana, for construction of bridge on Sidhwan Canal at Dugri Road, Ludhiana.

5. We first deal with the addition of Rs. 13.84 crores which was made by the Assessing Officer on the ground of disallowance of expenditure debited by the assessee for construction of railway underbridge in Ludhiana. The Assessing Officer in this regard has observed that the assessee had made a payment of Rs. 13.84 crores to northern railways for construction of railway underbridge and the same had been claimed as business expenditure by GLADA on the ground that the said bridge was being constructed for the overall development and specifically to ease the traffic situation. The assessee has also claimed before the Assessing Officer that the decision of the hon’ble Kerala High Court in the case of CIT v.Travancore Titanium Products Ltd. [2010] 187 Taxman 81 was clearly applicable. It was submitted that the hon’ble court had held that : the parameters applicable in case of a private company that too with the respect of the claim for business expenditure are exactly not applicable in the case of public sector company. The Assessing Officer after considering the submissions of the assessee analysed the role of Public Works Department (Building and Roads) of Punjab in construction, upgradation and maintenance of roads/ bridges in the state. He also referred to the set up of the Punjab Roads and Bridges Development Board as an undertaking to act as catalyst for infrastructure development and the road sector in the State of Punjab. The Assessing Officer further examined the “ACT” constituting GLADA in order to understand the objectives of the same and to find out whether construction of railway underbridge was intended to serve such business purpose. The Assessing Officer referred to sections 28 and 29 of the Punjab Regional and Town Planning and Development Act, 1995, to hold that the construction of railway underbridge was not the function of GLADA. The Assessing Officer therefore held that the amount claimed as expenditure was mere application of funds.

6. The assessee challenged the addition before the learned Commissioner of Income-tax (Appeals) and the assessee submitted the following arguments :

“The learned Assessing Officer has disallowed the expenditure incurred by GLADA on construction of railway underbridge by stating that GLADA is not an authority to construct bridges. It is outside the objects of GLADA. The construction of bridges is duty of Punjab Roads and Bridges Development Board. Therefore, the expenditure is not allowable under section 37(1) of the Income-tax Act, 1961. In this regard, we submit as under :

(i) The Punjab Roads and Bridges Development Board was constituted by the Government of Punjab, vide Punjab Act No. 22 of 1998 and notified on July 27, 1998, as an undertaking of the State Government to act as a catalyst for infrastructure development in the road sector in the State of Punjab. Its purpose is to act as a nodal agency to plan and monitor all aspects relating to construction and improvement of roads and bridges in the State. This Board is responsible for planning and deployment of funds on State roads, fiscal management, project management, interdepartmental co-ordination and the other key areas. The PRBDB is responsible for development of roads and bridges on state highways, district roads, etc. Roads and bridges within city limit are responsibility of local authority or Municipal Corporation. The PRBDB deals only in state highways and district roads which are of strategic importance to the State. The same is clear from the list of projects undertaken by the PRBDB which has been downloaded from the website of PRBDB. The Board has undertaken projects on roads or area which do not fall under any local authority or municipal corporation.

(ii) GLADA is a statutory body constituted by the Government of Punjab under the Punjab Regional and Town Planning and Development Act, 1995 and its objects and functions are as per section 28 of the Punjab Regional and Town Planning and Development Act, 1995, which reads as under :

28. (1) The objects of the authority shall be to promote and secure better planning and development of any area of the State and for that purpose the authority shall have the powers to acquire by way of purchase, transfer, exchange or gift or to hold, manage, plan, develop and mortgage or otherwise dispose of land or other property or to carry out itself or in collaboration with any other agency or through any other agency on its behalf, building, engineering, mining and other operations to execute works in connection with supply of water, disposal of sewerage, control of pollution and other services and amenities and generally to do anything with the prior approval or on direction of the State Government, for carrying out the purposes of this Act.

(2) In particular and without prejudice to the generality of the foregoing provisions, the authority itself or in collaboration with any other agency or through any other agency on its behalf :

(i) if so required by the State Government or the Board, take up the works in connection with the preparation and implementation of regional plans, master plans and new township plans and town improvement schemes ;

(ii) undertake the work relating to the amenities and services to be provided in the urban areas, urban estates, promotion of urban development as well as construction of houses ;

(iii) promote research, development of new techniques of planning, land development and house construction and manufacture of building material ;

(iv) promote companies, associations and other bodies for carrying out the purposes of the Act ; and

(v) perform any other function which are supplemental, incidental or consequential to any of the functions referred to in this sub-section or which may be prescribed.

Thus, it is clear that the object of authority is to promote and secure better planning and development of any area of the State.

(iii) Attention is also invited to section 49(2) of the Punjab Regional and Town Planning and Development Act, 1995, which reads as under :

The funds of the authority shall be applied towards ‘meeting’ :

(i) The expenditure incurred in the administration, implementation and carrying out the provisions of this Act ;

(ii) the cost of acquisition of land for the purposes of this Act ;

(iii) the expenditure for development of land and construction of houses ; and

(iv) the expenditure for such other purposes as the State Government may direct or permit.

(iv) GLADA is not a commercial organisation. It has been specifically incorporated for the development and better planning of the areas of the State. It has to work according to the Act under which it has been constituted. No other object or activity can be carried on by GLADA. Its business purpose means the objects for which it has been constituted, i.e., development and better planning of the area of the State. The construction of railway underbridge will help the development of the areas developed by GLADA.

GLADA is a statutory body constituted by the Government of Punjab. The governing body consists of Senior Government Officials and the Chief Minister as its Chairman. The decisions of GLADA are taken by the governing body in its meeting. It cannot be compared with the private colonisers. Activities of private colonisers are undertaken with profit motive whereas the activities of GLADA are undertaken with overall development and better infrastructure of area under its jurisdiction.

(v) It has been decided by the Government of Punjab (photocopy enclosed) that railway underbridge (RUB) near lodhi club; Ludhiana is to be constructed by GLADA. This RUB is to be constructed for the overall development and keeping in view the traffic problem of Ludhiana. The traffic coming from Bhatinda, Faridkot, Ferozepur and Moga District, etc., shall not require to enter into the city and snail pass through Ferozepur road to Pakhowal road proposed missing Link I, Urban Estate Phase II and III Dugri, proposed missing link II and Urban Estate at Village Gill from Pakhowal road to Sidhwan canal and shall considerably reduce the volume of traffic problem and congestion on city roads. Unplanned and uncontrolled traffic is the major problem of Ludhiana city.

(vi) Railways does not permit to undertake construction activity in its portion and had got deposited the amount of Rs. 13.84 crores from GLADA for its construction. As such, this amount has been paid to northern railway for construction of RUB.

(vii) Thus, it is clear that, GLADA is duly authorised to incur this expenditure and same is within the objects of GLADA,

(viii) Allowability under section 37(1), to make a expenditure to be eligible under section 37. (1) the conditions to be fulfilled are as follows :

(a) Not falling within the expenditure covered by sections 30 to 36,

(b) The expenditure should not be capital in nature,

(c) The expenditure should not be of personal in nature, and

(d) The expenditure should have been incurred in the normal course of business and for the purpose of the business.

(ix) This payment is attributed to the objects of GLADA and the same is allowable as deduction under section 37(1) of the Income-tax Act, 1961. Means it has been incurred for the purpose of business of GLADA and the same is also neither of capital nature nor of personal nature. The said expenditure will enhance the reputation of GLADA and also the marketability of properties of GLADA located around the location where the expenditure has been incurred. Thus the said expenditure has been incurred wholly and exclusively for the purpose and business of GLADA.

(x) The Delhi High Court in the case of CIT v. D.T.T.D.C. Ltd. [2013] 350 ITR 1 (Delhi) has held that the expenditure incurred on construction of flyovers, etc., was revenue expense and not capital expense. The expenditure has to be allowed under section 37.

(xi) The Supreme Court in the case of Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 (SC) has laid down following principles for allowablility of expenditure :

(a) It is not necessary to show that the expenditure was profitable one or not that in fact any profit was earned.

(b) It is enough to show that the money was expended not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency and in order indirectly, to facilitate the carrying on of the business.

(xii) The Bombay High Court in the case of CIT v. State Bank of India [2003] 261 ITR 82 (Bom.) and CIT v. State Bank of India [2003] 262 ITR 662 (Bom.), has held that subsidy given by the bank to its subsidiaries towards opening of new branches was considered as an expenditure in the hands of State Bank of India. It was held that though by giving subsidy assets were created, but these assets belong to the subsidiaries and assets did not belong to the State Bank of India and the profits earned by subsidiaries are not profits of SBI. It was held that expenditure incurred by the SBI was a normal revenue expenditure and while holding so the hon’ble Bombay High Court relied on the decision of the hon’ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC) in which it was held that what may be the capital receipt in the hands of a payee need not necessarily be the capital expenditure in the hands of the payer.

(xiii) The hon’ble Supreme Court in the case of Sri Venkata Satyanarayana Rice Mill Contractors Co. v. CIT [1997] 223 ITR 101 (SC) and Patnaik and Co. Ltd. v. CIT [1986] 161 ITR 365 (SC), has held that any contribution made by an assessee to a public welfare fund which is directly connected or related to the carrying on of the assessee’s business or which results in benefit to the assessee’s business has to be regarded as an allowable deduction under section 37(1). Such a contribution, whether voluntary or at the instance of the authorities concerned, when made for the benefit of the public and not regarded as payment opposed to public policy should be held allowable as an expenditure. It has been held that there is no law which prohibits making such donations and, thus, it was pleaded that benefit of section 37(1) could not be denied to the assessee when payment is made for the purpose of assessee’s business.

It has been held that it is not a case where the money is contributed to any private fund or for the benefit of any individual which could be regarded as a form of illegal gratification. The Government of India directs the assessee to spend money for the specific schemes which are beneficial to the general public and payments to such a scheme cannot be regarded as being opposed to public policy. The mere fact that making of a donation for charitable or public cause or in public interest results in the Government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount under section 37(1) when such payment had been made for the purpose of the assessee’s business.

(xiv) The Rajasthan High Court in the case of CIT v. Hindustan Zinc Ltd. [2010] 322 ITR 478 (Raj) has held that where expenditure was incurred by the assessee in construction of part of dam built by the State Government inasmuch as it required a large quantity of water for day-to-day operation of its super smelter located near about, same was allowable as revenue expenditure and was allowed as deduction under section 37(1).

(xv) The hon’ble Supreme Court in the case of Lakshmiji Sugar Mills Co. P. Ltd. v. CIT [1971] 82 ITR 376 (SC) in which it has been held that apart from the element of compulsion, the roads which were constructed and developed were not the property of the assessee nor was it the case of the Revenue that the entire cost of development of those roads was defrayed by the assessee. It only made certain contribution for road development between the various cane producing centres and the mills. The apparent object and purpose was to facilitate the running of its motor vehicles or other means employed for transportation of sugarcane to the factory. From the business point of view and on a fair appreciation of the whole situation the assessee considered that the development of the road in question could greatly facilitate the transportation of sugarcane. This was essential for the benefit of its business of manufacturing sugar in which the main raw material admittedly consisted of sugarcane. These facts would bring it within the principle, that the expenditure was incurred for running the business or working it with a view to produce the profit without the assessee getting any advantage of an enduring benefit to itself. The expenditure was incurred by the assessee for reasons of commercial expediency apart from statutory compulsion. The development of the roads was necessarily meant for facilitating the carrying on of the assessee’s business. Furthermore, the Tribunal did not give any finding that the roads were to be altogether newly made and that the assessee would get an enduring benefit from these roads. The expenditure in question should have, therefore, been allowed as an admissible deduction.

(xvi) The Madras High Court in the case of CIT v. Madura Coats Ltd. [2009] 24 DTR 24 (Mad) has held that the welfare measures and community assistant programmes are allowable as deduction under section 37(1) of the Income-tax Act, 1961.

(xvii) The Delhi High Court in the case of Airports Authority of India v. CIT [2012] 340 ITR 407 (Delhi) [FB] has held that the expenditure on removal of encroachments around the airport is allowable as business expenditure under section 37(1) of the Income-tax Act.

(xviii) The Karnataka High Court in the case of CIT v. Karnataka Financial Corporation [2010] 326 ITR 355 (Karn)has held that the expenditure incurred at the instance of the State for development of infrastructural facilities of villages and construction of new market is allowable as these activities will cater to the need of people and would satisfy the purpose for which it was created by the state end such expenditure was deductible.

(xix) Thus, in our view expenditure incurred is allowable as deduction under section 37(1) of the Income-tax Act.

As submitted earlier, it is again submitted that the amount spent on the construction of railway underbridge is within the objects and authority of the GLADA. There are a number of colonies and commercial sites developed and owned, by GLADA near and around the site where the railway underbridge is being constructed. GLADA also auctions properties in these areas. Copy of the paper advertisement for the auction of commercial sites in the vicinity of railway under-bridge is enclosed herewith. The construction of this railway under-bridge will add to the value of these properties. Therefore, the amount spent for the construction of railway underbridge is when in the objects of GLADA and for its business purposes, hence allowable under section 37(1) of the Income-tax Act, 1961.”

7. The learned Commissioner of Income-tax (Appeals), considering the object of the assessee and construction of railway underbridge made for the business purposes, deleted the addition. His findings in paragraph 5 of the appellate order are reproduced as under :

“I have considered the basis of disallowance made by the Assessing Officer and arguments of the authorised representative during the assessment as well as appellate proceedings. It is apparent that the payment made by the assessee for construction of railway under-bridge in its jurisdiction/area of activity, i.e., Ludhiana is intended to improve the traffic situation especially in areas which are falling in and around the colonies developed by GLADA. It is also important to appreciate that the construction of the said bridge would improve the connectivity between Ferozepur Road to Pakhowal Road leading to smooth flow of traffic and therefore would definitely serve the purpose of GLADA in creating better civic amenities in the area of its operation. Even from purely commercial point of view the said bridge would go to add to the quality of life so as to eventually lead to appreciation in the market rates in respect of properties situated in that area. In this sense, I can see that the claim of expenditure is related to the objects of GLADA. It is also seen that the Assessing Officer has merely referred to the objects of GLADA in concluding that the said expenditure was application of funds but has definitely missed the clear link between the construction of railway underbridge and improvement of civic amenities. I am also guided by the judgment of the hon’ble Kerala High Court as referred to by the appellant wherein it has been clearly held that the standards/parameters in respect of claim of expenditure of a private company and a public sector company have to be different. In view of the above the claim of expenditure is directed to be allowed.”

8. The learned Departmental representative relied upon order of the Assessing Officer and submitted that the assessee paid the amount for railway underbridge as per direction of the State Government and the assessee has no say. It has no nexus with the business of the assessee and relied upon the following decisions :

(i) CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 (SC) ;

(ii) CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC) ;

(iii) Lakshmiratan Cotton Mills Co. Ltd. v. CIT [1969] 73 ITR 634 (SC) ; and

(iv) Oil Industry Development Board v. Asstt. CIT [2010] 123 ITD 67 (Delhi).

9. The assessee is an independent authority. The creation of bridge is not related to the assessee. Expenses are not incurred for business activity of the assessee.

10. On the other hand, learned counsel for the assessee reiterated the submissions made before the authorities below and submitted that railway underbridge was constructed as per the scheme of the assessee and requirements for the business purposes and to achieve the aims and objects of the assessee. He has relied upon following decisions :

(i) CIT v. D.T.T.D.C. Ltd. [2013] 350 ITR 1

(ii) Sri Venkata Satyanarayana Rice Mill Contractors Co. v. CIT [1997] 223 ITR 101 (SC)

(iii) Patnaik & Co. Ltd. v. CIT [1986] 161 ITR 365 (SC)

(iv) Lakshmiji Sugar Mills Co. (P.) Ltd. v. CIT [1971] 82 ITR 376 (SC) ; and

(v) CIT v. Madura Coats Ltd. [2009] 24 DTR 24 (Mad.).

11. He has submitted that case law cited by the learned Commissioner of Income-tax (Appeals) in the assessment year 2010-11 do not apply to the facts of this case. The notification was issued by the State Government for the assessee’s Constitution. Paper book pages 31 to 33 are the minutes and meetings with the Chief Minister who is also Chairman of the Managing Committee and other authorities were also present at the time of meeting for giving approval for construction of railway underbridge. The letter regarding estimate of construction of bridge dated March 31, 2005, is also filed on record.

12. Learned counsel for the assessee also filed the map of the railway underbridge to show that the railway underbridge was constructed to connect the properties developed by the assessee. He has, therefore, submitted that the learned Commissioner of Income-tax (Appeals) on proper appreciation of the facts and material on record, correctly deleted the addition.

13. We have considered the rival submissions. It is not in dispute that the assessee made payments for construction of railway underbridge in its jurisdiction and area of activity in Ludhiana with the purpose to improve the traffic situation, specially in the areas which are falling in and around the colonies developed by the assessee. Learned counsel for the assessee filed the map of the underbridge constructed by the assessee to show that railway underbridge was constructed to connect the colonies which were located on both sides of railway track. It was, therefore, for the benefit of the business of the assessee only. The learned Commissioner of Income-tax (Appeals), therefore, correctly appreciated that the construction of the said bridge would improve the connectivity between Ferozepur Road to Pakhowal Road leading to smooth flow of traffic and therefore, would definitely serve the purpose of the assessee in providing better civic amenities in the area of operation. The main object of the assessee-authority is to promote and secure better planning and development of any area of the State. The scope of the assessee is not limited to the construction of housing project only but to work for the development and betterment of the State.

