Income Tax Appellate Tribunal - Mumbai
Deposit Insurance And Credit Guarantee ... vs Assessee on 6 October, 2003
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. The DCIT, Range 1(1),
Reserve Bank of India Building, 2nd 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
ORDER
Per Bench These five appeals listed for hearing before us are in respect of assessment years 2001- 02 to 2005-06, respectively. The assessee is a Government of India Undertaking constituted under the Deposit Insurance Credit Guarantee Act, 1961. 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 2 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. In respect of ITA No.4794/Mum/2007 for the assessment year 2001-02, the COD approval has been granted regarding assessee's ground 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 has been granted regarding assessee's ground whether ld CIT (A) erred in sustaining the addition 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, as and when the assessee gets the required approval, it can file MA for recall of Tribunal's 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. Subsequently, the assessment was reopened u/s.147 by issue of notice u/s.148 on 30.3.2006 served on the 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 income 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 3 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 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 expenditure as also on actual basis. The deduction claimed on estimated basis is as under:-
Deposit insurance Credit Total
(Rs.in lakhs) guarantee(Rs. In (Rs. In lakhs)
lakhs)
Amount for 115622,62 416,00 116038.62
estimated claims
Less estimated 63929.42 12666.00 76595.42
liability in respect of
rejected claims
39443.20
The assessee is following mercantile system of accounting; 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 rejected 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 section 44 and schedule 1 of the Income tax Act are not applicable to the assessee, the income 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 purpose of business is allowable expenditure subject to certain restriction. In other words deduction for liability on the estimate basis would not be allowable. In view of the above, I have 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 the 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 Credit Total
(Rs.in lakhs) guarantee(Rs. In (Rs. In lakhs)
lakhs)
Credit opening 43355.00 4821.00 48176.00
balance of fund
Debit closing 50074.00 7.00 50081.00
balance of fund
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 assesse 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 4 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 any bank is insured by it, on receipt of premium, the 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 respect 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 claims are received. Such Fund is created for liability in future and not for liability in presenti.
The assesse in fact is providing for a liability which 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 which is towards liability existing at the time, but the putting-aside of money which may become expenditure on happening of an event is not an expenditure. Where the liability of the assessee is dependent upon an event in future, which is not sure to happen, is only 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 in 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 crores 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.540,14,00,000/-.
6. Before ld CIT (A), the assessee had questioned the validity of reassessment proceedings which were upheld by ld CIT (A) observing that the notice u/s.148 was issued within four years from the end of the assessment year 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 us 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 5 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 "A) Number and amount of total claims intimated to you during the financial year 2000-2001 in both Deposit Insurance & Credit Guarantee.
B) Number and total amount of claim admitted in above 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 intimated 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 under 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 amounting to Rs.1186.76 crores and 0.47 crores respectively.
12.2 In this regard it is submitted that the participating banks lodge their claims whenever they are unable to meet the claim of depositors. Similarly whenever banks fail to realize the advances claims are made on the Corporation. We are instructed to state that various formalities have been prescribed by the 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 and merit of the claim is decided based on the details and information provided by the claimant banks. Many a times full information required by the Corporation are not furnished and formalities prescribed by the Corporation are not found to have been fully complied 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 Standard-4 issued by the Institute of Chartered Accountants of India provision for liability in respect of such claims is made in the accounts based on past experience.
12.4 After scrutiny of such pending claims if any of these claims are ultimately rejected the liability provided is written back and the amount involved is considered as income of the year of rejection.
12.5 Your Honour's attention is invited to paras (viii) and (ix) of the Significant Accounting Policies forming part of the audited statements of accounts which deal with the treatment that is being given to types claims discussed 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 accounts 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 6 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 12.7 We respectfully submit that though principle of 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, 109 ITR 229(Cal.)"
9. Ld Counsel for the assessee with reference to above 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 dated 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 years as well as this year and the assessee's claim of estimated claim had been rightly allowed and 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 which, it was, inter alia, pointed out that the assessee was following same practice since the start of the company and for more than 20 years this position has been accepted.
