TaxTMI 
TaxTMI 
2024 (4) TMI 1274
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....of 'Revenue receipts'. 2. Whether on facts and circumstances of the case, the Ld. CIT (A) is justified in holding the receipts 'Capital receipts' even though the assessee itself states that such receipts are collected by way of charges "from customers for having been facilitated a particular service" 2. The solitary common issue has been raised in all four appeals of the revenue is whether in the facts and circumstances of the case the CIT (A) has erred in deleting the addition made by the AO on account of supply affording charges and electrification charges by treating the same as revenue receipt as against the capital receipt claimed by the assessee. The assessee is an electricity distribution company (DISCOM) engaged in the business of distribution and retail supply of Electricity. For A.Y. 2011-12 the assessee filed it return of income on 27.09.2011 declaring total loss of Rs. 399.44 crore. Originally the assessing officer passed assessment order u/s 143(3) on 27.03.2014 at total loss of Rs. 3,77.31 crores and thereafter, the Pr. CIT passed revision order section 263 dated 11.03.2016 and set aside the assessment order dated 27.03.2014 by ho....
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....s submitted that the AO has given a finding about nature of the receipts in question and specifically held that the receipts were collected by way of charges from the customers for providing electricity services including some items of stock- in- trade which is circulating assets therefore, these receipt derived from such basic services provided to the customers are revenue receipts. Ld. DR has strongly relied upon the orders of the AO. 4. On the other hand, ld. AR has submitted that these charges are collected only as one-time charges at the time of providing new connection or at the enhancement of existing connection. These charges are not recurring charges as received only at the time of providing new electricity connection. He has further submitted that the assessee company is required to lay down electric lines and distribution system comprising of wires, poles, towers, distribution mains, distribution transformers and power transformers and associated facilities. The assessee collects supply affording charges for augmenting the existing distribution/EHT system or creating new distribution which includes setting up/ laying new electric lines, service lines and the cost of n....
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.... set aside the original order of the AO dated 27.03.2014 by holding the same erroneous and prejudicial to the interest of revenue for lack of inquiry on the part of the AO in respect of the issue of supply affording charges and electrification charges claimed as capital receipts by the assessee. Therefore, the Pr. CIT has not given any finding on the merits of the issues which was to be verified and examined by the AO while passing a fresh order. The AO in the order passed u/s 143(3) r.w. section 263 has dealt with this issue in para 4 to 4.3 as under: "4. Taxation of Revenue Receipt of Rs. 25,80,14,015/- shown as Capital Receipt by the assessee :- Adhering to the directions as mentioned above, notices u/s 143(2) &142(1) dated 11/3 / 2016 were issued and properly served upon. In response to the said notice Shri T.N. Unni, CA appeared time to time and filed written submissions which were placed on record. The Books of account alongwith relevant bills and vouchers were produced and test checked. During the course of scrutiny proceedings on perusal of Balance Sheet, P & L account & Tax Audit report together with computation of income of the assessee, it....
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....the supply of any stock in trade, which also, further, means that it is not for any "particular service having been facilitated", (as wrongly interpreted by your predecessor in his assessment order for AY 2012-13 - which is being treated by the Hon'ble CIT as the basis for his view. It is submitted that this view was/is patently wrong and contrary to the provisions of the Electricity Act and the MPERC's notified regulations.. It is also re-iterated that such receipts, being elementary and essentially capital receipts, are reduced from the cost of the concerned capital assets under the provisions of Sec. 43(1) of the I.T. Act. 7.4. We also submit that as per the mandate of the Regulatory Authority, all the electric supply undertakings prepare their accounts uniformly as per the guidelines contained in the said Notification. Schedule No. 34 to the Balance Sheet (copy already on record) is the details of "Contributions, Grants, Subsidies towards Capital Assets". As per the Accounting Manual, all accounts are codified according to their nature of receipt/expenditure, and all receipts of capital nature bear codes commencing with "55" and, accordingly, the "Supply Affor....
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....ing the assessment proceedings for A.Y. 2014- 15 it is found that the assessee itself has revised the return of income vide e. acknowledgement number.. dated 30/03/2016 for A.Y. 2014-15 and supply affording and electrification charges as receipts for the year and loss claimed is accordingly reduced. Therefore, amount of Rs. 25,80,14,015/- credited as capital receipt is treated as revenue receipt on account of supply affording and electrification charges and accordingly added back to the total income of the assessee. 4.3 As a result, the amount of Rs. 25,80,14,015/- received on account of basic operations of the company i.e. "Supply affording Charges" and "Electrification Charges" was required to be credited in P & L Account. But this was not done by the assessee company. Hence, the revenue receipts of Rs. 25,80,14,015/- is added in the total income of the assessee. I am satisfied that the assessee has concealed its to the extent of Rs. 25,80,14,015/- be treating the same as capital expenditure rather than revenue by doing so has attracted penalty proceedings u / s 271(1)(c) of the I.T. Act, 1961, penalty proceedings u / s 271(1)(c) are initiated on this....