14. Before the authorities below, it was contended that as per section 28(1) of the Punjab Regional and Town Planning and Development Act, 1995 reproduced above would provide that the assessee can do anything with the prior approval or on the direction of the State Government for carrying out the purposes of this Act. In the same Act, it is also provided that the funds of the authority shall be applied for such other purposes as the State Government may direct or permit. Though we agree section 28 may not determine the allowability of expenditure under section 37 of the Income-tax Act, however, the amount in question is entirely paid to the northern railway for construction of underbridge as per the minutes duly approved by the authority. The assessee has furnished complete details on the same at pages 21 to 35 of the paper book and the relevant copy of the minutes is filed at page 33 of the paper book and further correspondence is filed at pages 81 to 83 of second paper book. The project was approved by the assessee-authority and execution with its funds. Since the assessee has constructed the railway underbridge to overcome the traffic problem in Ludhiana and for creating access of the projects undertaken by the assessee, therefore, the purpose of raising construction of railway underbridge was commercial in nature for the purpose of achieving the objects of the assessee-authority. This expenditure has also made the marketability of the properties of the assessee-authority around the location where underbridge was constructed. The decisions relied on before the learned Commissioner of Income-tax (Appeals) support the findings of the assessee.

15. The learned Commissioner of Income-tax (Appeals), therefore, correctly decided the issue in favour of the assessee holding that the amount is spent for the purpose of business activities of the assessee. There is, therefore, clear nexus between the amounts spent and the business activity of the assessee. We, therefore, do not find any justification to interfere with the order of the learned Commissioner of Income-tax (Appeals) in deleting the addition. This ground of Departmental appeal is dismissed.

16. In the same ground, the Revenue challenged the deletion of addition of Rs. 1.57 crores on account of payment made by the assessee to Punjab Mandi Board, Ludhiana for construction of bridge on the Sidhwan Canal at Dugari Road, Ludhiana. The learned Commissioner of Income-tax (Appeals) noted that the Assessing Officer disallowed these expenditure on the same reason as payments have been made to northern railway. Therefore, the learned Commissioner of Income-tax (Appeals) following his order on the above issue, deleted this addition as well.

17. Both parties stated that issue is same as have been considered with regard to payment made to northern railway for construction of railway underbridge. Learned counsel for the assessee also filed copy of the map showing the location where the bridge in question has been constructed. It would link the colonies constructed by the assessee-authority. Therefore, the issue being same, we following the order with regard to payment made to northern railway, dismiss this ground of the Revenue as well. In the result, ground No. 1 of the appeal of the Revenue is dismissed.

18. On ground No. 2, the Revenue challenged the order of the learned Commissioner of Income-tax (Appeals) in deleting the above additions as mere payment to northern railway and Punjab Mandi Board do not entitle the assessee to claim deduction under section 37 of the Act. This ground is academic and argumentative in nature and has already been decided while deciding ground No. 1 above. The assessee has correctly claimed deduction under section 37 of the Act. Therefore, following the reasons for decision on ground No. 1, we dismiss this ground of appeal of the Revenue.

19. In the result, the Departmental appeal stands dismissed.

I.T.A. No. 252/CHD/2013 (assessee’s appeal) (assessment year 2009-10)

20. This appeal is filed by the assessee against the same order of the learned Commissioner of Income-tax (Appeals)-I, Ludhiana, dated January 2, 2013, for the assessment year 2009-10.

21. Learned counsel for the assessee submitted that effective grounds raised in the appeal of the assessee are grounds Nos. 1 and 2 and grounds Nos. 3 to 6 are general and argumentative in nature. Ground Nos. 3 to 6 are accordingly, dismissed as call for no finding.

22. On ground No. 1, the assessee challenged the addition of Rs. 1,86,77,600 made by the Assessing Officer on account of amount paid to Punjab State Development and Welfare Fund. On ground No. 2, the assessee challenged the addition of Rs. 71,45,25,006 as receipt of external development charges. The learned Commissioner of Income-tax (Appeals) considered ground No. 2 in detail, therefore, it would be better to take up this issue before deciding ground No. 1 above.

23. On ground No. 2, the Assessing Officer made addition of Rs. 71,45,25,006 on account of treatment of external development charges as revenue receipts. The facts in this regard are that the assessee had received and shown Rs. 91.36 crores under the head external development charges (EDC) as on March 31, 2009, as liability in its books of account and out of same, an amount of Rs. 71,45,25,006 had been received during the year under consideration. The amount of interest of Rs. 5.53 crores earned on the same had been shown as interest income in the profit and loss account. The external development charges are collected from the promoters/developers of colonies as per the stipulated rates and are meant to be spent on the external development of the said colonies. The assessee claimed before the Assessing Officer that amount received as external development charges did not belong to GLADA but to the State Government and hence had been treated as liability. The Assessing Officer analysed the provisions of sections 2(p) and 5(5) of the Punjab Apartment and Property Regulation Act, 1995, to hold that it, is nowhere envisaged that amount received as external development charges was collected on behalf of the Government and was to be treated as a liability. The said amount received as external development charges should have been treated as income on the same lines as interest accruing on the amount standing under this head. The assessee challenged the addition before the learned Commissioner of Income-tax (Appeals) and its arguments are reproduced as under :

(i) The authority gets the deposit of external development charges from the promoters of private colonies. These charges are deposited by the promoter for development works to be carried out at the periphery of colonies by the Government or local authorities. These are the charges for providing infrastructure, i.e., roads, water supply and sewerage system, etc.

(ii) These are collected under the Punjab Apartment and Property Regulation Act, 1995. Some of the relevant provisions of the Punjab Apartment and Property Regulation Act, 1995, are reproduced as under :

Section 2(l) defines Competent Authority : Competent Authority means any person or authority appointed by the State Government, by notification, in the official gazette, to exercise and perform all or any of the powers and functions of the competent authority under this Act and the rules made thereunder ;

“Section 2(p) defines external development work. ‘External development works’ includes roads and road systems, water supply, sewerage and drainage systems, electric supply or any other work which may have to be executed, in the periphery of, or outside, a colony for its benefit.”

Section 2(v) defines local authority :

“local authority means a corporation constituted under section 4 of the Punjab Municipal Corporation Act, 1976 (Punjab Act No. 42 of 1976) or a committee constituted under section 12 of the Punjab Municipal Act, 1911 (Punjab Act No. 3 of 1911) or any other authority notified by the State Government for the purpose of this Act”.

Section 5(5), the promoter is bound to pay these charges ; “The promoter shall enter into agreement undertaking to pay proportionate development charges for external development works to be carried out by the Government or a local authority”.

Section 5(6), the use of external development charges : The competent authority shall determine the proportion in which, and the time within which, the estimated development charges referred to in sub-section (5) shall be paid to the State Government, or the local authority, as the case may be.

(iii) The competent authority means GLADA and local authority means other local bodies such as MC, PWD, etc.

(iv) As per section 5(5) of the Punjab Apartment and Property Regulation Act, 1995, the promoter is required to deposit external development charges with GLADA for external development works to be carried out by the Government itself or other local authority.

(v) As per section 5(6) of the Punjab Apartment and Property Regulation Act 1995, the GLADA (Competent Authority) shall pay the external development charges to the Government or a local authority.

(vi) These charges are deposited by the promoters for development works to be carried out in or outside their colonies by the Government, or local authorities. The amount received is kept in a separate bank account and is transferred to the State Government or local authorities as and when required.

(vii) The GLADA itself does not carry out any development work. The GLADA is only acting as a nodal agency. It has no control over the fund. When the amount has to be incurred, the same is given to the other authorities for carrying out the work. Therefore, these charges are not the income of the authority but it is a fund/liability collected on behalf of other agencies.

(viii) The Delhi High Court in the case of D.T.T.D.C. Ltd. (supra) has held that since amount under the other general economic services was kept in a deposit unrelated to the business of the assessee and the assessee did not exercise dominion over said fund/ deposit and deal with said fund/deposit, it was to be held that same was not taxable income of the assessee. The High Court held as under :

Every receipt or amount received/accounted, is not income. Amount received is income in the hands of the assessee if he has title/right the said amount in form of dominion and right to use the said amount When examining, the concept of ‘income’ one has to keep in mind, commercial reality/ speciality of the situation rather than pure theoretical or doctrine aspects. The business aspect of the matter has to be viewed as a whole but without disregarding the statutory language. Depending upon the nature and character of the deposits/payments, treatments should be given to hold whether or not the amount received was income/profit.

A distinction has to be made between deductions for ascertaining profits made and distribution made out of profits ; and receipts which do not form part of the profit. The latter do not form part of the profit and loss account. (paragraph 27)

The nature and character of the receipt has to be looked from practical and a commercial point of view. (paragraph 28)

It is the true nature of the receipt and purpose thereof is the determinative factor and the relevant principle to apply to decide whether or not an amount should be included or excluded from the profit/income. This requires examination of the question from various angles as noticed above do the receipts bear a character of income at the time when it reaches the hands of the assessee? Does the money vest with the assessee once and for all? Whether the assessee exercises complete dominion over the fund or is it to be regarded as the money of the depositors or a third person. When an assessee does not have dominion over the fund it is difficult to categorise the same as income. (paragraph 34)

Mere fact that the amount was retained in the bank account of the assessee under the head “other general economic services”, does not show or prove that it was the income of the assessee. Mere realisation of an amount in course of trading was not determinative whether the amount received was income. The court/authorities must determine the nature and character of the receipts before the amount can be taxed as income. This part of the sale consideration, i.e., other general economic services was kept in a deposit unrelated to the business of the assessee and the assessee did not exercise dominion over the said fund/deposit and deal with the said fund/deposit. Keeping in view the aforesaid elucidation of law and applying the same to the factual matrix, noting the nature and character of the other general economic services it was to be held that the same was not taxable income of the assessee. The same has to be excluded from the profit. The aforesaid receipts were not income earned and do not have character of income earned by the assessee over which it had dominion or right. (paragraph 36)

(ix) The Karnataka High Court in the case of CIT v. Karnataka Urban Infrastructure Development & Finance Corpn.[2006] 284 ITR 582 has held that these funds are not the income of the assessee.

(x) Also the hon’ble Supreme Court in the case of Motilal Chhadami Lal Jain v. CIT [1991] 56 Taxman 4A has held that when no income accrues to the assessee, he cannot be taxed.

(xi) The Delhi Income-tax Appellate Tribunal in the case of Saharanpur Development Authority v. Asstt. CIT [2011] 48 SOT 186 (URO) has held that infrastructure development fund is not the income of the assessee as the assessee has no control over this fund.

(xii) The Income-tax Appellate Tribunal, Ahmedabad Bench, in the case of National Dairy Development Board v.Addl. CIT [2009] 310 ITR (AT) 325 (Ahd) has held that the funds received for implementation of certain projects are not the income of the assessee.

(xiii) In view of the above discussion, it can be concluded that the addition of Rs. 71.45 crores on account of external development charges is against legal and factual position and the same merits to be deleted.

It was further submitted by the authorised representative which is as under :

(i) As submitted earlier, we again submit that the external development charges received by GLADA are not the income of GLADA. We are acting as agent/custodian of the State Government.

(ii) Reliance is placed upon the judgment of the Income-tax Appellate Tribunal, Mumbai Bench, in the case of City & Industrial Development Corpn. of Maharashtra Ltd. v. Asstt. CIT [2012] 138 ITD 381  wherein the Tribunal has deleted the addition of money received by the company for the development of infrastructure and towns. The assessee was considered as the agent of the State Government. The Tribunal has held as under :

The arguments of the assessee that it must be treated as Government or surrogate or an agent, is to be adjudicated at first. To consider the taxation point of view, one has to refer to article 289 of the Constitution. (paragraph 38)

The entire case of the assessee hinges on clause (2) or clause (3) of article 289 of the Constitution of India. The basic purport of article 289(2) is to neutralise clause (1), but with a rider that, if there is any “trade or business”, done, on behalf of the Government or any operations interlinked therewith or any property issued or occupied for the purposes of such trade or business, or any income accruing or arising in connection therewith. To make this clause effective, even for Government/State, conduct of “trade or business” is necessary, and this simply means involvement of commercial and profit motive for the vendor.

Therefore, whenever, there is an activity in the nature of trade or business, clause (2) shall come to life, which according to clause, shall be applicable towards the State, i.e., if an activity which is in the nature of trade or business, run by the State itself, the liability for tax will arise, a typical example is that of service tax collected by the State on events being conducted by the vendors, have to be deposited by the State, in the Government exchequer, making the State an assessee under the service tax. This is only possible where there is an activity of “trade or business”, but, if, confined towards development, either of a new township or betterment of the functions of the local authority, article 289(2) shall remain in the oblivion and shall not come into play. The only clause left for consideration then would be clause (3), which comes into play once clause (2) is disbanded. As soon as clause (2) becomes disbanded, clause (3) come to life, which operates only if, “Parliament may by Law declare to be incidental to the ordinary functions of Government”. Here, in the instant case, one has to read “Parliament” as “State Government” because in the instant case, it is the State Government which has authorised the assessee to perform the development projects at various places. (paragraph 39)

One cannot agree with the argument of the Revenue that there is no document which has drawn out the agent-principal relationship, because the very first resolution of the State Government dated March 18, 1970 mention in paragraph 2 that the assessee would act as an “agent” of Government for the development of the areas with a view to secure the objective mentioned in the resolution of the State Government and in paragraph 3 of this resolution clearly say, “The subsidiary company will work under the control and supervision of the State Government in the General Administrative Department”, Thus, the first resolution itself makes it clear that the assessee is an agent, but functions as an arm of the State Government, because, if the assessee can only work under the control and supervision of the State Government, meaning thereby that the assessee cannot make/take any decisions of its own, then, in such a case authority for performance of all activities lie somewhere else. In any case, as per this resolution, it clearly makes the assessee an “agent” of the State. (paragraph 40)

When one looks into the financial functions of the assessee, it appears that all dealings have to be routed through authorisations by the Government and all funds receivable would be in compliance and with intimations to officials of various Government departments. (paragraph 41)

According to the Maharashtra Regional and Town Planning Act, 1966, the machinery sections, i.e., sections 113 and 113A talk of appointment of development authority and local authority and accordingly, through various resolutions, in compliance of these sections, Maharashtra Regional and Town Planning Act has appointed the assessee as the development authority for development to new townships and local authorities for streamlining the functions of already existing towns like Aurangabad, Nashik, Nagpur, etc. This, on its own, shows that the assessee is acting totally on behalf of the Government. Another distinguishing feature is that as soon as the “project” is complete, it gets handed back to the State, i.e., when there is a development project, as per phases, and in the case of local authority, as and when the authorising committee is satisfied, the reins are transferred to the municipal boards, from whom, the project was taken over. (paragraph 42)

In tune with these observations, read with sections 113 and 113A of the Maharashtra Regional and Town Planning Act along with articles 289(1) and 289(3) and holding that the assessee corporation is not doing any trade activity on its own, it is to be held that the assessee is an agent of the State Government. Further, the fact that the department has been assessing the assessee as a State Government undertaking for the last three years, cannot also be ignored and, therefore, even this cannot be called as an afterthought and applying the “rule of consistency”, if is held that the Department cannot be allowed to take a distinctive approach in the current year. (paragraph 43)

The Revenue authorities were thus, clearly in error in assessing the business income in the hands of the assessee. This income is deleted, as not belonging to the assessee.

24. The learned Commissioner of Income-tax (Appeals), however, confirmed the addition and dismissed this ground of appeal of the assessee. His findings in paragraph 9 of the appellate order are reproduced as under :

“9. I have considered the basis of disallowance made by the Assessing Officer and arguments of the authorised representative during the assessment as well as appellate proceedings. The appellant has mainly relied upon his argument that the external development charges never belonged to GLADA but to the State Government, however this claim is not supported by any provision in the relevant statute, i.e., Punjab Apartment and Property Regulation Act, 1995. Further the letter of the Secretary Housing Urban and Development of Punjab Government referred to by the appellant does not help as it only says that funds collected under external development charges (EDC) have to be used for specific purpose as meant. It only means that the amount collected as external development charges should be spent on external development of the colonies and for not any other purpose. It is also a matter of fact that such external development charges are being collected as a matter of guarantee to ensure that the external development meant to be done is not compromised on account of want of funds at a later stage. The fact that the charges collected as external development charges have not been spent by the GLADA for a long time only means that the external development in the form of roads and lighting, etc., has already been in place by other agencies of State/Central Governments as part of their work. In case no amount is spent out of external development charges for the intended purpose, the surplus thereof can only be treated as the income of the assessee as the said amount is not being collected as an agent but as due to it by specific provisions in the Act governing it. It is also important to appreciate that the interest amount of Rs. 5.5 crores on the account of external development charges collected till March 31, 2009, has been shown by the appellant as its income. In case the principle amount was not belonging to the assessee, the interest obviously would also not belong and the vice versa should also hold. The appellant has placed reliance on the decision of CIT v. Bihar Rajya Pul Nirman Nigam Ltd. [1991] 191 ITR 173 (Patna) wherein the facts are clearly different as the said company was collecting the toll under the Tolls Act wherein amounts so collected were specifically part of the consolidated funds of the State and hence State revenues. The facts of the case under consideration clearly shows that the external development charges collected is not part of the State revenues but part of the revenue receipts of the corporation for the purposes of making external development and if such external development is already done then the surplus thereof would only amount to profits. Even the reliance placed by the appellant on the judgment of hon’ble apex court in the case of CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 (SC) is of no help as the impugned judgment only lays down the rules with regard to the accessibility of a particular receipt as income. In the instant case if the amount did not belong to the assessee the interest income on the same would not be its income as well. The claim of the appellant that there was diversion by overriding title is not admissible as the external development charges are being collected for a specified purpose are as per the facts of the case which have already been taken care of, leading to the said surplus. It is a different matter that the said surplus had not been used pending clear directions from the State Government but the interest on the same has been treated as income. In the circumstances, it becomes apparent that the funds representing collected external development charges belong to the assessee and should have been treated as its income. As such, the addition made by the Assessing Officer is confirmed.”

