Housing And Urban Development Corporation Ltd v. Additional Commissioner Of Income Tax Range 12 New Delhi

IN THE HIGH COURT OF DELHI AT NEW DELHI * Reserved on: 6[th ]November, 2019Pronounced on: 6[th] February, 2020 + ITA 541/2019 HOUSING AND URBAN DEVELOPMENT CORPORATION LTD THROUGH ITS AUTHORIZED SIGNATORY..... Appellant Through: Mr. Gagan Kumar and Mr. Amit Kaushik, Advocates. versus ADDITIONAL COMMISSIONER OF INCOME TAX RANGE 12 NEW DELHI ..... Respondent Through: Mr. Zoheb Hossain and Mr. Deepak Anand, Advocates. CORAM: HON’BLE MR. JUSTICE VIPIN SANGHI HON’BLE MR. JUSTICE SANJEEV NARULA J U D G M E N T SANJEEV NARULA, J 1. This appeal under Section 260A of the Income Tax Act, 1961 (herein after referred to as the “Act”) filed by the Housing and Urban Development Corporation Ltd - HUDCO (hereinafter referred to as “the appellant”) assails the order dated 21[st] December, 2018 passed by Income Tax Appellate Tribunal, Delhi Bench „C‟: New Delhi (hereinafter referred to as “ITAT”) in ITA No:- 5705/Del/2014 for the Assessment Year (AY)2007-08(herein after “the impugned order”). Page 1 of 33 2. On 6[th] November, 2019, after hearing the learned counsels for the parties, the following questions of law were framed: “1. Whether the Hon'ble ITAT erred in confirming the disallowance of the claim of provision for salary of Rs. 1,60,00,000/- on the ground that it did not accrue and the same was merely a contingent liability without appreciating the legal precedents as well the facts of the case. II. Whether the Hon'ble ITAT erred in confirming the disallowance of the claim of provision for salary of Rs. 1,60,00,000/-- without appreciating that pay revision of the employees of the Appellant being a Public Sector Enterprise is due every 10 years and with the expiry of one wage settlement or agreement, invariably, there is a time lag when another fresh wage revision agreement is negotiated and entered and this Hon'ble Court in the case of in the case of CIT v. Bharat Heavy Electricals Ltd. 352 ITR 88 (Del) while dealing with a similar provision made on account of wage revision, held, that the deduction claimed for that period cannot 'be termed as contingent because the wage and the probable revision or rates of revision would be within the fair estimation of the employer. III. Whether the Hon'ble ITAT erred in confirming the addition of Rs. 1,28,00,000/- on account of change in accounting policy of revenue recognition for application fee, front end fees, administrative fee and processing fee of loans from the date of signing of loan agreement to the date of realization on the ground that the same was not in accordance with the provisions of the Act without appreciating the legal precedents as well the facts of the ”case. Page 2 of 33 3. The factual background of the case giving rise to the present appeal is that the appellant, a Public Sector Undertaking (PSU), filed its return of income for the AY 2007-08 on 30[th] October, 2007 declaring an income of Rs. 351,93,26,019/-. The same was revised on 24[th] October, 2008 wherein the income of Rs. 331,58,74,360/- was declared. Appellant‟s case was selected for scrutiny and an assessment order under Section 143(3) of the Act was passed on 30[th] December, 2009, assessing the total income of the appellant as Rs. 355,28,96,515/-. The Commissioner of Income Tax [herein after referred to as “CIT(A)”] examined the records and vide order dated 24[th]February, 2012 exercised his jurisdiction under Section 263 of the Act, directing the Respondent to reframe the assessment inter alia on the ground that Assessing Officer (AO) had not disallowed the provision for salary of Rs. 1.60 crores and has erred in not making an addition of Rs. 1.28 crores on account of the financial impact due to change in the accounting policy with respect to revenue recognition for application fee, front end fees, administrative fee and processing fee of loans from the date of signing of the loan agreement to the date of realization. 4. Pursuant to the aforesaid directions, the AO framed the assessment order dated 28[th] March, 2013 under Section 263/143(3) of the Act, and made certain additions/disallowances which inter alia includes the disallowance of the claim for provision of salary of Rs.1.60 crores and addition of Rs. 1.28 crores on account of financial impact due to change in accounting policy. In the appeal, CIT (A) vide order dated 28.08.2014 upheld the order of the AO and sustained the disallowance and the addition. 5. The appellant challenged the order of the CIT (A) before the Income Page 3 of 33 Tax Appellate Tribunal (“ITAT”). Revenue also filed an appeal regarding the disallowance made by AO under Section 14A of the Act read with Rule 8D of Income Tax Rules. The two cross appeals were heard and decided by way of the impugned judgment and order dated 21[st] December, 2018. 