PER B.C. MEENA, ACCOUNTANT MEMBER : In both the appeals, one issue is common, therefore, both the appeals are being disposed off by this common order. ITA No.4921/Del./2010 ITA No.149/Del/2012

2. ITA No.4921/Del/2010 for the Assessment Year 2007-08 emanates from the order of CIT (Appeals)-VI, New Delhi dated 05.08.2010. The return of income was filed on 30.10.2007 declaring income at Rs.86,81,98,000/-. The company is engaged in generation of power by the operation of thermal power plant at Bokaro. The whole of the power generated is sold to the steel plant of Steel Authority of India Limited located at Bokaro. The shares of the company are owned by Damodar Valley Corporation and Steel Authority of India Limited. The Assessing Officer made an addition of Rs.74,03,000/- on account of provision for post retirement medical and settlement benefits treating the same as unascertained liability. The CIT (A) upheld the addition by holding as under :-

5. Briefly stated facts of the case are that the assessee has made a provision of Rs.74,03,000/- in the name of post retirement medical benefit. The Assessing Officer was of the view that it is an unascertained liability. He required the assessee to give details of post retirement medical benefit and to show cause as to why it should not be disallowed. It was explained by the assessee that employees, their spouses and dependents family members are eligible for medical treatment at empanelled hospitals. They are eligible for reimbursement of medical treatment in approved hospital. The fact of an employee having served and retired is a known and determined fact. The right to claim medical benefits for life is also known and determined fact. The liability on this count is definite and determined. However. This becomes an administratively complex uneconomical exercise of receiving the bills, processing and verifying them and then sending remittance. Therefore, the company obtains a Group Medical Claim insurance policy under which the retired employees make direct claims on the insurance company. In accordance to accounting standard (AS)-15 it is necessary to provide for all the known and ITA No.4921/Del./2010 ITA No.149/Del/2012 determined terminal/post retirement benefits. The post retirement benefits include gratuity and leave encashment etc. The view taken by auditors and other that the post retirement medical benefits are also part of the terminal benefits and thus they have to be provided in the accounts in terms of Accounting Standard (AS)-15. Therefore, the company has provided for the post retirement medical benefits to employees on the basis of actuarial valuation. However, the Assessing Officer rejected the assessee's submissions as the assessee did not file any details of the above amount and considering the fact that it is an 'unascertained liability', the same was disallowed. 5.2 During the proceedings before me, it was submitted that the company is liable for life to pay for the medical expenses for its retired employees in accordance to the terms of employment. The company was claiming the expenses in the year of incurring them till last year. However, due to a change in the Accounting Standards, AS-15, regarding the accounting of post-retirement benefits an actual valuation was obtained and necessary provision made in this year. Since the liability for post- retirement medical benefits is a known and determined liability, and has been provided on a scientific basis, it is an allowable provision in terms of the decision of the Hon'ble Supreme Court in the cases of Metal Box - 73 ITR 53 Bharat Earth Movers Ltd.

235 ITR 428. The Income tax Act has by Section 40A(7) and 43B(f) made the allowance of these on payment basis. No such restriction is there in the Act for not allowing the known and determined liability for "Post Retirement Medical Benefits". 5.3 I have carefully considered the submissions of ld. AR and have gone the assessment order. While making the disallowance, the Assessing Officer has specifically pointed out that the assessee has not filed any details for the amount or Rs.74,03,000/-. During the proceedings before me also no details and documents have been filed to show as to how this liability of Rs.74.03 lakhs has been worked out. In the absence of the same, it is not possible to ascertain the true nature of the expenditure and its allowability. Hence, the addition made by the Assessing Officer is upheld.

3. Assessee had challenged this in ground no.1 which read as under :- ITA No.4921/Del./2010 ITA No.149/Del/2012 The learned CIT (A) erred in confirming the action of the learned AO disallowing Rs.74.03 lakhs by holding the liability for post retirement medical benefits determined on an actuarial valuation and in accordance to Accounting Standards as an unascertained liability. Ground No.2 in this appeal is general in nature and does not require any adjudication, hence we dismiss the same.

