Tribunal upholds CIT(A)'s decision on power plant income treatment

The Tribunal upheld the CIT(A)'s decision to delete the addition made by the AO regarding the treatment of trial run income from a power plant as revenue. The Tribunal emphasized that the income should be capitalized, aligning with accounting standards and previous court decisions. The Revenue's appeal was dismissed, and the assessee's cross-objection on the reopening of the assessment was not argued and thus dismissed. The decision was pronounced on 16-11-2018.

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Issues Involved:
1. Deletion of addition made by AO on account of receipt of sale proceeds from trial run of the plant.
2. Reopening of assessment.

Detailed Analysis:

1. Deletion of Addition Made by AO on Account of Receipt of Sale Proceeds from Trial Run of the Plant:

The Revenue's appeal contested the deletion by CIT(A) of an addition made by the AO, which treated Rs. 42.75 crores received from the trial run of a power plant's Phase-II as revenue in nature and not capital. The AO argued that this income should be credited to the Profit and Loss account rather than being reduced from the capital work in progress (CWIP). The assessee, engaged in power generation, had initially filed its return for AY 2007-08, showing income under normal provisions and under section 115JB of the Income Tax Act, 1961. The AO later noticed that the income from power generation was reduced from CWIP instead of being credited to the P&L account, which led to the reopening of the assessment.

The CIT(A) deleted the addition, referencing the Supreme Court's decision in Apollo Tyres Ltd. vs. CIT (2002) 255 ITR 273 (SC), which held that the AO can only examine whether the books of account are certified by the authorities under the Companies Act. The AO cannot reassess the company's income beyond the net profit shown in the P&L account except as provided in the Explanation to section 115JB. The CIT(A) observed that the trial run income is inextricably linked to setting up the business and should be capitalized, reducing the balance of CWIP, consistent with mandatory accounting standards.

The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO erred in comparing the total receipts from different phases without considering the plant's capacity and the nature of trial run operations. The Tribunal reiterated that the trial run income should be capitalized and not treated as revenue receipts, aligning with the Supreme Court's ruling in Apollo Tyres Ltd. and the Bombay High Court's decision in CIT vs. Forever Diamonds Pvt. Ltd.

2. Reopening of Assessment:

The assessee's cross-objection regarding the reopening of the assessment was not argued and thus dismissed as not pressed.

Conclusion:

The Tribunal dismissed the Revenue's appeal, confirming that the trial run income should be capitalized and not treated as revenue receipts. The cross-objection raised by the assessee on the reopening of the assessment was dismissed as not pressed. The order was pronounced in the open court on 16-11-2018.

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