25. Learned counsel for the assessee reiterated the submissions made before the learned Commissioner of Income-tax (Appeals) and relied upon the same case law which were relied on before the learned Commissioner of Income-tax (Appeals) and also referred to the judgment of the Delhi High Court in the case of D.T.T.D.C. Ltd. (supra) in which it was held (headnote) “mere fact that the amount was retained in the bank account of the assessee under the head ‘other general economic services’ does not show or prove that it was income of the assessee”. It was submitted that the assessee did not make any claim of deduction and the entire amount was deposited in a particular bank account which was received from the colonisers and was payable by the assessee to the State Government or any other authority. Thus the external development charges did not belong to the assessee and no expenses have been claimed in the next year. He had filed copy of the notification dated June 23, 2005, issued by the Government of Punjab to revise the policy of external development charges with regard to payment of external development charges by the promoters in licensed colonies and submitted that as per direction of the State Government, external development charges were paid to the assessee which were payable by the assessee to the State Government. The details of the external development charges received from various colonisers are also filed.

26. On the other hand, the learned Departmental representative relied upon orders of the authorities below and submitted that external development charges are collected by the assessee. Therefore, it is income of the assessee. The assessee, as per rule was entitled to collect the development charges, therefore, it should be shown as income and whatever expenditure is incurred, the assessee could claim deduction of the same. Since the assessee maintained the cash accounting system, therefore, it was correctly added as income of the assessee. The learned Departmental representative relied upon decisions of the hon’ble Supreme Court in the cases of CIT v. Bazpur Co-operative Sugar Factory Ltd. [1988] 172 ITR 321 and Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 (SC). The learned Departmental representative also submitted that as per provisions of PUDA Act, all amounts vest in the assessee-authority and in the assessment year 2010-11, the learned Commissioner of Income-tax (Appeals) found that no expenses have been incurred by the assessee. Therefore, the receipts in the hands of the assessee is income and has to be taxed accordingly.

27. We have considered the rival submissions. The assessee explained that the assessee-authority received the external development charges from the promoters of private colonies and the charges were deposited by the promoters for development work to be carried out at the periphery of the colonies by the Government or local authority. The amounts are collected as per specified rates and were meant to be spent on the external development of the colonies. These charges are for providing infrastructure, the facilities like roads, water supply and civic system, etc. The assessee explained that these amounts are collected as per the Punjab Apartment and Property Regulation Act, 1995 and provisions of the same are also reproduced in the impugned order. The assessee, therefore, submitted that external development charges does not belong to the assessee at all the same is collected as per the direction of the State Government.

28. Learned counsel for the assessee filed copy of the notification of the Government of Punjab, dated June 23, 2005, to show that the Punjab Government has revised policy of external development charges with regard to the payment of external development charges by the promoters in licensed colonies. The assessee also deposited the amount in question in a separate bank account which is not in dispute. It is, therefore, clear that the amount in question is received by the assessee as per direction of the Government of Punjab. This amount was shown as payable in the accounts of the assessee. Therefore, the nature and character of the receipt should have been examined by the authorities below as per the relevant provisions of the law and the notification issued by the Government of Punjab in this regard. It appears that authorities below have failed to consider the relevant provisions of the law and the notifications issued by the Government of Punjab in this regard which would clearly through light on the nature and character of the receipt of external development charges received by the assessee. Because the assessee claimed that the amount is received as per direction of the State Government and was to be spent as per the direction of the State Government or specified authority. Thus, how the said amount could be income of the assessee, is not established by the authorities below. The main reason for the above addition as made by the Assessing Officer is that the assessee has shown the amount of interest on the bank deposit as income for the year under consideration. Since the principle amount itself is shown as liability and the amount is to be spent as per the direction of the State Government, merely showing interest as income on such liability by itself is not sufficient to put the entire liability upon assessee to treat the liability amount as income. The assessee has no right/title or interest in external development charges. The assessee is competent/ nodal authority to receive external development charges as per the provisions of law referred to above. Therefore, it was liability of the assessee to pay back the amount as per direction of the State Government or local authority. The learned Commissioner of Income-tax (Appeals) admitted that external development charges kept pending and not used pending clearance from the State Government would prove it was not money of the assessee. Further, the facts disclose that the assessee may be a custodian of the amount of external development charges, therefore, how it could be treated as income of the assessee, is not explained by the authorities below. The assessee also in the paper book, filed certain correspondence to show that since external development charges were lying unutilised, therefore, due to financial constraints, request was made to the State Government to permit the assessee-authority to use external development charges for development projects in the larger public interest. This correspondence would reveal that the assessee was not entitled even to use this amount of its own for any purpose. It may also be noted here that since the amount in question itself is shown as outstanding since long, would prove that the amount did not belong to the assessee and was shown as liability in the accounts. The above facts would clearly disclose that the assessee cannot use the external development charges account for any purposes unless it is approved by the State Government. The assessee since referred to the provisions of the Punjab Apartment and Property Regulation Act, 1995 by which external development charges are collected by the assessee and the provisions thereon state that the competent authority shall transfer the funds to the State Government or local authority (through authority) is competent authority and it did not carry out any development work of its own and only acts as nodal agency. These provisions have not been properly appreciated by the authorities below. The authorities below should also ascertain whether the similar type of authority like the assessee, how they have given the treatment of the external development charges in their records and what is the stand of the Revenue Department in the cases of the similar other authorities. The nature and character of receipt is not examined by the authorities below.

29. It further appears that the learned Commissioner of Income-tax (Appeals) has not given any finding on the case law relied upon by the assessee before him. Considering the above discussion and the relevant case laws cited before the learned Commissioner of Income-tax (Appeals) and the notification produced before us clearly disclose that the matter requires reconsideration at the level of the Assessing Officer. The decisions cited by the learned Departmental representative in the case of Bazpur Co-operative Sugar Factory Ltd. (supra), the amounts in question were found to be deducted in the course of trading operation and in the case of Chowringhee Sales Bureau (P.) Ltd. (supra) (SC), the sales tax was received by the assessee in its character as an auctioneer, the amount was found to be form part of its trading or business receipts. These decisions stated by the learned Departmental representative are not applicable to the issue in controversy.

30. From the above discussion, we set aside the orders of the authorities below and restore the issue to the file of the Assessing Officer with direction to redecide the issue in the light of the relevant provisions of the law referred to by the assessee before the authorities below along with the notifications issued with regard to external development charges. The Assessing Officer shall give reasonably sufficient opportunity of being heard to the assessee. In the result, this ground of appeal of the assessee is allowed for statistical purposes.

31. On ground No. 1, the assessee challenged the addition of Rs. 1,86,77,600 made by the Assessing Officer on account of amount paid to Punjab State Development and Welfare Fund as per notification of Punjab Government for the welfare activities in the field of education, health and welfare. It is seen that the same amount has been disallowed being expenditure debited as payment towards Punjab State Development and Welfare Fund. The assessee claimed before the Assessing Officer that the said amount had been as per notification dated March 31, 2008 and had been paid on the auctioned value of the properties for the welfare activities in the field of education, health and social welfare. The Assessing Officer held that the said amount was mere application of income but not an expenditure as none of the objects of the assessee-authority require it to make payment to the State Welfare Fund. The learned Commissioner of Income-tax (Appeals) agreed with the findings of the Assessing Officer and dismissed this ground of appeal of the assessee.

32. Learned counsel for the assessee relied upon submissions made before the authorities below and referred to paper book page 36 which is notification dated March 17, 2008, through which the assessee was directed to instrumalised to deposit 5 per cent. of the amount realised from the bidders by way of sale of property of all immovable properties auctioned or sold or transferred by any means. The notification is issued by the Government of Punjab. The main object of the assessee is to achieve the aims and objects for which it was formulated by the State Government as per law. Therefore, the amount spent by the assessee was as per direction of the State Government who has constituted the assessee-authority. Therefore, payment made by way of 5 per cent. is allowable deduction. He has relied upon the decision of the hon’ble Supreme Court in the case of Sri Venkata Satyanarayana Rice Mill Contractors Co. (supra) in which it was held as under :

“The assessee doing business of export of rice and contributing 50 paise per quintal to district welfare fund maintained by the District Collector without which contribution he would not get permit, the payment is directly connected with the assessee’s carrying on of business, is not against public policy, and is allowable under section 37(1).”

33. He has also relied upon the decision of the Kerala High Court in the case of Travancore Titanium Products Ltd. (supra) in which it was held as under :

“Payment of service charges by the assessee Government company towards discharging the obligation under Government orders is a business expenditure and the payment being mandatory for carrying on business, the expenditure so incurred by the company is allowable under section 37(1).”

34. On the other hand, the learned Departmental representative relied upon orders of the authorities below and submitted that payment in question is not connected with the business activity of the assessee and it was diversion of the profit. The assessee did not decide how to incur the expenditure and the amount is spent only as per direction of the State Government. The learned Departmental representative relied upon the decisions of the hon’ble Supreme Court in the cases of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 and Sitaldas Tirathdas case (supra). The learned Departmental representative submitted that the letter of the State Government cannot override the provisions of the Income-tax Act.

35. We have considered the rival submissions and perused the material available on record. The assessee has paid the amount in question, i.e., Rs. 1.86 crores to the Government of Punjab as per notification dated March 17, 2008 (paper book page 36). When the State Government has directed by way of notification to the assessee to deposit 5 per cent. of the bid amount on sale of the properties with the State Government towards the Punjab State Development Funds in the public account of the State, it is definitely connected with the business activity of the assessee on sale of properties. The assessee-authority is bound to follow the directions of the Punjab Government and has to act accordingly. The payment in question is, therefore not voluntary or gratuitous but is an obligation and primary charges as per the notification issued by the State Government. The amount of 5 per cent. is, therefore, directly related to the sales activities of the assessee-authority. The assessee has followed the directions of the State Government as per the existing laws and the notification as issued by the State Government. The non-compliance of the directions of the State Government would directly affect the business activities of the assessing authority. Therefore, the contributions to the welfare fund is in the nature of commercial expediency and has a nexus with the business activity of the assessee. Since the assessee made payment of 5 per cent. of the bid amount of the auction on sale of property as per notification effective, therefore the amount is incurred for the purpose of business activities of the assessee. The decisions relied upon by learned counsel for the assessee clearly support the submission of learned counsel for the assessee. We, therefore, hold that the amount in question is spent and incurred by the assessee wholly and exclusively for the purpose of business. Therefore, same is allowable as deduction. We accordingly set aside the orders of the authorities below and delete the addition. In the result, ground No. 1 of the appeal of the assessee is allowed.

36. No other point is argued or pressed.

37. In the result, the appeal of the assessee is partly allowed, as indicated above.

I.T.A. No. 1028/CHD/2013

38. This appeal by the assessee is directed against the order of the learned Commissioner of Income-tax (Appeals)-II Ludhiana, dated October 23, 2013, for the assessment year 2010-11.

39. On ground No. 1, the assessee challenged the addition of Rs. 67,90,756 on account of amount paid to northern railway for construction of railway underbridge near Lodhi Club, Ludhiana, as per object of the assessee-authority. The assessee derives income from developing land which is then sold in the shape of plots through draw or auction. On some developed land, different type of houses are constructed which are allotted through draw. During the course of assessment proceedings, the assessee has debited a sum of Rs. 67,90,756 as contribution to northern railways. The assessee submitted that it has been decided by the Government of Punjab that railway underbridge near Lodhi Club was to be constructed by the assessee-authority. Therefore, this amount is paid to the railways for construction of railway underbridge. The Assessing Officer disallowed the amount considering that it has no nexus with the business activities of the assessee. The assessee filed detailed written submissions which is noted in the impugned order. However, the learned Commissioner of Income-tax (Appeals) dismissed this ground of appeal of the assessee holding that this amount is not spent wholly and exclusively for the business purpose of the assessee nor it was revenue expenditure.

40. Learned counsel for the assessee submitted that the learned Commissioner of Income-tax (Appeals) in preceding assessment year 2009-10 has allowed the appeal of the assessee on the similar issue and it is identical issue on which Departmental appeal is filed, the same may be decided accordingly. He has submitted that the assessee is not specialised in building bridges and payments have been made to this agency for business purposes.

41. The learned Departmental representative relied upon the submissions made in preceding assessment year 2009-10 and also submitted that it is capital expenditure because it is not the work of the assessee to raise the construction of underbridge over railways.

42. On consideration of the rival submissions and facts of the case, we find that issue is identical which is decided in the assessment year 2009-10 in the Departmental appeal and the Departmental appeal has been dismissed. Therefore, following the reasons for decision in the Departmental appeal, we set aside the orders of the authorities below and delete the addition. In the result, ground No. 1 of the appeal of the assessee is allowed.

43. On ground No. 2, the assessee challenged the addition of Rs. 28 crores on account of amount paid to the Punjab Water Supply and Sewerage Board for sewerage work within the jurisdiction of assessee-authority as per its objects.

44. The brief facts are that during the course of assessment proceedings, the Assessing Officer noted that the assessee paid a sum of Rs. 28 crores to the Punjab Water Supply and Sewerage Board for sewerage treatment plant work and other sewerage work and debited the same to the profit and loss account. On similar grounds, as discussed by the Assessing Officer in the assessment order, the Assessing Officer disallowed the contribution of Rs. 28 crores and added the same to the income of the assessee. The assessee challenged the addition before the learned Commissioner of Income-tax (Appeals) and reiterated the submissions already made on this issue and main contention of the assessee was that the expenditure has been made in accordance with the objects and functions of the authority and the assessee is bound by the direction of the State Government. The amount is incurred wholly and exclusively for the purpose of business. The Assessing Officer in his report briefly submitted that the assessee-authority is independent organisation, therefore the assessee cannot claim the expenditure which is borne by another body. At the most, it can be said that the assessee had donated these amounts to these organisations so as to overcome their financial difficulties. Such expenditure cannot be allowed. The assessee, however, submitted before the learned Commissioner of Income-tax (Appeals) that the details furnished squarely support the case of the assessee that it was revenue expenditure.

45. The learned Commissioner of Income-tax (Appeals), however found that expenditure was incurred by the assessee-authority by way of transfer of funds to the Punjab Water Supply and Sewerage Board as per direction of the State Government and the Punjab Water Supply and Sewerage Board has spent the money for construction of sewerage treatment plant and sewerage system at Ludhiana. The sewerage plants have been installed at village Baloke, Ludhiana and village Bhatian, Ludhiana and sewerage system was made in different areas of Ludhiana. The ownership of the sewerage plant vests with the Punjab Water Supply and Sewerage Board and it is their responsibility to maintain the same and there is no formal agreement between these two independent authorities. The learned Commissioner of Income-tax (Appeals), following the orders on ground No. 1 above held that the amount in question was not wholly and exclusively incurred for business purpose and accordingly dismissed the appeal of the assessee.

46. Learned counsel for the assessee reiterated the submissions made before the authorities below and submitted that object of the assessee is to promote and secure better planning and development of any area of the State as per the provisions of section 28(1) of PRTPD Act under which assessee-authority is constituted, it is specifically mentioned that the assessee shall carry out other operations like supply of water, disposal of sewerage, control of pollution and other services. He has submitted that the assessee is not an expert in carrying out sewerage work. Therefore, it was done through the independent agency who is specialised in that field. The payment is also covered by section 28(2)(ii) of the said Act which provides the assessee-authority to undertake work relating to the amenities and services to be provided in urban areas, urban estate and promotion of urban development as well as construction of houses. He has submitted that section 49(2) of the PRTPD Act also allowed the funds of the assessee to be used for a purpose as directed by the State Government. The copies of the minutes of meeting held under the chairmanship of Chief Secretary, Punjab are filed at pages 46 to 48 and English translation is filed at pages 48A and 49A for sewerage scheme. Copy of the letter issued by the Punjab Water Supply and Sewerage Board requesting the assessee for deposit of requisite amount and further affirming that the amount would be utilised in this year is filed at page 50 of the paper book. Copies of the letters issued by the Chief Administrator, the assessee-authority confirming the amounts to be paid under the sewerage scheme are filed at pages 51 and 52 of the paper book. The assessee has, therefore, incurred the expenses as per the objects of the assessee-authority. The deduction cannot be disallowed when work is done through other agency. The assessee is not a commercial organisation and it has been specifically incorporated for the development and better planning of the areas of the State. The utilisation certificate is issued by the PWSSB Department for utilisation of funds, copies of which are filed at pages 194 and 195 of the paper book which mentioned that sewerage work was carried out at Ludhiana. Copy of the notification stating the jurisdiction of the assessee-authority with copy of the map is filed at paper book pages 216 and 220. The assessee has not capitalised any expenditure in the books of account and the construction work like bridges, sewerage system, roads, etc. are for the public at large and expenditure is incurred for the development of the same. Both authorities are created by the State Government and amounts are incurred as per direction of the State Government. It was, therefore, not a capital expenditure because no capital is generated by the assessee.

47. On the other hand, the learned Departmental representative relied upon orders of the authorities below and submitted that it is an application of funds. The learned Departmental representative submitted that the amount was spent as approved by the Government of India under the JNNURM Project and State Government has contributed as their shares. Therefore, State Government directed the assessee-authority to contribute the ULB share. Therefore, it was a contribution of the assessee-authority only towards sewerage treatment plant and sewerage system. Therefore, it was capital expenditure in nature.

