Electricity plant operator wins right to claim revenue expenditure and depreciation despite suspended power purchase agreement

The ITAT Delhi dismissed the Revenue's appeal regarding disallowance of expenditure claimed by an assessee operating an electricity generation plant. Despite the power purchase agreement being suspended by HPCC since May 2005 following HERC's order, the tribunal held that the assessee could claim revenue expenditure and depreciation. The tribunal agreed with CIT(A) that temporary business suspension was justified, the assessee maintained the plant in running condition for potential resumption, and deemed income declaration was not required until fixed tariff realization. The case involved a pending SC suit regarding tariff payments.

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Issues Involved:
1. Whether the business of the assessee was discontinued or temporarily suspended.
2. Whether the assessee is eligible to claim business expenditure and depreciation during the period of suspension.
3. Applicability of the matching principle in accounting for expenses and revenue.

Issue-wise Detailed Analysis:

1. Whether the business of the assessee was discontinued or temporarily suspended:
The primary issue was whether the business activities of the assessee were discontinued or merely temporarily suspended. The assessee argued that the business was temporarily suspended due to a dispute with Haryana Power Generation Corporation Limited (HPGCL) under a 15-year Power Purchase Agreement (PPA) which was suspended by HPGCL w.e.f. 10.05.2005. The assessee maintained that the suspension did not amount to discontinuance or closure of business, citing judicial precedents such as Lakshmi Narayan Board Mills Pvt. Ltd. v. CIT and L.VE. Vairavan Chettiar v. CIT, which support the notion that a business can be considered ongoing even if temporarily inactive. The Tribunal agreed with the assessee's contention, noting that the business was temporarily suspended due to ongoing litigation and that the infrastructure was maintained to resume operations once the dispute was resolved.

2. Whether the assessee is eligible to claim business expenditure and depreciation during the period of suspension:
The Assessing Officer (AO) had disallowed the expenses and depreciation claimed by the assessee, arguing that since no revenue was declared, no expenses could be allowed. The AO relied on the matching principle, which requires expenses to be recognized in the same period as the related revenues. However, the Learned Commissioner of Income Tax (Appeals) [Ld. CIT(A)] allowed the claim, noting that the company had incurred expenses to maintain the plant and was engaged in the business of power generation since 1995. The Tribunal upheld the Ld. CIT(A)'s decision, stating that the expenses incurred were necessary for maintaining the plant in anticipation of resuming business operations. The Tribunal also referenced judicial precedents such as CIT v. Vishwanath Bhaskar Sathe and Whittle Anderson Ltd. V. CIT, which support the allowance of depreciation even when machinery is idle but kept ready for use.

3. Applicability of the matching principle in accounting for expenses and revenue:
The AO had argued that the matching principle required the assessee to declare deemed revenue to claim the related expenses. However, the Tribunal found that the fixed tariff (deemed generation) had not accrued to the company due to the suspension of the PPA and ongoing litigation. The Tribunal agreed with the Ld. CIT(A) that until the fixed tariff was realizable, it could not be declared as income. The Tribunal concluded that the assessee was eligible to claim the expenses and depreciation as the business was only temporarily suspended and the plant was maintained in anticipation of resuming operations.

Conclusion:
The Tribunal dismissed the Revenue's appeal, agreeing with the Ld. CIT(A) that the business was temporarily suspended and not discontinued. The assessee was entitled to claim the expenses and depreciation incurred during the period of suspension, as these were necessary for maintaining the plant and keeping it ready for future operations. The matching principle did not preclude the allowance of these expenses, as the fixed tariff had not accrued due to the suspension of the PPA and ongoing litigation. The appeal filed by the Revenue was dismissed, and the order was pronounced on 23rd August, 2024.

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