M/S. DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPORATION, MUMBAI v. THE DCIT RG 1(1), MUMBAI

ITA 4794/MUM/2007 | 2001-2002
Pronouncement Date: 30-03-2010 | Result: Allowed

Appeal Details

RSA Number 479419914 RSA 2007
Bench Mumbai
Appeal Number ITA 4794/MUM/2007
Duration Of Justice 2 year(s) 8 month(s) 26 day(s)
Appellant M/S. DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPORATION, MUMBAI
Respondent THE DCIT RG 1(1), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 30-03-2010
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted D
Tribunal Order Date 30-03-2010
Date Of Final Hearing 18-03-2010
Next Hearing Date 18-03-2010
Assessment Year 2001-2002
Appeal Filed On 04-07-2007
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH MUMBAI BEFORE S/SHRI S.V.MEHROTRA AM & R. S.PADVEKAR JM I.T.A. NO. 4794/MUM/2007: ASSESSMENT YEAR: 2001-02 I.T.A. NO. 6078/MUM/2008: ASSESSMENT YEAR: 2002-03 I.T.A. NO. 3237/MUM/2007: ASSESSMENT YEAR: 2003-04 I.T.A. NO. 4795/MUM/2007: ASSESSMENT YEAR: 2004-05 I.T.A. NO. 3982/MUM/2008: ASSESSMENT YEAR: 2005-06 DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPN. V. TH E DCIT RANGE 1(1) RESERVE BANK OF INDIA BUILDING 2 ND FLOOR AAYAKAR BHAVAN M.K. ROAD OPP. MUMBAI CENTRAL RLY STATION BYCULLA MUMBAI. MUMBAI-400 008. PA NO.AAACD 2094 E (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI YOGESH A THAR RESPONDENT BY : SHRI R.N.JHA O R D E R PER BENCH THESE FIVE APPEALS LISTED FOR HEARING BEFORE US AR E IN RESPECT OF ASSESSMENT YEARS 2001- 02 TO 2005-06 RESPECTIVELY. THE ASSESSEE IS A G OVERNMENT OF INDIA UNDERTAKING CONSTITUTED UNDER THE DEPOSIT INSURANCE CREDIT GUARANTEE ACT 1 961. THE ASSESSEE HAS BEEN GRANTED COD APPROVAL ON 20.12.2007 IN RESPECT OF FOLLOWING THREE APPEALS: ITA NO.4794/MUM/2007: ASSESSMENT YEAR: 2001-02 ITA NO.3237/MUM/2007: ASSESSMENT YEAR: 2003-04 ITA NO.4795/MUM/2007: ASSESSMENT YEAR: 2004-05 I.T.A. NO. 4794/MUM/2007: ASSESSMENT YEAR: 2001-02 I.T.A. NO. 6078/MUM/2008: ASSESSMENT YEAR: 2002-03 I.T.A. NO. 3237/MUM/2007: ASSESSMENT YEAR: 2003-04 I.T.A. NO. 4795/MUM/2007: ASSESSMENT YEAR: 2004-05 I.T.A. NO. 3982/MUM/2008: ASSESSMENT YEAR: 2005-06 DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPN 2 2. IN RESPECT OF ITA NO.4794/MUM/2007 FOR THE ASSES SMENT YEAR 2001-02 THE COD APPROVAL HAS BEEN GRANTED REGARDING ASSESSEES GROU ND WHETHER LD CIT (A) WAS JUSTIFIED IN CONFIRMING THE ORDER PASSED BY THE AO U/S.144 R.W. 148. 3. IN REGARD TO OTHER TWO APPEALS VIZ. ITA NO.4795 /M/2007 FOR A.Y. 2004-05 AND ITA NO.3237/M/2007 FOR A.Y. 2003-04 THE COD APPROVAL H AS BEEN GRANTED REGARDING ASSESSEES GROUND WHETHER LD CIT (A) ERRED IN SUSTAINING THE A DDITION TO TOTAL INCOME IN RESPECT OF DIFFERENCE BETWEEN THE OPENING AND CLOSING BALANCE OF FUND WHICH WAS WORKED OUT AS PER ACTUARIAL VALUATION. 4. ITA NO.3982/M/2008 FOR A.Y. 2005-06 AND ITA NO .6078/MUM/2008 FOR A.Y. 2002-03 ARE DISMISSED FOR WANT OF COD APPROVAL. HOWEVER A S AND WHEN THE ASSESSEE GETS THE REQUIRED APPROVAL IT CAN FILE MA FOR RECALL OF TRI BUNALS ORDER WHICH WILL BE DECIDED AS PER LAW. NOW WE PROCEED TO DECIDE THE RESPECTIVE GROUNDS OF APPEAL IN RESPECT OF VARIOUS APPEALS WHERE COD APPROVAL HAS BEEN GRANTED. ITA NO.4794/M/2007: ASSESSMENT YEAR 2001-02 5. BRIEF FACTS ARE THAT THE ORIGINAL ASSESSMENT WAS COMPLETED U/S.143(3) AT A TOTAL INCOME OF RS.8 38 31 88 160/- ON 17..12.2003. SUBSEQUENTL Y THE ASSESSMENT WAS REOPENED U/S.147 BY ISSUE OF NOTICE U/S.148 ON 30.3.2006 SERVED ON T HE ASSESSEE ON 31.3.2006. THE ASSESSMENT WAS REOPENED AFTER RECORDING FOLLOWING REASONS:- THE RETURN OF INCOME WAS FILED ON 30.10.2001 AT AN INCOME OF RS.815 96 59 733/-. THE CASE WAS COMPLETED U/S.143(3) ON 17.12.2003 AT AN I NCOME OF RS.838 31 88 160/-. THE ASSESSEE IS A SUBSIDIARY OF RBI AND ENGAGED IN THE BUSINESS OF DEPOSIT INSURANCE AND CREDIT GUARANTEE. THE ACCOUNTS OF INSURANCE AS WELL AS CREDIT GUARANTEE ARE MAINTAINED SEPARATELY. I.T.A. NO. 4794/MUM/2007: ASSESSMENT YEAR: 2001-02 I.T.A. NO. 6078/MUM/2008: ASSESSMENT YEAR: 2002-03 I.T.A. NO. 3237/MUM/2007: ASSESSMENT YEAR: 2003-04 I.T.A. NO. 4795/MUM/2007: ASSESSMENT YEAR: 2004-05 I.T.A. NO. 3982/MUM/2008: ASSESSMENT YEAR: 2005-06 DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPN 3 IT IS SEEN THAT THEN ASSESSEE HAS CLAIMED ESTIMATED LIABILITY IN RESPECT OF CLAIMS INITIATED BUT NOT ADMITTED AT THE END OF THE YEAR AS EXPENDIT URE AS ALSO ON ACTUAL BASIS. THE DEDUCTION CLAIMED ON ESTIMATED BASIS IS AS UNDER:- DEPOSIT INSURANCE (RS.IN LAKHS) CREDIT GUARANTEE(RS. IN LAKHS) TOTAL (RS. IN LAKHS ) AMOUNT FOR ESTIMATED CLAIMS 115622 62 416 00 116038.62 LESS ESTIMATED LIABILITY IN RESPECT OF REJECTED CLAIMS 63929.42 12666.00 76595.42 39443.20 THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCO UNTING; THEREFORE IT CANNOT BE ALLOWED THE CLAIM OF ANY EXPENDITURE ON ACCOUNT OF ESTIMATED LIABILITY. EVEN IN THE A.Y. 2003-04 SIMILAR CLAIM OF THE ASSESSEE HAVE BEEN RE JECTED AND DENIED. UNDER THE I.T.ACT 1961 THE DEDUCTION IS NOT ENTITLED TO ANY EXPENDITURE WHICH IS CONTINGENT IN NATURE. THE EXPENDITURE DEDUCTIBLE FROM INCOME TAX IS ONE WHICH IS MADE TOWARDS LIABILITY IN PRESENTI AND NOT LIABILITY IN FUTURE THEREFORE THE CLAIM OF THE ASSESSEE IS NOT ALLOWABLE. FURTHER IT HAS BEEN HELD THAT SINCE SE CTION 44 AND SCHEDULE 1 OF THE INCOME TAX ACT ARE NOT APPLICABLE TO THE ASSESSEE THE INC OME OF THE ASSESSEE HAS TO BE COMPUTED AS PER THE NORMAL PROVISIONS OF THE ACT. UNDER THE PROVISION OF SECTION 36 OF THE INCOME TAX ACT LIABILITY INCURRED FOR THE PURP OSE OF BUSINESS IS ALLOWABLE EXPENDITURE SUBJECT TO CERTAIN RESTRICTION. IN OTHER WORDS DED UCTION FOR LIABILITY ON THE ESTIMATE BASIS WOULD NOT BE ALLOWABLE. IN VIEW OF THE ABOVE I HA VE REASON TO BELIEVE THAT THE INCOME HAS ESCAPED ASSESSMENT ON ACCOUNT OF THE ALLOWANCE OF THE ABOVE CLAIM OF THE ASSESSEE OF RS.526.93 CORES ON ESTIMATE BASIS IN TH E CASE OF BUSINESS OF DEPOSIT INSURANCE AND RS.4.16 CRORES UNDER THE BUSINESS OF CREDIT GUARANTEE. FURTHER IT IS OBSERVED THAT THE ASSESSEE MAINTAINS SEPARATE ACCOUNT OF INSURANCE AS WELL AS CREDIT GUARANTEE. THE CLOSING BALANCE AND OPENING BALANCE OF FUND OF EACH ACTIVITY WAS CREDITED AND DEBITED SEPARATELY WHICH WAS AS UNDER: DEPOSIT INSURANCE (RS.IN LAKHS) CREDIT GUARANTEE(RS. IN LAKHS) TOTAL (RS. IN LAKHS) CREDIT OPENING BALANCE OF FUND 43355.00 4821.00 48176.00 DEBIT CLOSING BALANCE OF FUND 50074.00 7.00 50081.00 THE DEBIT TO ACCOUNT WAS IN EXCESS BY RS.1905 LAKH DUE TO WHICH SURPLUS PROFIT WAS REDUCED TO THAT EXTENT. IT HAS BEEN SEEN THAT THE A SSESSE FOLLOWS A PROCEDURE THAT WHEN I.T.A. NO. 4794/MUM/2007: ASSESSMENT YEAR: 2001-02 I.T.A. NO. 6078/MUM/2008: ASSESSMENT YEAR: 2002-03 I.T.A. NO. 3237/MUM/2007: ASSESSMENT YEAR: 2003-04 I.T.A. NO. 4795/MUM/2007: ASSESSMENT YEAR: 2004-05 I.T.A. NO. 3982/MUM/2008: ASSESSMENT YEAR: 2005-06 DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPN 4 ANY BANK IS INSURED BY IT ON RECEIPT OF PREMIUM T