2013 (5) TMI 902 - AT - Income Tax

ITAT Hyderabad: Appeals Allowed for Stat Purposes, Penalty Upheld

Dy. Commissioner of Income-tax, Circle – 2 (3), Hyderabad Versus M/s Greenko Energies Pvt. Ltd. (formerly known as M/s Sri Balaji Biomass Power Plant Pvt. Ltd.

The ITAT Hyderabad allowed appeals for statistical purposes in ITA Nos. 3, 5, 6 & 7/Hyd/2013, remitting the issue to the AO with directions similar to ... - ISSUES PRESENTED AND CONSIDERED 1. Whether differential amounts invoiced but not settled (being subject matter of litigation and interim judicial orders) accrued as income under the mercantile system of accounting for the relevant previous years or ought to be recognised only on receipt/when finally determined. 2. Whether, in the facts where tariff rates were under judicial dispute and interim orders fixed a provisional payable amount, the assessee's treatment of revenue at the lower/provisional rates conforms to applicable accounting principles (including prudence and Accounting Standard 9) and is acceptable for income-tax assessment. 3. Whether the Assessing Officer was justified in making additions on account of the higher invoiced rate notwithstanding ongoing litigation and interim orders, and whether such additions must be restored or remitted for assessment when the tariff attains finality. 4. Whether penalty under section 271(1)(c) can be imposed where additions arise solely from a disputed tariff difference which the assessee did not treat as income in view of pending litigation and interim judicial orders (i.e., whether the return contained inaccurate particulars or involved concealment). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Accrual of differential invoiced amounts under mercantile accounting Legal framework: Under the mercantile (accrual) system, income is generally recognised when earned/receivable. Accounting principles, including prudence and Accounting Standard 9 (Revenue Recognition), guide whether an uncertain claim should be recognised on accrual or only on receipt/realisation. Tax accrual is governed by the statutory concept of income accruing or becoming due in the previous year; however, recognition must reflect enforceability and certainty of entitlement. Precedent treatment: The Tribunal previously considered the identical factual matrix for an earlier year and held that where entitlement to differential amount was uncertain and subject to judicial adjudication, mere raising of invoices did not render the differential amount accrued/receivable for tax purposes. That approach was followed by the CIT(A) and reiterated by the Tribunal in the present appeals. The analysis relied upon judicial authorities (including apex court pronouncements) that require concealment or furnishing of inaccurate particulars to invoke penalty provisions. Interpretation and reasoning: The Court reasoned that when entitlement to a claim is contingent on the outcome of litigation and no enforceable debt exists against the purchaser (or no claim was asserted within limitation to create an actionable right), the differential cannot be treated as income merely because an invoice was raised. The existence of interim judicial orders (which fixed a provisional payable amount lower than the invoiced rate) and prolonged litigation rendered the higher invoiced differential uncertain. Prudence and AS 9 support recognising only the amount not disputed or provisionally admitted. The Tribunal emphasised that accounting on mercantile basis does not mandate recognition of disputed claims; the taxpayer may validly defer recognition when facts warrant. Ratio vs. Obiter: Ratio - Where the right to receive an invoiced differential is contingent on judicial determination and not presently enforceable, the differential does not accrue as income under accrual accounting for tax purposes; it may be taxed when the tariff is finally determined or the amount is received. Obiter - observations on circumstances in which a claim should be raised within limitation to create an enforceable right. Conclusion: The tribunal upheld the CIT(A)'s deletion of additions; the correct approach is to defer recognition of the disputed differential until final determination/receipt and, if later determined in favour of the taxpayer, tax it in the year to which the income relates or when received. Issue 2 - Conformity with Accounting Standard 9 and prudence in revenue recognition Legal framework: Accounting Standard 9 requires revenue recognition only when it is probable that economic benefits will flow to the entity and the amount can be measured reliably. The principle of prudence counsels against recognising uncertain gains. Precedent treatment: The Tribunal applied AS 9 and prudence to conclude that the assessee's accounting (recognising only amounts not under dispute and receivable under interim orders) was acceptable. Tribunal decisions referenced treat similar tariff disputes consistently, directing taxation only when finality is reached. Interpretation and reasoning: Given interim orders limited APTRANSCO's payment obligation and the substantive tariff remained subject to adjudication, recognising the full invoiced amount would violate prudence and AS 9. The assessee's practice of accounting only for amounts actually admitted/received was found to present a true and fair view of financial affairs. Ratio vs. Obiter: Ratio - Application of AS 9/prudence permits deferral of recognition of disputed revenue where enforceability and certainty are lacking. Obiter - comparison with other cases where final judicial determination altered recognition. Conclusion: The assessee's accounting treatment conformed to AS 9 and prudence; revenue recognition on accrual of disputed tariff differences was rightly deferred. Issue 3 - Treatment of Assessing Officer's additions and directions on remittance/further assessment Legal framework: Assessing Officer may add amounts to income where he finds that income has accrued/been received but taxpayer has not offered it for tax. However, additions must be consistent with principles of accrual and enforceability. Precedent treatment: The Tribunal reversed the AO's additions in the present appeals, following its own prior finding for an earlier year and other tribunal orders which permitted taxation only upon final adjudication. Interpretation and reasoning: Since the rate dispute was pending and interim orders limited payable amounts, the AO's reliance on invoices alone was insufficient to treat the differential as accrued income. The Tribunal directed that, if and when tariff attains finality or amounts are actually received, the AO should bring such income to tax in the relevant assessment year. Appeals were allowed for statistical purposes and issues remitted to AO with identical directions for subsequent taxation if applicable. Ratio vs. Obiter: Ratio - Additions based solely on disputed invoices where entitlement is uncertain are inappropriate; assessment may be revisited when finality is reached. Obiter - procedural remarks on remittance and timing of taxation. Conclusion: The AO's additions are not sustainable; the matter is remitted with direction to tax only upon final determination/receipt. Issue 4 - Validity of penalty under Section 271(1)(c) for disputed tariff differences Legal framework: Section 271(1)(c) penalises concealment of particulars or furnishing inaccurate particulars of income. Penal liability requires a finding that particulars in the return were incorrect, inaccurate, or that there was concealment. Precedent treatment: The Tribunal relied on authoritative precedent establishing that making a claim which is unsustainable in law, without more, does not constitute furnishing inaccurate particulars; penalty cannot be invoked unless particulars in the return are shown to be incorrect or false. Interpretation and reasoning: Since the quantum addition was deleted and the assessee's accounting treatment was justified by interim orders and prudence, there was no concealment or inaccurate particulars in the return. The penalty founded solely on the deleted addition could not be sustained. The Tribunal followed the ratio that absence of incorrect particulars precludes invocation of section 271(1)(c). Ratio vs. Obiter: Ratio - Penalty under s.271(1)(c) is not attracted merely because a claim is disallowed; there must be a positive finding of inaccurate particulars or concealment. Obiter - reference to policy of strict construction of penalty provisions. Conclusion: Penalty under section 271(1)(c) for the deleted addition was unsustainable and was dismissed.