Case Law Details
Case Name : ACIT Vs M/s. Maharashtra State Electricity Distribution Co. Ltd. (ITAT Mumbai)
Appeal Number : ITA No. 762 & 720/MUM/2010
Date of Judgement/Order : 12/08/2015
Related Assessment Year : 2006-07
Brief of the case:
In the case of ACIT Vs. M/s. Maharashtra State Electricity Distribution Co. Ltd. ITAT adjudicated two appeals against the order of CIT (A) who allowed the appeal of assessee in part. Both revenue as well as assessee filed appeal against the order of CIT (A). During the year under consideration AO made various disallowances against the claim of assessee. Assessee is engaged in the production and supply of electricity in the state of Maharashtra. Aggrieved from the assessment order assessee filed appeal before CIT (A). During appellate proceedings CIT (A) also allowed additional evidence under rule 46 and sought remand report also.
Facts of the case:
- M/s. MSEB was engaged in the activity of generation, transmission and distribution of electricity in the State of Maharashtra. During the year, the MSEB was trifurcated into three new companies and each company took over one activity of MSEB.
- Assessee was under statutory control of Maharashtra Electricity Regulatory Commissioner (MERC) in respect of tariff of electricity to be charged from the public and assessee has to purchase electricity from MSE Power Generation Co. Ltd. as per the rate approved by MERC.
- The assessee’s previous year ended on 31.3.2006 and till that date, the MERC order was not received. Therefore, apart from electricity charges, the appellant provide / accounted for revenue of Rs. 1063.95 crore towards FOCA (i.e. Fuel and Other Cost Adjustment to be charged from public) till the end of previous year.
- The MERC vide order dtd. 5.5.2006 and 1.6.2006 authorized the appellant to charge FOCA from public at enhanced rate i.e. Rs. 1410.52 crore. The MERC also ordered that the excess FOCA charges (at Rs.346.57 crore) was to be received / collected from the public in the billing months of June, July and August, 2006.
- The appellant collected that amount of Rs. 346.57 crore from public in the previous year 2006-07 and accordingly, offered the same as revenue in the AY 2007-08.
- AO observed that the revenue of the assessee company was understated by an amount of Rs.346.56 crores in this manner. Accordingly AO made addition in this connection.
- The amount of Rs.346.57 crores was included in its income by the assessee company in AY 2007-08, whereas the AO’s stand was that the same should have been accounted for in the year under consideration i.e. AY 2006-07.
- Assessee claimed write-off of capital items of Rs.7.41 lakhs which was disallowed by AO by holding that this amount on the ground that the expenditure was capital in nature.
- AO, further, has rejected the claim of the assessee of set off of brought forward /loss/ unabsorbed depreciation. The assessee company made the claim in terms of section 72(A)(4) of the Income Tax Act 1961.
- AO also made disallowance on account of excess provision for interest/ finance charges amounting to Rs.52.79 lakhs.
- AO made disallowance on account of excess provision for purchase of power amounting to Rs.320.72 crores.
- Further AO made disallowance of Rs.39.23 lakhs on account of capitalization of interest.
- AO further made addition on account of recovery from temporary service communication amounting to Rs.7.68 crores.
- AO has observed that the recovery is made amounting to Rs.7.68 crores from temporary service communication were transferred to liability account by the assessee company.
- The AO further observed that statutory auditor have also pointed out that this amount should have been added to the miscellaneous income in the profit and loss account of the assessee but the assessee did not include the said amount in its income.
- During the course of assessment proceedings the AO noticed that the assessee company had shown liability to the tune of Rs.23291.59 lakhs.
- AO was of the opinion that the said amount of duty was collected but was not paid to the Government and consequently the provisions of section 43B were attracted and the impugned amount was disallowable and accordingly, the AO made an addition of this amount to the income of the assessee.
- Assessee produced additional evidence before CIT (A) which were accepted by CIT (A).
Contention of the revenue:
- Sufficient opportunities were given to the assessee to explain the issues and therefore the CIT(A) ought not have admitted the additional evidences.
