Case Law Details
ACIT Vs Haryana Power Generation Corporation Limited (ITAT Chandigarh)
The Income Tax Appellate Tribunal Chandigarh allowed the Revenue’s appeals and restored additions made by the Assessing Officer on account of receipts from sale of fly ash for Assessment Years 2014-15 and 2018-19. The dispute concerned whether receipts generated from sale of fly ash by a government power generation company constituted taxable business income or were merely amounts credited to a statutory fund in the nature of liability.
The assessee, engaged in the business of electricity generation, had filed its return declaring nil income, which was later revised to declare a loss. The assessment was originally completed under Section 143(3) of the Income Tax Act. Subsequently, the assessment was reopened under Section 147 on the ground that income had escaped assessment because receipts from sale of fly ash had not been offered to tax. Instead, the assessee had directly credited the amounts to a “Fly Ash Fund” in the balance sheet without routing them through the Profit and Loss Account.
During reassessment proceedings, the Assessing Officer observed that the assessee had generated approximately ₹38.68 crore from sale of fly ash, which was a by-product of its power generation operations. The Assessing Officer held that the receipts were revenue in nature and constituted taxable business income. Accordingly, the amount was added to the income of the assessee.
In appeal, the Commissioner (Appeals) upheld the validity of reopening but deleted the addition on merits. The Commissioner (Appeals) accepted the assessee’s contention that the receipts had been credited to a statutory fund created pursuant to Government Notification S.O. 2804(E) dated 03.11.2009 issued by the Ministry of Environment and Forests, and therefore represented a liability rather than taxable income.
Before the Tribunal, the Revenue argued that the receipts arose directly from the assessee’s business operations and therefore retained the character of business income. The Revenue submitted that the accounting treatment adopted by the assessee could not alter the taxability of the receipts. According to the Revenue, the income accrued to the assessee at the point of sale of fly ash, and any subsequent earmarking or restriction on utilization merely amounted to application of income after accrual. It was also argued that the assessee retained full control over the funds and had utilized amounts from the fund, demonstrating that it was not a liability payable to a third party.
The assessee contended that the Fly Ash Fund had been created pursuant to the Government notification, which required proceeds from sale of fly ash to be credited to a separate fund and used only for specified environmental and infrastructural purposes. According to the assessee, the funds were not available for free use and therefore assumed the character of liability rather than income. Reliance was also placed on judicial precedent, including the Tribunal’s decision in NTPC Vidyut Vyapar Nigam Ltd.
The Tribunal examined the nature of fly ash and observed that it was generated as a by-product in the process of electricity generation through combustion of coal. It noted that the generation and sale of fly ash were intrinsically linked to the assessee’s core business activity and the receipts therefore prima facie bore the character of business income.
The Tribunal further observed that receipts from sale of fly ash formed part of the assessee’s overall revenue stream in the same manner as other operational receipts. It held that once fly ash was sold, the consideration received accrued directly to the assessee. According to the Tribunal, there was no diversion of income by overriding title because the payments were made directly to the assessee and not to any third party or statutory authority.
The Tribunal distinguished between accrual of income and application of income. It held that any restriction on utilization of the receipts under the Government notification only governed the application of income after accrual and did not affect taxability. The Tribunal further held that the amounts could not be treated as liability because no enforceable obligation existed to pay a definite sum to a third party. The assessee continued to retain dominion and control over the fund and had utilized the amounts from it.
The Tribunal also observed that accounting treatment in the books of account could not override the provisions of the Income Tax Act. It found that the Commissioner (Appeals) had relied upon the Government notification and earlier judicial precedents without examining whether conditions for diversion of income by overriding title were actually satisfied. The Tribunal also held that reliance on the decision in NTPC Vidyut Vyapar Nigam Ltd. was misplaced in absence of demonstrated factual parity.
Accordingly, the Tribunal held that the receipts from sale of fly ash represented an independent and additional stream of revenue arising from the assessee’s business operations and squarely fell within the scope of taxable business income. The Tribunal therefore restored the addition made by the Assessing Officer and set aside the order of the Commissioner (Appeals). Both Revenue appeals were allowed.
FULL TEXT OF THE ORDER OF ITAT CHANDIGARH
Both the above appeals have been filed by the Revenue against the separate orders of Ld. CIT(A)/NFAC, Delhi each dt. 31/01/2024 for A.Y. 201415 and 2018-19 respectively.
2. Since common issues are involved in both the above appeals and were hared together so these are being disposed off by this consolidated order.
3. We shall take up the appeal in ITA No. 304/Chd/2024 for A.Y. 2014-15 as a lead case for discussion, wherein Revenue has raised the following grounds:
1. Whether on the facts and circumstances of the case, Ld. CIT(A) has not erred in allowing the appeal of the assessee and in deleting the addition of Rs. 38,72,00,000/- made on account of fly ash by holding that the same is not taxable under Income Tax Act, 1961.
2. Whether on the facts and circumstances of the case, Ld. CIT(A) has erred in not appreciating that Notification S.O. 2804(E) dated 03.11.2009 Govt. of India, Ministry of Environment and Forests, is only about utilization of receipts from fly ash sale and it does not infringe upon the taxation of income from sale of fly ash. Further, the above Notification cannot prevail over the express provisions of the I.T. Act, 1961. Further, merely making a separate fund and transferring it in liabilities on balance sheet does not imply that revenue will not be income recognized.
3. Whether on the facts and circumstances of the case the Ld. CIT(A) has erred in not appreciating that receipts cannot be credited directly to any Provision on fund without routing it through the Profit and loss account.