48. We have considered rival submissions and material available on record. As per section 28(1) of the PRTPD Act under which the assessee-authority is constituted, it is specifically mentioned that the assessee-authority shall carry out other operations like supply of water, disposal of sewerage, control of pollution and other services. The object of the assessee is to promote and secure better planning and development of the areas of the State of Punjab. The assessee is created by the Government of Punjab under the abovesaid Act for the development of the areas especially the jurisdiction which lies with Ludhiana. Copy of the minutes of executive committee of the assessee-authority is filed at page 48A in which the executive committee has approved payment in question the Punjab Water Supply and Sewerage Board for construction of sewerage disposal system providing sewerage scheme at Ludhiana under JNNURM. Paper book page 49A is the copy of the letter dated May 19, 2010, in which the meeting was convened under the chairmanship of the Chief Minister of Punjab and it was directed that the assessee to provide Rs. 25 crores as their contribution to the sewerage system through ULB. The letter of Punjab Water Supply and Sewerage Board is filed at page 50 of the paper book for providing sewerage scheme, Ludhiana under JNNURM requesting the assessee to make deposit of the amount in question. Therefore, the amount in question is directly connected with the activities of the assessee to promote and secure better planning and development of the area within the jurisdiction of the assessee and amount is spent as per objectives of the assessee. The copies of the letters of PWSSB Department are filed at pages 194 and 195 to certify that the amount in question have been spent for construction of sewerage treatment plant and sewerage system at Ludhiana. The copy of the notification and map is also filed to show that sewerage system is laid out in the areas of Ludhiana. The assessee also explained that since the assessee is not an expert, therefore, construction of sewerage system was carried out through independent agency controlled by the State Government. Therefore, there is nothing wrong in the explanation of the assessee. The expenditure is incurred on the direction of the governing body of the assessee-authority which is covered under the provisions of the PRTPD Act and was allowable expenditure as per section 28 of the PRTPD Act. The assessee has not capitalised any expenditure in the books of account and sewerage system was meant for the public at large.

49. The learned Commissioner of Income-tax (Appeals) considering the issue in the light of railway underbridge constructed by the assessee and following his findings on that issue, dismissed the appeal of the assessee. However, on said issue, we have already dismissed the Departmental appeal in the assessment year 2009-10 and allowed the appeal of the assessee in this year. Therefore, considering the totality of the facts and circumstances and aims and objects of the assessee in the light of the special Act under which the assessee-authority is created, it is clear that amount in question is incurred by the assessee for sewerage work within the jurisdiction of the assessee-authority. It is, therefore, clearly revenue in nature and has to be allowed as expenditure incurred wholly and exclusively for the purpose of business activities of the assessee. No capital is generated by assessee-authority for incurring the expenditure on this issue. We, therefore, set aside the orders of the authorities below and delete the addition of Rs. 28 crores. In the result, ground No. 2 of appeal of the assessee is allowed.

50. On ground No. 3, the assessee challenged the addition of Rs. 40 crores on account of amount paid to Punjab Infrastructure Development Board (PIDB) for construction of flyovers and bridges within the jurisdiction of the assessee-authority as per the objects of the assessee-authority.

51. The brief facts are that the assessee paid the aforesaid amount to Punjab Infrastructure Development Board for four-laneing of the roads and construction of flyovers and underbridges along southern bypass and it debited the same to the profit and loss account. The Assessing Officer disallowed the same amount as discussed in earlier grounds. The assessee, once again reiterated before the learned Commissioner of Income-tax (Appeals) that amount in question was given to the Punjab Infrastructure Development Board for four-laneing the road and construction of flyovers and underbridges along with the southern bypass. The development of the road will the overall development of Ludhiana and remove the traffic problem of Ludhiana. Moreover, the construction of this road will also add value to the properties of the assessee-authority located in vicinity of the roads. The construction/development of the road is within the objects of the assessee-authority and hence allowable under section 37 of the Income-tax Act. The submissions of the assessee were forwarded to the Assessing Officer and the Assessing Officer reiterated the facts stated in the assessment order and submitted that due to financial constrains of fundings of the Punjab Infrastructure Development Board, the amount was paid. It is nowhere mentioned that it was a project of the assessee-authority. The assessee attached the copy of the minutes of meetings held under the chairmanship of the Chief Secretary so as to discuss infrastructure projects of Ludhiana. The projects were prepared by the Punjab Infrastructure Development Board and the assessee has acted on the behest of the State Government rather than acting on business considerations.

52. The learned Commissioner of Income-tax (Appeals), considering the submissions of both parties found that expenditure was incurred by the assessee-authority by way of transfer of funds to the Punjab Infrastructure Development Board at the direction of the State Government. The amount has been spent for widening of the roads and construction of flyovers and the ownership vests with Punjab Infrastructure Development Board. There is no formal agreement between the parties. The learned Commissioner of Income-tax (Appeals) following his findings on ground No. 1 above with regard to the construction of railway underbridge, confirmed the addition and held that it was capital expenditure in nature.

53. Learned counsel for the assessee reiterated the submissions made before the authorities below and referred to paper book page 46 which is minutes of the assessee-authority in which it was approved that the assessee-authority shall pay the amount in question for construction of four-laneing road along with Sidhwan Canal, construction of road and the flyover and ROB (West) bypass, Ludhiana. Copy of the Sidhwan Scheme is filed at page 57. Copies of the proceedings of the meeting held by the Punjab Infrastructure Development Board are filed at pages 58 to 63. Copy of the letter issued by the Chief Administrator by the assessee-authority confirming the amount to be paid to the Punjab Infrastructure Development Board is filed at pages 64 and 65 of the paper book. The assessee, as per special law, was under obligation to construct the roads and flyovers. The Punjab Infrastructure Development Board Department in their letter (paper book pages 197 and 198) mentioned the cost sharing by the Punjab Infrastructure Development Board and the assessee-authority. Therefore, it was the expenditure incurred by the assessee. Learned counsel for the assessee relied upon the same submissions as were made on grounds Nos. 1 and 2 above and also submitted that the assessee is not expert in raising the flyovers and the bridges, therefore payment is made to Punjab Infrastructure Development Board for construction of flyovers/bridges for the benefit of colonies developed by the assessee-authority. It is, therefore, not capital expenditure in nature.

54. On the other hand, the learned Departmental representative relied upon orders of the authorities below and submitted that the assessee made contribution to the project which is not the project of the assessee-authority and payments have been made at the direction of the State Government. The ownership of all the flyovers/bridges lies with the Municipal Corporation for maintenance. The learned Departmental representative relied upon same submissions as were made in the Departmental appeal on ground No. 1 in the assessment year 2009-10.

55. We have considered rival submissions and material on record. This issue is same as is considered on grounds Nos. 1 and 2 in the present appeal as well as ground raised in the Departmental appeal for construction of the railway underpass. The assessee has developed colonies and therefore, has to provide infrastructure and other facilities as per section 28 of the PRTPD Act. On construction of railway underpass in the colony developed by the assessee, the learned Commissioner of Income-tax (Appeals) has allowed the claim of the assessee in the assessment year 2009-10 and we have dismissed the Departmental appeal. This issue is identical as was considered earlier on grounds Nos. 1 and 2 above as well as in the Departmental appeal on which we have confirmed the order of the learned Commissioner of Income-tax (Appeals). Therefore, following the orders on these grounds, we set aside the orders of the authorities below and delete the addition. In the result, ground No. 3 of the appeal of the assessee is allowed.

56. On ground No. 4, the assessee has challenged the addition of Rs. 27 crores on account of payment made to Municipal Corporation, Ludhiana for construction of bridges and other development work within the jurisdiction of the assessee-authority as per the objects of the assessee-authority. Briefly the Assessing Officer noted that the assessee had made contribution of Rs. 27 crores to the Municipal Corporation, Ludhiana, for Railway overbridge (Lakkar Bridge) Pratap Chowk flyover, Gill Chowk flyover, Indoor Stadium at Pakhowal Road and other development work and it debited the same to profit and loss account. The Assessing Officer made the addition. The assessee submitted that the amount in question was given to Municipal Corporation, Ludhiana (MCL) for construction of railway overbridges above and indoor stadium and other development work. The amount has been given after obtaining necessary approval. The construction/development of roads and bridges is within the objectives of the assessee and thus, allowable deduction. The Assessing Officer submitted before the learned Commissioner of Income-tax (Appeals) that the assessee had transferred the funds to MCL. It may be a loan or gift for contribution from his own capital and it has no connection with the business activities of the assessee. No proper contracts have been entered into. The learned Commissioner of Income-tax (Appeals), on the same reasoning, as given on grounds Nos. 1 to 3 above, dismissed the appeal of the assessee and held that expenditure is capital in nature and not spent wholly or exclusively for business purposes.

57. Learned counsel for the assessee reiterated the submissions made before the authorities below and submitted that the amount in question was paid to MCL for construction of flyovers and overbridge, stadium and other development work. The copy of the minutes approving the payment to MCL is filed at page 46 of the paper book, copy of the letter issued by MCL to the assessee-authority specifying the project-wise contribution requirement is filed at page 54 of the paper book. The copy of the letter issued by Chief Administrator, the assessee-authority confirming the amount to be paid to MCL is filed at page 64 and 65 of the paper book. The assessee, as per the provisions of section 28(2)(ii) of the Special Act incurred the expenditure. So, it was incurred as per the objectives of the assessee-authority. The utilisation certificate issued by MCL is filed at page 199 of the paper book. Learned counsel for the assessee submitted that the issue is same as is considered above. Since, the assessee is not a specialised person in building flyovers and bridges, therefore, the expenses were incurred through MCL.

58. On the other hand, the learned Departmental representative submitted that the authorities below have correctly denied the deduction to the assessee being the application of income only. The assessee-authority has made a contribution which is not the project of the assessee-authority. The amounts were required by MC, Ludhiana. Therefore, amount was given for financial constraints. There is no agreement of the same and the issue is same as is considered by the assessment year 2009-10.

59. On consideration of the rival submissions, we do not find any justification to sustain the addition. We have decided the similar issue above on grounds Nos. 1 to 3 and held that the assessee, for better development of its colonies has carried out the work of construction of bridges and other development work within the jurisdiction of the assessee-authority at Ludhiana and other places. The bridges and development work is connected with the business activity of the assessee and for benefit of the colonies, constructed and developed by the assessee-authority. Since we have allowed deduction of the similar expenditure on other grounds of appeal, therefore following the reasons for the same, we set aside the orders of the authorities below and delete the addition.

60. In the result, ground No. 4 of the appeal of the assessee is allowed.

61. On ground No. 5, the assessee challenged the addition of Rs. 41,06,741 on account of amount paid to the Punjab State Development and Welfare Fund which is statutory liability as per the objects of the assessee-society. The Assessing Officer noted that the assessee has paid the contribution to the above welfare fund. The assessee submitted that 5 per cent. of the auction amount has been paid to the Punjab State Development and Welfare Fund as per the State Government’s notification. The Assessing Officer disallowed the amount. The learned Commissioner of Income-tax (Appeals) confirmed the addition.

62. Learned counsel for the assessee submitted that this ground is same as is considered in the assessment year 2009-10 and submitted that the decision on the same may be followed here also. The learned Departmental representative also submitted that issue is same as is considered in the assessment year 2009-10.

63. On consideration of the facts of the case, we find that this issue is same as is considered and decided in the assessment year 2009-10 in which we have allowed the claim of the assessee for deduction of the expenditure. By following the same reasons for decision on identical issue, we set aside the orders of the authorities below and delete the addition.

64. In the result, ground No. 5 of the appeal of the assessee is allowed.

65. On ground No. 6, the assessee challenged the addition of Rs. 15,12,89,222 as income which have been received on account of external development charges which are lying with the assessee on behalf of the State Government. The learned representatives of both parties submitted that the issue is same as is considered in the assessment year 2009-10. In the assessment year 2009-10, we have restored this issue to the file of the Assessing Officer with direction to redecide this issue by considering the relevant statutory provisions of law and material on record. Following the orders for the assessment year 2009-10, we set aside the orders of the authorities below and restore this issue to the file of the Assessing Officer with direction to redecide this issue by giving reasonable sufficient opportunity of being heard to the assessee. In the result, ground No. 6 of the appeal of the assessee is allowed for statistical purposes.

66. On ground No. 7, the assessee challenged the addition of Rs. 1,69,49,493 as income of the assessee which is lying with the assessee as building plan security and are liable to be refunded.

67. On ground No. 8, the assessee challenged the addition by treating deposits of Rs. 74,30,344 as income of the assessee which is liable to be refunded.

68. The assessee on ground No. 9 challenged the addition of Rs. 14,03,859 as income of the assessee which is security from different departments and is liable to be refunded.

69. The assessee on ground No. 10 challenged the addition of Rs. 4,04,48,216 being deposits received from customers amounting to Rs. 6,49,43,225 against the flats and by allowing expenditure of Rs. 2,44,95,009 as income of the assessee.

70. The learned Commissioner of Income-tax (Appeals) has decided all these grounds together along with addition of Rs. 75,42,113 being earnest money received. The learned Commissioner of Income-tax (Appeals) deleted the addition of Rs. 75,42,113 on which no appeal has been filed. However, as the composite order is passed on all these grounds, therefore, facts taken from the order of the learned Commissioner of Income-tax (Appeals) would be taken together on all these grounds.

71. The brief facts are that the Assessing Officer noted that as per the Significant Accounting Policy and notes on accounts attached to the balance-sheet, it was mentioned as under :

“144 flats at Sector 40, Ludhiana, have been allotted during the year. These flats are under construction. As such amount received against these flats have been shown under ‘securities and deposits’ on the liability side of the balance-sheet.”

72. The Assessing Officer also noted that Schedule “B” of the balance-sheet shows an amount of Rs. 116,72,81,185 under the head “securities and deposits”. The Assessing Officer was of the view that as the assessee was following the cash system of accounting these receipts ought to have been shown as income of the assessee during the period under consideration. The Assessing Officer further pointed out that in column 1(a) of Form 3CD of the audit report, the appellant had mentioned its method of account employed in the previous year as “generally cash except as mentioned in the note on accounts attached to the balance-sheet”. The Assessing Officer observed that under section 145(1) the appellant was required to compute its income in accordance with either cash or mercantile system of accounting. In view of these facts, the Assessing Officer asked the appellant to explain why amount received on account of allotment of the flats may not be added to the income of the assessee.

73. Regarding the amounts received against flats under construction the appellant submitted that it had received Rs. 6,49,43,225 during the year against the allotment of flats against which an expenditure of Rs. 2,44,95,009 had been incurred. The appellant further submitted that construction of flats has not been completed and the appellant had neither claimed any expenditure nor shown any income against these flats. The appellant submitted that income and expenditure will be booked in the year in which the construction will be completed and the possession will be handed over to the prospective buyers. Regarding its accounting policy, the appellant submitted that the financial statements of GLADA are prepared on cash system of accounting except the interest which is accounted for on accrual basis. The appellant submitted that the project completion method being followed by the appellant is permissible under the Income-tax Act. The assessee also relied upon the following case law :

(i) CIT v. Hyundai Heavy Industries Co. Ltd. [2007] 291 ITR 482 (SC) ; and

(ii) CIT v. Bilahari Investment (P.) Ltd. [2008] 299 ITR 1 (SC).

74. Regarding building plan security, the appellant submitted that this amount represented the security received from allottees at the time of map approval over and above the map approval fees. The map approval fee was shown as income and the security was refunded after the completion of building/houses as per norms.

75. Regarding the pending adjustment account, the appellant submitted that these amounts represents the amounts received about which the status was not clear due to proper documentation, therefore, this amount was kept as liability till its clarification. Regarding earnest money from prospective buyers, the appellant submit that the amount represented the amounts received from the applicants under application for allotment of plots and flats. The unsuccessful applicants refunded the amounts. The successful applicants are allotted flats and earnest money is adjusted against instalments.

76. Regarding earnest money from contractors, the assessee submitted that the amount represented the amounts received from the contractors along with tender forms. The unsuccessful contractors refunded the amounts. The successful contractors are allotted tenders and earnest money is adjusted against their bills. Regarding other deposits, the assessee submitted that the amount represents security deposits received against land used by the various authorities and the Departments of State and other Departments.

77. The Assessing Officer considered the appellant’s reply but found the same unsatisfactory. Referring to the two decisions relied upon the assessee in support of its contention that project completion method is an accepted method, the Assessing Officer pointed out that these decisions have been delivered with respect to the assessment years 1987-88 to 1988-89 and 1991-92 to 1997-98, respectively, whereas, the Finance Act, 1995 has amended the provisions of section 145 with effect from April 1, 1997. The Assessing Officer observed that with effect from April 1, 1997, the appellant was required to follow either cash or mercantile system of accounting and therefore these decisions were not applicable in the assessee’s case. As the appellant was following the cash system of accounting, the Assessing Officer held that the receipts shown under Schedule “B” attached to the balance-sheet were required to be shown as income of the appellant. Following additions were made to the total income of the appellant :

(i) Addition of Rs. 75,42,113 being 10 per cent. of the earnest money received.

(ii) Addition of Rs. 1,69,49,493 received on account of building plan security.

(iii) Addition of Rs. 74,30,344 being deposits received by the appellant.

(iv) Addition of Rs. 14,03,859 being security received from different departments.

(v) Addition of Rs. 4,04,48,216 being deposits received from customers against flats.

78. The assessee reiterated the submissions before the learned Commissioner of Income-tax (Appeals) and also submitted that :

“The details of amount received against allotment of the flats at sector-40, it is submitted that we have received Rs. 6,49,43,225 during the year, the detail of which is as under :

10% application money Rs. 1,15,20,000
Allotment money Rs. 5,34,23,225

And we have incurred the following development expenses for the construction of flats which have been shown in the stock :

Civil construction Rs. 2,16,62,231
Public health expenditure (water and sewerage) Rs. 28,32,778

The above costs do not include the land cost which also forms part of the cost of project.