HE ASSESSE ACCRUES A LIABILITY TOWARDS THE INSURED BANK TO THE EXTENT OF SUM INSURED. THE LIABILITY THOUGH WILL ARISE ONLY WHEN THE INSURED BANK EITHER GOES INTO LIQUIDATION OR IS WOUND UP. THE CONTENTION OF THE ASSESSE IS THAT IT ESTIMATES ITS LIABILITY IN RESPE CT OF UNCLAIMED RISK ASSUMING THAT SOME CLAIMS MAY ARISE IN THE EVENT THAT SOME BANKS WILL GO INTO LIQUIDATION OR WOULD BE WOUND UP. THIS IS MORE ASSUMPTION. THE BALANCE OF FUND ON ACTUARIAL BASIS IS DEBITED TO THE REVENUE ACCOUNT ONLY FOR THE CLAIMS FOR WHICH NO CL AIMS ARE RECEIVED. SUCH FUND IS CREATED FOR LIABILITY IN FUTURE AND NOT FOR LIABILI TY IN PRESENTI. THE ASSESSE IN FACT IS PROVIDING FOR A LIABILITY WH ICH MAY OR MAY NOT ARISE IN FUTURE DEPENDING UPON THE HAPPENING OR NON HAPPENING OF A FUTURE EVENT. THE EXPENDITURE WHICH IS DEDUCTIBLE FOR INCOME TAX PURPOSE IN ONE W HICH IS TOWARDS LIABILITY EXISTING AT THE TIME BUT THE PUTTING-ASIDE OF MONEY WHICH MAY BECO ME EXPENDITURE ON HAPPENING OF AN EVENT IS NOT AN EXPENDITURE. WHERE THE LIABILITY O F THE ASSESSEE IS DEPENDENT UPON AN EVENT IN FUTURE WHICH IS NOT SURE TO HAPPEN IS ON LY A CONTINGENT LIABILITY. FURTHER IT IS SEEN THAT THE PROVISIONS OF SECTION 44 IN SCHEDULE 1 OF THE INCOME TAX ACT ARE NOT APPLICABLE TO THE ASSESSEE. INCOME OF THE ASSESSEE HAS TO BE COMPUTED AS PER NORMAL PROVISIONS OF THE ACT. THEREFORE THE DIFFERENCE I N BALANCE OF FUND AT THE END OF THE YEAR AND IN THE BEGINNING OF THE YEAR (AS PER ACTUARIAL VALUATION) IS NOT ALLOWABLE THEREFORE I HAVE REASON TO BELIEVE THAT A SUM OF RS.19.05 CRORE S HAS ESCAPED ASSESSMENT. THE AO COMPLETED THE ASSESSMENT U/S.144 R.W. 148 AS THE ASSESSMENT WAS GETTING TIME BARRED AND MADE INTER ALIA AN ADDITION OF RS.540 14 00 0 00/-. 6. BEFORE LD CIT (A) THE ASSESSEE HAD QUESTIONED T HE VALIDITY OF REASSESSMENT PROCEEDINGS WHICH WERE UPHELD BY LD CIT (A) OBSERVI NG THAT THE NOTICE U/S.148 WAS ISSUED WITHIN FOUR YEARS FROM THE END OF THE ASSESSMENT YE AR 2001-02 AND THEREFORE THE PROCEEDINGS HAD VALIDLY BEEN TAKEN. 7. LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT IT IS A CLEAR CASE OF CHANGE OF OPINION BECAUSE THE ORIGINAL ASSESSMENT HAD BEEN COMPLETED U/S.143(3) AFTER DUE VERIFICATION OF DETAILS. IN THIS REGARD LD COUNSEL FILED BEFORE U S A COPY OF QUESTIONNAIRE DATED 6.10.2003 RECEIVED FROM THE ASSESSING OFFICER AT THE TIME OF ORIGINAL ASSESSMENT. IN THIS QUESTIONNAIRE INTER ALIA IN POINT NO.7 THE FOLLOWING DETAILS WERE REQUIRED TO BE FURNISHED BY THE ASSESSEE:- I.T.A. NO. 4794/MUM/2007: ASSESSMENT YEAR: 2001-02 I.T.A. NO. 6078/MUM/2008: ASSESSMENT YEAR: 2002-03 I.T.A. NO. 3237/MUM/2007: ASSESSMENT YEAR: 2003-04 I.T.A. NO. 4795/MUM/2007: ASSESSMENT YEAR: 2004-05 I.T.A. NO. 3982/MUM/2008: ASSESSMENT YEAR: 2005-06 DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPN 5 A) NUMBER AND AMOUNT OF TOTAL CLAIMS INTIMATED TO YOU DURING THE FINANCIAL YEAR 2000-2001 IN BOTH DEPOSIT INSURANCE & CREDIT GUARAN TEE. B) NUMBER AND TOTAL AMOUNT OF CLAIM ADMITTED IN ABO VE F.YS UNDER BOTH FUNDS. PLEASE ALSO INDICATE THE YEAR IN WHICH SUCH CLAIMS WERE INTIMATED TO YOU. C) PLEASE INDICATE (OUT OF ABOVE 2) NO. AND AMOUNT OF CLAIM PAID UNDER BOTH FUND. ALSO INDICATE THE YEAR IN WHICH SUCH CLAIM WAS INTI MATED TO YOU. 8. THIS QUERY WAS REPLIED BY THE ASSESSEE VIDE ITS LETTER DATED 22.3.2004 AS UNDER:- 12.1 REGARDING THE ITEM OF EXPENDITURE APPEARING U NDER THE HEAD LIABILITY IN RESPECT OF CLAIMS INTIMATED BUT NOT ADMITTED AT THE END OF THE YEAR IN THE REVENUE ACCOUNTS OF DEPOSIT INSURANCE FUND AND CREDIT GUARANTEE FUND AM OUNTING TO RS.1186.76 CRORES AND 0.47 CRORES RESPECTIVELY. 12.2 IN THIS REGARD IT IS SUBMITTED THAT THE PARTI CIPATING BANKS LODGE THEIR CLAIMS WHENEVER THEY ARE UNABLE TO MEET THE CLAIM OF DEPOS ITORS. SIMILARLY WHENEVER BANKS FAIL TO REALIZE THE ADVANCES CLAIMS ARE MADE ON THE CORP ORATION. WE ARE INSTRUCTED TO STATE THAT VARIOUS FORMALITIES HAVE BEEN PRESCRIBED BY TH E CORPORATION WHICH THE CLAIMANT BANKS HAVE TO FULFILL BEFORE THE CLAIM IS SETTLED. WE ARE ALSO INSTRUCTED TO STATE THAT ON RECEIPT OF CLAIMS THE CORPORATION SCRUTINIZE THEM A ND MERIT OF THE CLAIM IS DECIDED BASED ON THE DETAILS AND INFORMATION PROVIDED BY THE CLAI MANT BANKS. MANY A TIMES FULL INFORMATION REQUIRED BY THE CORPORATION ARE NOT FUR NISHED AND FORMALITIES PRESCRIBED BY THE CORPORATION ARE NOT FOUND TO HAVE BEEN FULLY CO MPLIED WITH. SUCH CLAIMS ARE CONSIDERED DEFECTIVE AND ARE NOT REJECTED THEY ARE HOWEVER CATEGORIZED AS CLAIMS INTIMATED BUT NOT ACCEPTED. 12.3 WITH A VIEW TO COMPLYING WITH THE ACCOUNTING S TANDARD-4 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA PROVISION FOR LIA BILITY IN RESPECT OF SUCH CLAIMS IS MADE IN THE ACCOUNTS BASED ON PAST EXPERIENCE. 12.4 AFTER SCRUTINY OF SUCH PENDING CLAIMS IF ANY O F THESE CLAIMS ARE ULTIMATELY REJECTED THE LIABILITY PROVIDED IS WRITTEN BACK AND THE AMOU NT INVOLVED IS CONSIDERED AS INCOME OF THE YEAR OF REJECTION. 12.5 YOUR HONOURS ATTENTION IS INVITED TO PARAS (V III) AND (IX) OF THE SIGNIFICANT ACCOUNTING POLICIES FORMING PART OF THE AUDITED STA TEMENTS OF ACCOUNTS WHICH DEAL WITH THE TREATMENT THAT IS BEING GIVEN TO TYPES CLAIMS D ISCUSSED HEREINABOVE. 12.6 WE HAVE FURTHER TO STATE THAT THE CORPORATION IS BEING ASSESSED TO TAX SINCE THE YEAR 1989-90 AND THE LIABILITY IN RESPECT OF CLAIMS INTIMATED BUT NOT ACCEPTED IS BEING REGULARLY AND CONSISTENTLY PROVIDED IN THE ACCOUNTS . THIS PRACTICE HAS BEEN SPECIFICALLY DISCLOSED IN THE ACCOUNTS AND HAS BEEN ACCEPTED BY THE DEPARTMENT ALL ALONG THESE YEARS. THE YEAR AND LIABILITY PROVIDED IN THE ACCO UNTS HAS BEEN ALLOWED AS DEDUCTION. I.T.A. NO. 4794/MUM/2007: ASSESSMENT YEAR: 2001-02 I.T.A. NO. 6078/MUM/2008: ASSESSMENT YEAR: 2002-03 I.T.A. NO. 3237/MUM/2007: ASSESSMENT YEAR: 2003-04 I.T.A. NO. 4795/MUM/2007: ASSESSMENT YEAR: 2004-05 I.T.A. NO. 3982/MUM/2008: ASSESSMENT YEAR: 2005-06 DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPN 6 12.7 WE RESPECTFULLY SUBMIT THAT THOUGH PRINCIPLE O F RESJUDICITA OR ESTOPPELS BY RECORD HAS NO APPLICATION TO INCOME TAX PROCEEDINGS THIS RULE IS SUBJECT TO LIMITATION AS THERE SHOULD BE FINALITY AND CERTAINTY TO LITIGATION AND EARLIER DECISION ON THE SAME QUESTION CANNOT BE REOPENED UNLESS THE EARLIER DECISION WAS ARBITRARY OR PERVERSE AND NEW FACTS ARE PLACED BEFORE ASSESSING AUTHORITIES. REF CIIT V. DALMIA DADRI CEMENT LTD. 77 ITR 410(PUNJ) AND RUISSEL PROPERTIES P.LTD. V. ACIT 10 9 ITR 229(CAL.) 9. LD COUNSEL FOR THE ASSESSEE WITH REFERENCE TO AB OVE REPLY SUBMITTED THAT THIS ISSUE HAD THOROUGHLY BEEN EXAMINED BY THE AO AND THEREAFTER THE ASSESSMENT ORDER WAS PASSED. LD COUNSEL SUBMITTED THAT THE WHOLE ISSUE CROPPED UP BECAUSE OF AUDIT QUERY RAISED IN THIS REGARD. TO DEMONSTRATE THIS LD COUNSEL FILED THE CORRESPONDENCE IN REGARD TO AUDIT QUERY DATED 12.5.2004. LD COUNSEL ALSO REFERRED TO LETTER DATE D 19.5.2004 ADDRESSED TO SENIOR AUDIT OFFICER LAP-1 MUMBAI BY THE DCIT-1(1) MUMBAI(AO) IN WHICH IT WAS INTER ALIA STATED THAT THE ISSUE HAD BEEN EXAMINED IN DETAIL IN EARLIER Y EARS AS WELL AS THIS YEAR AND THE ASSESSEES CLAIM OF ESTIMATED CLAIM HAD BEEN RIGHTLY ALLOWED A ND NO EXCESS CLAIM HAD BEEN ALLOWED TO THE ASSESEE. HE FURTHER REFERRED TO LETTER DATED 20.12 .2004 ADDRESSED TO THE COMMISSIONER OF INCOME TAX-1 MUMBAI BY THE ASSESSING OFFICER IN W HICH IT WAS INTER ALIA POINTED OUT THAT THE ASSESSEE WAS FOLLOWING SAME PRACTICE SINCE THE STAR T OF THE COMPANY AND FOR MORE THAN 20 YEARS THIS POSITION HAS BEEN ACCEPTED. 