4. Similar addition was also made in Assessment Year 2008-09 by Assessing Officer. The CIT (A) granted relief to the assessee. Now, revenue is in appeal and the ground no.1 in ITA No.149/Del./2012 read as under :- The CIT (A) has erred on facts and in law in directing the A.O. to allow the deduction claimed under the head post medical retirement benefits of Rs.29,70,000/-. Ground No.3 in this appeal is general in nature and does not require any adjudication, hence the same is dismissed.

5. We have heard both the sides on the issue. We have also perused the order of authorities below. The assessee company of was liable to pay for medical expenses of its retired employees in accordance with the terms of employment. Prior to this year, the assessee was claiming these expenses in the year of expenditure. Due to the change in the Accounting Standard in respect of the accounting of post retirement benefits, the assessee got done the actuarial valuation of these liabilities and started claiming the same on that basis. It is claimed in view of the Accounting Standard, AS-15. This claim was based on the valuation of liability on actuarial and scientific basis. In ITA No.4921/Del./2010 ITA No.149/Del/2012 such cases, the actual and exact quantification may not be possible, however, liability cannot be said to be a contingent one. Since the provision has been made on scientific basis and the assessee is following mercantile system of accounting, therefore, in our considered view, the CIT (A) was justified in deleting the addition while deciding ITA No.149/Del/2012. A liability which has already accrued though discharged on a future date would be entitled for deduction. While working out the profit & gain of the business the accrued receipts are brought to the tax, similarly, accrued liabilities due would also be entitled for deduction while working out the profit and gain of the business of the year. Computation of taxable profit for a particular year can be worked out only by deducting the actual payments made to the employees and present value of any payment in respect of the services in that particular year to be made in subsequent year. In view of this, we find the order of CIT (A) in ITA No.149/Del/2012 in order. We set aside the order of CIT (A) in ITA No.4921/Del/2010. For doing so, we also get support from the following decisions of Hon'ble Supreme Court and Hon'ble Delhi High Court. 5.1 Hon'ble Supreme Court in the case of Metal Box Company of India Ltd. vs. Their Workmen 73 ITR 53 has held as under :- Contingent liabilities discounted and valued as necessary, can be taken into account as trading expenses if they are sufficiently certain to be capable of valuation and if profits cannot be properly estimated without taking them into consideration. An estimated liability under a scheme of gratuity, if property ascertainable and its present value is discounted, is deductible from the gross receipts while preparing the profit and loss account. This is recognised in trade circles and there is ITA No.4921/Del./2010 ITA No.149/Del/2012 nothing in the Bonus Act which prohibits such a practice. Such a provision provides for a known liability of which the amount can be determined with substantial accuracy. It cannot, therefore, be termed a "reserve". Therefore, the estimated liability for the year on account of a scheme of gratuity should be allowed to be deducted from the gross profits. The allowance is not restricted to the actual payment of gratuity during the year. Where the fixed assets are revalued and the difference between its cost and the value fixed on such revaluation is credited to the capital reserve, unless the Tribunal finds that the revaluation is mala fide, the interest on the amount of the reserve should be allowed as a deduction from the gross profits. From the provisions of section 6(c) and section 7 of the Bonus Act, it is evident that the Tribunal must first estimate the amount of direct taxes on the balance of gross profits as worked out under sections 4 and 6, but without deduction bonus, then work out the quantum of taxes thereon at rates applicable during the year to the income, profits and gains of the employer and, after deducting the amount of taxes so worked out, arrive at the available surplus. This will be consistent with the rule laid down by courts and tribunals before the Act was enacted, that the bonus amount should be calculated after provision for tax was made and not before, from which Parliament does not appear to have made a departure. Hon'ble Supreme Court in the case of Bharat Earth Movers Limited vs. CIT

