In mercantile method of accounting allowability of expenditure depend on liability to pay.

In mercantile method of accounting allowability of expenditure depend on liability to pay.
SUMMARY OF CASE LAW
Once the goods have been purchased, the invoices raised and the purchase considerations are accounted for in the books of the assessee, the expenditure can be said to have been incurred as per the method of accounting – mercantile basis – followed by the assessee.
CASE LAW DETAILS
Decided by: HIGH COURT OF DELHI, In The case of: CIT v. Panacea Biotech Ltd.,
Appeal No.: ITA No. 422/ 2007, Decided on: July 27, 2009
RELEVENT PARAGRAPH
3. So far as the contention with regard to the disallowing the claim on the expenditure incurred on the purchase of two machineries is concerned, the counsel for the Revenue has urged that though with respect to the first machinery an advance payment was made within the Assessment year, with respect to the second machinery no payment at all was made. It was, therefore, urged that since expenditure was not incurred within the meaning of the provision of section 35(2)(i)(a), it was said that in the present assessment year the benefit of the same cannot be claimed and it would be entitled only in the next assessment the benefit of the same cannot be claimed and it would be entitled only in next assessment year. Per contra the counsel for the assessee has urged that the books of accounts were maintained on mercantile basis and, therefore, since the invoices were raised within the relevant financial year and since a letter of credit was already opened with respect to the second machinery, it cannot be said that expenditure was not incurred. It was argued that a debt incurred is an expenditure incurred within the meaning of the expression ‘expenditure is incurred’ occurring in section 35(2)(i)(a). The counsel for the assessee drew the attention of this Court to section 43 sub-section 2 of the Act which defines the expression “paid” to means actually paid or incurred according to the method of accounting upon the basis of which profits or gains are computed. It is not disputed by the Revenue that the books of accounts are maintained by the assessee on mercantile basis. This is also the concurrent finding of the two authorities below. In the mercantile method of accounting incurring of the expenditure is not based on payment but on the liability to pay. Once the goods have been purchased, the invoices, raised and the purchase considerations are accounted for in the books of the assessee, the expenditure can be said to have been incurred as per the method of accounting followed by the assessee. Counsel for the assessee has rightly relied upon the judgment reported as Belapahar Refractories Ltd. v. CIT, 2007 ITR 144 (Orissa) in which the Division Bench of the Orissa High Court has held that incurring of expenditure for scientific research means “to become liable to” i.e. to incur a debt and at such time the expenditure can be said to have been incurred. It was further held that the expression “incurring” includes either an actual payment or that the concerned person has become liable for payment but had not actually made payment. We agreed with this view since in the facts of this case the position which has emerged from the record is that the assessee has maintained its books on a mercantile basis.

Why Lehman Brothers Fell ?

