2021 (5) TMI 629 - AT - Income Tax

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

The Tribunal dismissed the revenue's appeals and allowed the assessee's cross-objections, granting relief on various issues such as prior period expenses, ... Deduction on account of prior period expenditure - CIT-A had deleted the said disallowance by stating that this is a recurring issue from earlier years and the said issue has been decided in favour of the assessee by his predecessor for the Asst Year 2001-02 - HELD THAT:- The assessee company is engaged in the business of generation and distribution of electricity. The return of income for the Asst Year 2004-05 was filed by the assessee company on 29.10.2004 declaring total loss of ₹ 415,79,84,240/-. We find that the ld AO on verification of various details filed by the assessee company in the return of income and during the course of assessment proceedings observed that assessee had debited prior period expenditure to the tune of ₹ 501,72,79,228/- and claimed the same as deduction during the year under consideration and was asked to furnish the details with evidences to prove that the said expenditure got crystallised during the Asst Year 2004-05. We find that the assessee had replied before the ld AO by drawing specific reference to the relevant annexure to the Tax Audit Report and by stating that the prior period expenditure debited in the books mainly pertain to expenditure in respect of which, a provision was made in earlier year and the exact amounts have been ascertained in the year under consideration and exact amounts have been ascertained in the year and hence the differential amount between provision and actual sum has been debited as prior period expenditure. As submitted that the said expenditures are mainly in the nature of incentives payable to staff, payment of fees to contractors, payment of arrears to suppliers of power etc. Detailed statements giving account head wise, location code wise were furnished before the ld AO. The assessee also drew the attention of the ld AO that assessee is required to maintain its books of accounts as per Rule prescribed u/s 69 of Electricity Supply Act, 1948, which mandates disclosure of prior period expenditure separately in the books. As CIT-A had deleted the said disallowance by stating that this is a recurring issue from earlier years and the said issue has been decided in favour of the assessee by his predecessor for the Asst Year 2001-02. We further find that this tribunal in Asst Year 2001-02 in assessee’s own case vide its order in [2015 (9) TMI 1682 - ITAT MUMBAI] had upheld the action of the ld CIT-A. Disallowance of Capital Expenditure written off - HELD THAT:- We find that the write off capital expenditure on infructuous / abandoned projects has been accounted by the assessee in its books of accounts in accordance with ‘The Electricity (Supply) (Annual Accounts) Rules, 1985’ which is mandatorily to be followed by the assessee company. The said rules also mandate that the expenditure incurred on identification, survey and feasibility studies before the project is considered for sanction or rejection and later if the said project is rejected, then the full amount of expenditure shall be charged to the revenue as infructuous capital expenditure in the year in which the project is rejected. Hence it could be safely concluded that the assessee had written off the expenditure in accordance with the mandate provided by the aforesaid rules. It is not in dispute that the project got rejected during the year under consideration. As per letter addressed by assessee company to The Executive Engineer 400KV L.C.Division, Kalwa, wherein it was specifically pointd out the Chief Engineer (Tr.Plng) Mumbai had informed that the work of 400KV Tarapur-Boisar Line with extention unit 3 and 4 (2 *500MW) shall be executed by Power Grid Corporation of India Ltd i.e other than M.S.E.B (assessee herein) . Accordingly, the assessee had intimated in the said letter that the amounts incurred towards capital expenditure has been written off in the appropriate head amounting to ₹ 15.60 lakhs. CIT-A had given a categorical finding that Capital expenditure incurred by the assessee was not doubted by the ld AO, said expenditure was incurred for the purpose of extension of project was not doubted by the ld AO and said extension project has been given up by the assessee and hence the asset generated thereon is not in use. These factual observations were not controverted by the revenue before us. - Decided against revenue. Disallowance u/s 43B - deduction for payment of electricity duty made by the assessee - HELD THAT:- As decided in own case [2015 (9) TMI 1682 - ITAT MUMBAI] the electricity duty collected by the licensee from the consumers is so done by the licensee as an agent of the State and, hence, the same cannot be considered to a trading receipt in the hands of the licensee. It does not constitute income of the licensee and cannot be included in the licensee's income for the purpose of computation of income tax. It is not a business receipt of the licensee which the licensee collects on its own behalf in connection with its business of generating and supplying electricity. The licensee does not collect the electricity duty for its own consumption or utilization. If the licensee collects the duty but does not pay the same to the Government, the statute provides mechanism for the Government to recover the same from the licensee. Even iii a case where the licensee is unable to recover the duty but recovers the energy charges, the statutes still provides a procedure for the Government to recover the duty either from the consumer or from the licensee. This view of ours finds support from the decision of Commissioner of Income Tax-vs.-Devatha Chandraiah [1983 (4) TMI 6 - ANDHRA PRADESH HIGH COURT]. Though the said case deals with sales tax, the principle laid down in that case supports our view. The mischief that Section 43B of the Income Tax Act intended to present, is taken care of by the provisions of the Bengal Electricity Duty Act itself. - Decided in favour of assessee. Disallowance of loss on account of obsolescence of fixed assets, flood, cyclone, fire etc - Disallowance of Deferred Revenue Expenditure written off and Disallowance on account of write off of intangible assets - HELD THAT:- As decided in assessee's own case [2015 (9) TMI 1682 - ITAT MUMBAI] we direct the ld AO to grant depreciation on loss on obsolescence of fixed assets, grant deduction for loss fixed assets due to flood, cyclone, fire etc and grant deduction for intangible assets written off. Disallowance of expenses incurred towards cost of raising finance - HELD THAT:- We find that the ld CITA applied the proviso to section 36(1)(iii) of the Act which is applicable from Asst Year 2003-04 onwards by stating that all expenses on borrowed funds could be allowed to be capitalised until the asset is put to use and accordingly upheld the action of the ld AO. As relying on assessee's own case [2019 (8) TMI 1708 - ITAT MUMBAI] we direct the ld AO to grant deduction towards cost of raising funds for both the Asst Years in appeal before us. Disallowance of Penal Interest in respect of capital liabilities - allowability of interest on delayed payment of purchase of assets payable to Ahmedabad Cantonment Board - CIT-A deleted the addition - HELD THAT:- We find from letter dated 15.11.2006 filed before the ld AO by the assessee that this sum represent interest on balance amount (interest on delayed payment) of purchase of assets payable to Ex.Licensee viz M/s Ahmedabad Cantonment Board , Aurangabad and that the same is payable as per C.E. (Comm) letter No. CE(Com)/PG/Acctts-32/832 dated 23.3.2004 by the assessee. Hence this is a statutory payment made by the assessee which is squarely compensatory in nature and hence cannot be construed as penal in nature. Accordingly, the provisions of Explanation to Section 37(1) of the Act would not be applicable to the same. Moreover, the said interest is similar to the interest payable in the sum to REC which has been allowed by the ld CITA. We find that the nature of both the transactions are similar. Hence we find that the ld CITA is not justified in upholding the disallowance on account of ₹ 16,060/- alone. 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.