2022 (6) TMI 838 - AT - Income Tax

Tribunal upholds most deletions in tax assessment, remands Rs.40 crores issue for fresh review. Assessee wins repair expenditure appeal.

The Tribunal upheld the deletions made by the learned CIT(A) on various grounds, except for the issue pertaining to the addition of Rs.40 crores, which ... Prior period expenditure - Addition of legal and professional charges - AO has disallowed the claim by treating such expenses as prior period expenses i.e., not pertaining to the year under consideration - as submitted relevant assessment year is the fifth year of existence of the assessee company pursuant to demerger of MSEB and pursuant to demerger, assets and liabilities of MSEB to the extent it pertained to and were specifically allocable to the transmission undertaking were transferred to the assessee - HELD THAT:- It cannot be denied that it is a general practice among the Consultants to raise their invoices upon conclusion of the matters before the concerned authorities after the orders are passed by the said authorities. It is highly unlikely in such a case that the orders are passed by the concerned authority within the very same assessment year to which the matter pertains. Even if we consider the assessment year under consideration, as an example, the assessment order was passed on 14/03/2013, and the impugned order was passed on 03/02/2015, while the assessment year under consideration is 2010–11. In such a scenario, if the Tax Consultant following its general practice raises the invoice upon conclusion of the matter after passing of the order by the concerned authority, we are of the considered view that such expenditure cannot be treated as prior period expenses. Particularly, it is only when the invoices for legal and professional services are raised by the Consultant, the liability arises / crystallizes in the hands of the assessee and it is only in that year such expenditure will be allowable to the assessee - Decided against revenue. Addition of overstatement of interest and finance charge - CIT(A) deleted the addition - HELD THAT:- We find that on similar issue, the Co–ordinate Bench of the Tribunal in assessee”s own case in ACIT v/s Maharashtra State Electricity Transmission Co. Ltd [2021 (7) TMI 490 - ITAT MUMBAI] held that the interest accrued liability was transferred to the assessee on demerger/unbundling of the erstwhile MSEB; and as the said liabilities in question pertained to the earlier year, the same, thus, could not have been added during the year under consideration as an unexplained cash credit u/s 68 - We find no infirmity in the impugned order passed by the learned CIT(A) on this issue. Accordingly, ground no.2, raised in Revenue's appeal is dismissed. Disallowance of prior period expenses - HELD THAT:- As relying on own cases [2021 (2) TMI 733 - ITAT MUMBAI] we find no infirmity in the order of the ld. CIT(A) granting relief to the assessee in respect of prior period expenditure - as the assessee is one of the successor companies to the erstwhile MSEB, thus, respectfully following the aforesaid decisions rendered in case of erstwhile MSEB, we find no infirmity in the impugned order passed by the learned CIT(A) on this issue. Thus, ground no.3, raised in Revenue”s appeal is dismissed. Addition on account of notional increase in employee’s cost - surplus in planned assets pursuant to valuation exercise by actuary on the investment held by the CPF Trust - HELD THAT:- On a perusal of the record, it is evident that surplus in planned assets pursuant to valuation exercise by actuary on the investment held by the aforesaid CPF Trust was for the purpose of complying with the requirements of Accounting Standard–15. The same was done to compute the fair market value of the investments held in CPF Trust and to arrive at the shortfall / surplus of the investments over the liabilities of the assessee. The assessee has reduced the surplus in planned assets while computing the employee cost for the year under consideration. As the employee cost was reduced in the Profit & Loss Account, the said amount was also reduced from the income to nullify its effect. In the present case, it is not in dispute that the said entry is a notional entry. Thus, all the consequences in respect of the notional entries will follow and such an entry cannot be treated as an income if in excess / surplus. This being the accepted position, we do not find any infirmity in the impugned order passed by the learned CIT(A). Thus, ground no.4, raised in Revenue”s appeal is dismissed. Disallowance being provision for interest shortfall on Provident Fund liability - Revenue has only denied the claim of the assessee