10. Ld Counsel for the assessee pointed out that since the audit had not accepted the department's stand, therefore, the notice had been issued to the assessee. He, therefore, submitted that it was not the AO who entertained the requisite belief regarding escapement of income but it was on account of audit query that the belief had been imposed upon the AO. Ld Counsel for the assessee relied on the following decisions:-
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 7 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. Ld D.R. appearing for the revenue took strong exception to the internal correspondence being relied upon by the assessee. He submitted that these documents cannot be considered unless it is shown that they have been obtained properly. Ld D.R. further submitted that in the reasons recorded, the AO has pointed out that how the 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 debited to P&L account was contingent in nature or not. He only required the assessee to furnish the details of actual payments being made. He submitted that there may be various channel 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 submitted that the decision relied upon by ld Counsel for the assessee in Indian and Eastern Newspaper 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 scope of reassessment proceedings has considerably been enlarged. He submitted that as per 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 initiation 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 submitted that ld CIT (A)'s order has been passed on 20.2.2007, whereas the reassessment proceedings had been initiated on 30.3.2006. Therefore, ld CIT (A)'s order cannot be based of notice u/s.148. In regard to ld D.R.'s objection regarding papers relating to audit objection, ld Counsel 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 8 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. We have considered the rival submissions and perused the record of the case. As far as the ld D.R.'s preliminary objection regarding papers relating to audit query is concerned, we are of the opinion that since the papers had been obtained after due approval of ld CIT and had also been referred before COD, therefore, same can be taken cognizance of. However, it is the settled principle that the reasons have to be considered per se to find out whether the AO had reasons to believe regarding escapement of income or not. Therefore, the audit objection may be a source of information to the AO but ultimately the AO's 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 circumstances which influenced the formation of belief of AO. It is admitted fact that the system of accounting has been followed by the assessee since considerable long period and no such dispute was ever 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 revenue 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 that the allowability of any expenditure is to be examined with reference to Income tax Act and not with reference to any other regulation but when a consistent practice is being followed regularly 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 regarding escapement of income. The AO has to point out as to what was the basis for entertaining requisite belief regarding escapement of income and same should be borne out from the reasons recorded. It may be in the form of decision of the Hon'ble Supreme Court or any evidence coming to his notice which was not available at the time of assessment. But in the present case, none of these requirements are fulfilled and the AO merely stated that even in A.Y. 2003-04, the assessee's 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 9 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 rejected and denied because the assessee was following mercantile system of accounting and, therefore, it cannot be allowed the claim of any expenditure 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 assessee. The estimated liability debited to revenue account was also in respect of claims. Therefore, it cannot be said that the AO did not examine the assesse's account with reference to this aspect. Further, in any view of the matter, admittedly, the AO has reopened the assessment because in A.Y. 2003-04, he has taken a contrary view on same set of facts. No new material 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 Hon'ble Supreme Court in the case of CIT v. Kelvinator of India Ltd.,(2010) 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 substitution of section 147 of the I.T.Act, 1961 by the Direct Tax laws (Amendment) Act, 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. Hence, after April 1, 1989, the AO has power to reopen an assessment, provided there is "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 belief."
In view of the above discussion, we allow the ground taken by the assessee.
14. In the result, appeal for the assessment year 2001-02 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 10 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. 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 difference 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 company had filed its return of income declaring total income at Rs.17,74,04,52,986/-, which was subsequently revised to Rs.17,67,78,74,563/-. The assessee is a Corporation which is 100% subsidiary of RBI controlled and managed by the Reserve Bank of India. From the copy of audited accounts in form No.3CD, the AO, inter alia, noticed the following note regarding method of accounting:
"The method of accounting is generally on accrual basis in accordance with the Accounting Policies. The recognition of items of income 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 accounted for on accrual basis unless otherwise stated.
ii) ....
iii) .....
iv) .....
v) ......
vi) ......
vii) ......
viii) Provision for year end liability in respect of claims intimated but not admitted pertaining to credit guarantee fund is made on prudential basis taking into consideration the past trends.
ix) Conformity with the Accounting Standard AS-4 issued by the Institute of Chartered Accountants of India adequate provision is made towards the liability estimated to devolve under the Deposit Insurance Scheme on the events like liquidation/amalgamation of week banks occurring between 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 11 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
x) Adequate provision is made on the basis of actual 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 expenditure 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 observed that a sum of Rs.517,36,90,000/- had been claimed as expenses on account of estimated liability 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 explanations:
"The above adjustment includes addition and deduction 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 written back in the year of final payment. The Corporation makes provision for deposit insurance claims are made in respect of banks under liquidation/amalgamation/reconstruction on receipt of advices from the regulatory departments of RBI/Registrar of Corporative Societies, based on the figures of deposits available with the Corporation. This is as per the provisions of Section 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
12 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 terms of which "where an order for the winding up or 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 accordance 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." Section 16 has similar provision in respect of amalgamation, reconstruction, etc, while preparing the revenue accounts of the Corporation, inter alia, the provisions required to be made during the year towards deposit insurance claims on the above 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 receipt of list of deposits from the concerned authority under section 17 of the Act which essentially prescribes time limits for submitting the lists."