September 15, 2008: Shockwaves went through the world financial markets as it was hit by the biggest bankruptcy known to man.
Dow Jones fell by more than 500 points, its biggest one-day drop since reopening after the September 11 attacks; more than 50 billion pounds was wiped out off London's bluechip shares as the FTSE 100 index tumbled by 213 points; Asian markets were on a selling frenzy, and 26,000 people around the world lost their jobs.
Lehman Brothers Holdings Inc, America's fourth-largest investment bank, hit by gargantuan $60 billion loss in bad real estate loans filed for bankruptcy.
And this happened just when the United States government decided that Lehman wasn't 'too big to fail'.
The fall of the 158-year-old institution that started cotton trade in the US before the American Civil War and financed the railroad that built the American nation, got battered by a large dose of bad luck, pride, arrogance and greed.
Lehman, while it was a large and complex business trading in a web of assets, supported 100 per cent mortgage loans to people with little visible means of support.
When interest rates soared, borrowers could no longer afford their monthly payments.
Other banks refused to trade with Lehman. Without the ability to trade and without investors prepared to bet on its long-term viability, Lehman effectively had no business.
The main perpetrator
Lehman went under, holding assets of $639 billion against debts of $613 billion, making it the biggest corporate bankruptcy since WorldCom collapsed in 2002.
As central banks around the world battled to stabilise the system, the US Federal Reserve eased its rules for emergency lending. It announced that it would accept company shares in return for crisis loans for the first time.
Wall Street analysts believe that Lehman Brothers' collapse was the 'hubris' of Dick Fuld, the 62-year-old chief executive of Lehman Brothers, who did not take the tell-tale signs of impending doom seriously.
Fuld -- nicknamed 'The Gorilla' for his foul temper, intimidating presence and tough talk -- rejected many bids to save Lehman because he thought that the sinking giant was much bigger than Wall Street was giving it credit for and wanted to get more price for the sale of the company.
Analysts say if the bank was sold just a week before it went kaput, it could have been saved the ignominy of a bankruptcy, but Fuld was far too adamant to see reason.
Fuld, who is estimated to have lost more than $1 billion as a result of Lehman's failure, is believed to be in the process of setting up a financial consulting firm, Matrix Advisors.
The other villains
Joe Gregory, former president and chief operating officer, Lehman Brothers was a close friend of Fuld. The pair worked together for 30 years, rising up through the bank's ranks and transforming it from a mere division of American Express to a serious contender on Wall Street.
While Fuld was in charge, Gregory was the fixer.
But in June 2008, after the bank's shares fell 25% Gregory ended the partnership.
Since his exit, he has become one of Lehman's largest individual creditors, filing a claim for $233 million in deferred compensation.
The rise and fall of Erin Callan, former chief financial officer, is perhaps one of the most enduring tales of Lehman's collapse.
A talented hedge fund adviser Callan was made the CFO in September 2007. But soon doubts were raised about her ability and others started querying the bank's capital position.
By September 2008, as Lehman collapsed, she was joining Credit Suisse to run its hedge fund advisory group. But since February 2009 she has been on indefinite paid leave.
Bart McDade, president and chief operating officer, joined Lehman in 1983. When Gregory fell, McDade was the obvious replacement.
He played a vital role in the bank's final hours, liaising with both potential buyers -- Bank of American and Barclays Capital -- as well as regulators.
After BarCap took over most of Lehman's US business, he stayed on to help with integration, leaving at the end of November. He joined Nomura, the Japanese bank which bought Lehman's London assets.
Lehman Brothers was once considered one of Wall Street's biggest dealers in fixed-interest trading. It was heavily invested in securities linked to the US sub-prime mortgage market.
When these investments were shunned as high risk, confidence in Lehman Brothers inevitably took a hit.
During the June to August period 2007, the bank had said it would make write downs of $700m as it adjusted the value of its investments in residential mortgages and commercial property.
A year later (in 2008) this figure soared to $7.8 billion. Lehman's share price plummeted more than 95 per cent.
Despite having access to cash reserves, worried investors battered the firm's shares after talks to raise billions of dollars from outside investors fell flat.
Lehman's collapse greatly intensified the financial crisis and contributed to the erosion of close to $10 trillion in market capitalisation from global equity markets in October 2008, the biggest monthly decline on record at the time.

In 2003 and 2004, with the US housing boom well underway, Lehman bought five mortgage lenders, including subprime lender BNC Mortgage and Aurora Loan Services, which specialised in Alt-A loans (made to borrowers without full documentation).
Lehman reported record profits every year from 2005 to 2007.
In February 2007, the stock reached a record $86.18, giving Lehman a market capitalisation of close to $60 billion. However, by the first quarter of 2007, cracks in the US housing market were already becoming apparent as defaults on subprime mortgages rose to a seven-year high.
As the credit crisis erupted in August 2007 with the failure of two Bear Stearns hedge funds, Lehman's stock fell sharply. During that month, the company eliminated 2,500 mortgage-related jobs and shut down its BNC unit. In addition, it also closed offices of Alt-A lender Aurora in three states.
On June 9, Lehman announced a second-quarter loss of $2.8 billion.
As the world financial markets reeled, questions were raised as to why the US government decided to let Lehman fail, specially in the backdrop of its tacit support for Bear Stearns (which was acquired by JPMorgan Chase) in March 2008.
Its collapse also served as the catalyst for the purchase of Merrill Lynch by Bank of America on the very same day of September 15.
The US government could have helped, but US Treasury Secretary Henry Paulson said that it would not use up any more taxpayer dollars to bail out Lehman Brothers as it would lead to investment banks getting away with their gambling ways.
Paulson had bailed out Fannie Mae, Freddie Mac and Bear Stearns, saying that if the government had not done so, the US housing loan market would have collapsed leading to gigantic losses for hundreds of banks all over the globe that have invested in US property.
Paulson thought that a brokerage major like Lehman, which did not have a direct connection with ordinary people who have taken on home loans, need not be bailed out as it would not cause any systemic damage to the US economy.
Lehman Brothers's was one of those extraordinary rags-to-riches story. Only here, it did not have the fairy tale ending.
Its humble origins can be traced to a small general store founded by German immigrant Henry Lehman in Montgomery, Alabama, in 1844.
In 1850, Henry Lehman and his brothers, Emanuel and Mayer, founded Lehman Brothers.
Lehman survived the railroad bankruptcies of the 1800s, the Great Depression of the 1930s, two world wars, a capital shortage when it was spun off by American Express in 1994, and the Long Term Capital Management collapse and Russian debt default of 1998.
However, despite its ability to survive past disasters, the collapse of the US housing market ultimately brought Lehman Brothers to its knees, as its exposure to subprime mortgage market proved to be a disastrous step.