The construction of flats is not complete as submitted earlier in our reply. We again submit that we have neither claimed any expenditure nor shown any income against these flats. Income and expenditure will be booked in the year in which construction will be completed and the possession will be handed over to the prospective buyers. This accounting policy is regularly followed and is being accepted by the Department.

4. It is submitted that the financial statements of GLADA are prepared on cash system of accounting except the interest which is accounted for on accrual basis. This method is being regularly followed by GLADA since its inception and this method of accounting is also recognised by the Income-tax Department under section 145 which permits the maintenance of books on cash basis.

5. It is submitted that the project completion method of accounting is permissible, it is submitted that the project completion method is permissible in the Income-tax Act, 1961. It is well settled that the project completion method is one of the recognised methods of accounting. In CIT v. Hyundai Heavy Industries Co. Ltd. [2007] 291 ITR 482 (SC)the Supreme Court held as follows (page 495) :

‘Lastly, there is a concept in accounts which called the concept of contract accounts. Under that concept, two methods exist for ascertaining profit for contracts, namely, ‘completed contract method’ and ‘percentage of completion method’. To know the results of his operations, the contractor prepares what is called a contract account which is debited with various costs and which is credited with revenue associated with a particular contract. However, the rules of recognition of cost and revenue depend on the method of accounting.’

This view was reiterated by the Supreme Court in CIT v. Bilahari Investment (P.) Ltd. [2008] 299 ITR 1 (SC).

After the above judgments of the Supreme Court it cannot be said that the project completion method followed by the assessee would result in deferment of the payment of the taxes which are to be assessed annually under the Income-tax Act.

Therefore, the method of accounting followed by GLADA i.e. project completion method is permissible under the Income-tax Act.”

79. Copy of the appellant’s submissions was provided to the Assessing Officer, who was present during the course of the appellate proceedings. The Assessing Officer vide report dated September 23, 2013, submitted as under :

Reply of the assessee on all the above issues has been considered. The assessee has cited two decisions, i.e., Hyundai Heavy Industries Co. Ltd.‘s case (supra) and Bilahari Investment (P.) Ltd.’s case (supra) to support his contention that the project completion method is the right method as is being followed by the assessee. However perusal of the decisions of the hon’ble Supreme Court mentioned supra reveal that these decisions have been delivered with respect to the assessment years 1987-88 to 1988-89 and the assessment years 1991-92 to 1997-98 respectively whereas the Finance Act, 1995, has amended the provisions of section 145 with effect from April 1, 1997. As such the above decisions do not come to the rescue of the assessee and from April 1, 1997, the assessee is required to follow the method of accounting of either cash or mercantile. Therefore the reply of the assessee is not acceptable on this account and is rejected accordingly. As the assessee is following cash system of accounting the receipts shown under Schedule “B” attached to the balance sheet required to be shown as income by the assessee as detailed below :

The assessee had shown to have received Rs. 6,49,43,225 during the year, against the allotment of flats at sector 40 and also stated to have incurred expenses of Rs. 2,44,95,009. Therefore, balance of Rs. 4,04,48,216 should be added to the income of the assessee on the basis of cash system of accounting.

“10. Addition of Rs. 75,42,113 on account of earnest money from prospective buyers

In this regard it is submitted that the assessee has shown receipts of Rs. 7,54,21,138 under the head earnest money (prospective buyers). The assessee has stated that this amount represent the receipts from prospective buyers on application against allotment of flats/plots. These receipts other than the allottees are to be refunded. But the assessee had not given any bifurcation of these receipts or proved that this amount has been refunded back in past, hence 10 per cent. of this amount (Rs. 75,42,113) was considered to be receipts from the allottees and was added to the income of the assessee on the basis of cash system of accounting followed by the assessee.

11. Addition of Rs. 14,03,859 on account of security deposits from others.

In this regard it is submitted that the assessee, has shown receipts of Rs. 14,03,859 against the land used by various authorities and other departments. The assessee has failed to prove that it is a refundable security deposit. Till date no such amount has been refunded back. Hence this amount should be added to the income of the assessee as the assessee is following the cash system of accounting.

12. Addition of Rs. 74,30,334 on account of deposits against pending adjustments.

The assessee had shown deposits pending adjustment amounting to Rs. 74,30,344 about which the assessee had stated that the status of these receipts is not clear due to (no) proper documentation. As the assessee has failed to explain these receipts during the year, these are treated to be the income of the assessee and should be added to its income.”

80. Copy of the Assessing Officer’s report was provided to the assessee. The assessee made no further submissions on these issues.

81. The learned Commissioner of Income-tax (Appeals), considering the submission of the assessee, confirmed all the above four additions on which the assessee has preferred an appeal. His findings in paragraph 10.5 are reproduced as under :

10.5 I have carefully considered the rival submissions. Each of the aforesaid additions are being discussed as under :

(i) Addition of Rs. 75,42,113 being 10 per cent. of the earnest money received :

The details of earnest money received/refunded/adjusted during the last five years is as under :

S. No. Year Earnest money (received) Earnest money (refunded) Earnest money adjusted against cost of sales Balance
1. 2005-06
2. 2006-07 47,66,77,416 23,000 47,66,54,416
3. 2007-08 16,11,660 47,82,66,076 nil
4. 2008-09 7,52,550 7,52,550 nil
5. 2009-10 13,06,31,402 5,52,10,263 7,54,21,138

During the course of appellate proceedings the appellant was asked to file the details of any refunds or any adjustments against sales made out of the balance earnest money as on March 31, 2010, amounting to Rs. 7,54,21,138 up to March 31, 2013. As per the details submitted by the appellant out of the balance amount of Rs. 7,54,21,138 as on March 31, 2010, no amount was refunded during the year 2010-11. The balance earnest money with the appellant as on March 31, 2011, was Rs. 53,36,29,138. However, the balance as on March 31, 2012, was Rs. 5,88,60,328 and balance as on March 31, 2013, was Rs. 6,21,19,425. From the aforesaid facts it is apparent that the earnest money collected is purely refundable amount which is duly refunded from time to time. It cannot be held to be the income of the appellant. In case any amount out of earnest money is adjusted towards sale in any year, it will be liable to be included in the income of that year. The addition made by the Assessing Officer on this account is deleted.

(ii) Addition of Rs. 1,69,49,493 received on account of building plan security

The details of building plan security received/refunded during the last five years is as under :

S. No. Year Building plan security received Building plan security refunded Balance
1. 2005-06 Nil Nil Nil
2. 2006-07 5,40,000 Nil 5,40,000
3. 2007-08 16,44,500 Nil 16,44,500
4. 2008-09 13,33,500 Nil 13,33,500
5. 2009-10 1,34,31,493 3,75,000 1,69,49,493

Out of the balance amount of Rs. 1,69,49,493 under this head, no amount was refunded during the year 2010-11 as well as during the years 2011-12 and 2012-13. The total balance lying in this account as on March 31, 2013 was Rs. 2,27,87,338.

During the course of appellate proceedings, the authorised representative of the appellant explained the purpose of building plan security.

The condition for refund of this security is that the construction should be in accordance with the approved plan and the person has to furnish a completion certificate. It is a matter of common knowledge that in most of the cases, construction is not in accordance with the approved plans and often there is some violation of the plan even if it is minor violation. In such circumstances builder does not apply for a completion certificate and prefers to forfeit the building plan security rather than inviting closure/ demolition of building. This is evident from the fact that during the period of eight years from 2006-07 to 2012-13, only Rs. 3,75,000 were refunded in the year 2009-10 and the balance in this account as on March 31, 2013, was Rs. 2,27,87,338. Thus although, initially the amounts of building plan security were received as refundable security, with passage of time these amounts have become a part of the appellant’s funds with no likelihood of any claim for refunds. This amount would accordingly partake the character of the appellant’s income under section 28(iv) of the Income-tax Act. Reliance in this regard is placed on the following case law :

(i) CIT v. T.V. Sundaram Iyengar & Sons Ltd. [1996] 222 ITR 344/88 Taxman 429 (SC). (assessment year 2004-05)

The hon’ble Supreme Court held as under (page 353) :

“If a commonsense view of the matter is taken, the assessee, because of the trading operation, had become richer by the amount which it transferred to its profit and loss account. The moneys had arisen out of ordinary trading transactions. Although the amounts received originally were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time-barred and the amount attained a totally different quality. It became a definite trade surplus. Atkinson J. pointed out that in Tattersall’s caseMorley (Inspector of Taxes) v. Tattersall [1939] 7 ITR 316 (CA) no trading asset was created. Mere change of method of book-keeping had taken place. But, where a new asset came into being automatically by operation of law, commonsense demanded that the amount should be entered in the profit and loss account for the year and be treated as taxable income. In other words, the principle appears to be that if an amount is received in the course of trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessee’s own money because of limitation or by any other statutory or contractual right. When such a thing happens, common sense demands that the amount should be treated as income of the assessee.

In the present case, the money was received by the assessee in the course of carrying on his business. Although it was treated as deposit and was of capital nature at the point of time it was received, by efflux of time the money has become the assessee’s own money. What remains after adjustment of the deposits has not been claimed by the customers. The claims of the customers have become barred by limitation. The assessee itself has treated the money as its own money and taken the amount to its profit and loss account. There is no explanation from the assessee why the surplus money was taken to its profit and loss account even if it was somebody else’s money. In fact, as Atkinson J. pointed out that what the assessee did was the commonsense way of dealing with the amounts”.

(ii) Logitronics (P.) Ltd. v. CIT [2011] 333 ITR 386/197 Taxman 394/9 taxmann.com 302 (Delhi) ;

(iii) Rollatainers Ltd. v. CIT [2011] 339 ITR 54/203 Taxman 31 (Mag.)/15 taxmann.com 111 (Delhi) ; and

(iv) Solid Containers Ltd. v. Dy. CIT [2009] 308 ITR 417/178 Taxman 192 (Bom.).

The hon’ble High Court held as under (page 421) :

“The amount which initially did not fall within the scope of the provisions rendering it liable to tax subsequently had become the assessee’s income being part of the trading of the assessee. A similar view was also taken by a Bench of the Madras High Court in the case of CIT v. Aries Advertising Pvt. Ltd. [2002] 255 ITR 510 (Mad). The court took the view that the assessee because of trading operation became richer by the amount which had been transferred and/or retained in the profit and loss account of the assessee.”

The Assessing Officer was therefore fully justified in adding the amount of Rs. 1,69,49,493 to the total income of the appellant.

(iii) Addition of Rs. 74,30,344 being deposits received by the appellant

With respect to these receipts appellant has merely submitted that status was not clear and therefore these have been kept in suspense account. The appellant has not explained or given any evidence to show that these receipts were not revenue receipts. Merely because these receipts have been kept in suspense account it does not imply that these receipts do not form part of income. Reliance in this regard is placed on the case of CIT v. Tamil Nadu Industrial Investment Corpn. Ltd. [1999] 240 ITR 573/107 Taxman 16 (Mad.). In this case it was held that interest, guarantee commission and commitment charges collected by the assessee and kept in suspense account is income.

Keeping in view the aforesaid facts, the addition made by the Assessing Officer is confirmed.

(iv) Addition of Rs. 14,03,859 being security received from different departments

Details of security received under this head during the last five years is as under :

S. No. Year Security deposits received (Rs.) Security deposits refunded (Rs.) Balance (Rs.)
1. 2005-06 Nil Nil Nil
2. 2006-07 49,000 49,000
3. 2007-08 1,99,500 1,14,000 85,500
4. 2008-09 7,10,000 44,500 25,500
5. 2009-10 12,63,859 20,000 12,43,859
14,03,859

Facts on this issue are similar to the facts on the issue of building plan security. Substantial amount of security has not been refunded by GLADA. On similar grounds as in the case of building plan security the balance lying under this head is income of the appellant. Keeping in view the aforesaid facts, the addition by the Assessing Officer is confirmed.

(v) Addition of Rs. 4,04,48,216 being deposits received from customers against flats

On this issue the appellant’s contention is that it was following project completion method. The Assessing Officer has pointed out that after the amendment to section 145(1) with effect from April 1, 1997, the appellant could follow either mercantile or cash method of accounting. As per the provision of sub-section (1) of section 145 of the Income-tax Act, 1961, the appellant has to compute its income either on mercantile or cash system of accounting regularly employed by him. The appellant has option to adopt either cash system of accounting or mercantile system of accounting. But it is not permissible to compute income from different activities by applying different method of accounting in the same year. As per the appellant’s own submissions it was following cash system of accounting. Therefore, when the bills are raised and the money realised, the income accrued to the appellant. However, the same was not accounted for in the profit and loss account till the contract work was completed. This accounting treatment is not in accordance with law. According to section 4 of the Income-tax Act, income tax is chargeable in respect of total income of each assessment year. Income received during the year cannot be deferred to future by adopting a method of accounting which is inconsistent with the method of accounting which appellant claims to be regularly following. If the income has been received during the year, it has to be recorded during the year particularly when the appellant is following the cash system of accounting. In view of the charging section, the instalment received during the year is to be accounted for while computing the appellant’s income. In view of these facts, it is clear that the instalments actually received during the year under assessment are to be treated as revenue receipts.

In the appellant’s case, there is no dispute that the appellant received these amounts during the year and these amounts are instalments paid by the purchasers on purchase of flats from the appellant. Therefore, these receipts are revenue in nature. Since appellant is following cash system of accounting, these amounts are to be taxed during the year. The appellant cannot defer the income to future years by adopting incorrect method of accounting with a view to postpone the tax liability.

Reliance is placed on the following case law :

(a) Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172/93 Taxman 502 (SC)

Accountancy practice cannot override section 56 or any provisions of the Income-tax Act. The income-tax law does not march step by step in the footprints of the accountancy profession-when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice.

(b) Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC)

The matter of taxability cannot be decided on the basis of the entries which the assessee may choose to make in his accounts, but has to be decided in accordance with the provisions of law.

(c) CIT v. U.P. State Industrial Development Corpn. [1997] 225 ITR 703/92 Taxman 45 (SC)

Principles of commercial accounting should be applied in ascertaining profits and gains.

(d) CIT v. British Paints India Ltd. [1991] 188 ITR 44/54 Taxman 499 (SC)

It is not only the right, but the duty of the Assessing Officer to consider whether or not the books disclose the true statement of accounts and the correct income can be deduced therefrom-even if method of accounting is regularly followed, the Income-tax Officer can reject it since there is no estoppel on these matters-each year being a self-contained unit, taxes of a particular year is payable with reference to the income of that year as computed in terms of the Act.

(e) CIT v. Chandigarh Industrial & General Development Corpn. Ltd. [2009] 319 ITR 85/[2008] 167 Taxman 331 (Punj. & Har.)

In this case, the hon’ble High Court has held in similar circumstances that amount received on account of instalments are taxable during the year. The question of law before the hon’ble court was whether income of the assessee was to be taxed on receipt basis even though the assessee was following mercantile system of accounting. It held as under (page 91) :

“Applying the aforesaid principles to the facts of the present case, it is undisputed that the assessee allots an industrial shed on leasehold basis in which premium is required to be paid over ten years period and the rights are transferred in favour of the allottee/lessee on the payment of final instalments. Further, till the assessee received payment of annual instalments during the year, it is an inchoate right in favour of the assessee as in the event of failure on the part of the allottee/lessee, the managing director of the corporation has only right to resume but cannot enforce the payment of the balance amount. Still further, the Revenue since 1979 had been treating the accrual of profits on yearly basis on instalments due till the payment of last instalments was made and there is no justification for the Revenue in deviating from the said approach which is in conformity with law. Viewed from this, the approach of the Tribunal was correct and it had rightly held that even under mercantile system of accounting, the income would accrue on receipt of instalment on year to year basis and not on the allotment of land or industrial sheds.”

Ratio of this judgment is applicable to the appellant’s case as facts are identical and further the appellant is following cash system of accounting.

(f) Param Anand Builders (P.) Ltd. v. ITO [1996] 59 ITD 29 (Mum.) ;

(g) Uttam Singh Duggal & Co. (P.) Ltd. v. CIT [1981] 127 ITR 21/5 Taxman 175 (Delhi) ; and

(h) CIT v. Nandram Hunatram [1976] 103 ITR 433 (Ori.).

The assessee contractor claimed “project completion method” rejected under section 145(2) since income accrues every year-receipt of “on money” was there in all the years.

(i) IAC v. Punj & Sons [1996] 56 ITD 281 (Delhi)

Contractor made claim of completed contract method-As per contract, the assessee entitled to receive payment by March 31, 1983, vested right arose on that day even though some payments were received subsequently assessable in the assessment year 1983-84

Reference may also be made to the following case law :

(i) The decision of the hon’ble Delhi High Court in the case of Tirath Ram Ahuja (P.) Ltd. v. CIT [1976] 103 ITR 15, in which it was pointed out that one need not wait for completion of the project in order to ascertain the income. It will be open to the Revenue to estimate the profit on the basis of receipts of each year even though the contract is not completed in that year.

(ii) The hon’ble Patna High Court in the case of Sukhdeodas Jalan v. CIT [1954] 26 ITR 617, in which it was pointed out that profits in uncompleted contract are also taxable in the relevant accounting year.

(iii) The decisions of the hon’ble Supreme Court in the cases of E.D. Sassoon & Co. Ltd. v. CIT [1954] 26 ITR 27 andMorvi Industries Ltd. v. CIT [1971] 82 ITR 835, in which it was, inter alia, pointed out that the accrual of income does not depend upon entries made in the books of account as it occurs at the time of making the transaction.