10. LD COUNSEL FOR THE ASSESSEE POINTED OUT THAT SI NCE THE AUDIT HAD NOT ACCEPTED THE DEPARTMENTS STAND THEREFORE THE NOTICE HAD BEEN ISSUED TO THE ASSESSEE. HE THEREFORE SUBMITTED THAT IT WAS NOT THE AO WHO ENTERTAINED TH E REQUISITE BELIEF REGARDING ESCAPEMENT OF INCOME BUT IT WAS ON ACCOUNT OF AUDIT QUERY THAT T HE BELIEF HAD BEEN IMPOSED UPON THE AO. LD COUNSEL FOR THE ASSESSEE RELIED ON THE FOLLOWING DE CISIONS:- I) CIT V. KELVINATOR OF INDIA LTD. 187 TAXMAN 312( SC) II) INDIAN AND EASTERN NEWSPAPER SOCIETY V CIT 119 ITR 996(SC) I.T.A. NO. 4794/MUM/2007: ASSESSMENT YEAR: 2001-02 I.T.A. NO. 6078/MUM/2008: ASSESSMENT YEAR: 2002-03 I.T.A. NO. 3237/MUM/2007: ASSESSMENT YEAR: 2003-04 I.T.A. NO. 4795/MUM/2007: ASSESSMENT YEAR: 2004-05 I.T.A. NO. 3982/MUM/2008: ASSESSMENT YEAR: 2005-06 DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPN 7 11. LD D.R. APPEARING FOR THE REVENUE TOOK STRONG E XCEPTION TO THE INTERNAL CORRESPONDENCE BEING RELIED UPON BY THE ASSESSEE. HE SUBMITTED TH AT THESE DOCUMENTS CANNOT BE CONSIDERED UNLESS IT IS SHOWN THAT THEY HAVE BEEN OBTAINED PRO PERLY. LD D.R. FURTHER SUBMITTED THAT IN THE REASONS RECORDED THE AO HAS POINTED OUT THAT HOW T HE ESCAPEMENT OF INCOME IS THERE. HE REFERRED TO THE QUESTIONNAIRE OF THE AO RELIED UPON BY THE ASSESSEE AND POINTED OUT THAT THE AO HAD NOT RAISED ANY QUESTION WHETHER THE PROVISION D EBITED TO P&L ACCOUNT WAS CONTINGENT IN NATURE OR NOT. HE ONLY REQUIRED THE ASSESSEE TO FU RNISH THE DETAILS OF ACTUAL PAYMENTS BEING MADE. HE SUBMITTED THAT THERE MAY BE VARIOUS CHANN EL OF INFORMATION INCLUDING AUDIT FOR FORMATION OF BELIEF REGARDING ESCAPEMENT OF INCOME BY THE AO. HOWEVER IT IS TO BE EXAMINED ONLY WITH REFERENCE TO THE REASONS RECORDED. HE SU BMITTED THAT THE DECISION RELIED UPON BY LD COUNSEL FOR THE ASSESSEE IN INDIAN AND EASTERN NEWS PAPER SOCIETY 119 ITR 996 (SUPRA) IS NOT RELEVANT BECAUSE THE SAME HAD BEEN DELIVERED IN THE CONTEXT OF SECTION 147(B) AND THEREAFTER SECTION 147 HAS BEEN AMENDED AND THE SCO PE OF REASSESSMENT PROCEEDINGS HAS CONSIDERABLY BEEN ENLARGED. HE SUBMITTED THAT AS P ER EXPLANATION 2 TO CLAUSE (C) (I) (III) THERE IS DEEMED ESCAPEMENT OF INCOME AND THEREFORE THE REASSESSMENT PROCEEDINGS HAD VALIDLY BEEN INITIATED. HE SUBMITTED THAT THE BASIS FOR IN ITIATION OF REASSESSMENT PROCEEDINGS IS LD CIT (A)S ORDER FOR A.Y. 2003-04 AND IN THIS REGARD HE RELIED ON THE DECISION IN THE CASE OF TILAK RAJ BEDI V JCIT 319 ITR 385 (P&H). 12. IN THE REJOINDER LD COUNSEL FOR THE ASSESSEE S UBMITTED THAT LD CIT (A)S ORDER HAS BEEN PASSED ON 20.2.2007 WHEREAS THE REASSESSMENT PROCE EDINGS HAD BEEN INITIATED ON 30.3.2006. THEREFORE LD CIT (A)S ORDER CANNOT BE BASED OF NO TICE U/S.148. IN REGARD TO LD D.R.S OBJECTION REGARDING PAPERS RELATING TO AUDIT OBJECTION LD CO UNSEL SUBMITTED THAT HE HAS INSTRUCTIONS THAT THE SAME HAVE BEEN OBTAINED AFTER GETTING APPROVAL OF LD CIT. I.T.A. NO. 4794/MUM/2007: ASSESSMENT YEAR: 2001-02 I.T.A. NO. 6078/MUM/2008: ASSESSMENT YEAR: 2002-03 I.T.A. NO. 3237/MUM/2007: ASSESSMENT YEAR: 2003-04 I.T.A. NO. 4795/MUM/2007: ASSESSMENT YEAR: 2004-05 I.T.A. NO. 3982/MUM/2008: ASSESSMENT YEAR: 2005-06 DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPN 8 13. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE RECORD OF THE CASE. AS FAR AS THE LD D.R.S PRELIMINARY OBJECTION REGARDING PAPER S RELATING TO AUDIT QUERY IS CONCERNED WE ARE OF THE OPINION THAT SINCE THE PAPERS HAD BEEN OBTAI NED AFTER DUE APPROVAL OF LD CIT AND HAD ALSO BEEN REFERRED BEFORE COD THEREFORE SAME CAN BE TA KEN COGNIZANCE OF. HOWEVER IT IS THE SETTLED PRINCIPLE THAT THE REASONS HAVE TO BE CONSI DERED PER SE TO FIND OUT WHETHER THE AO HAD REASONS TO BELIEVE REGARDING ESCAPEMENT OF INCOME O R NOT. THEREFORE THE AUDIT OBJECTION MAY BE A SOURCE OF INFORMATION TO THE AO BUT ULTIMATELY THE AOS BELIEF REGARDING ESCAPEMENT OF INCOME IS TO BE EXAMINED WITH REFERENCE TO REASONS RECORDED AND FOR THIS PURPOSE COURT CAN TAKE INTO CONSIDERATION ALL SURROUNDING CIRCUMSTANC ES WHICH INFLUENCED THE FORMATION OF BELIEF OF AO. IT IS ADMITTED FACT THAT THE SYSTEM OF ACCOUNT ING HAS BEEN FOLLOWED BY THE ASSESSEE SINCE CONSIDERABLE LONG PERIOD AND NO SUCH DISPUTE WAS EV ER RAISED. THE ASSESSEE WAS PREPARING ITS ACCOUNTS AS PER THE REGULATIONS FRAMED UNDER THE DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPORATION ACT. THE FORMAT OF BALANCE SHEET AND R EVENUE ACCOUNT HAS BEEN PRESCRIBED UNDER THE REGULATION AND THE ASSESSEE HAD REGULARLY BEEN PREPARING ITS FINANCIAL STATEMENTS IN ACCORDANCE WITH THE SAID REGULATION. IT IS TRUE TH AT THE ALLOWABILITY OF ANY EXPENDITURE IS TO BE EXAMINED WITH REFERENCE TO INCOME TAX ACT AND NOT W ITH REFERENCE TO ANY OTHER REGULATION BUT WHEN A CONSISTENT PRACTICE IS BEING FOLLOWED REGULA RLY THEN UNLESS ANY SPECIFIC MATERIAL COMES BEFORE THE AO TO FORM A BELIEF REGARDING ESCAPEMENT OF INCOME UNDER THE SAME SET OF FACTS IT CANNOT BE SAID THAT THE AO ENTERTAINED THE BELIEF R EGARDING ESCAPEMENT OF INCOME. THE AO HAS TO POINT OUT AS TO WHAT WAS THE BASIS FOR ENTERTAIN ING REQUISITE BELIEF REGARDING ESCAPEMENT OF INCOME AND SAME SHOULD BE BORNE OUT FROM THE REASON S RECORDED. IT MAY BE IN THE FORM OF DECISION OF THE HONBLE SUPREME COURT OR ANY EVIDEN CE COMING TO HIS NOTICE WHICH WAS NOT AVAILABLE AT THE TIME OF ASSESSMENT. BUT IN THE PR ESENT CASE NONE OF THESE REQUIREMENTS ARE FULFILLED AND THE AO MERELY STATED THAT EVEN IN A.Y . 