Demerger depreciation and disputed receivables: uncrystallised income cannot be taxed until it becomes real income.

Depreciation on assets received through demerger was not denied merely because the transfer was treated as cost-free; the assets were taken at written down value with corresponding liabilities, so the actual cost had to be recognised for depreciation purposes, and the disallowance was rejected. Disputed capacity charges, deemed generation charges and capacity index incentive were not taxed in the year under appeal because the receivable remained uncrystallised and unquantified when the accounts were drawn, and only real income can be brought to tax; the later settlement and taxation on receipt supported exclusion from that year.

---

---

Issues: (i) Whether depreciation on assets transferred on demerger could be disallowed on the footing that the assets were acquired free of cost and had nil actual cost; (ii) Whether capacity charges, deemed generation charges and capacity index incentive were taxable in the year under appeal despite the dispute and later crystallisation of the receivable.

Issue (i): Whether depreciation on assets transferred on demerger could be disallowed on the footing that the assets were acquired free of cost and had nil actual cost.

Analysis: The assets were received in the course of a demerger and were reflected in the books at their written down value with a corresponding reconstruction reserve on the liabilities side. The transfer was not a case of assets being obtained without cost, because the cost was embedded in the book values and the succession of assets and liabilities arising from the restructuring had to be recognised in determining actual cost for depreciation purposes. The Tribunal also followed the consistent view taken in the assessee's own earlier years.

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

Issue (ii): Whether capacity charges, deemed generation charges and capacity index incentive were taxable in the year under appeal despite the dispute and later crystallisation of the receivable.

Analysis: The receivable had remained disputed and unquantified when the accounts were prepared, and the revenue could not be brought to tax as hypothetical income merely because the assessee followed the mercantile system. Once the regulatory dispute was finally settled and the amount payable was crystallised, the later acceptance and taxation on receipt basis in the subsequent year supported the view that no addition was warranted in the year under appeal. The Tribunal followed the settled principle that only real income can be taxed.

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

Final Conclusion: The Revenue's challenge to the deletion of both additions failed, and the assessed relief granted by the first appellate authority was upheld in full.

Ratio Decidendi: Depreciation cannot be denied on assets received through demerger where the assets are taken over at book value with corresponding liabilities, and an uncrystallised or disputed receivable cannot be taxed as income until it becomes real income.

---