AI Drafter 
TaxTMI 
TaxTMI 
2021 (3) TMI 936
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....r notice that this issue has been covered by the orders of the Co-ordinate Benches of ITAT for many assessment years. 5. For the sake of ready reference, the relevant portion of the order of the ITAT dated 07.03.2012 in ITA No. 3440/Del/2011 for the assessment year 2007 -08 is reproduced as under: "2. Adverting first to ground nos. 1 to3 in the appeal, facts in brief, as per relevant orders are that the return declaring income of Rs. 35,19,791 /- after claiming deduction of Rs. 1,49,09,636/- u/s 80 -IA of the Income- tax Act,1961 [hereinafter referred to as the 'Act'] under the normal provisions of the Act and book profit of Rs. 1,55,10,901 /- u/s 115 JB of the Act, filed on 30.10. 2007 by the assessee, generating power, after being processed on 06.10.2008 u/ s 143(1) of the Act, was selected for scrutiny with the service of a notice issued u/s 143(2) of the Act on 15.09.2008. During the course of assessment proceedings, the Assessing Officer (A.O. in short) noticed that the assessee had shown production of 2,89,240 tonne of steam, which was supplied to SBEC Sugar Ltd. [SSL in short] free of cost instead of @ Rs. 236 per tonne and Rs. 75 per tonne, in earlier years. To ....
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.....2 is against addition Rs. 9,93,41,508/- being the sale value of steam supplied to SSL worked by the AD @ of Rs. 236 /- per ton. The appellant had shown sale proceeds in respect of supply of power to UPSEB and SSL aggregating to Rs. 11,59,51,575/- However no sale proceeds in respect of exhaust steam supplied to SSL were shown in the accounts. The AO noted that in the earlier years the appellant had sold exhaust steam to SSL @ Rs. 236 & Rs. 75 per ton for varying periods. During this year however the steam was supplied free of cost. The AO therefore proposed to treat the sale proceeds of exhaust steam worked out at the rate of Rs. 236 per ton claimed income from the appellant in the same was as in earlier years. In response to show cause notice the appellant made written submissions by letter dated 3 /2 / 06 and thereafter by letter dated 13/ 3/06. The contents of letter dated 13/3/06 have been reproduced by the AO on page 4 of the assessment order. Since the said letter gives gist of history of this issue but same is reproduced in this order also even at the cost of repetition: i. Receipts from steam during A Y 2000-01 were recognized in the books @ Rs. 236 per ton. Howeve....
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....bring to your notice that question sought to be referred by the department to the Hon. Delhi High court in A Y 2000- 01 reads as under: "Because retrospective proviso of arrangement by which rates per unit were revised by subsequent letter dated 20 /6/01 cannot exempt the income already accrued upto31 /3/2000." Further as submitted in our letter dated 3/2 /06 only real income could be taxed. SSL has stopped paying for charges of exhaust steam with effect from Oct. 2001. Thus no receipt should be estimated and taxed on account of steam in the present assessment year. The proposed estimated income of steam computed @ Rs. 236 per tone is unjustified and against the principles laid down by the Supreme Court and various High Courts including the territorial judicial High court. 2.2 As can be seen the appellant agreed that in the earlier years steam was sold @ Rs. 236 per ton and that rate was retrospectively changed to Rs. 75 per ton. However with effect from Oct. 2001 SSL has refused to make any payment towards supply of steam. Since there was uncertainty about realization of any sale price of supply of steam the appellant did not recognize the value followin....
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.... would receive conversion charges from SSL for converting bagasse and water into electric power and exhaust steam which will be supplied to SSL. For this purpose a Conversion Contract dated 10112198 was executed. According to this Conversion Contract following payments were to be received by the appellant from SSL as conversion charges: * A fixed fee of Rs. 19.75 /- million per month during the production season. * Variable charges in proportion to the quantities of electricity and steam supplied: Rs. 0.521 per unit of electricity energy, i. e. electricity Rs. 40 per ton of thermal energy, i.e. steam 2.4 The fixed fee of Rs. 19.75 million per month included 50% of income received from sale of surplus electricity to UPSEB. Therefore, it was provided in clause 7.11 that 50% of such realization from UPSEB would be returned to SSL. As per Article 18 of the Conversion Contract the said agreement was to be approved by PICUP who had given loan of Rs. 8 crores to SSL. PICUP strongly objected to payment terms as per Conversion Contract and did not give its approval. In view of PICUP's objection re- negotiation of the payment terms were proposed betwee....