2003-04 THE ASSESSEES CLAIM HAS BEEN I.T.A. NO. 4794/MUM/2007: ASSESSMENT YEAR: 2001-02 I.T.A. NO. 6078/MUM/2008: ASSESSMENT YEAR: 2002-03 I.T.A. NO. 3237/MUM/2007: ASSESSMENT YEAR: 2003-04 I.T.A. NO. 4795/MUM/2007: ASSESSMENT YEAR: 2004-05 I.T.A. NO. 3982/MUM/2008: ASSESSMENT YEAR: 2005-06 DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPN 9 REJECTED AND DENIED BECAUSE THE ASSESSEE WAS FOLLOW ING MERCANTILE SYSTEM OF ACCOUNTING AND THEREFORE IT CANNOT BE ALLOWED THE CLAIM OF ANY EX PENDITURE ON ACCOUNT OF ESTIMATED LIABILITY. AS POINTED OUT BY LD COUNSEL FOR THE ASSESSEE THE AO HAD RAISED SPECIFIC QUERY REGARDING THE CLAIM OF AMOUNT WHICH WAS INTIMATED TO THE ASSESSE E. THE ESTIMATED LIABILITY DEBITED TO REVENUE ACCOUNT WAS ALSO IN RESPECT OF CLAIMS. THE REFORE IT CANNOT BE SAID THAT THE AO DID NOT EXAMINE THE ASSESSES ACCOUNT WITH REFERENCE TO THI S ASPECT. FURTHER IN ANY VIEW OF THE MATTER ADMITTEDLY THE AO HAS REOPENED THE ASSESSMENT BECA USE IN A.Y. 2003-04 HE HAS TAKEN A CONTRARY VIEW ON SAME SET OF FACTS. NO NEW MATERIA L OR NEW FACT HAS BEEN BROUGHT ON RECORD BY THE DEPARTMENT. THEREFORE IT IS DEFINITELY A CASE OF CHANGE OF OPINION AND THEREFORE THE REASSESSMENT PROCEEDINGS ARE BAD IN LAW IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT V. KELVINATOR OF INDIA LTD. (201 0) 320 ITR 561 (SC) WHEREIN IT WAS HELD AS UNDER: THE CONCEPT OF CHANGE OF OPINION ON THE PART OF THE AO TO REOPEN THE ASSESSMENT DOES NOT STAND OBLITERATED AFTER THE SUB STITUTION OF SECTION 147 OF THE I.T.ACT 1961 BY THE DIRECT TAX LAWS (AMENDMENT) AC T 1987 AND 1989. AFTER THE AMENDMENT THE AO HAS TO HAVE REASON TO BELIEVE THAT INCOME HAS ESCAPED ASSESSMENT BUT THIS DOES NOT IMPLY THAT THE AO CAN REOPEN AN ASSESSMENT ON MERE CHANGE OF OPINION. THE CONCEPT OF CHANGE OF OPINION MUST BE TREATED AS AN IN-BUILT TEST TO CHECK THE ABUSE OF POWER. HENC E AFTER APRIL 1 1989 THE AO HAS POWER TO REOPEN AN ASSESSMENT PROVIDED THERE I S TANGIBLE MATERIAL TO COME TO THE CONCLUSION THAT THERE WAS ESCAPEMENT OF INCOME FROM ASSESSMENT. REASON MUST HAVE A LINK WITH THE FORMATION OF THE B ELIEF. IN VIEW OF THE ABOVE DISCUSSION WE ALLOW THE GROUN D TAKEN BY THE ASSESSEE. 14. IN THE RESULT APPEAL FOR THE ASSESSMENT YEAR 2 001-02 IS ALLOWED. ITA NO.3237/M/2007 : A.Y 2003-04 I.T.A. NO. 4794/MUM/2007: ASSESSMENT YEAR: 2001-02 I.T.A. NO. 6078/MUM/2008: ASSESSMENT YEAR: 2002-03 I.T.A. NO. 3237/MUM/2007: ASSESSMENT YEAR: 2003-04 I.T.A. NO. 4795/MUM/2007: ASSESSMENT YEAR: 2004-05 I.T.A. NO. 3982/MUM/2008: ASSESSMENT YEAR: 2005-06 DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPN 10 15. THE EFFECTIVE GROUND OF APPEAL IS THAT LD CIT ( A) ERRED IN SUSTAINING THE ADDITION OF RS.2 68 10 00 000/- TO TOTAL INCOME BEING DIFFERENC E OF THE BALANCE OF FUND AT THE END OF THE YEAR AND AT THE BEGINNING OF THE YEAR AS WORKED OUT AS PER ACTUARIAL VALUATION. 16. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE C OMPANY HAD FILED ITS RETURN OF INCOME DECLARING TOTAL INCOME AT RS.17 74 04 52 986/- WHI CH WAS SUBSEQUENTLY REVISED TO RS.17 67 78 74 563/-. THE ASSESSEE IS A CORPORATIO N WHICH IS 100% SUBSIDIARY OF RBI CONTROLLED AND MANAGED BY THE RESERVE BANK OF INDI A. FROM THE COPY OF AUDITED ACCOUNTS IN FORM NO.3CD THE AO INTER ALIA NOTICED THE FOLLO WING NOTE REGARDING METHOD OF ACCOUNTING: THE METHOD OF ACCOUNTING IS GENERALLY ON ACCRUAL BA SIS IN ACCORDANCE WITH THE ACCOUNTING POLICIES. THE RECOGNITION OF ITEMS OF I NCOME AND EXPENSES IS ON THE BASIS OF ACCOUNTING POLICIES FOLLOWED BY THE CORPORATION AND FURTHER WHICH ARE SUMMARIZED IN THE STATEMENT IN ANNEXURE-B. IN ANNEXURE B THE ASSESSEE COMPANY STATED THAT IT IS FOLLOWING XII METHOD OF ACCOUNTING WHICH IS REPRODUCED AS UNDER: I) ITEMS OF INCOME AND EXPENDITURE ARE GENERALLY AC COUNTED FOR ON ACCRUAL BASIS UNLESS OTHERWISE STATED. II) . III) .. IV) .. V) VI) VII) VIII) PROVISION FOR YEAR END LIABILITY IN RESPECT O F CLAIMS INTIMATED BUT NOT ADMITTED PERTAINING TO CREDIT GUARANTEE FUND IS MADE ON PRUD ENTIAL BASIS TAKING INTO CONSIDERATION THE PAST TRENDS. IX) CONFORMITY WITH THE ACCOUNTING STANDARD AS-4 IS SUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA ADEQUATE PROVISION I S MADE TOWARDS THE LIABILITY ESTIMATED TO DEVOLVE UNDER THE DEPOSIT INSURANCE SC HEME ON THE EVENTS LIKE LIQUIDATION/AMALGAMATION OF WEEK BANKS OCCURRING BE TWEEN THE DATE OF BALANCE SHEET AND THE DATE OF FINALIZATION OF BALANCE SHEET . I.T.A. NO. 4794/MUM/2007: ASSESSMENT YEAR: 2001-02 I.T.A. NO. 6078/MUM/2008: ASSESSMENT YEAR: 2002-03 I.T.A. NO. 3237/MUM/2007: ASSESSMENT YEAR: 2003-04 I.T.A. NO. 4795/MUM/2007: ASSESSMENT YEAR: 2004-05 I.T.A. NO. 3982/MUM/2008: ASSESSMENT YEAR: 2005-06 DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPN 11 X) ADEQUATE PROVISION IS MADE ON THE BASIS OF ACTUA L VALUATION OF THE LIABILITY TOWARDS FUND BALANCES AS AT THE END OF THE YEAR IN RESPECT OF CREDIT GUARANTEE FUNDS AN DEPOSIT INSURANCE FUND. XI) XII) XIII) XIV) THE AO NOTICED THAT THE ASSESSEE HAD CLAIMED EXPEND ITURE ON ACCOUNT OF DEPOSIT INSURANCE FUND IN THE REVENUE ACCOUNT AS FOLLOWS: FIGURE IN LAKHS TO CLAIMS A) PAID DURING THE YEAR (NET OF RECOVERIES AGAINST EXCESS 1 86 43 04 PAYMENT IN EARLIER YEARS B) ADMITTED BUT NOT PAID ADD: ESTIMATED LIABILITY IN RESPECT OF CLAIMS 5 17 36 90 7 03 79 94 LESS: ESTIMATED LIABILITY IN RESPECT OF CLAIMS INTIMATED BUT NOT ADMITTED AT THE END OF PREVIOUS YEAR INTIMATED 11 86 76 97 FROM THE ABOVE FIGURES RELATING TO CLAIM HE OBSERV ED THAT A SUM OF RS.517 36 90 000/- HAD BEEN CLAIMED AS EXPENSES ON ACCOUNT OF ESTIMATED LI ABILITY IN RESPECT OF CLAIMS. HE OBSERVED THAT THIS WAS AN ESTIMATED LIABILITY AND THEREFORE THE ASSESSEE WAS REQUIRED TO SUBSTANTIATE ITS CLAIM. THE ASSESSEE HAD FILED FOLLOWING EXPLANATIO NS: THE ABOVE ADJUSTMENT INCLUDES ADDITION AND DEDUCTIO N OF LIABILITY WHICH IS BASED ON ESTIMATION BASED ON THE INFORMATION AVAILABLE AT THE TIME OF INTIMATION OF THE LIABILITY AND HENCE EXCESS PROVISION IF ANY IS WRIT TEN BACK IN THE YEAR OF FINAL PAYMENT. THE CORPORATION MAKES PROVISION FOR DEPOS IT INSURANCE CLAIMS ARE MADE IN RESPECT OF BANKS UNDER LIQUIDATION/AMALGAMA TION/RECONSTRUCTION ON RECEIPT OF ADVICES FROM THE REGULATORY DEPARTMENTS OF RBI/REGISTRAR OF CORPORATIVE SOCIETIES BASED ON THE FIGURES OF DEPO SITS AVAILABLE WITH THE CORPORATION. THIS IS AS PER THE PROVISIONS OF SECT ION 16 OF DICGC ACT 1961 IN I.T.A. NO. 4794/MUM/2007: ASSESSMENT YEAR: 2001-02 I.T.A. NO. 6078/MUM/2008: ASSESSMENT YEAR: 2002-03 I.T.A. NO. 3237/MUM/2007: ASSESSMENT YEAR: 2003-04 I.T.A. NO. 4795/MUM/2007: ASSESSMENT YEAR: 2004-05 I.T.A. NO. 3982/MUM/2008: ASSESSMENT YEAR: 2005-06 DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPN 12 TERMS OF WHICH WHERE AN ORDER FOR THE WINDING UP O R LIQUIDATION OF AN INSURED BANK IS MADE THE CORPORATION SHALL SUBJECT TO THE OTHER PROVISIONS OF THIS ACT BE LIABLE TO PAY TO EVERY DEPOSITOR OF THAT BANK IN AC CORDANCE WITH THE PROVISIONS OF SECTION 17 AN AMOUNT EQUAL TO THE AMOUNT DUE TO HIM IN RESPECT OF HIS DEPOSIT IN THAT BANK AT THE TIME WHEN SUCH ORDER IS MADE. SE CTION 16 HAS SIMILAR PROVISION IN RESPECT OF AMALGAMATION RECONSTRUCTION ETC WH ILE PREPARING THE REVENUE ACCOUNTS OF THE CORPORATION INTER ALIA THE PROVIS IONS REQUIRED TO BE MADE DURING THE YEAR TOWARDS DEPOSIT INSURANCE CLAIMS ON THE AB OVE BASIS ARE TREATED AS DEDUCTIBLE EXPENSES. THE LIABILITY UNDER SECTION 16 OF THE DICGC ACT IS AN ENFORCEABLE LIABILITY AND IS NOT BASED ON THE RECEI PT OF LIST OF DEPOSITS FROM THE CONCERNED AUTHORITY UNDER SECTION 17 OF THE ACT WHI CH ESSENTIALLY PRESCRIBES TIME LIMITS FOR SUBMITTING THE LISTS. FROM THE ASSESSEES EXPLANATION THE AO CONCLUDED T HAT IN RESPECT OF ESTIMATED LIABILITY UNLESS THE PROCEDURE FOR QUANTIFICATION OF LIABILITY AS S UBMITTED BY THE ASSESSEE IS COMPLETED THE LIABILITY COULD NOT BE DEEMED TO HAVE CRYSTALLIZED. HE FURTHER OBSERVED THAT THE ASSESSEE ITSELF WAS WRITING BACK THE EXCESS PROVISION WHICH SHOWS THAT THE PROVISIONS WERE NOT MADE ON A SCIENTIFIC BASIS. TREATING THIS AMOUNT AS CONTINGE NT IN NATURE THE AO ADDED RS.5 17 36 90 00 000/- AS ASSESSEES INCOME. 