Real income accrual and depreciation on actual cost principles favoured the assessee in disputed receipt and asset cost claims.

Income is taxable on accrual only when it represents real income, not a disputed or hypothetical claim. Capacity charges, deemed generation charges and capacity index incentive were shown only as claimable amounts, and the dispute covered the basis, modality and verification of the charges; since the amounts were later settled and offered to tax when recovery began, they did not accrue in the year under appeal. Depreciation could not be denied merely on the assertion that the assets had nil actual cost, and the Tribunal applied its earlier approach in the assessee's case for a prior year. The assessee succeeded on both issues and the departmental appeal failed.

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Issues: (i) Whether capacity charges, deemed generation charges and capacity index incentive accrued to the assessee and were taxable in the relevant year despite the continuing dispute with the payer and later quantification by the regulatory authority; (ii) Whether depreciation could be denied on the footing that the actual cost of the assets was nil.

Issue (i): Whether capacity charges, deemed generation charges and capacity index incentive accrued to the assessee and were taxable in the relevant year despite the continuing dispute with the payer and later quantification by the regulatory authority.

Analysis: The receipts were shown only as claimable amounts in the balance sheet and not as realised income. The dispute between the parties concerned not merely quantification but the very basis, modality and verification of the charges. The regulatory authority ultimately settled the matter later, and the assessee offered the income to tax in the subsequent year when the dispute was resolved and recoveries commenced. On these facts, the amount did not represent real income that had accrued for tax purposes in the year under appeal.

Conclusion: The addition was not sustainable and the issue was decided in favour of the assessee.

Issue (ii): Whether depreciation could be denied on the footing that the actual cost of the assets was nil.

Analysis: The departmental challenge rested on the treatment of actual cost under the governing income-tax provisions. The matter was stated to be a legacy issue and the Tribunal followed its own earlier decision in the assessee's case for an earlier assessment year, applying the same reasoning to the present year.

Conclusion: The disallowance of depreciation was not upheld and the issue was decided in favour of the assessee.

Final Conclusion: The assessee succeeded on the disputed addition as well as on the depreciation issue, while the departmental appeal failed.

Ratio Decidendi: Income is taxable on accrual only when it constitutes real income and not a mere disputed or hypothetical claim; where recoverability and quantification remain unsettled and are later resolved in a subsequent year, taxation follows the year of actual crystallisation. Depreciation must be determined in accordance with the applicable income-tax treatment of actual cost and the binding approach already adopted for the assessee in an earlier year.

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