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.... 2.6 In view of this SSL stopped paying anything for exhaust steam from Oct. 2001. Since there was a lot of uncertainty regarding realization of any amount for steam supplied from Oct. 01, the appellant did not raise any invoice to recognize revenue for the same. The appellant relied on Accounting Standard 9 (AS 9) issued by ICAI on revenue recognition. It is now mandatory to follow such standards as accounting practice. The relevant clause is 10 to 12 of AS 9 were reproduced in the submissions It was therefore stated that the appellant was fully justified in not recognizing any sale proceeds of steam applied to SSL. The main contention was that only real income can be taxed under IT Act. Notional income on estimated basis cannot be brought to tax. In support of this legal contention also the appellant relied on a few judicial decisions. Therefore according to appellant the income estimated by AO from supply of steam to SSL and at the rate of 236 per ton was highly unjustified and against the judicial principles. Without prejudice, it was also stated that the AO has not given justification for adopting the rate of steam at the rate of 236 per metric ton when only Rs. 75....
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....ars. However, earlier the income (being sale value of steam) was credited in the accounts at the rate agreed and confirmed by the SSL. In fact the rate was retrospectively rendered & such reduction was agreed to by both the parties. On this basis itself the ITAT in A Y 00-01 allowed reduction of income from sale of steam. The point to be noted is that the income from any contract (sale) can be said to accrue as per agreed terms of such contract. If there is any dispute by ether party the accrual of income (of expenditure in the hands of other party) will be subject to the outcome of such dispute & accordingly contingent. Normally the income in such cases can be said to accrue in the year in which the dispute is resolved & other party acknowledges the debt. Even in such cases some party may choose to recognize its income or liability as accrued accordingly to facts & circumstances whereby it is certain to be able to enforce the terms of the contract. However, the appellant did not recognize any revenue from sale of steam in current year according to AS-9, since SSL had categorically refused to make any payment for supply of steam. Therefore, non-recognition of any ....
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.... income is from sale of surplus power to UPSEB. Even if theoretically the price of steam is computed at Rs. 236/- per ton (which however was never agreed and acted upon between the two parties) it is almost equivalent to the cost of bagasse worked out at the market price. Therefore in this kind of transaction there is no profit or loss in money terms to any of the company. However transaction of exchange of bagasse & water for power & steam is for mutual benefit and convenience. 2.11 Even if we look at things from a different perspective, the income of one company will be a deductible expenditure for the other and between the two there is no tax gain from this transaction. The income in the case of appellant is eligible to 100% deduction u/ s80 lA also. Hence no allegation of tax planning can be attributed in this transaction, which appears to be wholly for business considerations. It may not be out of place to reproduce hereunder a part of letter dated 2 / 11/02 written by SSL to the appellant company. "The sugar and power generation project are for all practical purposes two limbs of a single project one cannot survive without the other. In 1994, when the constr....
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....ture) partner. Therefore the transaction of exchange of bagasse & water with power & steam is in fact between two limbs of same project. If the whole project was owned by one company (as in fact it was initially) only the net profit of the entire project had been taxable. As can be seen in the last paragraph reproduced above from the letter of SSL, the appellant company proposed to be made the subsidiary of SSL (and in fact has already become so). Looked from this angle, the transaction is between the holding and subsidiary company. Therefore in my opinion the action of the appellant company in not charging for steam supplied to SSL is quite justified on fact and cannot be said to be deliberate or motivated. Moreover even if an assessee gives (sells) his goods free of cost to other, there is no provision in the IT Act to tax its sale value as income on presumptive basis. Legally Speaking since no income has accrued & neither any payment has actually been received by the appellant company, making addition in respect of estimated price of steam amounts to taxing of notional income which is not permissible. In view of this addition of Rs. 9,93,41,508/- (Rs. 8,49,14,188 /-afte....