State PSU's electricity surcharge income taxed on receipt basis not accrual basis due to disputable nature

The ITAT Delhi held that surcharge income on delayed electricity payments by a state PSU should be taxed on receipt basis rather than accrual basis. The tribunal found the surcharge was disputable, not mandatorily payable, and hypothetical rather than real income under the assessee's accounting policy. The AO was directed to verify when surcharge was actually realized and offered as income. Regarding Section 14A disallowances, the tribunal admitted additional CA certificate evidence and remanded the matter to AO for fresh examination, directing consideration of whether investments were made from own funds rather than borrowed funds.

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Issues Involved:
1. Chargeability of income-tax attributable to surcharge income offered by the assessee on a receipt basis.
2. Disallowance of certain expenses by invoking the provisions of Rule 8D read with Section 14A of the Income-Tax Act, 1961.

Detailed Analysis:

Issue 1: Chargeability of Income-Tax Attributable to Surcharge Income

The primary issue is whether the surcharge for delayed payment should be taxed on an accrual basis or receipt basis. The agreement for the sale/purchase of energy includes a clause for a 15% per annum surcharge on delayed payments. The assessee argued that the surcharge should be accounted for only when actually received from the customer, as the primary purpose of the surcharge is to ensure the realization of dues, and the actual receipt varies case by case.

The assessee cited the judgment of the Hon'ble Punjab & Haryana High Court in the case of CIT vs. Dakshin Haryana Bijli Vitran Nigam Ltd., which held that surcharge income should not be taxed unless actually received. The court emphasized that income tax is fundamentally a levy on income, and hypothetical income should not be taxed merely because it is recorded in the books.

The Tribunal found that the facts of the present case were similar to those in the Dakshin Haryana Bijli Vitran Nigam Ltd. case. It directed the Assessing Officer to verify when the surcharge was realized and offered as income. The grounds related to this issue were allowed, and the Assessing Officer was instructed to consider the claim of the assessee after verification.

Issue 2: Disallowance of Expenses Under Rule 8D Read with Section 14A

The second issue pertains to the disallowance of expenses by invoking Rule 8D read with Section 14A of the Income-Tax Act. Both the assessee and the Revenue appealed regarding the assessment years 2011-12 to 2015-16. The Revenue contested the relief granted to the assessee by reducing the quantum of disallowances, while the assessee challenged the sustained additions.

The assessee's counsel argued that similar disallowances had been dealt with by the ITAT in earlier assessment years (2008-09 to 2010-11), where additional evidence, specifically a CA certificate certifying the quantum of expenses incurred vis-a-vis earning of exempt income, was considered. The Tribunal admitted the additional evidence and restored the issue to the Assessing Officer for fresh examination, ensuring sufficient opportunity for the assessee to present their case.

For the assessment year 2014-15, the assessee raised an additional contention that the investments were made from their own funds, not borrowed funds, citing the judgment of the Hon'ble Punjab & Haryana High Court in CIT vs. HDFC Bank. The Tribunal directed the Assessing Officer to examine the position of own funds while deciding the disallowance under Section 14A.

Conclusion:

The appeals were allowed for statistical purposes, with the Assessing Officer directed to verify the facts and re-examine the issues based on the Tribunal's directions. The order was pronounced in the open court on 27/05/2024.

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