245 ITR 428 has held as under :- Held, reversing the decision of the High Court, that the provisions made by the assessee-company for meeting the liability incurred by it under the leave encashment scheme proportionate with the entitlement earned by the employees of the company, inclusive of the officers and the staff, subject to the ceiling on accumulation as applicable on the relevant date, was entitled to deduction out of the gross receipts for the accounting year during which the provision is made for the liability. The liability is not a contingent liability. Hon'ble Delhi High Court in the case of CIT vs. Insilco Limited 197 Taxman 55 has held as under :- Similarly it was held by the Hon'ble Delhi High Court in the case of CIT vs. Insilco Ltd. that where the provisions were estimated on the basis of actuarial calculations, the deduction ITA No.4921/Del./2010 ITA No.149/Del/2012 claimed by the assessee has to be allowed. The relevant extracts of the decision is reproduced below for ready reference:- "6. In the case of Shree Sajjan Mills Ltd (supra), the Supreme Court was examining the provision-made by the assessee towards gratuity under the Income Tax Act, 1961. The Supreme Court, after noticing the judgment in Metal Box Company (supra), crystallized its analysis at page 599 and made the following observations:- "It would thus be apparent from the analysis aforesaid that the position till the provisions of section 40A(7) were inserted in the Act in 1973 was as follows :-

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5. Provision made in the profit and loss account for the estimated present value of the contingent liability properly ascertained and discounted on an accrued basis as falling on the assessee in the year of account could be deductible either under Section 28 or section 37 of the Act." ITA 873/2008 & 1156/2008 Page 6 of 25

7. The Division Bench of this Court, while considering deductibility of a provision for warranties made by an assessee, which dealt in computers in the case of CIT vs Hewlett Packard India (P) Ltd, by its judgment passed in Appeal No. ITA 486/2006 dated 31.03.2008, upheld the deductibility of the provision for warranty on the ground that it was made on the basis of actuarial valuation being covered by the principle set out in Metal Box Company (supra). In view of the aforesaid decisions and given the fact that the provision was estimated based on actuarial calculations, we are of the opinion that the deduction claimed by the assessee had to be allowed. We find no fault with the reasoning of the Tribunal. No substantial question of law arises for our consideration." 5.2 Considering the facts of the assessees case and also the decision of Hon'ble Supreme Court and Hon'ble jurisdictional High Court, we sustain the ITA No.4921/Del./2010 ITA No.149/Del/2012 order of CIT (A) in ITA No.149/Del/2012 on this issue. We allow ITA No.4921/Del/2010 and dismiss revenues appeal on this ground.

6. The ground no.2 in ITA No.149/Del/2012 is against directing the Assessing Officer to allow the netting off of interest before determining the business profit of the assessee company.

7. The assessee company was in the process of expansion and setting up of new unit of 9th Boiler Project for generation of power. The company financed the expansion plan by raising the additional capital of Rs.30 crores by way of share application money from the shareholders, namely, Steel Authority of India Limited and Damodar Valley Corporation. The company also borrowed by way of term loan of Rs.185.66 crores. Interest/financial expenses of Rs.9,47,91,000/- were incurred during the year. The assessee company also earned interest of Rs.25,45,000/- on the deposits made with the bank by way of margin or advances for the purposes of expansion of adjusted/ credited to Incidental Expenses During Construction (IECD). Rs.4.07 crores of interest which was earned from the banks on deposits made from its temporary surplus fund as well as from employees from funds of the operational business has been admitted as taxable income to the assessee. The assessee claims that interest expenses on expansion of existing business are allowable as revenue expenditure u/s 36(1)(ii) of the Income-tax Act, 1961. The ld. AR also relied on the decision of India Cements Ltd. vs. CIT ITA No.4921/Del./2010 ITA No.149/Del/2012

60 ITR 52 (SC), CIT vs. Alembic Glass Industries Ltd. 103 ITR 715 and CIT vs. Tata Chemicals Ltd. 256 ITR 395 (Bom.). The ld. AR also submitted that interest expenses of Rs.9,47,91,000/- had been capitalized by way of transfer of incidental expenses during construction. On account of matching principle, the interest earned on deposits kept in relation to its expansion were credited to / reduced from the IEDC.

