AI Drafter 
TaxTMI 
TaxTMI 
2004 (12) TMI 14
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....(b) depreciation and advance against depreciation (for short AAD) ; (c) return on equity; and (d) incentive for higher production. The usual life of a plant for working out component (b) is taken between 25 and 30 years. Under the rules, the total depreciation which includes AAD cannot exceed 90 per cent, of the capital cost during the life of the project but 90 per cent, of the cost is allowed to be recovered through tariff over a shorter period of 12 years. The AAD component of the tariff is meant to facilitate repayment of loans taken by a company for the equipments/projects. On capital assets depreciation is an allowable deduction under section 32 of the Act, which is calculated on the straight line method at the rates prescribed under the Electricity (Supply) Act, 1948, as notified from time to time. As an accounting policy the applicant has reduced from the total sales of the year, the amount representing the AAD component in the tariff and shown it as income received in advance on the liability side of the balance-sheet to be transferred to sales in the profit and loss account in the subsequent years, namely, when the depreciation charged in the book is more than the depreci....
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....nies Act. In the additional comments filed by the Commissioner it is added that the assessee while making the computation of income for the assessment years 1996-97 to 2000-01 used to include the said amount of AAD while working out the profits under section 28(1) of the Act. It, however, discontinued that practice after the assessment year 2001-2002. This change of stand by the applicant is not permissible in law. At the outset, we may record that question (b) is not pressed by Mr. V.U. Eradi, advocate, who appeared for the applicant. The sole question that survives for consideration is question (a) noted above. Mr. V.U. Eradi argued that the applicant prepared its profit and loss account on the basis of the advice of the Expert Advisory Committee of the Institute of Chartered Accountants of India and accordingly AAD amounting to Rs. 133.8 crores was shown as a deduction from the sales of power treating it as revenue received in advance which would be adjusted in the later years. For the accounting year ending on March 31, 2001, the total amount representing sale was Rs. 1142.8 crores after deducting AAD component of Rs. 133.8 crores. The Assessing Officer did not accept the....
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....e notification of the tariff is issued by the CERC, the individual components lose their significance and relevance; in the absence of any provision in any rule or notification, the applicant is not justified in picking up AAD, a specific item of tariff, and giving it a separate treatment in the regular accounts which are required to be maintained in accordance with the Companies Act. The AAD cannot be treated as advance tariff, if that were so, it would not have formed part of the invoiced sale price and it would also not form part of the gross sales turnover of the company. There was no case of adjustment or reduction of a particular tariff component from the gross sale, credited to the profit and loss account. The applicant itself had been adding back the AAD from the assessment year 1996-97 and when the practice was deviated from in 1998-99, the Assessing Officer added back the same, which was not disputed by the applicant in appeal. It is only after MAT provisions were made applicable to electricity generating companies from April 1, 2001, that the applicant sought an advance ruling from the Authority and in the significant accounting policies for the financial year 2001-02, i....
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....for the purpose of section 115JB. For all these reasons, the decision in Apollo Tyres case [2002] 255 ITR 273 (SC) would not apply. The further submission is that the tariff realised from the beneficiaries as per the invoice is final and no part of it is in the nature of advance as the electricity for which invoices were raised by the applicant, was not only supplied but was also consumed by the beneficiaries, therefore, the same has to be regarded as reserve in the accounts. The applicant is under the obligation to maintain its books on accrual basis as per section 209 of the Companies Act and accounting policy disclosed for maintenance of accounts. The invoice amount representing the sale of electricity has to be included in the year in which it is received for the purpose of computation of the book profit under section 115JB. In the light of the above contentions, we shall consider the aforementioned question which requires us to give an advance ruling on whether the AAD is to be included for the computation of book profits under section 115JB of the Income-tax Act in the year of receipt or in the year the depreciation relates to. Indeed the proper query should be whether AAD....
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....on, 'book profit' means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by- (a) the amounts of income-tax paid or payable, and the provision therefor ; or (b) the amount carried to any reserves, by whatever name called other than a reserve specified under section 33AC ; or (c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities ; or (d) the amount by way of provision for losses of subsidiary companies ; or (e) the amount or amounts of dividends paid or proposed ; or (f) the amount or amounts of expenditure relatable to any income to which section 10 or section 10A or section 10B or section 11 or section 12 apply, if any amount referred to in clauses (a) to (f) is debited to the profit and loss account, and as reduced by- (i) the amount withdrawn from any reserve or provision (excluding a reserve created before the 1st day of April, 1997 otherwise than by way of a debit to the profit and loss account), if any such amount is credited to the profit and loss account: Provided that where this section is applicable to an ass....
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....ts that while preparing the annual accounts including the profit and loss account, the following factors shall be the same as have been adopted for the purposes of preparing such accounts including the profit and loss account for laying before the annual general meeting of the company in accordance with the provisions of section 210 of the Companies Act. The factors referred to above are: (i) the accounting policies ; (ii) the accounting standards adopted for preparing such accounts including profit and loss account ; and (iii) the method and rates adopted for calculating the depreciation, shall be the same as have been adopted for the purpose of preparing such accounts including the profit and loss account and laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956). The second proviso speaks of the situation where the company's financial year under the Companies Act is different from the previous year under the Act. This proviso is not relevant for our purpose. For purposes of this section the Explanation appended thereto embodies the definition of "book profit" to mean the net pro....
