Real income and verified nexus principles govern taxability of surcharge, interest disallowance, foreign exchange loss and depreciation adjustments.

Late payment surcharge on overdue electricity dues is not taxable on accrual where collection remains uncertain and the real income test is not satisfied; the corresponding MAT adjustment also falls away. Interest disallowance on additions to fixed assets and capital work in progress requires a verified nexus between borrowed funds and the capital outlay, and own funds may support a presumption against disallowance. Unwinding interest on vendor liabilities, being a notional IND-AS 109 item already neutralised in computation, should not distort eligible profit under section 80IA. Foreign exchange loss on liabilities for the Bawana project is not capital under section 43A where no foreign asset was acquired by the assessee. Depreciation adjustments under normal provisions and MAT require factual verification of the applicable rate and period of use.

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Issues: (i) Whether late payment surcharge on overdue electricity dues was taxable on accrual basis despite uncertainty of recovery and whether the corresponding adjustment under section 115JB was sustainable; (ii) Whether proportionate interest expenditure was disallowable in relation to additions to fixed assets and capital work in progress; (iii) Whether unwinding interest on vendor liabilities could be excluded from deduction under section 80IA; (iv) Whether foreign exchange loss on liabilities connected with the Bawana project was capital in nature or allowable as revenue expenditure; (v) Whether the depreciation adjustments made under normal provisions and under section 115JB were sustainable.

Issue (i): Whether late payment surcharge on overdue electricity dues was taxable on accrual basis despite uncertainty of recovery and whether the corresponding adjustment under section 115JB was sustainable

Analysis: The surcharge arose from delayed payment of power purchase dues and the assessee had consistently recognised it only on receipt because the DISCOMS had persistently defaulted and recovery remained uncertain. The record showed continuing disputes, pending recovery proceedings, and disclosure of the position in the accounts. The principle applied was that mere mercantile accounting does not justify taxation of income that has not really accrued, and certainty of collection is relevant in determining accrual. Once the surcharge itself was not taxable on the basis of real income, the corresponding MAT adjustment also could not survive.

Conclusion: The addition on account of late payment surcharge and the related MAT addition were deleted, in favour of the assessee.

Issue (ii): Whether proportionate interest expenditure was disallowable in relation to additions to fixed assets and capital work in progress

Analysis: The disallowance was made by applying an average cost of debt to the closing figure of capital work in progress and fixed asset additions, without establishing a direct nexus between borrowed funds and the impugned investments. The material showed that one project had already been commissioned earlier, that one project was funded from equity infusion, and that direct asset purchases were made from internal accruals. The governing approach is that interest disallowance under section 36(1)(iii) depends on borrowed capital being used for the relevant capital outlay, and where own funds are sufficient, the investment is ordinarily presumed to have come from those funds. However, the factual verification regarding the Bamnauli project and the supporting documents was not complete on record.

Conclusion: The issue was remitted to the Assessing Officer for fresh verification and consequential decision, resulting in partial relief to the assessee.

Issue (iii): Whether unwinding interest on vendor liabilities could be excluded from deduction under section 80IA

Analysis: The amount represented a notional finance cost arising from IND-AS 109 accounting for vendor liabilities on a present value basis. The assessee had already added back this notional item in computing taxable income and had also adjusted it while computing eligible profit of the power undertaking. Since the item was not an allowable expenditure under the Income-tax Act and had already been neutralised in the computation, it could not be treated as a ground to deny or reduce the deduction from the eligible business profit. The adjustment made by the Assessing Officer would have distorted the eligible profit computation without any real tax basis.

Conclusion: The disallowance under section 80IA was deleted, in favour of the assessee.

Issue (iv): Whether foreign exchange loss on liabilities connected with the Bawana project was capital in nature or allowable as revenue expenditure

Analysis: The foreign exchange loss arose from year-end restatement of contractual liabilities payable to the contractor for the domestic power project. The project asset was located in India, the contractor had imported certain equipment, and the assessee had not itself acquired a foreign asset from abroad. The conditions for applying section 43A were therefore not satisfied. The loss was instead governed by the ordinary foreign exchange principles and was recognised in accordance with the accounting treatment for monetary items. On those facts, the loss was allowable and not capital to be added to the asset cost.

Conclusion: The foreign exchange loss was allowed as revenue expenditure, in favour of the assessee.

Issue (v): Whether the depreciation adjustments made under normal provisions and under section 115JB were sustainable

Analysis: The assessee claimed depreciation in accordance with the special rate applicable to power generation and distribution undertakings, and also claimed 50% depreciation where assets were put to use for less than 180 days. The Assessing Officer recalculated the depreciation by applying an incorrect method and without properly verifying the depreciation schedule and supporting records. Since the assessee had already furnished the relevant audit schedule and the correct statutory method had to be tested against the actual usage and acquisition dates, the matter required factual verification rather than outright disallowance. The same verification was necessary for the MAT computation because the adjustment depended on the correctness of the underlying depreciation claim.

Conclusion: The depreciation issues were remitted to the Assessing Officer for verification and fresh adjudication, resulting in partial relief to the assessee.

Final Conclusion: The appeal succeeded on the core taxability of late payment surcharge, the section 80IA adjustment, and the foreign exchange loss issue, while the interest and depreciation matters required further verification at the assessment stage.

Ratio Decidendi: Income cannot be taxed on a mercantile basis unless it has really accrued with reasonable certainty of collection, and disallowances affecting capitalisation or eligible business profits must rest on statutory conditions and verified facts rather than presumptive or mechanical computations.

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