Thus, the income embedded in the receipts, carried to the balance-sheet in respect of the aforesaid kind of contracts, was liable to be taxed in this year. Keeping in view the aforesaid facts, the addition made by the Assessing Officer is confirmed.

82. Learned counsel for the assessee reiterated the submissions made before the authorities below with regard to grounds Nos. 7, 8 and 9. On ground No. 7, he has submitted that the ground in question represents security as received from different allottees at the time of map approval over and above the map approval fees. The approval fees is booked as income by the assessee and security is refunded as and when demanded by the allottees. The copy of the letter issued by the Punjab Urban Planning and Development Authority prescribed the rates at which building security has to be charged and also about the refund of the same at the time of submission of the building plan is filed at pages 167, 168 and 169 of the paper book. He has submitted that building plan security is refundable as and when building is completed. The details of the refund are filed at page 209 of the paper book to show that in assessment year under appeal, the assessee has refunded Rs. 3,75,000. The said amount has been shown as liability in the balance-sheet, copy of which is filed at page 3 of the paper book. Since the amount did not belong to the assessee, therefore, the assessee cannot forfeit the amount and the assessee is bound to return the security amount as and when demanded. He has submitted that the authorities below have merely confirmed the addition because there is no likelihood of claim of refund in future. He has submitted that the decisions relied upon by the learned Commissioner of Income-tax (Appeals) are clearly distinguishable on facts because in the said cases, the amounts have not been received as security deposit.

83. On ground No. 8, learned counsel for the assessee submitted that the amount represents the amount either received from the allottees or from other departments which do not belong to the assessee and need adjustments. The said amount has been kept in separate account and same is adjusted as and when some clarification is received from the parties whose amount is outstanding in the books of the assessee. The complete details were filed at paper book pages 211 and 212. The amount in the said account cannot be termed as income of the assessee. The judgments relied upon by the learned Commissioner of Income-tax (Appeals) are clearly distinguishable on facts.

84. On ground No. 9, learned counsel for the assessee submitted that the amount is security deposits received against the land used by different departments and it is security refundable in nature and the assessee has refunded time to time, separate detail of which is filed at page 210 of the paper book to show that in the year under consideration, Rs. 20,000 has been refunded. It is not the income of the assessee.

85. On the other hand, the learned Departmental representative relied upon orders of the authorities below.

86. The learned Departmental representative submitted that since only Rs. 3,75,000 as building plan security has been refunded, therefore, non-submission of the completion certificate by various colonisers/builders would show it is income in the hands of the assessee.

87. We have considered rival submissions and material available on record. The assessee, on account of building completion security has refunded Rs. 3,75,000 in the assessment year under appeal. The security amount is received as per the letter issued by the Punjab Urban Planning and Development Authority prescribing the rates at which building security has to be charged and the same is to be refunded to the concerned parties at the time of submission of the building completion. Complete details were filed before the authorities below and the assessee has also shown the security as their liability in the balance-sheet. Thus, the amount in question did not belong to the assessee and was kept in the books of account as liability of the assessee. The amount is refundable as and when completion certificate is obtained by the parties who have submitted the building plan. The refund of the security is to be done as per guidelines issued by the Punjab Urban Planning and Development Authority. No details have been brought on record if after passing of certain period, whether the assessee would be entitled to forfeit the amount in question. No detail is also brought on record as to how many parties have submitted completion certificate and in how many cases, some actions have been taken by the assessee-authority. Merely because only a small amount is refunded to the parties it would not prove that the assessee has forfeited the amount in question and earned it as income. The assessee has continuously shown the security amount as liability in the books of account and has never taken the amount in its profit and loss account. Therefore, the case law relied upon by the learned Commissioner of Income-tax (Appeals) are clearly distinguishable. In the absence of complete details brought on record, the learned Commissioner of Income-tax (Appeals) was not justified in dismissing this ground of appeal of the assessee. Therefore, the matter requires reconsideration at the level of the Assessing Officer.

88. With regard to ground No. 8 regarding certain deposits, the assessee has maintained a suspense account on account of various amounts received from different allottees or from other departments. There was some doubt with regard to persons against whom the amount has to be deposited, therefore, according to submission of the assessee, as and when clarification is received from the parties, the amount is adjusted against their names. Therefore, in such circumstances, the deposits received by the assessee and taken into suspense account due to certain confusions regarding the allotment of the property or the amount received from the concerned parties when amount is taken into suspense account would not prove that the amount lying in the suspense account has become income of the assessee. The decisions relied upon by the learned Commissioner of Income-tax (Appeals) are therefore, not applicable to the facts of the case and this matter also requires clarification from the side of the assessee and investigation by the Assessing Officer as to in how many cases, the clarification has been received and how further treatments have been given on this matter. Therefore, this issue also requires reconsideration at the level of the Assessing Officer.

89. On ground No. 9 also, the position is same because the security amount received from different departments is treated as income of the assessee. This issue is same as is considered on building plan security on which the matter requires reconsideration at the level of the Assessing Officer. In view of the above and in absence of any specific finding by the authorities below, we set aside the orders of the authorities below and restore all these three issues on grounds Nos. 7, 8 and 9 to the file of the Assessing Officer with direction to redecide these grounds in detail considering the factual aspect by giving reasonable sufficient opportunity of being heard to the assessee.

90. In the result, grounds Nos. 7, 8 and 9 are allowed for statistical purposes.

91. Now we take up ground No. 10 with regard to the addition of Rs. 4.04 crores being deposit received from the customers against flats. Learned counsel for the assessee submitted that the issue is covered against the assessee by judgment of the Income-tax Appellate Tribunal, Chandigarh Bench, in the group case of Asstt. CIT v. Punjab Urban Development Authority[2014] 64 SOT 65 (URO)/42 taxmann.com 160. The learned Departmental representative for the Revenue also submitted that the issue is covered against the assessee by the above decision in the case of Punjab Urban Development Authority(supra).

92. On consideration of the submissions and material on record, we find that ground No. 10 is covered against the assessee by order of the Income-tax Appellate Tribunal, Chandigarh Bench, in the case of Punjab Urban Development Authority(supra) in which on identical issue, the Tribunal in principle, confirmed the orders of the authorities below with regard to addition maintained on account of advances received from the customer by following cash system of accounting. However, certain directions have been given as to how the addition is to be made against the assessee. The findings of the Tribunal in this case in paragraphs 77 to 95 are reproduced as under (page 544) :

“77. We have heard the rival submissions carefully. Section 145 of the 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 Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income.

(3) Where the Assessing Officer is not satisfied about 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 not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.’

78. The above provision was substituted by the Finance Act, 1995 with effect from April 1, 1997. Before this substitution the assessee had choice to follow mercantile or cash or even hybrid system of accounting, i.e., the assessee could choose cash system of accounting for one source of income and mercantile system of accounting for other sources. This choice have been removed and now the assessee could follow either cash system of accounting or mercantile system of accounting. Plain reading of the provision shows that the assessee could follow only one system of accounting in respect of income under the head ‘profits and gains of business or profession or income from other sources’. These restrictions have not been prescribed 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 adopted only one system of accounting. Before the present assessment year the assessee was following mercantile system of accounting and in this year system has been changed from mercantile system of accounting to cash system of accounting. Though it is very surprising how a large organisation such as the assessee, could follow cash system of accounting but it is admitted fact that the assessee followed cash system of accounting. In fact in respect of other additions like receipt of interest from bank and receipt of interest from Government of Punjab, it was vehemently argued on behalf of the assessee that these receipts can be taxed only when the same have been actually received by the assessee because the assessee was following cash system of accounting. Therefore, admitted position is that the assessee is following cash system of accounting.

79. Normally people other than the traders keep accounts in cash system, i.e., people like doctors, advocates or other professionals keep their accounts in cash basis because 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 system of accounting. Therefore, when the traders follow cash system and whenever such traders sell any merchandise on credit he would enter the transaction only in a memorandum account or in some other rough account as a record so that he does not forget the same. This is the reason we are surprised that the assessee is following cash system of accounting when in the assessee’s case large number of transactions are involved then how can an organisation follow cash system because in the transaction where no cash is incoming or outgoing such transactions are not recorded under this system and they are only noted as memorandum entries or in rough jotting. Under the cash system of accounting such trader would not enter the sale proceeds on the income side in his books of account or cash book until the same is actually received. Similarly an item of expenditure will be booked only when actual cash payment is made. In case of mercantile system of accounting income as well as expenditure would be recognised on the principle of accrual. In fact this issue was considered by the hon’ble Supreme Court in the case of Raja Mohan Raja Bahadur v. CIT [1967] 66 ITR 378 (SC). In that case the assessee was a money lender and had given loan to one Shri Nisar Ahmad Khan, Taluqdar of Mohana Estate. The assessee was maintaining 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 the Privy Council decreed in favour of the assessee. Shri Nisar Ahmad Khan obtained under the Uttar Pradesh Encumbered Estates Act, 1934 (25 of 1934) an order applying the provision of the Act to him. The Special Judge, Sultanpur, passed an order for payment of Rs. 5,00,992 to the assessee. Pursuant to the order the assessee received in 1946, Rs. 1,54,692 from the debtor and for the balance the Government of the United Provinces gave to the assessee Encumbered Estate Bonds of the face value of Rs. 3,46,300. The amount received in the year 1946 was appropriated by the assessee towards the principal due. The assessee split up the amount of the face value of the bonds into two sums of Rs. 2,22,097-9-11 and Rs. 1,24,202-6-1 and credited the first amount in the books of account towards the balance of principal and the second amount to an account styled ‘interest accrued’. In submitting the return of his taxable income for the assessment year 1948-49 the assessee did not disclose any receipt of income from interest due on the loans advanced to Nisar Ahmad Khan. The assessee was duly assessed to tax on the income disclosed by him. In October 1948, the assessee sold the Encumbered Estates Bonds and realised a total sum of interest received during the year on account the difference between the amount realised by sale of the bonds and the amount due as principal. The Income-tax Officer issued a notice under section 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 and the Income-tax Appellate Tribunal. The High Court also decided the issue against the assessee. On further appeal before the hon’ble Supreme Court it was mainly contended that the assessee was maintaining books of account on cash system of accounting and until the assessee realised the value of bonds, no interest can be said to have been received by the assessee because it was further submitted that when the accounts 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 total 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 received 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 1st day of April, 1933, are brought into or received in the taxable territories by him during such year. The Act does not contain much guidance as to cases in which tax is to be levied on income received, and cases in which tax is to be levied on income accrued or arisen. Section 13 however requires that income, profits and gains for the purposes of sections 10 and 12 shall be computed in accordance with the method of accounting regularly employed by the assessee. If accounts are maintained according to the mercantile system, whenever the right to receive money in the course of a trading transaction accrues or arises, even 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 money’s worth and not the accrual of the right to receive is the determining factor. Therefore, if commercial assets are received by a trader maintaining accounts on cash basis in satisfaction of an obligation, income which is embedded in the value of the assets is deemed to be received : the receipt of income is not deferred till the asset is realised in terms of cash or money. It makes 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 complete, whether by a consensual arrangement or by operation of law, he receives the income embedded in the value of the asset. In Californian Copper Syndicate v. Harris [1904] 5 Tax Cas. 159, 167 Lord Trayner in dealing with a case of assessment to income-tax of a company, formed for the purpose, inter alia, of acquiring and reselling mining property, which resold the whole of its assets to a second company and received payment in fully paid shares of the purchasing company, observed :

“A profit is realised 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 realised profit, except when that is paid in cash, the shares were realisable 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 to the manner in which the person making the profit pleases to deal with it”.’

80. The other observations have been summarised in the headnote which read as under :

“If accounts are maintained according to the mercantile system, whenever the right to receive money in the course of a trading transaction accrues or arises, even though income is not realised, income embedded in the receipt is deemed to accrue or arise. Where the accounts are maintained on cash basis, receipt of money or money’s worth and not the accrual of the right to receive is the determining factor. Therefore, if commercial assets are received by a trader maintaining accounts on cash basis in satisfaction of an obligation, income which is embedded in the value of the assets is deemed to be received ; the receipt of income is not deferred till the asset is realised in terms of cash or money. It makes 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 complete whether by a consensual arrangement or by operation of law, he receives the income embedded in the value of the asset.”

81. Therefore, in cash system of accounting for determination of the income receipt on money (cash) or money’s worth instruments 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, if there is simply a right to receive such cash the same cannot be taxed in the cash system of accounting. In our opinion, this would answer the question and or contention raised by learned 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 income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person :

Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly.

(2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act.’

82. The plain reading of this provision would show that tax can be charged at the rate prescribed by any Central Act which is practically done through passing of the Finance Act in every year by Parliament. Such tax can be charged in respect of total income of the previous year. Total income has been defined in section 5 of the Act. The word ‘Income’ has been defined 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 going into the details we would simply take the simple meaning of the ‘income’. In the normal commercial parlance an item which is of revenue nature, is taken as income. Now in a case where an organisation which is carrying out the business of construction and development of houses and if such organisation sells the same outrightly or on instalments basis then such instalments would be in nature of income. Therefore, there is no force in the submissions of learned counsel of the assessee that instalments received by the assessee do not come under the charging section and therefore, the same cannot be taxed simply because under section 145 the receipt under cash system has to be taxed. No doubt section 145 is a machinery section but machinery section also have lot of bearing on determination of income and cannot be ignored lightly. In this connection we would like to refer to one of the celebrated judgment of the hon’ble Supreme Court in the case of CIT v.B.C. Srinivasa Setty [1981] 128 ITR 294 (SC). In that case the assessee was a registered firm. Clause 13 of the instrument of partnership deed showed that goodwill of the firm have not been valued and valuation would be made at the dissolution of the partnership. The period of the partnership was extended and subsequently partnership was dissolved on December 31, 1965. At the time of dissolution goodwill was 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 liability of the dissolved firm. Originally no addition was made on account of gain arising out of transfer of goodwill but this assessment order was found erroneous and prejudicial to the interests of the Revenue and therefore, the learned Commissioner passed revisionary order directing the Assessing Officer to make fresh assessment after taking into account the capital gain arising out of sale of goodwill. The assessee maintained that no sale took place to attract the tax on capital gain under section 45 of the Income-tax Act. The Tribunal allowed the appeal. When the matter travelled to the hon’ble Supreme Court the matter was argued in great detail. One of the issue arose whether there was transfer and it was held yes it was a transfer. Another issue arose whether the gain of such transfer of goodwill would be taxed under section 45 of the Act. It was found that goodwill is a self-generated asset and no cost of acquisition can be attributed to self-generated assets. Since section 48 which is mode of computation of capital gain prescribes reduction of cost of acquisition from the sale consideration it was held that in the absence of cost of acquisition computation of capital gain, was not possible. Therefore, the same was held to be not taxable. This clearly shows that computation provision which is again a machinery provision, had lot of bearing on the taxability of gain received on transfer of goodwill. Therefore, even if section 145 being machinery section has its own implications. Implications are very clear that the assessee has a right to follow either mercantile system of accounting or cash system of accounting for determination of the income. The assessee has been given a choice and in the case before us, the assessee has deliberately and after applying its mind decided to follow cash system of accounting, therefore, the assessee has to bear the consequences of such system of accounting.

83. Learned counsel of the assessee has strongly relied on the decision of K.K. Khullar v. Deputy CIT [2008] 304 ITR (AT) 295 (Delhi). In this case the assessee was an advocate and received certain amounts for services to be performed over a period of time. The amount received from the client in respect of services rendered 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, the whole amount was taxable. The Tribunal decided the issue in favour of the assessee vide the following paragraphs (page 301) :

‘We have considered the facts of the case and rival submissions. We may refer to the charging section 4 of the Act to the effect that income-tax shall be charged for any assessment year at the rate or rates provided in any Central Acts in respect of the 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 previous year in terms of accrual, deemed accrual, receipt and deemed receipt etc. Section 145 deals with the method of accounting in respect of “profits and gains of business or profession” or “income from other sources”. Thus, while sections 4 and 5 deal with the scope of income and its charge to income-tax, section 145 is a procedural section regarding the method to be followed for recording of income in the books of account. It is no doubt true that for the assessment year 1997-98 and onwards, the assessee can follow either the cash or the mercantile system of accounting and the hybrid system of accounting is prohibited. However, what is to be taxed is income and receipt of an amount is not to be the basis for the levy of the tax. In the case of CIT v. Shoorji Vallabhdas and Co.[1962] 46 ITR 144 (SC), the hon’ble Supreme Court pointed out that the Income-tax Act takes into account two points of time on which the liability to tax is attracted, namely,-(i) accrual of income or (ii) receipt of income. It is further mentioned that the substance of the matter is “income”. It may be emphasised that it is accrual of income or receipt of income that can become the subject-matter of tax and it is the income which has to be recorded as per system of accounting followed by the assessee in view of section 145 of the Act, because the substance of the matter is “income”. Therefore, there is an infirmity in the order of the learned Commissioner of Income-tax (Appeals) in paragraph 4.7 where it was stated that the entire amount received, whether arrears or advance, is to be shown as income under the cash system of accounting. The correct position would be that the entire income received, whether arrear or advance of income, has to be shown as income under the cash system of accounting.’

84. The highlighted portion of the above paragraph clearly shows that in cash system of accounting the receipt of money whether arrears or advance, has to be shown as income, therefore, this decision is totally distinguishable.