17. THE AO FURTHER EXAMINED THE BALANCE OF FUND IN REVENUE ACCOUNT AND NOTED THAT THE ASSESSEE HAD CREDITED A SUM OF RS.56290.00 LAKHS TO THE PROFIT AND LOSS ACCOUNT REPRESENTING THE BALANCE OF FUND IN THE BEGINNING OF THE YEAR AN D HAD DEBITED A SUM OF RS.83100.00 LAKHS TOWARDS BALANCE OF FUND. THE ASSESSEE HAD FURNISHE D THE FOLLOWING EXPLANATION IN THIS REGARD: IN THIS CONNECTION WE HAVE TO STATE THAT THE CORPOR ATION IS ENGAGED IN THE BUSINESS OF PROVIDING INSURANCE COVER ON DEPOSITS A CCEPTED BY THE INSURED BANKS FOR WHICH THE CORPORATION RECEIVES PREMIUM CONSTITU TING THE PRINCIPAL SOURCE OF REVENUE. THE ONLY OTHER MAJOR SOURCE OF INCOME IS F ROM INVESTMENTS OF THE EXCESS MONEYS OF PREMIUM RECEIVED FROM THE PRINCIPA L BUSINESS. IN THE BUSINESS OF DEPOSIT INSURANCE THE RECEIPT OF PREMIUM AS WEL L AS THE SETTLEMENT OF INSURANCE CLAIMS ARE INEXTRICABLY BOUND WITH EACH O THER AND THEREFORE IT THE PRIMIA RECEIVED ARE TAKEN NOTE OF IN A YEAR THE LI ABILITY IN RESPECT OF THE CLAIMS IS ALSO TO BE TAKEN NOTE OF IN THE SAME YEAR. THE LIA BILITY IS NOT CONTINGENT- IT IS A DEFINITE AND CERTAIN LIABILITY EMBEDDED WITH THE PR EMIUM RECEIVED AS FAR AS THE EXTENSION OF INSURANCE COVER IS CONCERNED. ONLY TH E QUANTIFICATION OF THE LIABILITY IS BASED ON RATIONAL AND SCIENTIFIC ESTIMATE WHICH IN TURN IS BASED ON THE PAST EXPERIENCE AND DATA ALONG WITH CURRENT INFORMATION ABOUT THE POSSIBLE CLAIMS FOR WHICH FORMAL INTIMATION HAVE NOT BEEN RECEIVED. TH E APPROPRIATENESS OF I.T.A. NO. 4794/MUM/2007: ASSESSMENT YEAR: 2001-02 I.T.A. NO. 6078/MUM/2008: ASSESSMENT YEAR: 2002-03 I.T.A. NO. 3237/MUM/2007: ASSESSMENT YEAR: 2003-04 I.T.A. NO. 4795/MUM/2007: ASSESSMENT YEAR: 2004-05 I.T.A. NO. 3982/MUM/2008: ASSESSMENT YEAR: 2005-06 DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPN 13 QUANTIFICATION OF THE LIABILITY MAY KINDLY BE SEEN FROM THE SIZE OF THE ACTUAL LIABILITY IN SUBSEQUENT PERIOD VIS--VIS THE ACTUARIAL LIABIL ITY. THE ASSESSEE POINTED OUT THAT THIS PRACTICE HAD BEE N FOLLOWED SINCE LAST SEVERAL YEARS. IT WAS FURTHER SUBMITTED THAT AS PER ACCOUNTING POLICY AT THE END OF EACH YEAR ON THE BASIS OF ACTUARIAL VALUATION THE BALANCE IN THE FUND ACCOUNT IS REVIS ED WHICH PROVISION IS REVERSED IN THE NEXT YEAR. IT WAS POINTED OUT THAT EFFECTIVELY BY PASSI NG THE ENTRY BY REVERSING THE LAST YEAR & PROVIDING FRESH AS PER ACTUARIAL VALUATION THE COR PORATION WAS RECOGNIZING ITS LIABILITY TOWARDS FUND ONLY TO THE EXTENT OF INCREMENTAL PORTION FOR THE CURRENT YEAR. THE AO CONCLUDED THAT THE ASSESSEE IN FACT WAS PROVIDING FOR A LIABILITY WH ICH MAY OR MAY NOT ARISE IN FUTURE DEPENDING UPON THE HAPPENING OR NON-HAPPENING OF A FUTURE EVE NT. HE ACCORDINGLY DISALLOWED THE ASSESSEES CLAIM OF INCREMENTAL LIABILITY BASED ON ACTUARIAL VALUATION TO THE EXTENT OF RS.26810.00 LAKHS (RS.83100.00 LAKHS RS.56290.00 LAKHS). 18. LD CIT (A) DELETED THE ADDITION OF RS.5 17 36 9 LAKHS. HOWEVER THE DEPARTMENTS APPEAL IS NOT BEFORE US AND THEREFORE WE ARE REFR AINING FROM MAKING ANY OBSERVATION IN THIS REGARD. 19. AS REGARDS THE ADDITION OF RS.268 10 00 000/- BEING DIFFERENCE OF THE BALANCE OF FUNDS AT THE END OF THE YEAR AND AT THE BEGINNING OF THE YEAR WORKED OUT AS PER ACTUARIAL VALUATION LD CIT (A) CONFIRMED THE AOS ACTION INTER ALIA OBSE RVING THAT NO EXPENDITURE COULD BE ALLOWED IN TWO DIFFERENT WAYS AGAINST THE EARNED INCOME. THUS HE HELD THAT SINCE THE ASSESSEE HAD BEEN ALLOWED DEDUCTION ON ACTUAL BASIS THEREFORE THE A DDITION ON ACCRUAL BASIS COULD NOT BE ALLOWED. 20. LD COUNSEL FOR THE ASSESSEE REFERRED TO THE DEP OSIT INSURANCE AND CREDIT GUARANTEE CORPORATION ACT 1961 AND POINTED OUT THAT THIS COR PORATION WAS ESTABLISHED FOR THE PURPOSE OF INSURANCE OF DEPOSITS AND GUARANTEEING OF CREDIT FA CILITIES AND FOR OTHER MATTERS CONNECTED I.T.A. NO. 4794/MUM/2007: ASSESSMENT YEAR: 2001-02 I.T.A. NO. 6078/MUM/2008: ASSESSMENT YEAR: 2002-03 I.T.A. NO. 3237/MUM/2007: ASSESSMENT YEAR: 2003-04 I.T.A. NO. 4795/MUM/2007: ASSESSMENT YEAR: 2004-05 I.T.A. NO. 3982/MUM/2008: ASSESSMENT YEAR: 2005-06 DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPN 14 THEREWITH OR INCIDENTAL THERETO. HE POINTED OUT TH AT THE BASIC FUNCTION OF THE CORPORATION IS TO PROVIDE INSURANCE COVER IN RESPECT OF DEPOSITS RECE IVED BY VARIOUS BAKING COMPANIES AGAINST THE PREMIUM BEING RECEIVED FROM THE SAID BANKS. HE REFERRED TO THE DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPORATION GENERAL REGULATIONS 1 961 (DICGC) AND REFERRED TO THE REVENUE ACCOUNT PRESCRIBED UNDER THE REGULATION. HE POINTE D OUT THAT AS PER THESE REGULATIONS; THE ASSESSEE WAS MAINTAINING ITS DEPOSIT INSURANCE FUND S AND CREDIT GUARANTEE FUNDS. HE SUBMITTED THAT THE METHODOLOGY FOLLOWED REGARDING T HIS FUND IS THAT AT THE END OF EVERY YEAR ACTUARIAL VALUATION IS BEING CARRIED OUT IN ORDER T O ESTIMATE THE LIABILITY OF THE CORPORATION AGAINST THE DEPOSIT INSURANCE PREMIUM RECEIVED BY THE CORPO RATION. HE SUBMITTED THAT THE BALANCE AT THE END OF EVERY YEAR IS REVERSED IN THE SUBSEQUENT YEAR BY CREDITING THE BALANCE FUND ON THE INCOME SIDE. TO THE EXTENT THE CLAIMS HAVE BEEN REC EIVED IN RESPECT OF SUCH BANKS WHICH HAVE BEEN DE-REGISTERED ON ACCOUNT OF LIQUIDATION SAME ARE BEING DEBITED TO EXPENDITURE ACCOUNT AND WHILE MAKING THE INCREMENTAL PROVISIONS THE DE -RECOGNIZED BANK DEPOSITS ARE NOT TAKEN INTO CONSIDERATION. THEREFORE HE SUBMITTED THAT THERE IS NO DOUBLE DEDUCTION AS HELD BY LD CIT (A). LD COUNSEL FOR THE ASSESSEE REFERRED TO SECTI ON 31 OF DICGC ACT AND POINTED OUT THAT AS PER THE SAID SECTION THE CORPORATION IS REQUIRED T O MAKE PROVISIONS FOR ALL ITS LIABILITIES AND FOR A LL OTHER MATTERS FOR WHICH PROVISION IS NECESSARY OR E XPEDIENT. LD COUNSEL REFERRED TO PAGE 36 OF ANNUAL ACCOUNTS CONTAINED IN THE PAPER BOOK AND POI NTED OUT THAT THE ACCOUNTS HAVE BEEN MAINTAINED AS PER THE REGULATIONS OF DICGC. AT THE END OF THE YEAR THE PROVISION IN THE FUND IS BEING MADE ON THE BASIS OF ACTUARIAL VALUATION. HE SUBMITTED THAT THE METHOD ADOPTED BY THE ASSESSEE IS ACCEPTED BY THE DEPARTMENT FROM 1988 AN D NEVER ANY ADDITION HAS BEEN MADE ON THIS COUNT. LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT SINCE THE BALANCE IN FUND HAS BEEN PROVIDED ON ACTUARIAL BASIS THUS MAKING PROVISION FOR INCREMENTAL LIABILITY IT CANNOT BE SAID TO BE A CONTINGENT LIABILITY. HE SUBMITTED THAT IT IS NOT NECESSARY THAT IN EVERY CASE LIABILITY SHOULD I.T.A. NO. 4794/MUM/2007: ASSESSMENT YEAR: 2001-02 I.T.A. NO. 6078/MUM/2008: ASSESSMENT YEAR: 2002-03 I.T.A. NO. 3237/MUM/2007: ASSESSMENT YEAR: 2003-04 I.T.A. NO. 4795/MUM/2007: ASSESSMENT YEAR: 2004-05 I.T.A. NO. 3982/MUM/2008: ASSESSMENT YEAR: 2005-06 DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPN 15 ACCRUE BUT THE VERY NATURE OF ASSESSEES ACTIVITY W ARRANT OF MAKING THIS PROVISION TO MEET THE PRINCIPLE OF MATCHING OF REVENUE WITH EXPENDITURE. LD COUNSEL FOR THE ASSESSEE RELIED ON THE FOLLOWING DECISIONS IN SUPPORT OF HIS CONTENTION TH AT THE LIABILITY IS NOT CONTINGENT LIABILITY WHEN SCIENTIFICALLY DETERMINED HAVING REGARD TO THE EVEN TS WHICH ARE LIKELY TO FIX THE LIABILITY OF THE ASSESSEE AND IS ALLOWABLE UNDER THE INCOME TAX ACT AS ASCERTAINED LIABILITY. I) CIT V INDIAN TRANSFORMERS LTD 270 ITR 259(KER ALA) II) BHARAT EARTH MOVERS V CIT 245 ITR 428(SC) III) COMMISSIONER OF INLAND REVENUE V. PRIVY COUNCI L MITSUBISHI MOTORS 222 ITR 697. 