6. The appellant has preferred the present appeal questioning the correctness of the impugned order, inter alia on the ground that the ITAT has erred in confirming disallowance of the claim for provision of salary of Rs. 1.60 crores, and the addition of Rs. 1.28 crores on account of change in accounting policy with respect to revenue recognition for application fee, front end fees, administrative fee and processing fee of loans. QUESTION I & II: 7. The appellant claimed deduction of Rs. 1.60 crores on account of the provision for revision of pay in the books of account. The deduction was made in light of the Pay Revision Committee (hereinafter referred to as “PRC”) appointed by the Government of India. The AO disallowed the claim, holding that the expenditure was purely a provision against unascertained liability and could not be claimed as expenditure for Assessment Year 2007-08. The relevant findings of the AO on this issue are as under: “'Neither, the said liability accrued nor crystallized during the year under consideration. As per the recommendations of the central Sixth Pay Commission/Ministry of Finance etc. It was decided that 60% of arrears worked out on the implementation of Sixth Central Pay Commission was ordered by the Central govt. Page 4 of 33 to be paid in Financial Year 2008-09 relevant to A. Y. 2009-10 and balance 40% was ordered to be paid in F. Y. 2009-10 relevant to A. Y. 2010-11. Accordingly, the assessee could have claimed the expenditure on account of revision of pay in the A. Y. 2009-10 and the balance amount of expenditure w.e.f. 1-4-2008 to the implementation of Sixth Pay commission should have been claimed in A. Y. 2010-1.1. Even the Ld CIT-IV after careful consideration of the issue in question, has observed that the liability on account of revision of pay in consequence of report of Sixth Central Pay Commission has not accrued and crystallized during the F. Y. 2..6-07 relevant to A. Y. 2007-08 because the implementation of the said report in respect of public sector undertaking and State Govt. Employees has been carried out only after September, 2008 beyond the close of the instant financial year relevant to A. Y. 2007-08 and accordingly, the provision of such revision of pay amounting to Rs. 1,60,00,000;- is unascertained liability which is not eligible for deduction for the year under consideration. Even from the documents filed during fresh proceedings along with its reply dated 30.11.2012 in the form of a note marked as annexure-III and further marked as ''Finance Wing;" with thesubject: Provision against pay revision of Executives, clearly states that ''during discussions regarding Annual Account for the year 2006-07 on 10.10.2007 in CMD's Chamber when DF was also present, it was decided that suitable provision on account of pay revision of Executives w.e.f. 01.01.2007 should also be made in the Annual accounts for the year 2006-07. Accordingly, an ad hoc provision of Rs. 1.60 crores is proposed to be made in the accounts for the period of three months for executives only from 01.01.2007 to 31.3.2007. On the back side of the said note it is mentioned as under:- Page 5 of 33 Even from the documents filed during fresh proceedings along with its reply dated 30.11.2012 in the form of a note marked as annexure-III and further marked as ''Finance Wing;" with thesubject: Provision against pay revision of Executives, clearly states that ''during discussions regarding Annual Account for the year 2006-07 on 10.10.2007 in CMD's Chamber when DF was also present, it was decided that suitable provision on account of pay revision of Executives w.e.f. 01.01.2007 should also be made in the Annual accounts for the year 2006-07. Accordingly, an ad hoc provision of Rs. 1.60 crores is proposed to be made in the accounts for the period of three months for executives only from 01.01.2007 to 31.3.2007. On the back side of the said note it is mentioned as under:- Page 5 of 33 Submitted for approval please. Sd/- ACF(S) 13.10.2007” This note was finally approved on 15.10.2007. The accounts for the year under consideration are from 1.4.2006 to 31.3.2007 and are closed on 31.3.2007. That the deduction claimed is on account of creation of provision. Additionally, the ''Provision'' is an ''an ad hoc provision". Neither the liability for revision of pay accrued during the year before 31.3.2007 nor crystallized before 31.3.2007. Additionally, no payment of the same was made before 31.3.2007. All proposals were made in the month of October 2007 after the close of the accounting year. As per the recommendations of the Central Sixth Pay Commission the assessee should have claimed such expenses of revised pay of its employees only in the assessment year 2009-10 and 2010-11. -Hence, the provision rather ad hoc provision of Rs. 1,60,00,000/is hereby disallowed”. [Emphasis Supplied] Page 6 of 33 8. CIT (A) while dismissing the appeal of the assessee, held that there was no decision of the Central Government in the current financial year (2006-07) which may have a bearing on the revision of pay of executives of the appellant Company and therefore it cannot be held that such liability had crystallized during Financial Year 2006-07. In the absence of finality, there was no justification on part of the appellant company to have made a provision in the current year. The relevant portion of the order of the ITAT relating to the aforesaid disallowance reads as under: “(3.1) In the facts of the case before us, we have already noticed that that the Pay Revision Committee had not completed its deliberations before the end of the FY 2006-07 and was yet to submit its report at the time when the FY 2006-07 came to an end; and furthermore, that the pay revision was finally implemented in pursuance of aforesaid Office Memorandum dated 26.11.2008 in No.2(70)/08-DPE(WC) of Ministry of Heavy Industries & Public Enterprises. Under these facts and circumstances, we conclude that the liability for Rs. 1,60,00,000 deduction for which was claimed by the Assessee on account of ad hoc provision for pay revision, had not accrued during