- There was a understatement of income by the assessee company to extent of Rs.346.57 crores and therefore, CIT(A) has wrongly deleted the same.
- AO rejected the claim of the brought forward/loss/depreciation does not belong to the assessee company but belong to erstwhile Maharashtra State Electricity Board (MSEB) which was trifurcated into three companies i.e. for generation, transmission and distribution.
- AO made disallowance on account of excess provision for interest/ finance charges on the ground that in some cases assessee made provision of excess interest and on some other cases the assessee had made short provision and according to the AO net excess amount provided by the assessee company in its books of account on account of interest and other finance charges is amounting to Rs.52.79 lakhs.
- AO has made the disallowance of Rs. 320.72 Crores on the ground that the assessee company has made provision for purchase of cost of power.
- The additions on account of capitalization of interest were made on the basis of the CAG comment on the accounts of the appellant.
- The AO has selectively relied on CAG comments and made additions to taxable while ignoring overstatement of income as per the same report.
Contention of the assessee:
- The assessee company is a public sector under taking and there were valid reasons due to which some of the evidences could not be submitted before the AO during the course assessment proceedings.
- The right to recover FOCA from public accrued only in the previous year 2006-07 i.e. A Y 2007-08 and not in the year under consideration.
- Business loss and unabsorbed depreciation of MSEB has been apportioned to the assessee company (1/3rd share) and the same was set off against the total income of the impugned year and the balance amount was carried forward for set off against income of subsequent years.
- In subsequent years the AO has himself allowed the set off of brought forward business loss/unabsorbed depreciation to the assessee company.
- Regarding disallowance of Rs. 52.79 Lakhs it is contended that the assessee dealt with voluminous transactions and there was a total annual expenditure of Rs.339.11 crores and under such voluminous transactions possibility of the error could not be ruled out and error was miniscule and was inherent of the appellants accounting year after year.
- In the next year, necessary rectification entries had already been passed by the reducing the expenditure to the extent of excess provision made during the year under consideration.
- Due to voluminous transactions and temporary demerger process, the assessee could not focus on its accounting accurately and therefore, it could not be transferred to the income during the year under consideration but in the subsequent years rectification entries have been passed.
- The assessee collected electricity duty from the consumers on behalf of the Government of Maharashtra and was required to pay the same to the Government.
- since the Govt. itself was required to make payment to the appellant under a variety of accounts, or to certain poor or backward region/section of society, at Nil or subsidized charges, to be recovered from the government, the Govt. settles its inter se accounts with the appellant on account of electricity duty by setting off/adjusting the amount receivable against the amount payable.
- The assessee did not account for this amount through its profit and loss account and only the net amount was duly effected in the balance sheet and thus electricity duty was not expenditure of the assessee and therefore, it was outside the preview of section 43B of the Income Tax Act.
- If the provisions of section 43B are held to be applicable to the electricity duty, then in the alternative appropriate direction must be given to the AO to allow as deduction the electricity duty paid upto the date of filing of the return.
- For the purpose of payment of electricity duty the appellant argued that since the duty payable to Govt. are settled by adjustment of the amount receivable by it towards the sale of power, the adjustment of such amount between the appellant and Govt. be considered as payment of electricity duty in this regard.
Held by CIT (A):
- No specific query was raised by the AO during the assessment proceedings in respect of issues on which addition/disallowance was to be made and accordingly in these circumstances, the applicant’s case was covered by clause (d) of Rule 46A.
- Assessee’s case was also covered by clause (c) of Rule 46A, as the assessee was prevented by sufficient cause from producing these evidences before the AO.
- The assessee’s action of offering FOCA revenue of Rs.346.57 crore in next assessment year was correct. There was no dispute on the fact that the MERC order was statutorily binding on the appellant.
- Assesssee was following mercantile system of accounting and it’s previous year ended on 31.3.2006.TiII 31.3.06, MERC order was not in existence and therefore, the appellant could not have visualized the fixation of tariff at higher rate by the MERC.
- The items written off were of capital nature, but being low cost items, the writing off the same/charging of same to P&L account was permissible.
