2021 (5) TMI 629 - AT - Income Tax

Tribunal grants relief to assessee in tax appeal, considers accounting methods, legal precedents

DCIT – 1 (2), Mumbai Versus M/s. Maharashtra State Electricity Board And (Vice-Versa)

DCIT – 1 (2), Mumbai Versus M/s. Maharashtra State Electricity Board And (Vice-Versa) - TMI Issues Involved:1. Deduction on account of prior period expenditure.2. Disallowance of capital expenditure written off.3. Disallowance of electricity duty under section 43B of the Income Tax Act.4. Disallowance of loss on account of obsolescence of fixed assets, flood, cyclone, fire, etc.5. Disallowance of deferred revenue expenditure written off.6. Disallowance on account of write-off of intangible assets.7. Disallowance of expenses incurred towards the cost of raising finance.8. Disallowance of penal interest in respect of capital liabilities.Detailed Analysis:1. Deduction on account of prior period expenditure:The assessee claimed a deduction for prior period expenditure, which was disallowed by the Assessing Officer (AO) on the grounds that these expenses did not crystallize during the year under consideration. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the disallowance, referencing past decisions in favor of the assessee. The Tribunal upheld the CIT(A)'s decision, noting that the assessee followed a consistent accounting method as mandated by the Electricity Supply Act, 1948. The Tribunal also cited the jurisdictional High Court's decision in CIT vs. Mahanagar Gas Ltd. that supported the assessee's method of accounting for prior period expenses.2. Disallowance of capital expenditure written off:The AO disallowed a sum of Rs. 15,59,789/- categorized as infructuous capital expenditure. The CIT(A) deleted the disallowance, noting that the expenditure was for survey work on a project that was eventually rejected. The Tribunal upheld the CIT(A)'s decision, stating that the write-off was in accordance with the Electricity (Supply) (Annual Accounts) Rules, 1985, which mandate such accounting treatment for abandoned projects.3. Disallowance of electricity duty under section 43B of the Income Tax Act:The AO disallowed Rs. 631,01,65,577/- under section 43B, considering it a trading receipt. The CIT(A) deleted the disallowance, referencing the Gujarat High Court's decision in Ahmedabad Electricity Company Ltd., which held that electricity duty collected by the assessee as a licensee is not subject to section 43B. The Tribunal upheld the CIT(A)'s order, citing similar decisions in the assessee's own case for earlier years and the Kerala High Court's decision in Kerala State Electricity Board vs. DCIT.4. Disallowance of loss on account of obsolescence of fixed assets, flood, cyclone, fire, etc.:The AO disallowed various capital expenditures, including losses due to obsolescence and natural calamities. The CIT(A) upheld the disallowance. The Tribunal, however, directed the AO to grant depreciation on the loss due to obsolescence and allow deductions for losses due to natural calamities, following its own decisions in the assessee's case for earlier years.5. Disallowance of deferred revenue expenditure written off:The AO disallowed Rs. 63,62,526/- as deferred revenue expenditure. The CIT(A) upheld the disallowance, citing a lack of details. The Tribunal reversed the CIT(A)'s decision, noting that the expenditure was for upgrading a hydro power plant and other business-related expenses, supported by documentary evidence.6. Disallowance on account of write-off of intangible assets:The AO disallowed Rs. 2,07,38,086/- as intangible assets written off. The CIT(A) upheld the disallowance. The Tribunal reversed the CIT(A)'s decision, stating that the write-off was in line with judicial precedents and the nature of the expenses (e.g., software purchases, legal fees) were business-related.7. Disallowance of expenses incurred towards the cost of raising finance:The AO disallowed Rs. 2,42,41,827/- as capital expenditure. The CIT(A) upheld the disallowance, applying section 36(1)(iii). The Tribunal reversed the CIT(A)'s decision, following the Supreme Court's ruling in India Cement Ltd. vs. CIT, which allowed such expenses as business expenditure.8. Disallowance of penal interest in respect of capital liabilities:The AO disallowed Rs. 4,55,562/- as penal interest. The CIT(A) deleted part of the disallowance but upheld Rs. 16,060/-. The Tribunal reversed the CIT(A)'s decision, stating that the interest was compensatory and not penal, thus not attracting the provisions of section 37(1).Conclusion:The Tribunal dismissed the revenue's appeals and allowed the assessee's cross-objections, providing relief on multiple grounds, including prior period expenses, capital expenditure write-offs, electricity duty, and costs of raising finance.