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....m the facts of the query that this advance against depreciation will be adjusted in later years when the depreciation at rates fixed for tariff purposes exceed the advance against depreciation. In other words, the advance against depreciation is basically a timing difference." From the above excerpt of the opinion, it is noticed that the Committee proceeded on the premise that the AAD (a component of tariff) is allowed with the objective of enabling the electricity company to recover depreciation higher than that as would be allowed as per the rates of depreciation applicable as notified by the Central Government from time to time for the purpose of fixation of electricity tariff so that the company may be able to generate internal resources for the payment of loans and that this AAD will be adjusted in later years when the depreciation at the rates fixed for tariff purposes exceeds the AAD. It is expressed that the AAD "is basically a timing difference". It is also noted in the opinion that in view of para. 2.5(i) of the Guidance Note on Accrual Basis of Accounting issued by the Institute of Chartered Accountants of India "revenue is recognised as it is earned" and where revenu....
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....additional revenue to discharge the loans raised on equipment/projects, the CERC coined the expression of AAD for including it as one of the components of tariff in addition to the usual depreciation. Clause (iii) of sub-para, (b) of para. 3.5.1 of Notification No. L-7/25(1)/2001-CERC dated March 26, 2001, issued by the CERC provides thus: "Advance against depreciation (AAD), in addition to allowable depreciation, shall be permitted wherever originally scheduled loan repayment exceeds the depreciation allowable as per schedule and shall be computed as follows : AAD = Originally scheduled loan repayment amount subject to a ceiling of 1/12th of original loan amount minus depreciation as per schedule". It is seen from the extract that AAD is a variable amount. It is computed with reference to the loan amount and allowable depreciation on a capital asset. It will be useful to refer to the order of the CERC dated November 1, 2002, for the period April 1, 2001, to March 31, 2004. Paragraph 17 of the order in so far as it is relevant for our purpose, may be extracted here: "The Commission in the norms of tariff notified on March 26, 2001 has made a provision for advance against depreci....
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....nbsp; 105.19 105.19 105.19 Return of equity 158.34 158.34 158.34 O and M Expenses 62.94 66.72 70.72 Total 583.16 538.61 513.59 It is seen that depreciation and AAD are added as components of tariff to enable such companies to raise revenue. There is nothing in the said notification or the aforementioned order, which requires AAD to be adjusted against future years. Clause (iv) speaks of the remaining depreciable value of the asset when it says that on repayment of the entire loan, the remaining depreciable value shall be spread over the balance useful life of the asset. The applicant supplied electricity at the tariff rate notified by the CERC and recovered the sale price from the beneficiaries, which undoubtedly became its income. At no part of time in future is the sale price....
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....introducing section 115J, the hon'ble Supreme Court observed: "If we examine the said provision in the above background, we notice that the use of the words 'in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act' was made for the limited purpose of empowering the assessing authority to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, an Assessing Officer under the Income-tax Act has to accept the authenticity of the accounts with reference to the provisions of the Companies Act which obligates the company to maintain its account in a manner provided by the Companies Act and the same to be scrutinised and certified by the statutory auditors and will have to be approved by the company in its general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act. In spite of all these procedures contemplated under the provisions of the Companies Act, we find it difficult to accept the argument of the Revenue that it ....
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....been maintained in accordance with the provisions of the Companies Act and acceptance of the same by the annual general meeting of the company as well as the Registrar of Companies, the Assessing Officer has no power to reopen the accounts except to the extent provided in the Explanation in section 115J. In the context of the case on hand, the Assessing Officer can justifiably verify whether the statutory auditor has certified that the accounts of the company including the profit and loss account have been prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act and whether they are laid before and approved by the annual general meeting of the company and the Registrar of Companies. If these requirements are satisfied he can only increase the book profit by adding amounts referred to in clauses (a) to (f) to the Explanation to sub-section (2) of section 115JB, if the circumstances so justify. Mr. V.U. Eradi endeavoured to point out that the statutory auditor certified the profit and loss account of the applicant as having been maintained in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act and that as....
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....are shown at Rs. 12,210 million. The balance-sheet shows AAD as income received in advance. The accounting policy mentions as follows: "Advance against depreciation given as component of tariff in the initial years to facilitate repayment of loan is reduced from sales and considered as deferred income to be included in sales in subsequent years." There are certain qualifications in the auditors' report but the clauses referred to therein do not deal with AAD. Similarly, there is no mention of AAD in the comments of the CAG. From the above it appears to us that the figure of sales of electricity mentioned after deducting the AAD component was certified by the auditor as being in accordance with the provisions of the Companies Act, referred to above and the same has been laid before the annual general meeting of the company, thus, there cannot be any doubt that the accounts have attained finality. However, if the amount of AAD, deducted from the total sale price, falls under clauses (a) to (f) of the Explanation to section 115JB, only then the book profit can be increased by adding that amount. Here two factors must be considered. The first is that the amount representing....