- The items written off truly constituted revenue items, which were charged to the cost of the appellant’s operations.
- The assessee with the assets of thousands of crores, and in the business of power distribution was bound to charge low cost items to its cost of operations, particularly if mandated by the overriding accounting guidelines.
- The CIT(A) has allowed claim of write off of capital items on the ground that though the items written off were of capital nature, but being low cost items, the writing off the same/charging of same to P&L account was permissible.
- The demerger of MSEB and trifurcation into three new entitles, including that of appellant was proved before A.O during assessment proceedings itself. Therefore, in terms of section 72A(4) r.w.s. 2(19AA) of the Act, assessee was entitled for benefit of set off of balance b/f. losses I depreciation of MSEB against its income.
- The appellant had tried to justify its action of making excess provision but the fact is that as per mercantile system of accounting, the income and expenditure are required to be accounted for in the year to which they related. The disallowance made by AO is therefore, confirmed.
- As the assessee has stated that this excess provision was rectified in accounts of next year. The AO is directed to allow relief on this account in the next assessment year after verification of assessee’s claim.
- Capitalization of interest was capital in nature and therefore, it was not allowable as an expenditure in the year under consideration.
- The impugned amounts of recoveries made from the temporary service communications was neither a capital receipt nor a liability but was in fact income of the appellant and therefore, the assessee company should have shown the same in the income account.
- CIT(A) did not accept claim of assessee but with a partial relief by giving a direction that payment by way of adjustment made and actual payment both till date of filing of return should be allowed.
Held by ITAT:
- Admission of additional evidences by the CIT(A) in the case of the assessee is on the basis of proper reasoning and has been done in view of principles of natural justice and the same is held to be justified.
- Regarding income of Rs. 346.57 Crores ITAT decided that this issue was not that of suppression of income, but – the year of taxability of income. CIT (A) rightly adjudicated the issue in favour of assessee.
- CIT(A) has deleted the disallowance of claim of write off of capital items with proper reasoning and no interference is called for in the order of CIT(A).
- CIT(A) has allowed claim of set off of brought forward business loss/unabsorbed depreciation subject to verification by the AO to ascertain the correct fact before allowing this claim. Under these circumstances we do not find if any prejudice would be caused to the revenue.
- It is settled law that expenditure can be allowed against the business income only if the expense has been incurred for the purpose of the business and has been incurred during the year under consideration and that the expenditure should not be a capital nature.
- It is an admitted position by the assessee also that the expenditure under consideration did not pertain to the year under consideration and the same was recorded in the books of account, as a result of an error. Therefore, in view of these facts we find that the AO has rightly disallowed the claim and the Ld. CIT(A) has rightly upheld the action of AO in this regard.
- CIT(A) was fair enough in issuing requisite direction to the AO to allow the relief on this action in the next assessment year after verification of the claim made by the assessee.
- Assessee is unable to show anything to convince that impugned interest expense can be allowed as revenue expenditure during the year under consideration.
- The assessee is obliged under the law to include income from temporary service communication in its income. Since the assessee had not done so, the AO had rightly brought this amount to tax as part of income of the year under consideration.
- The liability to pay service into the treasury will arise only upon the assessee receiving funds and not otherwise, and it was accordingly held that liability to pay the service tax in respect of consideration payable will arise only upon receipt of such consideration, and not otherwise.
- Regarding addition made u/s 43B ITAT held that because of some settlements pending between the assessee company and the Government of Maharashtra,payments could not be made during the financial year and the assessee has not routed this amount through the P&L account.
- Reliance was placed on the judgment of Hon’ble Calcutta High Court in the case of CESC Ltd. (ITA No.82/110/83/84 of 2004) and Hon’ble Kerala High Court in the case of ‘Kerala State Electricity Board’ ((2010) 329 ITR 91) to hold that the electricity duty is not being a sum payable by the assessee as a primary liability by way of tax, duty cess or fee, section 43B is not attracted to the assessee in respect of electricity duty collected by it for being passed on the State Govt.
- Hence, the disallowance made by AO of Rs.23291.59 lakhs is hereby deleted.