on the basis that it is merely based on the provisions so made and there is no actual expenditure by the assessee during the year under consideration - HELD THAT:- It cannot be denied that in case of actual payment made by the assessee in respect of Provident Fund such payments are allowable under section 43B of the Act. However, in the present case, the claim made by the assessee is on the basis of the provisions made for interest shortfall on Provident Fund liability. As the assessee is following mercantile system of accounting, in view of the decision of the Hon'ble Supreme Court in Bharat Earth Movers [2000 (8) TMI 4 - SUPREME COURT] which has rightly been followed by the learned CIT(A,) such a liability which has arisen during the year under consideration is allowable even though the same may have to be discharged at a future date. In view of the above, we find no infirmity in the impugned order passed by the learned CIT(A) on this issue. Accordingly, ground no.5, raised in Revenue”s appeal is dismissed. Addition with regard to advance paid by the assessee - assessee submitted that the advance paid for lease finance project was transferred / allocated to the assessee in terms of the transfer scheme notification no. Reform 1005/CR 9061(1) MRG–5, dated 04/06/2005, i.e., these amounts were received by the assessee in accordance with the transfer scheme and pertained to erstwhile MSEB for the earlier year - DR. submitted that the learned CIT(A) instead of deciding this issue has set aside the same to the file of the Assessing Officer - HELD THAT:- With effect from 01/06/2001, the learned CIT(A) no longer has power to set aside the matter and can only confirm, reduce, enhance or annul the assessment in an appeal against the assessment order. Thus, the impugned order on this issue to the extent the matter is restored to the Assessing Officer for de novo verification of the details as directed to be filed by the assessee is contrary to the provisions of section 251(1)(a) of the Act. In view of the above, we direct the learned CIT(A) to adjudicate this issue de novo. The learned CIT(A) shall have the liberty to seek remand report, if any, from the Assessing Officer. Needless to say that before passing any order, opportunity of hearing shall be granted to assessee. Accordingly, grounds no.6 and 6.1, raised in the Revenue's appeal are allowed for statistical purpose. Nature of expenses - Disallowance of expenditure on repairs of plant and machinery - AO making a disallowance of expenditure on repairs to plant and machinery by holding the same to be capital in nature - HELD THAT:- In the present case, it is an accepted fact that the assessee is engaged in the business of transmission of electricity and thus, it cannot be denied that the assessee is required to maintain the transmission lines for which in the normal course of business, the assessee is also required to incur certain expenditure for the purpose of same. As per the assessee, the expenditure incurred is required for preservation, maintenance, proper utilisation or for restoring the existing assets to its original condition and hence, the said expenditure is to be allowed under section 31(i) of the Act. In the present case, apart from a mere allegation by Revenue that by way of these expenditure substantial addition in the assets were made, the Revenue has not proved by way of any material that new asset has come into existence by incurring these expenditure by the assessee. Further, the Revenue has also not doubted the policy of assessee whereby assessee suo-moto capitalise its repairs and maintenance expenditure, which needs to be capitalised. Further, unlike other observations of the C&AG on other aspects, the C&AG has not found any wrong in accounts of the assessee on this issue. At this stage, it is also pertinent to note the description on sample invoices, forming part of the paperbook reads as– Fixation of vibration dampers cum spacers by Hot Line method including replacement & tightening of Nut bolts of Existing jumpers cone/dead end of towers. Thus, in view of the above, we direct the Assessing Officer to delete the disallowance made by treating the expenditure on repairs of plant and machinery as capital in nature. Accordingly, grounds raised by the assessee are allowed. Issues Involved:1. Deletion of addition of Rs.8.80 lakh in respect of legal and professional charges.2. Deletion of addition of Rs.1530.50 lakhs on account of overstatement of interest and finance charges.3. Deletion of disallowance of prior period expenses of Rs.28,71,38,221.4. Deletion of addition of Rs.12.86 crores on account of notional increase in employee's cost.5. Deletion of