the relevant FY i.e., 2006-07 (AY 2007-08). Merely because Pay Revision Committee was constituted during the year, it cannot be said that liability towards pay revision had accrued during the year, when we consider the facts that the Pay Revision Committee had not completed its deliberations before the end of the FY 2006-07 and was yet to submit its report at the time when the FY 2006-07 came to an end; and furthermore, that the pay revision was finally implemented in pursuance of aforesaid Office Memorandum dated 26.11.2008 in No.2(70)/08-DPE(WC) of Ministry of Heavy Industries & Public Enterprises. During FY 2006-07 (AY 2007-08), there was neither any statutory liability nor any legally enforceable liability against the Assessee in respect of the Assessee's claim for Rs. 1,60,00,000 deduction for which was claimed by the Assessee on account of ad hoc provision for pay revision. In Page 7 of 33 fact, there was no such liability at all. Even if there was a liability, it was purely a contingent liability which is not deductible for income tax purposes.” Page 7 of 33 fact, there was no such liability at all. Even if there was a liability, it was purely a contingent liability which is not deductible for income tax purposes.” 9. Mr. Gagan Kumar, learned counsel for the appellant has assailed the aforesaid findings and argued that the tax authorities and the Tribunal have ignored the fact that the provision of salary of Rs.1.60 crores was an „ascertained liability‟ in light of the recommendation of PRC, appointed by Department of Public Enterprises (herein after referred to as “DPE”) on 30[th]November, 2006. He submits that the effective date of commencement of the revised pay is important and not the date of signing of the agreement or its approval granted by DPE. In support of his submission, the learned counsel has relied upon the judgment of this Court in Commissioner of Income-tax vs. Bharat Heavy Electrical, Limited 352 ITR 88 (Delhi);Bharat Earth Movers vs. Commissioner of Income-tax, 245 ITR 428 (SC). Besides, the learned counsel also relied upon the DPE - guidelines relating to wage policies and related matters. 10. Mr. Zoheb Hossain, senior standing counsel for Revenue along with Mr. Deepak Anand on the other hand supported the decision of the ITAT and argued that the provision for salary was not finally ascertained and determined, and thus the appellant could not have made a deduction for the same on ad hoc basis. They relied upon the judgments in Commissioner of Income-Tax, Bombay vs. M/S Morarji Goculdas Spinning and Weaving Co. Ltd., Bombay, 2000(2) Mh.L.J.; Nonsuch Estate Ltd. vs. The Commissioner of Income –Tax, Madras, (1975) 3 SCC 443 and Indian Page 8 of 33 Molasses Co. (Private) Ltd vs Commissioner of Income Tax, West Bengal, AIR 1959 SC 1049. 11. We have given our due consideration to the submissions advanced by both the learned counsels on the aforesaid issue. Before expressing our views, it is essential to briefly note the history of the provision relating to deduction on account of pay revision. The appellant is a PSU under Government of India. A PRC was constituted by the Ministry of Heavy Industries and Public Enterprises, under the Chairmanship of Hon‟ble(Retd.) Justice M. Jagannadha Rao, Supreme Court of India, vide resolution dated 30[th] November, 2006. The pay revision fell due during the Assessment Year 2007-08, with effect from 1[st] January, 2007. The committee held a total of 39 meetings out of which 4 meetings were held during the Assessment Year 2007-08, and it furnished its final report on 26[th]November, 2008. Pursuant to the recommendations of PRC, the appellant declared expenditure of Rs.1.60 crores on account of provision for revision of pay in books of account from 1[st] January 2007, since the effective date of implementation was not known. The report of the PRC was implemented later in September, 2008; nevertheless, this would not render the expenditure to become “unascertained liability”, making it ineligible for deduction for the year under consideration i.e. 2007-08. The appellant has placed on record a note of the Finance Wing relating to aforesaid provision which reads as under: “FinanceWing” with the subject: Provision against pay revision of Executives, clearly states that “during discussions regarding Annual Account for the year 2006-07 on 10.10.2007 in CMD’s Chamber when DF was also present, it was decided Page 9 of 33 that suitable provision on account of pay revision of Executives w.e.f. 01.01.2007 should also be made in the Annual accounts for the year 2006-07. Accordingly, an ad hoc provision of Rs.1.60 crores is proposed to be made in the accounts for the period of three months for executives only from 01.01.2007 to 31.3.2007. On the back side of the said note it is mentioned as under:- Submitted for approval please. Sd/- ACF(S) 13.10.2007” “FinanceWing” with the subject: Provision against pay revision of Executives, clearly states that “during discussions regarding Annual Account for the year 2006-07 on 10.10.2007 in CMD’s Chamber when DF was also present, it was decided Page 9 of 33 that suitable provision on account of pay revision of Executives w.e.f. 01.01.2007 should also be made in the Annual accounts for the year 2006-07. Accordingly, an ad hoc provision of Rs.1.60 crores is proposed to be made in the accounts for the period of three months for executives only from 01.01.2007 to 31.3.2007. On the back side of the said note it is