2014 (11) TMI 594 - AT - Income Tax

Tribunal confirms disallowances, remands issues, allows surcharge as compensatory expenditure

Principal Officer Kanpur Electricity Supply Company Limited Versus Dy. CIT Range VI, Kanpur

The Tribunal confirmed the disallowances of provisions for bad and doubtful debts and interest on consumer security deposits. However, it remanded issues ... Bad and doubtful debts written off disallowed – Held that:- The assessee has made provisions for bad and doubtful debts against sale of powers at 50% of incremental basis - According to the assessee, this is a policy matter and has been approved by the Board of Directors of the Company - Accordingly it claimed deduction of the same under section 36(1)(vii) of the Act, but on a careful perusal of the provisions of section 36(1)(vii) of the Act, deduction of the amount of any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year, can be allowed subject to the provisions of sub-section (2) of section 36 of the Act - Under this sub-section, only claim of deduction of bad and doubtful debts on its written off or irrecoverable can be allowed and not provision for bad and doubtful debts - The other clause (vii)(a) of section 36(1) of the Act deals with the issue of claim of provision for bad and doubtful debts made by the Scheduled Bank or non- Scheduled Bank or Corporation Bank, etc. - the assessee has claimed deduction for provisions of bad and doubtful debts under section 36(1)(vii) of the Act which only deals with actual claim of deductions - provision for bad and doubtful debts cannot be allowed u/s 36(1)(vii) – the order of the CIT(A) is upheld – decided against assessee. Interest in consumer security disallowed – Invocation of section 43B – Held that:- Assessee has made provision for payment of interest on consumer securities, but it was not in fact paid even in succeeding years, as it depends upon certain happenings or the events. If the assessee has debited a particular interest to this account, a corresponding credit entry should have been made in the accounts of the consumer - But the assessee without crediting the corresponding interest to the account of the consumers intend to claim expenditure of provision of interest on consumer securities, even the payment depends upon certain happenings or events - it is not clear that as to in how many cases interest were paid to the consumers - CIT(A) has not adjudicated the issue in detail - Considering the complexity of facts with regard to the issue of provision for interest, the is required to be remitted back to the CIT(A) for proper adjudication – Decided in favour of assessee. Electricity expenses disallowed – Invocation of section 43B – Held that:- Assessee rightly contended that electricity duty received from consumers was immediately transferred to UPPCL, the holding company which adjusted the electricity duty subsidy released by the Govt. to reduce the loss of the company - The debit note was also accordingly issued by UPPCL to KESCO, the assessee - But these facts were not brought to the notice of the AO and the AO has invoked the provisions of section 43B of the Act for the reason that the assessee-company has not paid the amount on the date of filing of the return of income - new facts require proper verification by the Assessing Officer – thus, the matter is remitted back to the AO for proper verification – Decided in favour of revenue. Non-payment of interest to U.P. Power Corporation Ltd. – Held that:- UPPCL is a holding company of the assessee and as per contractual arrangement, the assessee-company was required to pay interest to UPPCL - But since the payment of interest is not statutory liability, provisions of section 43B of the Act cannot be invoked - Therefore, the disallowance made by the AO having invoked the provisions of section 43B of the Act is not correct- the order of the CIT(A) is upheld – Decided against revenue. Trade tax liability and employee cost treated as prior paid expenses – Held that:- During the course of assessment proceedings, the AO has asked the assessee to furnish explanations, as these expenses appear to be prior period expenses, but the assessee made a general explanation which was not accepted by the AO and made disallowance- Whereas before the ld. CIT(A) assessee has taken altogether a different stand by raising a different plea - The new explanation was neither confronted to the AO nor the CIT(A) examined the correctness of the claim, making necessary enquiry by himself - the new explanation furnished by the assessee was not properly examined by the CIT(A) and it requires a fresh adjudication/examination by the AO – thus, the matter is remitted back to the AO for fresh adjudication – Decided in favour of revenue. Allowability of relief on surcharge of power purchase due to late payment – Held that:- Clause 3 deals with late payment charges, according to which the assessee was required to pay additional charge at the rate equal to 2% per month or part thereof on the amount which is subject to delay - The text and tenure of the clause speaks that late payment surcharge is of compensatory nature on account of delay in payment - Therefore, it can be treated as revenue expenditure - the payment is of compensatory nature and no disallowance is called for – the order of the CIT(A) is upheld – Decided against revenue. Issues Involved:1. Disallowance of bad and doubtful debts written off.2. Disallowance of interest on consumer security deposit under section 43B.3. Disallowance of electricity duty under section 43B.4. Disallowance of interest to U.P. Power Corporation Ltd. under section 43B.5. Disallowance of trade tax liability and employees cost as prior period expenses.6. Disallowance of surcharge on power purchase due to late payment.Issue-wise Detailed Analysis:1. Disallowance of Bad and Doubtful Debts:The assessee appealed against the disallowance of Rs. 24,33,42,403/- for bad and doubtful debts. The Assessing Officer (AO) disallowed this provision, stating that under section 36(1)(vii) of the Income-tax Act, 1961, only actual bad debts written off are allowable, not provisions. The CIT(A) upheld this decision. The Tribunal confirmed the CIT(A)'s order, emphasizing that provisions for bad and doubtful debts are not allowable under section 36(1)(vii), which allows only actual written-off debts.2. Disallowance of Interest on Consumer Security Deposit:The AO disallowed Rs. 1.50 crores of interest on consumer security deposits, invoking section 43B, as it was not paid but only provisioned. The CIT(A) confirmed this disallowance. The Tribunal found that the provision for interest was not paid even in subsequent years and depended on certain events. The Tribunal remanded the issue back to the CIT(A) for detailed adjudication, requiring verification of whether any interest was paid or adjusted to consumer accounts.3. Disallowance of Electricity Duty:The Revenue appealed against the CIT(A)'s decision to allow Rs. 9,90,82,803/- for electricity duty, which the AO had disallowed under section 43B. The CIT(A) found that the duty was transferred to UPPCL and adjusted against government subsidies. The Tribunal remanded the issue back to the AO for verification of these facts, stating that if the duty was indeed adjusted as claimed, section 43B would not apply.4. Disallowance of Interest to U.P. Power Corporation Ltd.:The AO disallowed Rs. 19,95,19,863/- of interest payable to UPPCL under section 43B. The CIT(A) allowed the claim, noting it was a contractual obligation, not a statutory one. The Tribunal upheld the CIT(A)'s decision, agreeing that section 43B does not apply to contractual interest payments between the assessee and its holding company, UPPCL.5. Disallowance of Trade Tax Liability and Employees Cost:The AO disallowed Rs. 7,78,488/- for trade tax liability and Rs. 13,42,805/- for employees cost, treating them as prior period expenses. The CIT(A) allowed these claims based on new explanations provided by the assessee. The Tribunal found that the CIT(A) did not properly examine these new explanations and remanded the issue back to the AO for fresh adjudication and verification.6. Disallowance of Surcharge on Power Purchase:The AO disallowed Rs. 38.50 lakhs for surcharge on power purchase, treating it as a penalty. The CIT(A) found it to be compensatory in nature and allowed the claim. The Tribunal upheld the CIT(A)'s decision, noting that the surcharge was compensatory as per the Bulk Supply Agreement, which required additional charges for late payments.Conclusion:The Tribunal confirmed the disallowances related to bad and doubtful debts and interest on consumer security deposits but remanded the issues of electricity duty, interest to UPPCL, trade tax liability, and employees cost for further verification. The surcharge on power purchase was deemed compensatory and allowed as a revenue expenditure. The appeals were partly allowed for statistical purposes.