85. Another decision relied on was that of CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144 (SC). In that case the assessee firm was the managing agent of two shipping companies and under the managing agency agreement, the assessee was entitled for commission at 10 per cent. of the freight charges. 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 at 10 per cent. This amount was credited in the books of account and debited to managing agent. In November 1947, the assessee desired to have managing agency transferred to two private companies and in this connection agreed in December, 1948 to accept 2ݠper cent. as commission and gave up 7ݠper cent. of its earnings. The Revenue sought to assess the amounts to Rs. 1,36,903 and Rs. 2,00,625 being 7ݠper cent. of the foregone amount as income. On these facts it was held as under (headnote) :

‘Held, that the subsequent agreement had altered the rate of commission in such a way as to make the income which really accrued to the assessee different from what had been entered in the books of account. This was not a case of a gift by the assessee to the managed companies of a portion of income which had already accrued, but an agreement to receive a lesser remuneration than what had been agreed upon. The assessee had in fact received only the lesser amount in spite of the entries in the account books, and this lesser amount alone was taxable.

Income-tax is a levy on income. Though the Income-tax Act takes into account two points of time at which the liability to 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 made about a ‘hypothetical income’, which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account.’

86. Thus it is clear from the above that the amount which was sought to be assessed was not in nature of income because the assessee has clearly agreed to reduce the rate of commission on conversion of the agency in the name of private companies. Inthe case before us, nowhere it has been denied that instalments received by the assessee-firm from the allottees of the houses isnot in the nature of the income. Therefore, the proposition laid down in the case of CIT v.Shoorji Vallabhdas and Co. [1962] 46 ITR 144 (SC) are not applicable.

87. We would also like to note that in original return filed by the assessee, was for income of Rs. 21.19 crores whereas in the revised return a loss of Rs. 19.12 crores was claimed. The Assessing Officer examined the reasons for loss and he found that main reason was that expenditure accounts show the figures of cost of plots and therefore, sale which was not there in the original income and expenditure account. Result of these figures is as under :

(Rs.) (Rs.)
Cost of plots 1,05,42,88,169 Sale of plots 65, 18,29,803
Loss 40,24,58,366
1,05,42,88,169 1,05,42,88,169

88. This matter was investigated in detail and ultimately the reason for these entries was analysed and discussed by the Assessing Officer as mentioned in the assessment order as under :

‘As regards the reason for huge loss from purchase and sale of plots, it was explained by counsel, during discussion and also explained by the assessee in its letter No. 1567, dated March 8, 2006, that since the assessee has changed its system to cash system of accounting, only the amount actually received out of total sale amount 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 reflected in the closing stock which is the reason for the loss in the purchase and sale of plots for the assessment year 2003-04. But in the subsequent years, i.e., assessment year 2004-05 onwards, there is profit from purchase and sale of plots. During discussion, it was explained by 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 per cent. of the cost of the plot, i.e., Rs. 37,500 is actually received during the year. Actually, the profit earned is Rs. 50,000. But since the assessee has adopted cash system, sale will be shown at Rs. 37,500 for the year. The value of closing stock of 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 that year. Now in the next year, there will be no opening stock in respect of that plot but if the balance amount of sale consideration, i.e., Rs. 1,12,500 is actually received in that year that will be shown as the amount of sale for which there will be no opening stock or corresponding purchase and the same, already sold plot will give a profit of Rs. 1,12,500 in that next year. This is the reason that there is steep rise in the profit from sale of plots in the next year. The assessee’s counsel referred to the original and revised return for the succeeding 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 Income-tax Rules has been shown at Rs. 7,67,61,289, In the revised return, the income as per the profit and loss account and after deducting depreciation as per the Income-tax Rules has been shown at Rs. 39,50,14,907. There is a steep rise of Rs. 31,82,53,618 in the income for the assessment year 2004-05 which is mainly on account of recognising revenue on purchase and sale of plots on cash method of accounting.’

89. This explanation of the assessee was found to be convincing and accepted. Thus it is clear that the assessee itself contended that sale of plots has to be accepted on the basis of actual cash receipt on sale effected during the year. Therefore, the assessee could not take a different stand in respect of sale of houses and flats.

90. Coming to the facts of the case, the assessee sold certain houses and flats under the hire purchase agreement. The allottees were treated as tenant during the completion of such hire purchase agreement till all the instalments were paid by such allottees. The instalments as well as expenditure incurred by the assessee, was being accumulated in various schemes and was reflected in the balance-sheet because the assessee was following the mercantile system of accounting till the 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 surprise on adoption of cash system by the assessee but admittedly this system has been adopted and therefore, the assessee has to bear the consequences. The first contention was that houses and flats were sold on hire purchase basis and under the Hire Purchase Act, 1972, the buyer does not get the ownership right till the completion of the purchase as provided in the agreement and as per the agreement till all the instalments are paid such buyer or allottees will not become the owners. However, we find no force in this contention because no other Act can override the provisions of the Act and this has been clarified by the hon’ble Supreme Court in the case of Southern Technologies Ltd. v. Joint CIT [2010] 320 ITR 577 (SC). Therefore, the instalments received against such sales which are in the nature of revenue receipts, are required to be taken into consideration for determination of income in this year because the assessee has adopted cash system of accounting during the year. Next contention was that the assessee was following continuously the project completion method and therefore, no income can be determined unless the projects are completed. Again as discussed above in detail the issue of system of accounting and the meaning of cash system of accounting, this contention cannot be accepted because the assessee cannot follow two different systems of accounting under the same head. Therefore, in our opinion, the Assessing Officer has correctly included all the instalments received from the allottees of the houses and flats in the income of the assessee.

91. However, we find that the submissions of learned counsel of the assessee that if such instalments are included then the corresponding expenditure which has been incurred should also be allowed on matching principle. Learned counsel for the assessee had relied on the decision of CIT v. Bilahari Investment P. Ltd. [2008] 299 ITR 1 (SC). In that case the assessee subscribed to chits as their business activities. They maintained their accounts on the mercantile basis and computed the profit/loss 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 conclusion that the completed contract method for chit discount was not accurate in recognising/identifying income and that the percentage of completion method was to be preferred. The High Court held that the completed contract method of accounting adopted by the assessees for chit discount was valid and the Department erred in spreading the discount over the remaining period of the chit under the percentage of completion method on proportionate basis. On appeal by the Department to the Supreme Court. it was held as under (headnote) :

‘Held accordingly, affirming the decision of the High Court, that, since, from the various statements produced, the entire exercise arising out of the change of method from the completed contract method to deferred revenue expenditure was revenue neutral, the completed contract method was not required to be substituted by the percentage of completion method.’

92. In our opinion, the above case is not very relevant because in this case the assessee was continuously following the method of completed contract under mercantile system of accounting which was found to be correct. However, the matching principle was laid down in the case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC) by the hon’ble Supreme Court. In that case the assessee purchased certain lands and developed the same for building purposes by laying roads, providing drains system and installing lights, etc. The flats were sold on instalment basis. At the time of sale the assessee undertook to carry out more developments. In the relevant year the assessee received a sum of Rs. 29,392 towards sale price of land. However, the assessee was following mercantile system of accounts and credited to its account a sum of Rs. 43,692 representing full sale price of the land. At the same time the assessee also debited an estimated sum of Rs. 24,809 as expenditure for the developments. This was disallowed by the Revenue. On appeal it was held as under (headnote) :

‘Held, (i) that the undertaking to carry out the developments within six months from the dates of the deeds of sale (which, in view of the fact that time was not of the essence of the contract, meant a reasonable time) was unconditional, the appellant binding itself absolutely to carry out the same. That undertaking imported a liability on the appellant which accrued on the dates of the deeds of sale, though that liability was to be discharged at a future date. It was thus an accrued liability and the estimated expenditure which would be incurred in discharging the same could be deducted from the profits and gains of the business, and the amount to be expended could be debited in accounts maintained in the mercantile system of accounting before it was actually disbursed. The difficulty in the estimation thereof did not convert the accrued liability into a conditional one, because it was always open to the income-tax authorities concerned to arrive at a proper estimate thereof having regard to all the circumstances of the case.

(ii) That the sum of Rs. 24,809 represented the estimated 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, having regard to the accepted commercial practice and trading principles, was a deduction which, if there was no specific provision for it under section 10(2) of the Income-tax Act, was certainly an allowable deduction, arriving at the profits and gains of the business of the appellant, under section 10(1) of the Act, there being no prohibition against it, express or implied, in the Act.

The expression “profits or gains” in section 10(1) of the Income-tax Act has to be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure which is necessary for the purpose of earning the receipts is deducted there 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.’

93. Thus from the above it is clear that for determining true profits cost incurred by the assessee towards the construction 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 the case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC) the assessee was following mercantile system of accounting and had credited whole amount received or receivable towards sale of proceeds, i.e., why the amount still to be incurred on development was allowed as expenditure but still the principle is there. Therefore, in case were cash system of accounting is followed then whatever expenditure has been incurred in cash during the year, has to be allowed. In the case before us, the assessee has neither offered the instalments as income nor claimed expenditure incurred. Since we have already held that instalments received have been rightly included in the income of the assessee, therefore, corresponding expenditure which has been incurred in cash towards construction of such houses and flats sold under hire purchase is also to be allowed.

94. One more angle needs to be considered that is what would happen to the opening stock as well as closing stock. In the cash system of accounting closing stock is not considered, therefore, what has been accumulated in the schemes is also required to be considered. Considering the contentions of the parties and the principles we have already discussed, we are of the opinion that whatever instalments were accumulated in the schemes needs to be considered along with the opening stock whenever a particular scheme was completed. This is so because it was pointed out by learned counsel of the assessee that the profit in each of the scheme was offered for taxation when a particular scheme was completed. Therefore, the results of individual schemes have to be recalculated and instalments accumulated should be taken as income and expenditure incurred after reducing the expenditure incurred in cash which has been allowed in various years, should be reduced from the such instalments 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 completed scheme were actually offered by the assessee.

95. In these circumstances we set aside the order of the learned Commissioner of Income-tax (Appeals) and direct the Assessing Officer to include instalments received on sale of various houses and flats under hire purchase agreement and at the same time allow corresponding expenditure which has been expended by the assessee in cash (including through cheque). Further in the year of completion of a particular scheme effect has to be given in respect of accumulated instalments as well as accumulated expenditure which has not been already considered in a particular year on cash basis as observed earlier. We have observed right in beginning that this issue is involved in all the years before us therefore, similar treatment as observed by us, should be given in each of the year.”

93. By following the above order, the Assessing Officer is directed to follow the above order for the purpose of making addition against the assessee. In the result, this ground of appeal of the assessee is, therefore, disposed of accordingly in view of the findings given in the case of Punjab Urban Development Authority (supra).

94. On ground No. 11, the assessee challenged order of the learned Commissioner of Income-tax (Appeals) in confirming the contention of the Assessing Officer in rejecting the method of accounting regularly followed by the assessee, which has been accepted by the Department in previous years. This issue is connected with ground No. 10 of the appeal of the assessee in which the learned Commissioner of Income-tax (Appeals) has given a categorical finding that the assessee was following the cash system of accounting and, therefore, income is to be computed accordingly. Since, ground No. 10 is disposed of in terms of the order of the Tribunal in the case of Punjab Urban Development Authority (supra), therefore, this ground stands disposed of accordingly and no further interference is required.

95. On ground No. 12, the assessee challenged the addition of Rs. 61,41,511 being amount paid by the assessee-authority on account of contribution of provident fund.

96. On ground No. 13, the assessee challenged the order of the learned Commissioner of Income-tax (Appeals) in confirming the contention of the Assessing Officer in treating share of employees to provident fund of Rs. 61,41,511 as income of the assessee under section 2(24)(x) of the Income-tax Act.

97. The brief facts are that the Assessing Officer noted that the assessee had debited expenditure amounting to Rs. 61,41,511 in its income and expenditure account under the head “establishment and personal expenses” on account of contribution to contributory pension fund. The Assessing Officer noted that the provident fund was not approved by the Commissioner of Income-tax/Chief Commissioner of Income-tax or under any scheme framed by the Employees Provident Fund Act, 1952. The Assessing Officer asked the appellant to explain why the contribution made to provident fund may not be disallowed. The appellant submitted that as per powers of notification issued by housing department on August 12, 1983, PUDA/GLADA can manage its provident fund independently. This notification had been challenged by the Regional Provident Fund Commissioner and the Ministry of Labour, Government of India in the court. The first authority had decided in favour of Regional Provident Fund Commissioner that the provident fund shall be managed by the Regional Provident Fund Commissioner. The PUDA has challenged this order in the hon’ble Punjab and Haryana High Court. Pending the disposal of this case, the amount contributed by GLADA and the share of employees was being deposited in separate bank account. The assessee further submitted that various courts have held that contribution to unrecognised provident fund is allowable deduction under section 37(1) of the Income-tax Act. The Assessing Officer referred to the provisions of section 36(1)(iv) of the Income-tax Act and held that the contributions made by the appellant to CPF were not allowable. The Assessing Officer also referred to the fact that the Regional Provident Fund Commissioner who is statutory authority for the purposes has also filed a suit against the appellant for not following the provident fund law. The Assessing Officer further held that judicial pronouncements cited by the appellant are not applicable as the assessee was virtually keeping and investing the provident fund contribution at its will. The contribution of Rs. 61,41,511 made by the appellant to the contributory pension fund was accordingly disallowed by the Assessing Officer. On similar ground, an amount of Rs. 61,41,511 being provident fund deducted from the employees was added to the total income of the assessee.

98. The assessee vide written submissions dated July 1, 2013, once again reiterated submissions made during the course of the assessment proceedings. The assessee submitted that :

1. In this regard, it is submitted that GLADA is a statutory body constituted under the Punjab Regional and Town Planning and Development Act, 1995 in the year 2006. Earlier, it was a part of Punjab Urban Planning and Development Authority which was managed by the Department of Housing and Urban Development of Punjab Government as per powers of notification issued by the housing department on August 12, 1983, PUDA/ GLADA can manage its provident fund independently but this notification has been challenged by the Regional Provident Fund Commissioner and the Ministry of Labour, Government of India in the court. The first authority has decided in favour of the Regional Provident Fund Commissioner that the provident fund shall be managed by the Regional Provident Fund Commissioner. The PUDA has challenged this order in Punjab and Haryana High Court. Till the disposal of the case, the amount contributed by GLADA and the share of employees is being deposited in a separate bank account. The Regional Provident Fund Commissioner has also applied for the recovery of all the funds from the PUDA but the Punjab and Haryana High Court has stayed the same. Copy of the order of Punjab and Haryana High Court is enclosed herewith.

The above contributions are statutory contributions which have been contributed as per the directions of the State Government.

2. Reliance is placed upon the judgment of the Punjab and Haryana High Court in the case of CIT v. Punjab Financial Corpn. Ltd. [2007] 295 ITR 510 wherein it has been held that the contribution to the provident fund is allowable even if it is not recognised. The High Court held as under (page 514) :

“Applying the above principles in the present case, it is not disputed that the assessee had contributed the provident fund for its employees under the Provident Funds Act, 1925. Further, it cannot be disputed that the expense was made wholly and exclusively for the purpose of business and was neither capital in nature nor the personal expense of the assessee. Section 36(1)(iv) of the Act does not debar specifically deduction on account of contribution made under the Provident Funds Act, 1925. It only talks about grant of deduction in respect of recognised provident fund. Keeping this in view, we do not find that any illegality has been committed by the Tribunal in rejecting the appeal of the Revenue sustaining the deletion of disallowance of Rs. 29,402 represents contribution made by the assessee towards provident fund.

Therefore, the contribution of Rs. 61,41,511 is allowable.”

99. Copy of the appellant’s submissions was provided to the Assessing Officer, who was present during the course of appellate proceedings. The Assessing Officer vide report dated September 23, 2013, submitted as under :

“The reply of the assessee has been perused. The contributions made by the assessee to the contributed provident fund are not allowable keeping in view the provisions of section 36(1)(iv) of the Income-tax Act, 1961 which reads as under :

‘any sum paid by the assessee as an employer by way of contribution towards a recognised provident fund or an approved superannuation fund, subject to such limits as may be prescribed for the purpose of recognising the provident fund or approving the superannuation fund, as the case may be ; and subject to such conditions as the Board may think fit to specify in cases where the contributions are not in the nature of annual contributions of fixed amounts or annual contributions fixed on some definite basis by reference to the income chargeable under the head “Salaries” or to the contributions or to the number of members of the fund.

In the case of the assessee, the conditions required under the provisions of section 36(1)(iv) of the Income-tax Act, 1961, are not being fulfilled, as the provident fund is neither approved by the Chief Commissioner nor by the Commissioner of Income-tax nor it is a provident fund established under a scheme framed under the Employees Provident Funds Act, 1952. It is also noteworthy that the Regional Provident Fund Commissioner who is statutory authority for the purposes has also filed a suit against the assessee, for not following the provident fund law and the case is stated to be pending before the hon’ble Punjab and Haryana High Court.

So far as the judicial pronouncements cited by the assessee on this issue, as above are concerned these are not applicable in the facts of the assessee’s case as the assessee is virtually keeping and investing the provident fund contributions at its will then the expenses of Rs. 61,41,511 being incurred by the assessee towards the contributory provident fund which is not recognised under any law as stated above should be disallowed and added back to the income of the assessee.’

Addition on account of employees’ share to provident fund of Rs. 61,41,511

In this regard, it is submitted that since the provident fund of the assessee is neither approved by the Chief Commissioner nor by the Commissioner of Income-tax nor it is a provident fund established under a scheme framed under the Employees Provident Funds Act, 1952 and also keeping in view the fact that the Provident Fund Commissioner has filed a suit against the assessee, the amount deducted by the assessee from its employees, is to be treated as income of the assessee under section 2(24)(x) of the Income-tax Act, 1961. Section 2(24)(x) is reproduced as under :

‘(24) “income” includes-

(x) any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees’ State Insurance Act, 1948 (34 of 1948), or any other fund for the welfare of such employees ;’

Therefore the provident fund deducted from the employees, i.e., equal to Rs. 61,41,511 (i.e. equal to the assessee’s contribution) should be disallowed and added back to his income.”