mentioned as under:- Submitted for approval please. Sd/- ACF(S) 13.10.2007” 12. The pay revision of employees of the appellant, a PSU is due every ten years with the expiry of one wage settlement or agreement. Invariably, there is a time lag between expiry of a wage revision and negotiation of a fresh wage revision. The appellant had made provision of Rs.1.60 crores on scientific foundation and on the basis of its past experience in its accounts for Financial Year 2006-07. The provision was made for the period 1[st] ITA 541/2019 Page 10 of 33 January, 2007 to 31[st] March, 2007 and deduction was claimed on the standpoint that appellant is under an obligation to pay revised pay to its employees with effect from 1[st] January, 2007, determination whereof, was a matter of time. The appellant, thus had a reasonable basis to make provision for this expenditure. Similar provisions were also made in subsequent years in the following manner. 13. Having noted the facts of the case, we now turn to the judgments relied upon by the parties. Appellant has relied upon Bharat Heavy Electrical Limited (supra), which is squarely applicable to the facts of the present case. The relevant paragraph is reproduced as under: “Question No.1 - Whether the provisions made claiming deduction for wage revision, allowed by the Tribunal was justified in the circumstances of the case? The assessee, BHEL, had during the relevant assessment years 1988-89 and 1998-99 claimed, in its schedule in the balance sheet, addition of its liability on account of wage revision. Accordingly, a provision for wage revision was factored. The assessee submitted that even though the wage revision proposals had been submitted to the competent bodies or authorities, the liability was certain and ascertained on the basis of its past experience and after taking into consideration the previous Pay Commission's reports, union demands and the ability of the employer to bear the additional burden. These provisions also took into account factors such as price index in adjustment inflation etc. The assessee, a public sector unit, had stated that since the liability being ascertained, even the Comptroller and Auditor General had not communicated them to be contingent liabilities. The Assessing Officer, for both the relevant years, held that the provision could not be allowed and that the claim or deduction was allowable when actually the entire quantum of liability could be calculated. The order of the AO was upheld in appeal. The Tribunal relying the Supreme Court's decision in Bharat Earth Movers v. CIT [2000] 245 ITR428/ 112 Taxman 61allowed the assessee's claim. The Tribunal noticed as follows: - price index in adjustment inflation etc. The assessee, a public sector unit, had stated that since the liability being ascertained, even the Comptroller and Auditor General had not communicated them to be contingent liabilities. The Assessing Officer, for both the relevant years, held that the provision could not be allowed and that the claim or deduction was allowable when actually the entire quantum of liability could be calculated. The order of the AO was upheld in appeal. The Tribunal relying the Supreme Court's decision in Bharat Earth Movers v. CIT [2000] 245 ITR428/ 112 Taxman 61allowed the assessee's claim. The Tribunal noticed as follows: - "13. In the assessee's case also, it is noticed that the provision for the wage revision is factored on the basis of past experience, interim pay commissions of govt. employees, available pay commission reports of public sector employees, union demands and other relevant factors required for a scientific computation. Obviously,when one wage agreement comes to an end and other isexecuted, there would be a passage of time, but the newwage agreement would come into effect from the end ofthe earlier wage agreement. This being so, the liability iscertain in the assessee's case though the quantum ofsuch liability is variable and it is further noticed that theassessee has categorically admitted that the provision asdone is invariable short of the final agreement and thedifference as ultimately emerging are always booked asexpenses in the year in which the payment is made. Thisbeing so, we are of the view that the provisions made onaccount of wage revision is not a contingent liabilityand is allowable in the year of making such provisionsmade.In the circumstances, this issue is held in favour of the assessee and the addition on this account stands deleted." [Emphasis Supplied] Page 12 of 33 14. In Bharat Earth Movers (supra), the Supreme Court has held that it is not the date of signing of the agreement or the grant of approval by the Government, but the effective date of commencement of the wage revision under the agreement that is of relevance. The relevant portion of the said judgment reads as under: “The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied, the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain.” 15. A similar view was also expressed by the Kerala High Court in the case of Commissioner of Income-tax vs. Kerala State Financial Enterprises Ltd.[2009] 178 Taxman 449 (Ker), where, while dealing with a similar provision made on account of wage revision, the High Court followed the decision of the Supreme Court in the case of Bharat Earth Movers (supra). 