disallowance of Rs.5,54,08,761 being provision for interest shortfall on Provident Fund liability.6. Addition of Rs.40 crores with regard to advance paid by the assessee.7. Disallowance of expenditure on repairs to plant and machinery - Rs.2,27,75,501.Detailed Analysis:1. Deletion of Addition of Rs.8.80 Lakh in Respect of Legal and Professional Charges:The issue pertains to the deletion of an addition of Rs.8.80 lakh for legal and professional charges. The assessee, a successor company to the erstwhile Maharashtra State Electricity Board (MSEB), debited these charges to its Profit & Loss Account based on apportioned brought forward losses and unabsorbed depreciation. The Assessing Officer disallowed the claim by treating such expenses as prior period expenses. The Tribunal held that the liability for these expenses crystallized during the year under consideration when the invoices were raised by the Tax Consultant, and thus, the expenditure is allowable. The Tribunal found no infirmity in the order passed by the learned CIT(A) and dismissed the Revenue's appeal on this ground.2. Deletion of Addition of Rs.1530.50 Lakhs on Account of Overstatement of Interest and Finance Charges:The issue involves the deletion of an addition of Rs.1530.50 lakhs on account of overstatement of interest and finance charges. The Tribunal referred to its earlier decision in the assessee's own case for the assessment year 2008-09, where it was held that the liabilities in question pertained to earlier years and could not be added as unexplained cash credit under Section 68 of the Act. The Tribunal upheld the deletion of the addition and dismissed the Revenue's appeal on this ground.3. Deletion of Disallowance of Prior Period Expenses of Rs.28,71,38,221:The issue relates to the deletion of disallowance of prior period expenses amounting to Rs.28,71,38,221. The Tribunal referred to its earlier decisions in the case of erstwhile MSEB, where it was held that prior period expenses, which crystallized during the year under consideration, are allowable. The Tribunal found no infirmity in the order passed by the learned CIT(A) and dismissed the Revenue's appeal on this ground.4. Deletion of Addition of Rs.12.86 Crores on Account of Notional Increase in Employee's Cost:The issue pertains to the deletion of an addition of Rs.12.86 crores on account of notional increase in employee's cost. The Tribunal held that the surplus in planned assets pursuant to valuation exercise by an actuary on the investment held by the CPF Trust was a notional entry and could not be treated as income. The Tribunal upheld the order passed by the learned CIT(A) and dismissed the Revenue's appeal on this ground.5. Deletion of Disallowance of Rs.5,54,08,761 Being Provision for Interest Shortfall on Provident Fund Liability:The issue involves the deletion of disallowance of Rs.5,54,08,761 being provision for interest shortfall on Provident Fund liability. The Tribunal held that the provision for interest shortfall on Provident Fund liability, based on the actuary's certificate, is a business liability arising during the year under consideration and is allowable as per the decision of the Hon'ble Supreme Court in Bharat Earth Movers v/s CIT. The Tribunal upheld the order passed by the learned CIT(A) and dismissed the Revenue's appeal on this ground.6. Addition of Rs.40 Crores with Regard to Advance Paid by the Assessee:The issue pertains to the addition of Rs.40 crores with regard to advance paid by the assessee. The Tribunal noted that the learned CIT(A) set aside the matter to the file of the Assessing Officer for de novo verification, which is beyond the powers now available to the learned CIT(A). The Tribunal directed the learned CIT(A) to adjudicate the issue de novo and allowed the Revenue's appeal for statistical purposes.7. Disallowance of Expenditure on Repairs to Plant and Machinery - Rs.2,27,75,501:The issue involves the disallowance of expenditure on repairs to plant and machinery amounting to Rs.2,27,75,501. The Tribunal held that the expenditure incurred for fixing vibrating dampers-cum-spacers for maintenance of transmission lines is in the nature of current repairs and is allowable under Section 31(i) of the Act. The Tribunal directed the Assessing Officer to delete the disallowance and allowed the assessee's appeal on this ground.Conclusion:The Tribunal upheld the deletions made by the learned CIT(A) on various grounds, except for the issue pertaining to the addition of Rs.40 crores, which was remanded back to the learned CIT(A) for de novo adjudication. The Tribunal allowed the assessee's appeal regarding the disallowance of expenditure on repairs to plant and machinery.