2013 (4) TMI 634 - AT - Income Tax

Income Recognition Criteria Upheld for AP Transco Billing; Interest Rate Swap Income Classification Confirmed

The Tribunal allowed the assessee's appeal regarding the non-accrual of the disputed amount billed to AP Transco, emphasizing income recognition when ... Revenue Recognition - Reimbursement of advance tax - Application of Accounting Standard No. 9 issued by the ICAI - held that:- it cannot be said that the amount disputed by APTRANSCO has really accrued to the assessee company in the assessment year under dispute. Only because, the assessee company has raised the bill for the said amount as per the Power Purchase Agreement. - Decided in favor of assessee. Interest income - the company availed foreign currency loans for setting up of a power plant at Libor Plus Fix Rate. In order to hedge the risk on account of exchange rate fluctuations, the company entered into an interest rate swap contract with State Bank of India, Koti, Hyderabad fixing the LIBOR rate. As the interest rates grew during the year, the assessee sold the above contract and made a profit of Rs 3,00,09,300. This profit was disclosed as income from business. - held that:- earning from business activity is independent from earning from saving on account of this kind of hedging. - Order of AO treated the same as income from other sources sustained. - Decided against the assessee. Issues Involved:1. Accrual of income from bills raised against AP Transco.2. Classification of profit from interest rate swap contract as business income or income from other sources.Issue-wise Detailed Analysis:1. Accrual of Income from Bills Raised Against AP Transco:The primary issue revolves around whether the amount of Rs. 7,21,16,000 billed against AP Transco represents income accruing to the appellant during the previous year under consideration. The assessee argued that although a bill was raised, AP Transco did not accept the claim, and the amount was written off during the year itself. The CIT(A) held that the amount accrued to the appellant during the previous year, which the assessee contested, citing ongoing arbitration proceedings and the non-appointment of an arbitrator by AP Transco.The Tribunal referenced its earlier decision in the assessee's own case for A.Y. 2001-02, where it was held that income does not accrue merely because a bill is raised if there is uncertainty over its receipt due to ongoing litigation. Citing Accounting Standard No. 9 and the Supreme Court's decision in Godhra Electricity Company Ltd V/s. CIT, the Tribunal emphasized that income should be recognized only when it is reasonably certain that the ultimate collection will be made. The Tribunal concluded that the disputed amount did not accrue to the assessee during the assessment year under consideration and should be taxed in the year it is actually received. Consequently, the grounds raised by the assessee were allowed, and the ground raised by the Revenue was dismissed.2. Classification of Profit from Interest Rate Swap Contract:The second issue pertains to whether the profit of Rs. 3,00,09,300 from an interest rate swap contract should be classified as income from business or income from other sources. The assessee contended that this profit, derived from hedging the risk on account of exchange rate fluctuations related to foreign currency loans for setting up a power plant, should be considered business income. The CIT(A) and the Assessing Officer, however, classified it as income from other sources.The Tribunal examined the nature of the income and concluded that the profit from the interest rate swap contract was not directly derived from the business activity of power generation. The Tribunal noted that even if the assessee had not carried on the business of power generation, it could still have earned this income from hedging activities. Therefore, the Tribunal upheld the CIT(A)'s decision that the profit from the interest rate swap contract should be classified as income from other sources, dismissing the assessee's argument.Conclusion:In summary, the Tribunal allowed the assessee's appeal regarding the non-accrual of the disputed amount billed to AP Transco, aligning with the principle that income should be recognized only when its receipt is reasonably certain. On the other hand, the Tribunal dismissed the assessee's appeal concerning the classification of profit from the interest rate swap contract, affirming that it should be treated as income from other sources rather than business income. Consequently, the assessee's appeal was partly allowed, and the Revenue's appeal was dismissed.