16. Pertinently, the CIT (A)has also categorically held that the provision had been computed on a scientific basis and it was erroneously mentioned as an ad hoc provision. In Rotork Controls India (P.) Ltd. vs. Commissioner of Income-Tax 314 ITR 62, the judgment relied upon by the appellant, the Court has defined the concept of provision in the following words: Page 13 of 33 “What is a provision? This is the question which needs to be answered. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when: (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized.” Page 13 of 33 “What is a provision? This is the question which needs to be answered. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when: (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized.” 17. It is a well settled principle of law that an assessee, following the mercantile system of accounting, is not entitled to claim deduction until the liability for which deduction is claimed has accrued. The Act makes a distinction between actual liability in praesenti and a liability de future which, for the time being is only contingent. The former is deductible but not the latter. The question to be decided in each case is whether any present liability has accrued against the assessee. In light of the facts noted above, the case laws relied upon by the appellant are squarely applicable to the facts and circumstances of the present case. 18. Per contra, the judgments relied upon by the counsels for the respondents are distinguishable on facts. In Morarji Goculdas Spinning and Weaving Co. Ltd. (Supra), the court while considering whether deduction could be claimed on account of excise duty based on show cause notices, rejected the claim of the assessee on the ground that there was no „demand‟by the Excise department and the liability of the assessee was merely contingent, which would not constitute an expenditure for taxation purposes. In Nonsuch Estate Ltd.(Supra), the court while deciding the question of Page 14 of 33 deduction on account of „managing agency remuneration‟, held that the assessee is not entitled to the same until liability for the sum for which deduction is claimed has actually accrued. The court observed that the liability would not accrue unless the Central Government conveyed its approval as mandated as per Section 326 of the Companies Act. In Indian Molasses Co. (Private) Ltd (Supra), the court considered whether the payments made to the trustees to create a life insurance in the name of the retiring Managaing Director of the assessee company would constitute „expenditure‟ so as to claim deduction. It was held that the liability was contingent and the expenditure which is deductible for income tax purposes is one which is towards a liability actually existing at the time. Merely putting aside money which may become expenditure on the happening of an event in future is not an expenditure that is deductible. 19. The position in the current case is that the liability had already arisen with certainty. The committee was constituted for the purpose of wage revision. That the wages would be revised was a foregone conclusion. Merely because the making of the report and implementation thereof took time, it could not be said that there was no basis for making the provision. In view of the above, we hold that the ITAT and CIT (A) have fell in error by disallowing the expenditure of Rs.1.60 crores on account of anticipated pay revision in Assessment Year 2007-08. The first and second questions of law are thus answered in favour of the appellant. Accordingly, it is directed that the revenue shall now pass consequential orders accepting the deduction of Rs. 1.60 crores. Page 15 of 33 QUESTION III: 19. The position in the current case is that the liability had already arisen with certainty. The committee was constituted for the purpose of wage revision. That the wages would be revised was a foregone conclusion. Merely because the making of the report and implementation thereof took time, it could not be said that there was no basis for making the provision. In view of the above, we hold that the ITAT and CIT (A) have fell in error by disallowing the expenditure of Rs.1.60 crores on account of anticipated pay revision in Assessment Year 2007-08. The first and second questions of law are thus answered in favour of the appellant. Accordingly, it is directed that the revenue shall now pass consequential orders accepting the deduction of Rs. 1.60 crores. Page 15 of 33 QUESTION III: 20. The next question pertains to addition of Rs.1.28 crores on account of financial impact due to change in accounting policy in respect of revenue recognition of application fee, front end fees, administrative fee and processing fee of loans (hereinafter collectively referred as „fees‟) from the date of signing of the loan agreement to the date of realization. The background of the aforesaid addition is that the appellant was following accrual/mercantile system of accounting and was accounting the „fees‟ as its revenue from the date of signing of the loan agreement. The amount was finally deducted/ realized from the loan amount, when it was actually disbursed to the borrower. There were instances when the loan agreement was signed and the borrower would not take the disbursement and, accordingly, fees would not be realized. The CAG objected to the same on the ground that the accounting treatment was not in accordance with Accounting Standards (hereinafter referred as „AS-9‟), issued by ICAI which provides guidance for determination of income on accrual basis. Appellant, vide letter dated 6[th] November, 