21. LD D.R. APPEARING FOR THE REVENUE SUBMITTED THA T THE INCREMENTAL PROVISION MADE BY THE ASSESSEE IS CONTINGENT IN NATURE BECAUSE IT IS PURE LY BASED ON ASSUMPTION THAT SOME BANK WILL GO INTO LIQUIDATION AND THEN LIABILITY WILL BE FIXE D AGAINST THE ASSESSEE. HE SUBMITTED THAT IT IS NOT AN ASCERTAINED LIABILITY; THEREFORE IT COULD NOT B E CLAIMED AS EXPENDITURE. HE REFERRED TO PAGE 25 OF PB TO POINT OUT THAT THE BASIS OF MAKING THIS PROVISION IS PURELY ESTIMATE WHICH IS EVIDENT FROM THE DETAILS AS REPRODUCED HEREUNDER: I) INSURED DEPOSITS : 20% OF THE DEPOSITS AS AT 3 1 ST MARCH 2003 RUN OFF EVERY YEAR. II) ASSESSABLE DEPOSITS : 20% OF THE DEPOSITS AS A T 31 ST MARCH 2003 RUN OFF EVERY YEAR. III) PREMIUM INCOME : 0.05 PER CENT OF ASSESSABLE DEPOSITS IV) NET CLAIMS : 0.1 PER UNIT OF INSURED DEPOSITS AFTER TAKING WEIGHTED AVERAGE. RATE OF INTEREST : 5% RESULTS OF VALUATION THE VALUATION HAS BEEN CONDUCTED ON THE BASIS INDIC ATED IN THE FOREGOING SECTION. THE RESULTS OF VALUATION ARE AS UNDER: VALUE OF CLAIM : 3097 CORES I.T.A. NO. 4794/MUM/2007: ASSESSMENT YEAR: 2001-02 I.T.A. NO. 6078/MUM/2008: ASSESSMENT YEAR: 2002-03 I.T.A. NO. 3237/MUM/2007: ASSESSMENT YEAR: 2003-04 I.T.A. NO. 4795/MUM/2007: ASSESSMENT YEAR: 2004-05 I.T.A. NO. 3982/MUM/2008: ASSESSMENT YEAR: 2005-06 DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPN 16 VALUE OF PREMIU : 2266 CRORE LIABILITY AS AT 31.3.2003 : 831 CRORE HE RELIED ON THE FOLLOWING DECISIONS TO SUBMIT THAT ESTIMATED LIABILITY CANNOT BE ALLOWED: I) SHREE SAJJAN MILLS LTD V. CIT 156 ITR 585 (SC) II) INDIAN MOLASSES CO. (P)LTD V. CIT 37 ITR 66 ( SC) III) RAJALAKSHMI MILLS LTD V. ITO 313 ITR 182 (AT )(CHENNAI) 22. WITHOUT PREJUDICE TO ABOVE SUBMISSION LD D.R FURTHER SUBMITTED THAT THE EXPENDITURE CANNOT BE ALLOWED IN TWO WAYS FIRSTLY ON THE CAS H BASIS AND SECONDLY ON ACCRUAL BASIS BECAUSE IT WILL LEAD TO DOUBLE DEDUCTION. HE RELIE D ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGIES LTD V. J CIT 320 ITR 577 (SC) WHEREIN THE HONBLE SUPREME COURT HAS HELD THAT RESERVE BANK DI RECTIONS 1998 ARE ONLY DISCLOSURE NORM AND THEY HAVE NOTHING TO DO WITH THE COMPUTATION O F TAXABLE INCOME UNDER INCOME TAX ACT 1961. HE THEREFORE SUBMITTED THAT MERELY BECAUSE A SPECIFIC FORMAT OF THE REVENUE ACCOUNT HAS BEEN PRESCRIBED UNDER DICGC REGULATION ACT IT DOES NOT FOLLOW THAT THE SAME IS FINAL FOR DETERMINING THE TAXABLE INCOME. 23. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE RECORD OF THE CASE. THE AO HAD DENIED THE INCREMENTAL PROVISIONS OF RS.2 68 10 00 000/- BEING DIFFERENCE OF THE BALANCE OF FUND AT THE ENDING OF THE YEAR AND AT THE BEGINNING OF THE YEAR ON THE GROUND THAT THE SAME WAS AN UNASCERTAINED LIABILITY. LD CIT (A) HOWEVER D ENIED THE ASSESSEES CLAIM ON THE GROUND THAT THE ASSESSEE WAS CLAIMING DOUBLE DEDUCTION FIRSTLY ON THE BASIS OF MERCANTILE SYSTEM OF ACCOUNTING AND SECONDLY ON THE BASIS OF CASH BASIS OF ACCOUNTING BY SETTLING THE CLAIMS INTIMATED TO IT BY A BANK. LD CIT (A) PRIMARILY RELIED ON SECTION 16 OF DICGC ACT ACCORDING TO WHICH THE ASSESSEE IS ELIGIBLE TO MEET THE LIABILI TY TOWARDS DEPOSITORS. HE OBSERVED THAT IN VIEW OF SECTION 44 OF THE INCOME TAX ACT THE PROVISION HAS TO BE ADDED BACK IN TERMS OF RULE 5(A) OF I.T.A. NO. 4794/MUM/2007: ASSESSMENT YEAR: 2001-02 I.T.A. NO. 6078/MUM/2008: ASSESSMENT YEAR: 2002-03 I.T.A. NO. 3237/MUM/2007: ASSESSMENT YEAR: 2003-04 I.T.A. NO. 4795/MUM/2007: ASSESSMENT YEAR: 2004-05 I.T.A. NO. 3982/MUM/2008: ASSESSMENT YEAR: 2005-06 DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPN 17 THE FIRST SCHEDULE. THUS IN SUM AND SUBSTANCE HE HELD THAT INCREMENTAL AMOUNT DEBITED TO FUND ACCOUNT WAS IN THE NATURE OF PROVISION AND THU S IT IS AN UNASCERTAINED LIABILITY. HE ALSO WAS OF THE VIEW THAT THE ENTIRE METHODOLOGY ADOPTED BY THE ASSESSEE LEADS TO DOUBLE DEDUCTION. 24. IN ORDER TO APPRECIATE THE CONTROVERSY WE HAV E TO REFER TO THE OBJECT WITH WHICH THE ASSESSEE WAS FORMED AND THE RELEVANT PROVISIONS OF THE DICGC ACT AND DICGC REGULATIONS 1961. AS PER THE ANNUAL REPORT FOR THE ASSESSMENT YEAR 2002-03 FILED IN THE PB THE DEPOSITORY INSURANCE CORPORATION WAS ESTABLISHED ON 1.1.1962 BY AN ACT OF PARLIAMENT CALLED DEPOSITORY INSURANCE AND CREDIT GUARANTEE CORPORATI ON 1961 W.E.F. 15 TH JULY 1978. IT TOOK OVER THE UNDERTAKING OF THE CREDIT GUARANTEE C ORPORATION OF INDIA LIMITED A PUBLIC LIMITED COMPANY PROMOTED BY RESERVE BANK OF INDIA ON 14 TH JANUARY 1971 WITH A VIEW TO INTEGRATING THE TWIN AND COGNATE FUNCTIONS OF GIVING INSURANCE PROTECTION TO SMALL DEPOSITORS IN BANKS AND PROVIDING GUARANTEE COVER TO CREDIT FACILITIES EXTE NDED TO CERTAIN CATEGORIES OF SMALL BORROWER PARTICULARLY THOSE BELONGING TO THE WEAKER SECTIONS OF THE SOCIETY. THUS THE CORPORATION HAS TWIN FUNCTIONS. PRIMARILY WE ARE CONCERNED WITH T HE DEPOSIT INSURANCE FUNDS AND NOT WITH THE CREDIT GUARANTEE FUNDS OF THE CORPORATION. THE COR PORATIONS OBJECTIVE IS TO PROVIDE FOR THE BENEFIT OF DEPOSITORS IN BANKS INSURANCE AGAINST T HE LOSS OF ALL OR PART OF THEIR DEPOSITS IN ALL BRANCHES OF A BANK TO A MAXIMUM OF RS.1 00 000/-. IN ORDER TO DISCHARGE ITS LIABILITY THE CORPORATION MAINTAINS DEPOSIT INSURANCE FUND WHI CH IS FUNDED BY THE PREMIUM RECEIVED FROM REGISTERED BANKS. CHAPTER III OF THE DICGC ACT 19 61 DEALS WITH REGISTRATION OF BANKING COMPANIES AND CO-OPERATIVE BANKS AS INSURED BANKS A ND LIABILITY OF CORPORATION TO DEPOSITORS. AS PER SECTION 15 OF THE DICGC ACT EVERY INSURED BANK SHALL SO LONG AS IT CONTINUES TO BE REGISTERED BE LIABLE TO PAY A PREMIUM TO THE CORPO RATION ON ITS DEPOSITS AT SUCH RATE OR RATES AS MAY WITH THE PREVIOUS APPROVAL OF THE RESERVE BANK BE NOTIFIED BY THE CORPORATION FROM TIME I.T.A. NO. 4794/MUM/2007: ASSESSMENT YEAR: 2001-02 I.T.A. NO. 6078/MUM/2008: ASSESSMENT YEAR: 2002-03 I.T.A. NO. 3237/MUM/2007: ASSESSMENT YEAR: 2003-04 I.T.A. NO. 4795/MUM/2007: ASSESSMENT YEAR: 2004-05 I.T.A. NO. 3982/MUM/2008: ASSESSMENT YEAR: 2005-06 DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPN 18 TO TIME TO THE INSURED BANKS. SECTION 15A OF THE DICGC ACT DEALS WITH CANCELLATION OF REGISTRATION OF AN INSURED BANK. SECTION 16 OF THE DICGC ACT DEALS WITH THE LIABILITY OF CORPORATION IN RESPECT OF INSURED DEPOSITS. THUS THE CORPORATION BECOMES LIABLE TO MAKE THE PAYMENTS TO THE DEPOSITORS OF THE BANK WHICH HAS BE EN DE-REGISTERED ON ACCOUNT OF CANCELLATION