From the assessee's explanation, the AO concluded that in respect of estimated liability, unless the procedure for quantification of liability, as submitted 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 contingent in nature, the AO added Rs.5,17,36,90,00,000/- as assessee's 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 and had debited a sum of Rs.83100.00 lakhs towards balance of fund. The assessee had furnished the following explanation in this regard:
"In this connection we have to state that the Corporation is engaged in the business of providing insurance cover on deposits accepted by the insured banks for which the Corporation receives premium constituting the principal source of revenue. The only other major source of income is from investments of the excess moneys of premium received from the principal business. In the business of deposit insurance, the receipt of premium as well as the settlement of insurance claims are inextricably bound with each other and, therefore, it the primia received are taken note of in a year, the liability in respect of the claims is also to be taken note of in the same year. The liability is not contingent- it is a definite and certain liability embedded with the premium received as far as the extension of insurance cover is concerned. Only the 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. The appropriateness of I.T.A. No. 4794/Mum/2007: Assessment year: 2001-02 I.T.A. No. 6078/Mum/2008: Assessment year: 2002-03 13 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 quantification of the liability may kindly be seen from the size of the actual liability in subsequent period vis-à-vis the actuarial liability."
The assessee pointed out that this practice had been 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 revised which provision is reversed in the next year. It was pointed out that effectively by passing, the entry by reversing the last year & providing fresh as per actuarial valuation, the Corporation 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 which may or may not arise in future depending upon the happening or non-happening of a future event. He, accordingly, disallowed the assessee's 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 department's appeal is not before us and, therefore, we are refraining 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 AO's action, inter alia, observing 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 addition on accrual basis could not be allowed.
20. Ld Counsel for the assessee referred to the Deposit Insurance and Credit Guarantee Corporation Act, 1961 and pointed out that this Corporation was established for the purpose of insurance of deposits and guaranteeing of credit facilities 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 14 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 therewith or incidental thereto. He pointed out that the basic function of the Corporation is to provide insurance cover in respect of deposits received 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, 1961 (DICGC) and referred to the revenue account prescribed under the Regulation. He pointed out that as per these regulations; the assessee was maintaining its deposit insurance funds and credit guarantee funds. He submitted that the methodology followed regarding this fund is that at the end of every year, actuarial valuation is being carried out in order to estimate the liability of the Corporation against the deposit insurance premium received by the Corporation. 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 received 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 Section 31 of DICGC Act and pointed out that as per the said section, the Corporation is required to make provisions for all its liabilities and for all other matters for which provision is necessary or expedient. Ld Counsel referred to page 36 of Annual Accounts contained in the paper Book and pointed 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 and 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 15 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 accrue but the very nature of assessee's activity warrant 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 that the liability is not contingent liability when scientifically determined having regard to the events 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(Kerala)
ii) Bharat Earth Movers v CIT, 245 ITR 428(SC)
iii) Commissioner of Inland Revenue v. Privy Council Mitsubishi Motors, 222 ITR 697.
21. Ld D.R. appearing for the revenue submitted that the incremental provision made by the assessee is contingent in nature because it is purely based on assumption that some bank will go into liquidation and then liability will be fixed against the assessee. He submitted that it is not an ascertained liability; therefore, it could not be 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 31st March, 2003 Run off every year.
ii) Assessable deposits : 20% of the deposits as at 31st 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 indicated 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 16 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 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 cash basis and secondly on accrual basis because it will lead to double deduction. He relied on the decision of the Hon'ble Supreme Court in the case of Southern Technologies Ltd v. JCIT, 320 ITR 577 (SC), wherein, the Hon'ble supreme Court has held that Reserve Bank Directions, 1998 are only disclosure norm and they have nothing to do with the computation of 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 perused 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, denied the assessee's 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 liability 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 17 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 the First Schedule. Thus, in sum and substance, he held that incremental amount debited to fund account was in the nature of provision and thus, 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 have 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 Corporation, 1961" w.e.f. 15th July, 1978. It took over the undertaking of the Credit Guarantee Corporation of India Limited, a public limited company promoted by Reserve Bank of India on 14th 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 extended 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 the deposit insurance funds and not with the credit guarantee funds of the Corporation. The Corporation's objective is to provide for the benefit of depositors in banks, insurance against the 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 which is funded by the premium received from registered banks. Chapter III of the DICGC Act 1961 deals with registration of banking companies and co-operative banks as insured banks and 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 Corporation 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 18 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 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 been de-registered on account of cancellation of registration. Ld CIT (A) has proceeded on the assumption that unless section 16 comes into play, there is no liability which the Corporation is required to meet and, therefore, whatever incremental provision has been made in the funds, the 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 it's liabilities and for all other matters for which provision is necessary or expedient, including any contribution to the staff and superannuation funds, the Corporation shall transfer the balance, if any, or any of it's income in its General Fund to one or more reserve funds to be utilized in such manner and for such purposes as the Corporation may deem fit."