2006, assured the CAG that the accounting policy shall be reviewed for FY 2006-07 and, accordingly, the Board approved the change in accounting policy in its meeting held on 27[th]September, 2007. The revised accounting policy recognized the aforementioned fees as on the date of its realization, instead of date of signing of the loan agreement. The AO made an addition of Rs. 1.28 crores on the ground that the change had resulted in under-statement of profits and also because the change was introduced after the closing of the financial year. Page 16 of 33 21. The CIT (A) confirmed the addition holding that change in accounting policy was not in accordance with the provisions of the Act. The relevant finding of the CIT (A) on this issue is as under: ''Regarding the Ground No.2 of the appeal relating to disallowance of Rs.l.28 crores on account of under-statement of profit due to change in accounting policy of revenue recognition in respect of processing fees of loans etc., I find that the appellant was regularly following the accounting practice upto 31.03.2007 by which such incomes were accounted for on accrual basis. Subsequently, in view of its Board's decision in the meeting dated 27.09.2007, the appellant company revised its accounts in the light of the advice from the statutory auditors and thereby changed the accounting policy and recognized the revenue in respect thereof on receipt basis. I find that the CAG audit party had raised the observation that accounting of such receipts at the time of signing of loan agreement was not in conformity with the Accounting Standard 9 to which the appellant company had assured vide letter dated 06.11.2006 that the accounting policy shall be reviewed in F. Y.2006-07. Subsequently, in the Board meeting of the appellant company of September, 2007, the following resolution was passed: "Resolved that the changes in accounting policy from the year 2006-07 be and are hereby approved as detailed in the agenda item" "Resolved that the changes in accounting policy from the year 2006-07 be and are hereby approved as detailed in the agenda item" The detailed note for comparing existing policy and the revised policy shows that the Board of the company took this decision by assuming that there was no financial impact and there was only change in language. However, the very basis of this decision that Page 17 of 33 there was no financial impact was incorrect, as the proposed change had resulted in reduction in the taxable profit under the Income Tax Act, 1961. Further, AO’sobservation that the decision was taken only after the F. Y. is over was also note-worthy, even though such decision was taken with retrospective effect. Evidently, the appellant is a company incorporated under Companies Act 1956. As per Accounting Standards, it follows mercantile system of accounting. Therefore, even though the company may have changed the accounting policy, which as mentioned was on a faulty premise that it did not have financial impact; in line with the Accounting Standards as per Section 145 A of the Act, it could have added back the amount of Rs.1.28 crores on account of such receipts in the computation of income. This would have ensured compliance with the CAG objections as also compliance with the provisions of the Act. Moreover, the decision of the Company's Board cannot override the provisions of the statute. Keeping in view the above, the addition made on this ground is upheld and this ground is accordingly dismissed.” [Emphasis Supplied] 22. The ITAT upheld the addition holding as under: “(4.1.1) The Assessee is now in appeal against the aforesaid order dated 28.8.2014 of the Ld. CIT(A). At the time of hearing before us, the Ld. AR of the Assessee submitted that the change in the Accounting Policy was made in order to comply with objection/observation of the Audit Party of Comptroller & Auditor General. The Ld. CIT(DR) relied on the orders of the AO and the Ld. CIT(A). Page 18 of 33 (4.2) The position in law is unambiguous. U/s 145(1) of I.T. Act, it is provided that income chargeable under the head "Profits and gains of business or profession" or" Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. The Assessee is not permitted to follow cash system of accounting for some of the items while following mercantile system of accounting for rest of the items in computation of income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" as the mixed system of accounting has lost statutory mandate w.e.f. AY 1989-90 in view of the amendment to Section 145 of I.T. Act. Thus, the Assessee was in clear error of law in changing the method of accounting to selectively adopt cash system of accounting for certain items, while following mercantile system of accounting for rest of the items. Even if the accounting policy was changed in pursuance of observation of Audit Party of Comptroller& Auditor General ("CAG" for short), even then, statutory provisions under I.T. Act will prevail over any observation/objection/remark of Audit Party of CAG. Moreover, despite having changed the accounting policy, in pursuance of observation of Audit Party & CAG, the Assessee would have added back the aforesaid amount of Rs. 1.28 crores in the computation of Total Income for Income Tax purposes. That would have ensured compliance with statutory provisions under I.T. Act, as well as with observation of Audit Party & CAG. The Assessee is a company incorporated under the Companies Act, 1956 and follows