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.... 7.3.2 It is noted that the said Regulations in its very title contains the phrase 'Recovery of Expenses and other charges for providing Electric Line or Plant used for the purpose of giving Supply. Thus, as per these Regulations, the SAC and EC are charged as recovery of expenses for providing capital assets for the purpose of giving Supply. Irrespective of the nomenclature, they are more in the nature of consumer contribution towards Fixed assets and gives an indication that they could be more in the nature of a Capital Receipt for the Appellant company. 7.4 Chapter 2 of the said Regulations define the following terminologies :- (f) "Distribution System" means the system of wires and associated facilities between the delivery points on the transmission lines or the Generating Station connection and the point of connection to the installation of the consumers; (g) "Electric Line" means any line which is used for carrying electricity for any purpose and includes: (i) any support for any such line, that is to say, any structure, tower, pole or other thing in, on, by or from which any such line is, or may be, supported, carried, or suspend....
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....Thus it is seen from the above regulations, that the charges so collected are to be kept in a separate account and used for the purposes of acquiring or creating Fixed Assets. The accounting treatment is same as that of the 'Works carried out with the consumer contributions'. This consumer contribution is being reduced by the company from the cost of asset for the calculation of depreciation as per Section 43(1) of the Act. To that extent, the Appellant has also claimed less depreciation. If the contention of the AO is accepted, then at least, the Appellant is rightfully entitled to this additional depreciation. 7.7.5 From the above, it is clear that the SAC and the EC are one time charges from the customer, more in the nature of consumer contribution and are charged at the time of a new connection or upgradation of an existing connection, specifically meant for the funding of capital expenses. Admittedly, it shows the character of a capital receipt rather than that of a revenue receipt. 7.8 The above view is further strengthened by the ratio laid down by the Hon'ble Supreme Court in [1961] 41 ITR 608 (SC) in Hoshiarpur Electric Supply Co. v. Commissio....
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....me-tax v. Poona Electric Supply Co. Ltd. [1946] 14 ITR 622 it was held by a Division Bench of the Bombay High Court that the amount received from the Government of Bombay by the Poona Electric Company in reimbursement of expenses incurred for constructing new supply lines for supplying energy to new areas not previously served was a capital receipt and not a trade receipt. The question of the taxability of the "profit element" in the contribution received from the Government was not expressly determined; but the court in that case held that the entire amount received by the Poona Electric Company from the Government as contribution was a capital receipt. In Monghyr Electric Supply Co. Ltd. v. Commissioner of Income-tax [1946] 26 ITR 15 it was held that the amount paid by the consumers of electricity for meeting the cost of service connections was a capital- receipt in the hands of the electricity undertaking and not a revenue receipt and the difference between the amount received on account of service connection charges and the amount immediately not expended was not taxable as revenue. The receipts though related to the business of the assessee as distributors of....
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....he detailed discussion above and respectfully following the directly relevant decisions of the Hon'ble Supreme Court and Bombay High Court, I am constrained to hold that the additions made by the AO cannot be sustained. The grounds 1 to 3 of the Appellant's appeal are therefore Allowed." 7. We further note that the Delhi Benches of the Tribunal in case of DCIT vs. BSES Yamuna Power Ltd. (supra) has also considered an identical issue in para 8 to 8.4 as under: "8. Ground No. (i) It is observed that assessee during year under consideration received a sum of Rs. 19,65,18,794/- as service line deposits from customers for setting up service line which include cost of GI pipes, bricks sand etc. The said charges have been received by assessee as per provisions of Electricity Act, 2003, and regulations framed thereunder, by DERC from time to time. It is observed that said issue has been considered by this Tribunal, in assessee's own case DCIT vs. BSES Yamuna Power Ltd. in consolidated order dated 05/10/15 for Assessment Years 2005- 06 to 2008-09 as under: 17.2.4 We find that while dealing with the issue the Learned CIT(Appeals) has discus....
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....ter accessories etc. These charges are taken from the customers only at the time of providing the new connection to recover the expenditure incurred on the equipments and these expenditures are capitalized under the head "plant and machinery" (meter) and depreciation is claimed thereon. 17.3 With regard to the observations of the Assessing Officer, only 1/3 of the total amount on revenue account and not whole of it is treated as capital receipts, the contention of the assessee remained that DERC is a regulatory body, which regulates the charges of service line charges. Thus, service line deposits are received by the company as per the provisions of DERC and Electricity Act for the purpose of incurring the expenditure for laying the service line and other related expenses for providing new connection to the customers. It was explained that in the absence of a one to one linking of the service line deposit scheme with the capital expenditure incurred on the service line connection, the justification for treating 1/3rd of the total amount of receipts in a particular year as Revenue is that by doing so the assessee is offering for Revenue all service line receipts over three y....
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....The ground No. 1 of the appeal preferred by the Revenue is accordingly rejected. 8.1. Further, it is observed that Hon'ble Delhi High Court approved order passed by this Tribunal vide order dated 14/09/16. Hon'ble Delhi High Court upheld findings of this Tribunal by observing as under: "8. With respect to the ITAT's ruling that the treatment of the service line deposit over the years being capital or revenue is concerned, we notice that the AO refused to recognise the amounts as capital receipts. The assessee offered 1/3rd of the amount to the profit and loss account and later explained that these were capital receipts and are not revenue in nature. This volte face of the assessee seems to have triggered the AO's decision that the receipts were not capital but revenue and therefore entirely liable to be taxed. The issue is covered against the revenue in Hoshiarpur Electric Supply Co. vs. CIT {1961} 41 ITR 608 (SC). 9. As far as the change in the method of valuation is concerned, the ITAT permitted the assessee to adopt the moving average methodology. The ITAT noted that the previous method adopted by the assessee was First In First Ou....