For s. 47(v), share capital of the subsidiary need not be “held” in the name of the holding company

CASE LAW DETAILS
Decided by: Delhi High Court, In The case of: The Commissioner of Income Tax (Appellant) Vs. M/s.Papilion Investments Pvt. Ltd. (Respondent), Appeal No.: 4 SOT 304 (Mumbai), Decided on: 28Th August 2009.
SUMMARY OF CASE LAW
S. 47 (v) provides that a transfer of a capital asset by a subsidiary company to its holding company shall not be regarded as a “transfer” if the whole of the share capital of the subsidiary company is held by the holding company. The assessee transferred shares to its subsidiary and claimed exemption from capital gains u/s 47 (v). The AO denied exemption on the ground that as two shares of the said subsidiary were held by a director of the assessee and not by the assessee itself, the shares were not “wholly held” by the holding company and s. 47 (v) did not apply. The Tribunal upheld the plea of the assessee. On appeal by the Revenue, the High Court upheld the order of the Tribunal and upheld the following findings:
(a) Though s. 47 (v) refers to shares being “wholly held”, a strict or mechanical interpretation should not be adopted. A construction must be adopted which makes the statute effective rather than redundant. It must be construed having regard to the object and purpose which the legislature had in view in enacting the provision. K.P. Varghese 131 ITR 597 (SC) andTeja Singh 35 ITR 408 (SC) followed.
(b) Under the Companies Act it is not possible for a company to have less than two shareholders. The requirement of s. 47(v) that the whole of the share capital of the subsidiary company should be held by the holding company is certainly not the same thing as the whole of the share capital being held in the name of the holding company. If one proceeds on the basis that the entire share capital of the subsidiary company should be held in the name of the holding company, there cannot be any situation in which s. 47(v) can apply. That interpretation makes the statutory provision redundant. If the holding company has a beneficial ownership over the entire share capital, s. 47 (v) applies.
Note: The decision of the Tribunal is in ACIT vs. Papillon 4 SOT 304 (Mumbai)

TDS on arrears of 6th Pay Commission's payments

Clarification regarding deduction of tax at source from payments of second installment of arrears to Government employees on account of implementation of Sixth Central Pay Commission’s recommendations.
Circular No. 6/2009, dated 31-8-2009
Under the provisions of Section 192 of the Income-tax Act, an employer is required to deduct tax at source from any payments in the nature of salary, which inter alia also includes any arrear payments. The Implementation Cell of the Department of Expenditure, Govt of India, vide its Office Order dated 30th Aug’ 08 had stated that 40% of the aggregate arrear (first installment of arrears) would be payable during FY 2008-09. In Circular No. 09/2008 dated 29th Sept. 2008 issued from this office it was stated that during 2008-09 the tax has to be deducted at source on this 40% of aggregate arrear during FY 2008-09. The OM,F.No-1//1/ 2008-IC, of the Implementation Cell of the Department of Expenditure, Govt of India, vide its order dated 25th August, 2009 has stated that the remaining 60% of the aggregate arrear ( second installment of arrears) would be paid to the concerned Government servants during FY 2009-10. Such arrangements could be followed by State Governments also. In this regard, all the DDOs and PAOs as the case may be, in the Central/State Government and various organizations under them are advised to compute the correct tax liability of every employee on second installment of arrears drawn by him and immediately recover the full tax liability along with education cess thereon at the rates in force. The deduction of tax at source on such arrear payment should not be deferred in any circumstance. They should further ensure that the tax so recovered is paid to the account of Central Government account immediately as per the Income Tax Rules, 1962. The DDOs/PAOs are further advised that they should ensure that the PAN details of the deductees (recipient of arrears) are correctly quoted in the relevant quarterly e-TDS returns filed by them so that the Government Servants get proper credit of their tax deducted in their respective income tax returns.
DDOs/PAOs who fail to comply with the provisions of Section 192 of the Income-tax Act, 1961 would be liable to pay interest under section 201(1)/(1A) of Income Tax Act along with other penal consequences.