8. On the other hand, the ld. DR submitted that all the case laws relied upon by the ld. AR were related to the period prior to the insertion of proviso to section 36(1)(iii) of the Income-tax Act, 1961 w.e.f. 1.4.2004. By inserting this proviso, the legislature clearly shows their intention. This proviso does not provide that the interest accrued on the margin money invested for borrowing of capital for acquisition of an asset for extension of existing business or profession is adjustable against the interest to be paid on such borrowings. There is no provision in the law to allow such deduction. The assessee cannot be allowed to interpret the law in his own way for netting of the interest earned on the margin money. The interest income so earned on the margin money has to be taxed u/s 56 of the Income-tax Act, 1961. Interest paid on the borrowed funds cannot be claimed as expenses u/s 57 of the Income-tax Act, 1961 as the both are not inter-dependent. This interest payment was not wholly and exclusively for earning the interest income on the margin money. Ld. DR also submitted that the CIT (A) has granted the ITA No.4921/Del./2010 ITA No.149/Del/2012 relief without considering the fact that this margin money was not out of the borrowed fund which was borrowed for the purpose of expansion. The assessee has also paid the interest of Rs.508.83 lacs on other borrowings which have been claimed as revenue expenditure. Therefore, fund invested in the margin money are coming out of funds for which the interest has been claimed as revenue expenditure in the profit and loss account. Therefore, the interest earned on this FDRs with the bank cannot be allowed to be net of from the interest to be capitalized by way of transfer to incidental expenditure during construction. The CIT (A) has granted the relief without going into the fact that whether there was nexus between the borrowed funds for expansion and the margin money paid and interest earned thereon. Therefore, the reliance of CIT (A) on the decision of Hon'ble Delhi High Court in the case of CIT vs. Shree Ram Honda Power Equipment reported in 289 ITR 475 was not justified. He pleaded to set aside the order of the CIT (A).

9. We have heard both the sides on the issue. The proviso to section 36(1)(iii) of the Income-tax Act, 1961 enacts that any amount of the interest paid towards or in respect of capital borrowed for acquisition of an asset or for expansion of the existing business regardless of its capitalization in the books or otherwise would not qualify as deduction. When the assessee received the interest for the fixed deposits on the borrowed funds which could not be put to use for the purpose for which they were taken then the receipt is ITA No.4921/Del./2010 ITA No.149/Del/2012 inextricably linked to the setting of the project, it would be capital receipt and not liable to tax but ultimately be used to reduce the cost of the project. But, as pointed out by learned DR, there is no finding regarding the source of the margin money whether it was from the borrowed fund borrowed for the purpose of expansion or from the other borrowings for which the assessee has claimed the interest paid as the revenue expenditure. In absence of any such findings which could establish that such receipts were inextricably linked for expansion of the project it would not be possible to decide the issue at this stage. Therefore, we restore the issue to the file of the Assessing Officer to decide the issue de novo.

10. In the result, the appeal of the assessee (ITA No.4921/Del/2010) is allowed and the appeal of the revenue (ITA No.149/Del/2010) is partly allowed for statistical purposes. Order pronounced in open court on this 24th day of January, 2013. Sd/- sd/- (U.B.S. BEDI) (B.C. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated the 24th day of January, 2013 Copy forwarded to: 1.Appellant 2.Respondent 3.CIT 4.CIT(A)-VI, New Delhi. 5.CIT(ITAT), New Delhi. AR, ITAT NEW DELHI.