25. Thus, it is evident that the assessee was required to make all the necessary provision for its liability which may accrue in future. This is also 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 banks. The receipt of premium by the Corporation immediately makes it liable for any claim 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 liabilities which were likely to arise keeping in view its past experience. The receipt of premium was inextricably 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 upon past experience, then it cannot be said that it is a contingent liability. The basic objective 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 19 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 meet the liabilities in future. One cannot comprehend a situation where the Corporation will keep on receiving the premium from various banks but it will never be called upon to meet any liability. It was the past experience of banks going 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 happening or non happening of an event which primarily implies that the event may not at all happen also. If the happening of an event can reasonably be inferred from all aspects being taken into consideration then a provision, if made on scientific basis, is treated as an ascertained liability, as held by the Hon'ble Supreme Court in the case of Bharat Earth Movers v CIT, 245 ITR 428 (SC). The Hon'ble Supreme Court has held that the liability should be capable of being estimated with reasonable certainty though the actual quantification may not be possible at the time of making provision. In the present case, only quantification took place in terms of section 16 of DICGC Act but the assumption of liability is as per the terms of section 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 scientific estimate on the basis of past experience and data alongwith current information about the possible claims for which formal intimation had not been received. The Hon'ble Supreme Court in the case of Rotork Controls India (P)Ltd v. CIT, 180 Taxman 422 (SC) has, inter alia, held as under:
"10. 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.
I.T.A. No. 4794/Mum/2007: Assessment year: 2001-02 I.T.A. No. 6078/Mum/2008: Assessment year: 2002-03
20 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. Liability is defined as a present obligation arising 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 obligations 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 recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. Where there are a number of obligations (e.g product warranties or similar contracts) the probability that an outflow will be required in settlement 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 Hon'ble High Court was as under:-
"1. Whether the Income tax Appellate Tribunal failed to appreciate that assuming while denying that the above sum of Rs.3,36,148 represented a contingent liability, the same having been determined scientifically and accurately was a legitimate deduction in the computation of the appellant's business income?
The Hon'ble 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 Hon'ble apex Court in the case of Bharat Earth Movers v CIT [2000} 245 ITR 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 liability allowable for deduction in view of the decision of the Hon'ble Supreme Court in the case of Bharat Earth Movers (supra) and Rotork Controls India (P)Ltd (supra).
27. Now coming to the second aspect of the issue regarding the issue of double deduction raised by ld CIT (A). In order to decide this issue, we have to refer first to the revenue account in Form B to the DICGIC Regulation, which is as under:-
"
I.T.A. No. 4794/Mum/2007: Assessment year: 2001-02 I.T.A. No. 6078/Mum/2008: Assessment year: 2002-03 21 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 Form B Revenue Account for the year ended 31st 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 revenue 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 adopted 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, the 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 every year. The result is that the difference between closing balance of fund and the opening balance of fund represented the current liability as per actuarial valuation. It is pertinent to mention at this stage that the actuarial valuation is being done only for banks whose registration 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 22 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 deregistered then the deposits of the same bank are not taken into consideration while making the provision. All those claims in respect of de-registered banks are debited to revenue account under the head "claims" as reproduced above. The net result of this entire methodology is that the provision made in respect of de-registered banks 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 mentioned 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 respect 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 end 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 respect 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 registered banks for which provision is made on the basis of past experience and liability which was likely to accrue in future and secondly in case of those banks for which the liability has actually been intimated. This methodology ensures that the fundamental principle of accounting which is that revenue and expenditure for each year is duly matched, is taken care of. It ensures true profits of a year being determined in terms of recognized Accounting Standards. It is not at all a case of double deduction because the provision in respect of de-recognized banks stands 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 23 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 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 allowed.
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. Therefore, in line with our decision in ITA No.3237/M/2007, this appeal of the assessee is allowed.
30. In the result, this appeal is allowed.
Pronounced on 30th March, 2010
Sd/- Sd/-
(R.S.PADVEKAR) (S.V. MEHROTRA)
(JUDICIAL MEMBER) (ACCOUNTANTMEMBER)
Mumbai, Dated 30th 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
24 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
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/JM
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
25 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
I.T.A. No. 4794/Mum/2007: Assessment year: 2001-02
I.T.A. No. 6078/Mum/2008: Assessment year: 2002-03
26 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