OF REGISTRATION. LD CIT (A) HAS PROCEEDED ON THE A SSUMPTION THAT UNLESS SECTION 16 COMES INTO PLAY THERE IS NO LIABILITY WHICH THE CORPORATION I S REQUIRED TO MEET AND THEREFORE WHATEVER INCREMENTAL PROVISION HAS BEEN MADE IN THE FUNDS T HE SAME REFLECTS MERELY A PROVISION AND REQUIRED TO BE ADDED BACK IN TERMS OF SECTION 44 R. W. RULE 5(A) OF FIRST SCHEDULE OF THE I.T.ACT. HOWEVER SECTION 31 OF DICGC ACT DEALS WITH RESERVE FUND WHICH READS AS UNDER: 31.AFTER MAKING PROVISION FOR ALL ITS LIABILITI ES AND FOR ALL OTHER MATTERS FOR WHICH PROVISION IS NECESSARY OR EXPEDIENT INCLUDING ANY CONTRIBUTION TO THE STAFF AND SUPERANNUATION FUNDS THE CORPORATION SHALL TRANSFE R THE BALANCE IF ANY OR ANY OF ITS INCOME IN ITS GENERAL FUND TO ONE OR MORE RESERVE F UNDS TO BE UTILIZED IN SUCH MANNER AND FOR SUCH PURPOSES AS THE CORPORATION MAY DEEM F IT. 25. THUS IT IS EVIDENT THAT THE ASSESSEE WAS REQUI RED TO MAKE ALL THE NECESSARY PROVISION FOR ITS LIABILITY WHICH MAY ACCRUE IN FUTURE. THIS IS A LSO AS PER FUNDAMENTAL PRINCIPLES OF ACCOUNTING AS PER WHICH PROVISION SHOULD BE MADE IN ACCOUNTS FOR ALL KNOWN LIABILITIES. THE BASIC FUNCTION AS NOTED EARLIER IS TO PROVIDE INSURANCE COVER TO SMALL DEPOSITORS FOR WHICH THE ASSESSEE CORPORATION RECEIVED PREMIUM FROM THE REGISTERED BA NKS. THE RECEIPT OF PREMIUM BY THE CORPORATION IMMEDIATELY MAKES IT LIABLE FOR ANY CLA IM BEING LODGED AGAINST IT IN FUTURE. IT IS TRUE THAT THE LIABILITY WILL PRIMARILY ARISE ONLY WHEN A BANK IS DE-REGISTERED BUT TILL THEN IT CANNOT BE SAID THAT THE ASSESSE COULD NOT FORESEE THE LIABILI TIES WHICH WERE LIKELY TO ARISE KEEPING IN VIEW ITS PAST EXPERIENCE. THE RECEIPT OF PREMIUM WAS IN EXTRICABLY LINKED WITH THE CLAIMS TO CROP UP DEPENDING UPON THE HAPPENING OF CERTAIN EVENTS. IF THE HAPPENING OF THE EVENT CAN REASON ABLY BE FORESEEN WITH CONSIDERABLE CERTAINTY DEPENDING U PON PAST EXPERIENCE THEN IT CANNOT BE SAID THAT IT IS A CONTINGENT LIABILITY. THE BASIC OBJEC TIVE OF THE CORPORATION ITSELF SHOWS THAT IT HAS TO I.T.A. NO. 4794/MUM/2007: ASSESSMENT YEAR: 2001-02 I.T.A. NO. 6078/MUM/2008: ASSESSMENT YEAR: 2002-03 I.T.A. NO. 3237/MUM/2007: ASSESSMENT YEAR: 2003-04 I.T.A. NO. 4795/MUM/2007: ASSESSMENT YEAR: 2004-05 I.T.A. NO. 3982/MUM/2008: ASSESSMENT YEAR: 2005-06 DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPN 19 MEET THE LIABILITIES IN FUTURE. ONE CANNOT COMPREH END A SITUATION WHERE THE CORPORATION WILL KEEP ON RECEIVING THE PREMIUM FROM VARIOUS BANKS BU T IT WILL NEVER BE CALLED UPON TO MEET ANY LIABILITY. IT WAS THE PAST EXPERIENCE OF BANKS GOI NG INTO LIQUIDATION AND THUS SMALL DEPOSITORS LOOSING THEIR MONEY THAT THE CORPORATION CAME INTO EXISTENCE AND THEREFORE WHEN THERE IS EVERY LIKELIHOOD OF THE EVENT BEING HAPPENING THAN NOT HAPPENING PROVISION HAS TO BE MADE IN THE ACCOUNTS TO SET APART A SPECIFIC PORTION OUT OF THE PROFITS TO MEET SUCH LIABILITY. THE CONTINGENT LIABILITY ON THE OTHER HAND DEPENDS ON H APPENING OR NON HAPPENING OF AN EVENT WHICH PRIMARILY IMPLIES THAT THE EVENT MAY NOT AT A LL HAPPEN ALSO. IF THE HAPPENING OF AN EVENT CAN REASONABLY BE INFERRED FROM ALL ASPECTS BEING T AKEN INTO CONSIDERATION THEN A PROVISION IF MADE ON SCIENTIFIC BASIS IS TREATED AS AN ASCERTA INED LIABILITY AS HELD BY THE HONBLE SUPREME COURT IN THE CASE OF BHARAT EARTH MOVERS V CIT 245 ITR 428 (SC). THE HONBLE SUPREME COURT HAS HELD THAT THE LIABILITY SHOULD BE CAPABLE OF BEING ESTIMATED WITH REASONABLE CERTAINTY THOUGH THE ACTUAL QUANTIFICATION MAY NOT BE POSSIBL E AT THE TIME OF MAKING PROVISION. IN THE PRESENT CASE ONLY QUANTIFICATION TOOK PLACE IN TE RMS OF SECTION 16 OF DICGC ACT BUT THE ASSUMPTION OF LIABILITY IS AS PER THE TERMS OF SECT ION 31 OF DICGC ACT. ADMITTEDLY THE INCREMENTAL LIABILITY TO THE EXTENT OF RS.26810.00 LAKHS HAS BEEN PROVIDED ON THE BASIS OF ACTUARIAL VALUATION BASED ON RATIONALE AND SCIENTIF IC ESTIMATE ON THE BASIS OF PAST EXPERIENCE AND DATA ALONGWITH CURRENT INFORMATION ABOUT THE P OSSIBLE CLAIMS FOR WHICH FORMAL INTIMATION HAD NOT BEEN RECEIVED. THE HONBLE SUPREME COURT I N THE CASE OF ROTORK CONTROLS INDIA (P)LTD V. CIT 180 TAXMAN 422 (SC) HAS INTER ALIA HELD A S UNDER: 10. WHAT IS A PROVISION? THIS IS THE QUESTION WHIC H 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 R ESOURCES 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 R ECOGNIZED. I.T.A. NO. 4794/MUM/2007: ASSESSMENT YEAR: 2001-02 I.T.A. NO. 6078/MUM/2008: ASSESSMENT YEAR: 2002-03 I.T.A. NO. 3237/MUM/2007: ASSESSMENT YEAR: 2003-04 I.T.A. NO. 4795/MUM/2007: ASSESSMENT YEAR: 2004-05 I.T.A. NO. 3982/MUM/2008: ASSESSMENT YEAR: 2005-06 DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPN 20 11. LIABILITY IS DEFINED AS A PRESENT OBLIGATION AR ISING FROM PAST EVENTS THE SETTLEMENT OF WHICH IS EXPECTED TO RESULT IN AN OUTFLOW FROM THE ENTERPRISE OF RESOURCES EMBODYING ECONOMIC BENEFITS. 12. A PAST EVENT THAT LEADS TO A PRESENT OBLIGATION IS CALLED AS AN OBLIGATION WHICH RESULTS IN AN OUTFLOW OF RESOURCES. IT IS ONLY THOSE OBLIG ATIONS ARISING FROM PAST EVENTS EXISTING INDEPENDENTLY OF THE FUTURE CONDUCT OF THE BUSINESS OF THE ENTERPRISE THAT IS RECOGNIZED AS PROVISION. FOR A LIABILITY TO QUALIFY FOR RECOG NITION THERE MUST BE NOT ONLY PRESENT OBLIGATION BUT ALSO THE PROBABILITY OF AN OUTFLOW O F RESOURCES TO SETTLE THAT OBLIGATION. WHERE THERE ARE A NUMBER OF OBLIGATIONS (E.G PRODUC T WARRANTIES OR SIMILAR CONTRACTS) THE PROBABILITY THAT AN OUTFLOW WILL BE REQUIRED IN SET TLEMENT IS DETERMINED BY CONSIDERING THE SAID OBLIGATIONS AS A WHOLE. . 26. IN THE CASE OF PROTOS ENGINEERING CO P LTD V. DCIT 282 ITR 550 (BOM) THE QUESTION OF LAW BEFORE THE HONBLE HIGH COURT WAS AS UNDER:- 1. WHETHER THE INCOME TAX APPELLATE TRIBUNAL FAIL ED TO APPRECIATE THAT ASSUMING WHILE DENYING THAT THE ABOVE SUM OF RS.3 36 148 REP RESENTED A CONTINGENT LIABILITY THE SAME HAVING BEEN DETERMINED SCIENTIF ICALLY AND ACCURATELY WAS A LEGITIMATE DEDUCTION IN THE COMPUTATION OF THE APPE LLANTS BUSINESS INCOME? THE HONBLE BOMBAY HIGH COURT HELD THAT THE REVENUE DID NOT DISPUTE THAT SO FAR AS THE FIRST QUESTION WAS CONCERNED THE SAME WAS COVERED BY THE JUDGMENT OF THE HONBLE APEX COURT IN THE CASE OF BHARAT EARTH MOVERS V CIT [2000} 245 IT R 428 (SC). IN VIEW OF THE ABOVE DISCUSSION WE HOLD THAT FRESH ESTIMATED LIABILITY AS PER ACTUARIAL VALUATION TO THE EXTENT OF INCREMENTAL PORTION REPRESENTED AN ASCERTAINED LIAB ILITY ALLOWABLE FOR DEDUCTION IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F BHARAT EARTH MOVERS (SUPRA) AND ROTORK CONTROLS INDIA (P)LTD (SUPRA). 