mercantile system of accounting. An Assessee company registered under the Companies Act, 1956 is required to maintain accounts in accordance with provisions of The Companies Act, 1956. However, the profits computed in Page 19 of 33 Page 19 of 33 this manner need not necessarily be the same as Total Income for the purposes of I.T. Act. The computation of Total Income for the purposes of Income Tax Act requires giving effect to statutory provisions under I.T. Act, by making necessary adjustments/ modifications /alterations/ variations to profits compounded in accordance with provisions of the Companies Act, 1956. In view of this, the Assessee was in clear error of law by not adding back the aforesaid amount of Rs. 1.28crores in the computation of Total Income for the purposes of I.T. Act. This error of law is further aggravated by the error of fact, in that the change of accounting policy was based on faulty premise (i.e, error of fact) that there was no financial impact. The fact is, there was financial impact to the extent of aforesaid amount of Rs. 1.28 crores. In view of the foregoing discussion and unambiguous position in law; and the clear error of law and fact on the part of the Assessee, we uphold the addition of aforesaid amount of Rs. 1.28 crores. The Ld. AR of the Assessee failed to bring to our notice any specific provisions of law or any judicial precedents to support this ground of appeal. We find that the order of the Ld. CIT(A) is well reasoned and in accordance with law in the facts and circumstances of this case. The Assessee has failed to make any case for inference with the impugned order of the Ld. CIT(A) on this issue. Therefore, the second ground of appeal in the appeal filed by the Assessee in the ITA No. 5705/Del/2014 is dismissed and the impugned order of the Ld. CIT(A) on this issue, sustaining the aforesaid addition of Rs. 1,28,00,000.” [Emphasis Supplied] 23. Learned counsel for the appellant has argued that the appellant follows mercantile system of accounting and under the said system of accounting, unless there is a reasonable certainty of its realization, income cannot be Page 20 of 33 said to have accrued. The Tribunal erred in confirming the addition without appreciating AS-9, issued by ICAI which provides for recognition of income on accrual basis only when there is a certainty of its realization. The change in accounting policy had been duly reflected in detailed note for comparing the existing and revised policy and the financial impact due to the said change was shown in „Schedule T‟ of the financial statements. It was also urged that the change is revenue neutral and there is no loss to the Department as the same has been realized in the Financial year 2008-09, and has been offered to tax in the AY 2009-10. In support of his submission, counsel has relied upon the decisions in Commissioner of Income-Tax, Chennai vs. Shriram Investments Ltd.[2015] 62 Taxman 298 (Madras); Commissioner of Income-tax vs. Bharat Aluminium Co. Ltd.[2010] 187 Taxman 111(Delhi); Commissioner of Income-tax-VI vs. Virtual Soft Systems Ltd.[2018] 92 taxman.com 370 (SC);Commissioner of Income-tax vs. Woodward Governor India (P.) Ltd.[2007] 162 Taxman 60 (Delhi)and Commissioner of Income Tax vs. Excel Industries Limited, 358 ITR 295 (SC). 24. Mr. Zoheb Hossain and Mr. Deepak Anand, learned counsels for the revenue, on the other hand urged that the assessee was required to make the book of accounts in accordance with the provisions of the Companies Act, 1956. However, profits computed as per the provisions of the Companies Act need not necessarily be the same as Total Income for the purposes of Income Tax Act. The computation of total income requires giving effect to statutory provisions under the Act by making necessary adjustments. Appellant has erred by not adding back the amount of Rs. 1.28 crores and Page 21 of 33 therefore, the findings of the tax authorities are in consonance with the provisions of the Act and the judicial pronouncements on this issue. 24. Mr. Zoheb Hossain and Mr. Deepak Anand, learned counsels for the revenue, on the other hand urged that the assessee was required to make the book of accounts in accordance with the provisions of the Companies Act, 1956. However, profits computed as per the provisions of the Companies Act need not necessarily be the same as Total Income for the purposes of Income Tax Act. The computation of total income requires giving effect to statutory provisions under the Act by making necessary adjustments. Appellant has erred by not adding back the amount of Rs. 1.28 crores and Page 21 of 33 therefore, the findings of the tax authorities are in consonance with the provisions of the Act and the judicial pronouncements on this issue. 25. We will first reflect on the decisions and viewpoints expressed by the courts on this issue. The appellant has relied upon the judgment of the Supreme Court in Excel Industries Limited (supra).The observations made in Paragraph Nos. 18 and 19 of the said case are of relevance, and the same read as under: 17.“First of all, it is now well settled that income tax cannot be levied on hypothetical income. In CIT v. Shoorji Vallabhdas & Co. [1962]46 ITR 144(SC) it was held as follows:- Income-tax is a levy on income. No doubt, 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; but 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 „hypotheticalincome‟, which does not materialize. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the 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 not receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account.” Page 22 of 33 18. “The above passage was cited with approval in Morvi Industries Ltd. v. CIT (Central), [1971]82ITR 835(SC) in which this Court also considered the dictionary meaning of the word “accrue” and held that income can be said to accrue when it becomes due. It was then observed that: “………..the date of payment ………… does not affect the accrual of income. The moment the income accrues, the assessee get vested with the right to claim that amount even though it may not be immediately.” 19. “This court further held, and in our opinion more importantly, that income accrues when there „arises a corresponding liability of the other party from whom the income becomes due to pay that amount.” 20.“It follows from these decisions that income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount. Only then can it be said that for the purposes of taxability that the income is not hypothetical and it has really accrued to the assessee.” 21.“In so far as the present case is concerned, even if it is assumed that the assessee was entitled to the benefits under the advance licenses as well as under the duty entitlement pass book, there was no corresponding liability on the customs authorities to pass on the benefit of duty free imports to the assessee until the goods are actually imported and made available for clearance. The benefits represent, at best, a hypothetical income which may or may not materialize and its money value is therefore not the income of the assessee.” [Emphasis Supplied] 21.“In so far as the present case is concerned, even if it is assumed that the assessee was entitled to the benefits under the advance licenses as well as under the duty entitlement pass book, there was no corresponding liability on the customs authorities to pass on the benefit of duty free imports to the assessee until the goods are actually imported and made available for clearance. The benefits represent, at best, a hypothetical income which may or may not materialize and its money value is therefore not the income of the assessee.” [Emphasis Supplied] 26. The factual situation in the said case is quite similar to the case in hand. In the aforenoted case, the question was with respect to assessee‟sentitlement to benefits under the „advance license‟ as well as under the „duty entitlement passbook‟. The Court observed that there was no corresponding liability on the customs authority to pass the benefit of duty-free imports to the assessee until the goods are actually imported and made available for clearance; the benefits represent a hypothetical income which may or may not materialize and its money value is not the income of the assessee. 27. In Commissioner of Income-Tax, Coimbatore vs. Annamalai Finance Ltd,[2009] 319 ITR 196 (Madras),judgment relied upon by the appellant, the following observations are essential to note: “4. The assessee had submitted that in respect of overdue charges, the assessee-company, keeping in line with the norms of the Reserve Bank of India as well as the credit rating agency, has been recognizing income by way of overdue charges only to the extent of actual collection i.e., the assessee is admitting income only on cash basis. The assessee-company has also placed reliance upon the Accounting Standard 9 of ICAI which lays down that when uncertainties exist regarding determination of the amount or its collectability, the revenue shall not be treated as accrued and hence shall not be recognised until collection. Page 24 of 33 5. The recognition of revenue on accrual basis presupposes the satisfaction of two conditions viz., the revenue is measurable and that the revenue is collectable without any uncertainty. Taking into account these standards also, the assessee submitted that the overdue on financial charges on hire purchase and lease had been admitted only on cash basis. Rejecting the said submission, the Assessing Officer passed the assessment order. XXXX In the instant case, learned counsel for the Revenue is not in a position to demonstrate or satisfy us that due to the change of accounting method adopted by the respondent/assessee, which is permissible in law as per the ratio laid down in (i) CIT v. Matchwell Electricals (I.) Ltd.[2003] 263 ITR 227 (Bom.) and (ii) Hela Holdings (P.) Ltd. v. CIT[2003] 263 ITR 129 (Cal.),the Revenue suffered any loss or such a change of methodology attracts tax evasion. Concededly, there is no finding to that effect in the assessment order or in the order of the Commissioner of Income-tax (Appeals). The change of method of accounting of overdue charges from the mercantile basis to cash system, method of accounting, as followed by an assessee, does not create any income; but the method of accounting only recognizes income. Therefore, either to apply the accrual system or cash system, recognition of income is a paramount factor. In the present case, the disputed amount is the overdue charges receivable by the assessee from various parties on the basis of hire-purchase and lease agreements. As per the terms of the agreements, overdue charges are payable by the parties concerned to the assessee when they make defaults in paying the installments as per the schedule of payments. When the installment itself is overdue is not collected, there is no basis for making out a case that the additional overdue charges