2004 (12) TMI 14 - AAR - Income Tax

Inclusion of Advance Against Depreciation in Book Profit under Income-tax Act

National Hydroelectric Power Corporation Ltd., In re

National Hydroelectric Power Corporation Ltd., In re - 273 ITR 171 (AAR), 193 CTR 594, 441 Taexpert 2004 Issues Involved:1. Inclusion of Advance Against Depreciation (AAD) in the computation of 'book profit' under section 115JB of the Income-tax Act.2. Treatment of AAD as income under section 28(1) of the Income-tax Act (not pressed by the applicant).Issue-wise Detailed Analysis:1. Inclusion of AAD in Book Profit Computation under Section 115JB:The applicant, a public sector undertaking engaged in hydroelectric power projects, sought an advance ruling on whether the AAD should be included in the computation of 'book profit' under section 115JB of the Income-tax Act in the year of receipt or the year the depreciation relates to. The applicant argued that AAD, a tariff component meant to facilitate loan repayment, should be treated as revenue received in advance and not included in book profit computation for MAT purposes.The Commissioner contended that the applicant received AAD as part of the sale price, which accrues at the time of supplying power. The book profit must be calculated based on the profit and loss account prepared according to the Companies Act, and AAD cannot be deducted for this purpose.The Authority examined section 115JB, which mandates that book profit should be computed based on the profit and loss account prepared as per Parts II and III of Schedule VI to the Companies Act. The Explanation to section 115JB specifies what can be added or deducted from the book profit. The Authority found no provision in section 115JB or the Companies Act justifying the deduction of AAD from the total sale price for book profit computation.The applicant relied on the opinion of the Expert Advisory Committee of the Institute of Chartered Accountants of India, which suggested treating AAD as revenue received in advance. However, the Authority found this opinion based on a misconception of facts, as AAD is a tariff component meant for loan repayment and not an advance.The Authority referred to the Supreme Court's decision in Apollo Tyres Ltd. v. CIT, which held that the Assessing Officer cannot go behind the net profit shown in the profit and loss account except as provided in the Explanation to section 115J. The Authority noted that the provisions of section 115JB are similar to those of section 115J, and the ratio of the Apollo Tyres case applies.The Authority concluded that AAD, being part of the sale price, accrues as income in the year of receipt. The applicant's practice of deducting AAD from the total sale price and showing it as income received in advance was not in accordance with the statutory provisions. The Authority ruled that AAD must be included in the computation of book profit under section 115JB in the year of receipt.Conclusion:The Authority ruled that the amount of advance against depreciation (AAD) is to be included for the computation of book profit under section 115JB of the Income-tax Act in the year of receipt. The applicant's practice of treating AAD as revenue received in advance and deducting it from the total sale price was not justified under the statutory provisions. The ruling aligns with the Supreme Court's decision in Apollo Tyres Ltd. v. CIT, emphasizing that the Assessing Officer cannot alter the net profit shown in the profit and loss account except as specified in the Explanation to section 115JB.