100. Copy of the Assessing Officer’s report was provided to the appellant. The appellant relied on the order of the Commissioner of Income-tax (Appeals) Chandigarh in the case of Punjab Urban Development Authority (supra) for the assessment year 2009-10 wherein asimilar addition had been deleted by the Commissioner of Income-tax (Appeals), Chandigarh, relying on the decision in the case of Punjab Financial Corpn. Ltd. (supra).

101. The learned Commissioner of Income-tax (Appeals) considering the material on record confirmed the addition. His findings in paragraphs 11.5 to 11.10 are reproduced as under :

“11.5 I have carefully considered the rival submissions. Whether such contributions are allowable as deduction or not is governed by the provisions of section 40A and section 36(1)(iv) of the Income-tax Act. Section 40A(9) reads as under :

(9) No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards the setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, society registered under the Societies Registration Act, 1860 (21 of I860), or other institution for any purpose, except where such sum is so paid, for the purposes and to the extent provided by or under clause (iv) or clause (v) of sub-section (1) of section 36, or as required by or under any other law for the time being in force.”

Therefore, it is evident that conditions prescribed under section 36(1)(iv) have to be fulfilled in order to claim the deduction on account of contribution to provident fund.

11.6 It is seen from the facts on record that in the case of the appellant, the conditions required under the provisions of section 36(1)(iv) of the Income-tax Act, 1961, are not be fulfilled, as the provident fund is neither approved by the Chief Commissioner nor by the Commissioner of Income-tax nor it is a provident fund established under a scheme framed under the Employees Provident Funds Act, 1952. Recognised provident fund has been defined in section 2(38) of the Income-tax Act, 1961, which is reproduced under :

“‘recognised provident fund’ means a provident fund which has been and continues to be recognised by the Chief Commissioner or Commissioner in accordance with the rules contained in Part A of the Fourth Schedule and includes a provident fund established under a scheme framed under the Employees’s Provident Fund Act, 1952.”

11.7 In this case contributions have neither been made to CPF approved by the Commissioner of Income-tax nor to a provident fund established under a scheme framed under the Employees’ Provident Fund Act, 1952. Moreover, the constitution of the provident fund is not in accordance with the law of the land and the Regional Provident Fund Commissioner who is statutory authority for the purposes has also filed a suit against the appellant, for not following the provident fund law. Further, the appellant has lost the case in the lower court and the case is stated to be pending before the hon’ble Punjab and Haryana High Court. The appellant is managing the fund on its own and virtually keeping and investing the provident fund contributions at its hon’ble Supreme Court in the case of CIT v. Textool Co. Ltd. in Civil Appeal No. 447 of 2003, vide order dated September 9, 2009 [2013] 1 ITR-OL 241 (SC) has held as under (page 245) :

‘True that a fiscal statute is to be construed strictly and nothing should be added or subtracted to the language employed in the section, yet a strict construction of a provision does not rule out the application of the principles of reasonable construction to give effect to the purpose and intention of any particular provision of the Act. (See : Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 (SC). From a bare reading of section 36(1)(v) of the Act, it is manifest that the real intention behind the provision is that the employer should not have any control over the funds of the irrevocable trust created exclusively for the benefit of the employees.’

In this case, the appellant is in control of the amount of provident fund contribution of both employers and employees and its interest. Therefore, the conditions of section 36(1)(iv) are not fulfilled. The appellant is therefore not eligible for deduction claimed on this account.

11.8 Reliance is placed on the following judgments :

1. (i) Raasi Cement Ltd. v. CIT (No. 1) [2005] 275 ITR 579 (AP) ;

(ii) Aspinwall and Co. (Travancore) Ltd. v. Deputy CIT (Assessment) [2007] 295 ITR 553 (Ker).

Only contribution towards reorganised provident fund for the purpose and to the extent provided under section 36(1)(iv) or (v) or as required by any law are allowable as deduction under section 40A(9). In view of section 40A(9) no deduction can be allowed under section 37.

2. Brooke Bond India Ltd. v. Joint CIT [2011] 337 ITR 482 (Cal)

On a conjoint reading of the provisions contained in sections 36 and 40A(9), the amount of liability alleged to have accrued to the employer towards an unapproved scheme of superannuation fund for the payment of the employees would not be entitled to deduction-section 40A(9) overrides provisions of section 36-It is preposterous to suggest that an expenditure of the nature provided in any of the provisions of sections 30 to 36 would be allowed under section 37, i.e., the residuary section. In that event, the purpose of putting various restrictions in sections 30 to 36 of the Act would become ineffective and an assessee can easily bypass those restrictions by claiming the benefit under the residuary section.

11.9 The judgment of Punjab Financial Corporation Ltd. [2007] 295 ITR 510 (P&H) relied on by the appellant is distinguishable on facts. This judgment is with respect to assessment year 1977-78 wherein section 40A(9) was inserted by the Finance Act, 1984 with retrospective effect from April 1, 1980. Therefore, this judgment pertains to the period before the insertion of provisions of section 40A(9). Further, the judgment is in the context of Provident Fund Act, 1925, whereas section 2(38) which defines recognised provident fund specifies only two types of provident fund Scheme one created under the Provident Fund Act, 1952 or those approved by the Chief Commissioner of the Commissioner of Income-tax.

11.10 Keeping in view the aforesaid facts the Assessing Officer was fully justified in of Rs. 61,41,511 being amount paid on account of contribution to provident fund and addition of Rs. 61,41,511 as income of the appellant under section 2(24) of the Income-tax Act. This ground of appeal is accordingly dismissed.”

102. Learned counsel for the assessee submitted that the assessee-authority is a statutory body constituted under PRTPD Act. Earlier it was a part of PUDA. As per notification issued by Housing Department on August 12, 1983, PUDA/GLADA can manage its provident fund independently. The copy of the relevant document is filed at pages 114 to 121. It is submitted that where an assessee is statutory corporation, is obliged to pay pension to its employees under the Rules governing it and the provisions by the assessee have been made for the same and in case there is no existence of any approved pension fund, the assessee can claim such expenditure under section 37 of the Act instead of section 36(1)(iv) of the Act and the same was incurred wholly and exclusively for the purpose of business. Learned counsel for the assessee submitted that the similar issue has been decided by the Income-tax Appellate Tribunal, Chandigarh Bench, in the case of Punjab Urban Development Authority (supra), dated December 6, 2013, in paragraphs 84 to 86 of the order. Therefore, issue is covered in favour of the assessee.

103. The learned Departmental representative also stated that issue is decided now in the case of Punjab Urban Development Authority (supra).

104. On consideration of the rival submissions, we find that issue is now decided by the Income-tax Appellate Tribunal, Chandigarh Bench, in the case of Punjab Urban Development Authority (supra) in which in paragraphs 111 to 124 the issue is decided that the assessee is entitled to claim deduction in respect of contributions made towards provident fund even if such fund is not recognised. However, Assessing Officer was directed to examine this issue clearly and allow the payment on cash basis. The findings of the Tribunal in this case in paragraphs 111 to 124 are reproduced as under :

“111. We have heard the rival submissions carefully. First of all we would like to point out that this issue is arising in all the years in which the appeals were heard by us, therefore, 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 which this organisation was known as ‘Punjab Housing Development Board’ which was stated to have been formed in 1972. Through a gazette notification dated August 12, 1983 (copy placed at paper book at pages 135-136) Government of Punjab made certain rules for Punjab Housing Development Board through GSR No. 70/ PA6z/73/S/98/83. Rule 16 of this notification reads as under :

Provident Fund. – (1) The State Government shall establish a provident fund for the employees of the Board and such provident fund shall be deemed to be a Government Provident Fund for the purpose of the Provident Funds Act, 1925 (Central Act XIV of 1925) and notwithstanding anything contained in section 8 thereof, such fund may be administered by such officers of the State Government or of the Board as the State Government may specify in that behalf.

112. The above clearly shows that Government through this notification was mandated to establish a Government provident fund under the Provident Funds Act, 1925. Further page 152 of the paper book is copy of another order of the Government of Punjab showing that on constitution of the Punjab Urban Planning and Development Authority various terms in the Punjab Housing Development Board Rules, 1983 would stand amended by substitution of the words ‘Punjab Housing Development Board’ to ‘Punjab Urban Planning Development Authority’. This shows that same rules which were made for the Punjab Housing Development Board were adopted for the assessee-authority also. Therefore, it becomes clear that provident fund established by the assessee is governed by the provisions of the Provident Funds 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 Funds Act, 1925 (19 of 1925) applies.

113. The above makes it clear that provident fund which are governed by the Provident Funds Act, 1925, are not covered by the Rules made under the Fourth schedule. In other words, the provisions regarding recognition of the provident fund would not be application to such funds and, therefore, it does not make any difference whether the assessee’s provident fund is recognised or not recognised. Therefore, there is no force in the submissions of the learned Departmental representative for the Revenue that the contribution should not be allowed because the assessee has not got its funds recognised or contribution was not made towards recognised provident fund. This also leads to the conclusion that section 36(1)(iv) which was for contribution towards recognised provident fund, is not applicable. However, as far as section 36(1)(va) is concerned, the same is still applicable because section 36(1)(va) reads as under :

’36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28-

(i) to (v) Not relevant

(va) any sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 apply, if such sum is credited by the assessee to the employee’s account in the relevant fund or funds on or before the due date.

Explanation. – For the purposes of this clause, ‘due date’ means the date by which the assessee is required as an employer to credit an 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 ;’

114. The above provision deals with employees share of the contribution. According to the scheme of the Act the employee’s share is treated as income when some contribution is received by the assessee and when same is contributed to provident fund then same is allowed as deduction under this provision. At the same time receipt of such contribution is treated as deemed income under section 2(24)(x) which reads as under :

‘any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees’ State Insurance Act, 1948 (34 of 1948), or any other fund for the welfare of such employees ;’

115. In this clause which is part of the definition of income, there is no mention of the word ‘recognised provident fund’ therefore, any contribution raised from the employee towards any provident fund would form part of the deemed income under this provision. In our opinion, this has been deliberately done by the Legislature because as far as employees contribution is concerned, Parliament wanted that the same should not be used by business people and should be deposited with the provident fund authorities and or trust at the earliest and that is why no difference has been made between recognised provident fund or other funds. From this it becomes clear that as far as employee’s contribution is concerned, the same is not covered by section 36(1)(iv). However, at the same time it cannot be denied that the contribution made by the assessee towards provident fund is clearly in the nature of business expenditure and therefore, same is allowable under section 37 of the Act which is residuary provision. Since the contribution of employer share towards provident fund is in the nature of revenue expenditure and not covered by any other provision as explained above, the same is covered by section 37 of the Act. This analysis leads to the conclusion that as far as employer share is concerned, the same is allowable under section 37 and as far as employee’s share is concerned, the same is allowable under section 36(1)(va). Lot of arguments have been made by both parties in respect 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 as contribution to, any fund, trust, company, association of persons, body of individuals, society registered under the Societies Registration Act, 1860 (21 of 1860), or other 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 being in force.’

116. A plain reading of this provisions shows that the contribution made by an assessee as an employer towards various funds for the benefit of the employees are not allowable except for contribution provided in this section itself. Therefore, the learned Departmental representative for the Revenue is correct that contribution which 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 :

’40A. (1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head “Profits and gains of business or profession.’

117. However, a careful reading clearly shows that exception provided in this section are in respect of deduction allowed under section 36(1)(iv) or 36(1)(iva) or 36(1)(v). There is another exception which reads as under :

‘or as required by or under any other law for the time being in force’.

118. Therefore, learned counsel of the assessee is correct that since provident fund established by the assessee was in terms of the Indian Provident Funds Act, 1925, therefore, this has to be read into the exceptions and accordingly fetter for not allowing the deduction under section 40A(9) would not be applicable for the funds contributed towards provident fund as the employer share in terms of the Indian Provident Funds Act, 1925 which was adopted by the assessee. Therefore, we hold that the assessee is entitled to claim deduction in respect of contributions made towards provident fund even if such fund is not recognised.

119. 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 payments have been made before the due date of filing of return as provided in section 43B. The relevant portion of section 43B reads as under :

’43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of-

(a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or

(b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, or

(c) to (f) not relevant

shall be allowed (irrespective of the year in which the liability to pay such sum was incurred by the assessee according to the method of accounting 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 in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return.’

120. A 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 method of accounting followed by the assessee the same is still not allowable unless and until such expenditure is paid. This means that this section provides further restriction on allowability of an expenditure which are otherwise allowable under sections 30 to 44. In other words even if an expenditure is allowable under various provisions under the head ‘Profits and gains of business or profession’ the same is not allowable because of section 43B unless such expenditure is actually paid. In case before us, the assessee is following the cash system of accounting which we have already discussed while adjudicating ground No. 5. Therefore, any expenditure in the case of the assessee has to be allowable only if actual cash has been paid during the year. Therefore, if no cash has been paid expenditure is not allowable. No doubt section 43B has carved out an exception by way of the proviso that even if expenditure is paid before due date of filing of return then the same shall be allowed and the hon’ble Punjab and Haryana High Court in the case of CIT v. Nuchem Ltd. in I.T.A. No. 323 of 2009 following the decision of the hon’ble apex court in CIT v. Alom Extrusions Ltd. [2009] 319 ITR 306 (SC) has clearly held that if such payments are made before the due date of filing of return then the same has to be allowed. However, as observed earlier this benefit could not be given to the assessee because the assessee is following the cash system of accounting and allowability of expenditure 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, therefore, if the payment for this year was made in the 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 the earlier years. The last dispute raised by the Revenue is that the assessee was not maintaining separate bank accounts and or fixed deposit receipts in the account in respect of provident fund because the same have been shown in the balance-sheet. In this regard the learned Departmental representative for the Revenue has relied on the decision of CIT v. Textool Co. Ltd.[2009] 1 ITR-OL 241 (SC). 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 contribution and Rs. 5,84,754 was paid towards annual premium. The balance of Rs. 36,22,224 was provided for initial contribution. 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 under (page 245 of 1 ITR-OL) :

‘Having considered the matter in the light of the background facts, we are of the opinion that there is no merit in the appeal. True that a fiscal statute is to be construed strictly and nothing should be added or subtracted to the language employed in the section, yet a strict construction of a provision does not rule out the application of the principles of reasonable construction to give effect to the purpose and intention of any particular provision of the Act (see Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 (SC). From a bare reading of section 36(1)(v) of the Act, it is manifest that the real intention behind the provision is that the employer should not have any control over the funds of the irrevocable trust created exclusively for the benefit of the employees.’

121. It is clear that intention behind the provisions for various funds for employees is that employer should not have control over the funds which has been contributed by the assessee or the workers. In this regard learned counsel of the assessee referred to section 3 of the notification which reads as under :

‘All moneys belonging to the fund shall be invested either in securities of the nature specified in clauses (a), (b), (c), (d) or (e) of section 20 of the Indian Trusts Act, 1882 (Central Act 2 of 1882) or in the post office savings bank accounts or in long-term fixed deposits with Scheduled Banks. Post Office National Saving Certificates or kept as a deposit with the State Government beating interest.’

122. Further the assessee also issued office order copy of which is placed at page 70 of the paper book which reads as under :

‘In pursuance to rule 3(1)(2) of the Punjab Housing Development Board (Provident Fund) Rules, 1983 and further adopted PUDA in its meeting held on 17th July, 1995 vide Agenda item No. 17 a committee, is hereby constituted to administer and manage the contributory provident fund of the employees of PUDA.

The committee shall include :

(a) The Chief Administrator as ex officio chairman of the committee or his nominee

(b) Accounts Officer (Pension) as Secretary of the Committee

(c) Administrative Officer (Admin-I)-Member

(d) Sh. Karam Chand, Senior Assistant and Sh. Shishu Pal, Senior Assistant-Members (representing the employees of PUDA, approved vide item No. 9, 10 in the meeting of the Authority held on November 29, 2002).

Rakesh Singh

Vice Chairman, PUDA’

123. Thus it is clear that separate committee has been constituted but it is not clear whether this committee was monitoring the funds of the provident fund. The fixed deposit receipts have been debited and made 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 aside the order of the learned Commissioner of Income-tax (Appeals) and direct the Assessing Officer to examine whether provident fund was independently monitored in the light of the directions issued by the hon’ble Supreme Court in the case of Textool Co. Ltd. [2009] 1 ITR-OL 241 (SC).

124. Another contention was also raised that the funds 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 further examination by the Assessing Officer where regularly FDRs have been made for a period of one year or longer period and where no justification for such shorter period is there or not ? Therefore, the Assessing Officer should examine this matter further and decide the issue in accordance with law. In the result, this ground is allowed for statistical purposes.”

105. In view of the above judgment, the Assessing Officer is directed to follow the order of the Tribunal in the case ofPunjab Urban Development Authority (supra) and pass consequential order accordingly. In the result, grounds Nos. 12 and 13 stand disposed of in terms of the order passed by the Tribunal in case of Punjab Urban Development Authority (supra).

106. Grounds Nos. 14, 15 and 16 are not pressed by learned counsel for the assessee being general in nature and the same are accordingly, dismissed.

107. No other point is argued or pressed. In the result, the appeal of the assessee is partly allowed for statistical purposes.

108. In the result, the Departmental appeal in I.T.A. No. 319/CHD/2013 is dismissed and appeal of the assessee in I.T.A. Nos. 252/CHD/2013 and 1028/CHD/2013 are partly allowed.

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