27. NOW COMING TO THE SECOND ASPECT OF THE ISSUE RE GARDING THE ISSUE OF DOUBLE DEDUCTION RAISED BY LD CIT (A). IN ORDER TO DECIDE THIS ISSU E WE HAVE TO REFER FIRST TO THE REVENUE ACCOUNT IN FORM B TO THE DICGIC REGULATION WHICH IS AS U NDER:- I.T.A. NO. 4794/MUM/2007: ASSESSMENT YEAR: 2001-02 I.T.A. NO. 6078/MUM/2008: ASSESSMENT YEAR: 2002-03 I.T.A. NO. 3237/MUM/2007: ASSESSMENT YEAR: 2003-04 I.T.A. NO. 4795/MUM/2007: ASSESSMENT YEAR: 2004-05 I.T.A. NO. 3982/MUM/2008: ASSESSMENT YEAR: 2005-06 DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPN 21 FORM B REVENUE ACCOUNT FOR THE YEAR ENDED 31 ST MARCH 1. DEPOSIT INSURANCE FUND AND CREDIT GUARANTEE FUND EXPENDITURE INCOME PREVIOUS YEAR PREVIOUS YEAR DEPOSIT CREDIT DEPOSIT CREDIT DEPOSIT CREDIT DEPOSIT CREDIT INSURA - GUARANTEE INSURA - GUARANTEE INSURA- GUARANTEE INSURANCE GUARANT- NCE FUND FEE FUND NCE FUND FEE FUND NCE FUND FEE FUND FUND EE FEE RS.IN LACS((RS.IN LACS (RS.IN (RS. IN (RS.IN LACS) FUND (RS.) LAKHS) LAKHS) TO CLAIMS: A) PAID DURING THE YEAR A) BALANCE OF FUND AT THE BEGINNING OF THE YEAR B) ADMITTED BUT NOT PAID ADD: ESTIMATED LIABILITY IN RESPECT OF CLAIMS INTIMATED BUT NOT ADMITTED AT THE END OF THE YEAR. LESS: ESTIMATED LIABILITY IN RESPECT OF CLAIMS INTIMATED BUT NOT ADMITTED AT THE END OF THE PREVIOUS YEAR. THE MAIN OBJECTION OF LD CIT (A) IS THAT IN THE REV ENUE ACCOUNT THE ASSESSEE HAD DEBITED THE AMOUNTS ON THE BASIS OF ACTUAL CLAIMS BEING LODGED IN TERMS OF 16 DICGC ACT AND HAD ALSO MADE A PROVISION IN THE ACCOUNT. THE METHODOLOGY A DOPTED BY THE CORPORATION AS PER THE DICGC REGULATION IS THAT AT THE END OF THE YEAR IT ESTIMATES ITS OVER ALL LIABILITY IN RESPECT OF REGISTERED BANKS AS REPRODUCED AT PARA 20 ABOVE. THIS AMOUNT IS REFLECTED ON THE EXPENDITURE SIDE. ON THE INCOME SIDE OF THE REVENUE ACCOUNT TH E OPENING BALANCE OF FUND ACCOUNT IS TRANSFERRED FROM THE BALANCE SHEET AND THE CLOSING BALANCE OF THE ABOVE ACCOUNT IS AGAIN TAKEN TO THE BALANCE SHEET. THIS PROCESS IS REPEATED EVE RY YEAR. THE RESULT IS THAT THE DIFFERENCE BETWEEN CLOSING BALANCE OF FUND AND THE OPENING BAL ANCE OF FUND REPRESENTED THE CURRENT LIABILITY AS PER ACTUARIAL VALUATION. IT IS PERTI NENT TO MENTION AT THIS STAGE THAT THE ACTUARIAL VALUATION IS BEING DONE ONLY FOR BANKS WHOSE REGIST RATION CONTINUES BUT IF A BANK HAS BEEN I.T.A. NO. 4794/MUM/2007: ASSESSMENT YEAR: 2001-02 I.T.A. NO. 6078/MUM/2008: ASSESSMENT YEAR: 2002-03 I.T.A. NO. 3237/MUM/2007: ASSESSMENT YEAR: 2003-04 I.T.A. NO. 4795/MUM/2007: ASSESSMENT YEAR: 2004-05 I.T.A. NO. 3982/MUM/2008: ASSESSMENT YEAR: 2005-06 DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPN 22 DEREGISTERED THEN THE DEPOSITS OF THE SAME BANK ARE NOT TAKEN INTO CONSIDERATION WHILE MAKING THE PROVISION. ALL THOSE CLAIMS IN RESPECT OF DE-R EGISTERED BANKS ARE DEBITED TO REVENUE ACCOUNT UNDER THE HEAD CLAIMS AS REPRODUCED ABOVE. THE N ET RESULT OF THIS ENTIRE METHODOLOGY IS THAT THE PROVISION MADE IN RESPECT OF DE-REGISTERED BANK S STANDS TRANSFERRED TO INCOME SIDE AND THE CORRESPONDING CLAIMS WHICH HAVE ACTUALLY TO BE MET BY THE CORPORATION ARE CHARGED TO THE REVENUE ACCOUNT. IF WE ANALYSE THE CLAMS AS MENTIO NED IN THE REVENUE ACCOUNT WE FIND THAT IT CONTAINS THE CLAIMS WHICH HAVE BEEN PAID DURING THE YEAR AND ALSO ESTIMATED BUT NOT PAID. IN THIS PROCESS AN ADJUSTMENT IS BEING MADE IN RESPEC T OF THOSE LIABILITIES WHICH ARE INTIMATED TO THE CORPORATION BUT WERE NOT ADMITTED AT THE END OF THE YEAR. THE ESTIMATED LIABILITY IN RESPECT OF THE CLAIMS INTIMATED BUT NOT INTIMATED AT THE EN D OF THE PREVIOUS YEAR IS DEBITED. THIS SHOWS THE POSITION OF NET CLAIMS FOR WHICH LIABILITY HAS ACTUALLY BEEN ESTIMATED BY THE CORPORATION. SINCE THE PROVISION MADE IN EARLIER YEARS IN RESPEC T OF THAT PARTICULAR BANK STANDS REVERSED THEREFORE AGAIN IN REVENUE ACCOUNT THE ESTIMATED LIABILITY HAS BEEN DULY TAKEN INTO CONSIDERATION ALONGWITH ACTUAL LIABILITY WHICH HAS BEEN ESTIMATED OR PAID DURING THE YEAR. THUS THE REVENUE ACCOUNT SEPARATELY DEALS WITH THE REGIS TERED BANKS FOR WHICH PROVISION IS MADE ON THE BASIS OF PAST EXPERIENCE AND LIABILITY WHICH WA S LIKELY TO ACCRUE IN FUTURE AND SECONDLY IN CASE OF THOSE BANKS FOR WHICH THE LIABILITY HAS ACT UALLY BEEN INTIMATED. THIS METHODOLOGY ENSURES THAT THE FUNDAMENTAL PRINCIPLE OF ACCOUNTIN G WHICH IS THAT REVENUE AND EXPENDITURE FOR EACH YEAR IS DULY MATCHED IS TAKEN CARE OF. IT ENS URES TRUE PROFITS OF A YEAR BEING DETERMINED IN TERMS OF RECOGNIZED ACCOUNTING STANDARDS. IT IS NO T AT ALL A CASE OF DOUBLE DEDUCTION BECAUSE THE PROVISION IN RESPECT OF DE-RECOGNIZED BANKS STA NDS REVERSED IN THE YEAR IN WHICH THE ACTUAL CLAIM IS LODGED. IN EFFECT THE CLAIMS IN RESPECT OF DERECOGNIZED BANKS ARE BEING SEPARATELY DEALT AND IN RESPECT OF REGISTERED BANK THEY ARE BEING SEPARATELY DEALT. IN OUR OPINION THE I.T.A. NO. 4794/MUM/2007: ASSESSMENT YEAR: 2001-02 I.T.A. NO. 6078/MUM/2008: ASSESSMENT YEAR: 2002-03 I.T.A. NO. 3237/MUM/2007: ASSESSMENT YEAR: 2003-04 I.T.A. NO. 4795/MUM/2007: ASSESSMENT YEAR: 2004-05 I.T.A. NO. 3982/MUM/2008: ASSESSMENT YEAR: 2005-06 DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPN 23 METHODOLOGY ADOPTED BY THE CORPORATION DOES NOT IN ANY MANNER COME IN CONFLICT WITH THE PROVISIONS OF INCOME TAX ACT. WE ACCORDINGLY SET ASIDE THE ORDER OF LD CIT (A). 28. IN THE RESULT THIS APPEAL OF THE ASSESSEE IS A LLOWED. 29. ITA NO.4795/M/2007 FOR THE ASSESSMENT YEAR 2004-05 IS SIMILAR TO ITA NO.3237/M/2007 FOR THE ASSESSMENT YEAR 2003-04. TH EREFORE IN LINE WITH OUR DECISION IN ITA NO.3237/M/2007 THIS APPEAL OF THE ASSESSEE IS ALLO WED. 30. IN THE RESULT THIS APPEAL IS ALLOWED. PRONOUNCED ON 30 TH MARCH 2010 SD/- (R.S.PADVEKAR) (JUDICIAL MEMBER) SD/- (S.V. MEHROTRA) (ACCOUNTANTMEMBER) MUMBAI DATED 30 TH MARCH 2010 PARIDA COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS)- MUMBAI 4. COMMISSIONER OF INCOME TAX CITY- MUMBAI 5. DEPARTMENTAL REPRESENTATIVE BENCH D MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR ITAT MUMBAI I.T.A. NO. 4794/MUM/2007: ASSESSMENT YEAR: 2001-02 I.T.A. NO. 6078/MUM/2008: ASSESSMENT YEAR: 2002-03 I.T.A. NO. 3237/MUM/2007: ASSESSMENT YEAR: 2003-04 I.T.A. NO. 4795/MUM/2007: ASSESSMENT YEAR: 2004-05 I.T.A. NO. 3982/MUM/2008: ASSESSMENT YEAR: 2005-06 DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPN 24 DATE INITIALS 1. DRAFT DICTATED ON 18.3.2010 PS 2. DRAFT PLACED BEFORE AUTHOR 19..3.2010 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER AM/JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER AM/J M 5. APPROVED DRAFT COMES TO THE SR. PS PS 6. KEPT FOR PRONOUNCEMENT ON PS 7. FILE SENT TO THE BENCH CLERK PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK 9. DATE OF DISPATCH OF ORDER I.T.A. NO. 4794/MUM/2007: ASSESSMENT YEAR: 2001-02 I.T.A. NO. 6078/MUM/2008: ASSESSMENT YEAR: 2002-03 I.T.A. NO. 3237/MUM/2007: ASSESSMENT YEAR: 2003-04 I.T.A. NO. 4795/MUM/2007: ASSESSMENT YEAR: 2004-05 I.T.A. NO. 3982/MUM/2008: ASSESSMENT YEAR: 2005-06 DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPN 25 I.T.A. NO. 4794/MUM/2007: ASSESSMENT YEAR: 2001-02 I.T.A. NO. 6078/MUM/2008: ASSESSMENT YEAR: 2002-03 I.T.A. NO. 3237/MUM/2007: ASSESSMENT YEAR: 2003-04 I.T.A. NO. 4795/MUM/2007: ASSESSMENT YEAR: 2004-05 I.T.A. NO. 3982/MUM/2008: ASSESSMENT YEAR: 2005-06 DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPN 26