4. Whether on the facts and circumstances of the case, Ld. CIT(A) has erred in not appreciating that the assessee had not shown as to what percentage of the fund created had been utilized for the prescribed purpose of notification S.O. 2804(E) dated 03.11.2009 of Ministry of Environment and Forests (100% or less) during the year. In case of any short fall in actual utilization as required by the notification, the same could not be claimed as expenditure.
5. It is prayed that the order of the Ld. CIT(A) be set-aside and that of the A.O. be restored.
6. The appellant craves leave to add or amend the grounds of appeal before the appeal is heard and disposed off.
4. Briefly, the facts of the case are that the assessee is a Government company engaged in the business of generation of electricity. It filed its return of income declaring nil income, which was subsequently revised declaring loss. The assessment was originally completed under section 143(3) of the Act.
4.1 Subsequently, the assessment was reopened under section 147 on the basis that income had escaped assessment inasmuch as the assessee had not offered to tax the sale proceeds of fly ash, which were directly credited to a “Fly Ash Fund” in the balance sheet instead of routing the same through the Profit & Loss account.
4.2 During the reassessment proceedings, the Assessing Officer observed that the assessee had generated revenue of approximately Rs. 38.68 crores from sale of fly ash, which is a by-product of its business activity. The Assessing Officer held that the said receipts constitute revenue income and accordingly added the same to the total income of the assessee.
5. In appeal, the Ld. CIT(A) upheld the validity of reopening but deleted the addition on merits holding that the receipts were credited to a statutory fund and were in the nature of liability.
6. Feeling aggrieved by the order passed by the Ld. CIT(A), the Revenue is in appeal before us, on the grounds mentioned in the appeal.
7. The Ld. DR, on the other hand, strongly supported the order of the Assessing Officer and submitted that the sale proceeds of fly ash are clearly revenue receipts arising from the business operations of the assessee.
7.1 The Ld. DR submitted that it is an undisputed fact on record that the assessee, during the year under consideration, generated and sold fly ash and realised substantial consideration therefrom. It was contended that such receipts are intrinsically linked to the assessee’s core business operations, being a by-product of its power generation activity, and therefore bear the character of business income.
7.2 The Ld. DR further emphasised that the Assessing Officer has rightly treated the said receipts as revenue in nature. It was argued that the assessee cannot escape its tax liability merely by adopting an alternative accounting treatment, namely by crediting the receipts to a separate fund in the balance sheet instead of routing the same through the Profit & Loss account.
7.3 It was submitted that the contention of the assessee that such receipts constitute a “liability” is fundamentally misconceived. According to the Ld. DR, there is no diversion of income by overriding title. The income unequivocally accrues to the assessee at the point of sale of fly ash, and any subsequent earmarking or allocation of such receipts does not alter their inherent character as income.
7.4 The Ld. DR further contended that the alleged restrictions on utilization of funds, purportedly arising from Government notifications, do not result in diversion of income at source. At best, such restrictions may govern the application of income post-accrual, which is legally irrelevant for determining taxability under the Act.
7.5 It was also argued that the assessee retains full dominion and control over the funds in question, and has, in fact, incurred expenditure therefrom. This, according to the Ld. DR, clearly demonstrates that the amount is not in the nature of a liability payable to any third party, but merely represents a reserve created at the discretion of the assessee.
7.6 The Ld. DR submitted that the accounting treatment adopted by the assessee cannot override the substantive provisions of the Income-tax Act. It was emphasized that the true nature and character of a receipt must be determined in accordance with settled legal principles and not merely on the basis of entries passed in the books of account.
7.7 Adverting to the reliance placed by the Ld. CIT(A) on the decision of the Hon’ble ITAT in the case of NTPC Vidyut Vyapar Nigam Ltd., the Ld. DR contended that the Ld. CIT(A) erred in mechanically following the said decision without appreciating the distinguishing factual matrix of the present case and without independently examining the applicability of the ratio laid down therein.
7.8 It was further submitted that each assessment year is a separate and independent unit of assessment, and the facts of each case must be evaluated on their own merits. The Ld. CIT(A), according to the Ld. DR, failed to appreciate that in the present case the assessee has admittedly received the consideration and has not established any legal obligation amounting to diversion of income at source.
7.9 The Ld. DR also submitted that the Assessing Officer has duly considered the explanation furnished by the assessee during the course of assessment proceedings and has recorded cogent reasons for rejecting the same. Therefore, the allegation that the Assessing Officer failed to examine the assessee’s submissions is factually untenable.
7.10 Summarizing the submissions, the Ld. DR contended that the order of the Ld. CIT(A) is contrary to the settled principles of taxation, inasmuch as revenue receipts arising from business activities cannot be excluded from taxation merely on account of internal accounting treatment or subsequent application of income. It was reiterated that there is no diversion of income by overriding title; the receipts accrue to the assessee in the first instance, and any subsequent credit to a fund or restriction on utilization merely constitutes application of income, which does not affect its taxability.
7.11 The Ld. DR, therefore, submitted that the reliance placed by the Ld. CIT(A) on judicial precedents is misplaced and that the addition has been deleted without proper appreciation of facts and applicable legal principles, warranting interference by this Tribunal.
8. Per contra, Ld. AR strongly relied upon the order of the Ld. CIT(A). It was submitted that the receipts from the sale of fly ash were credited to a “Dry Ash Fund” in compliance with the Government of India notification mandating their utilisation for specified purposes, and therefore, such receipts cannot be treated as income.
8.1 It was further submitted that the amounts were not at the free disposal of the assessee and were subject to statutory restrictions, thereby assuming the character of liability. Reliance was placed on judicial precedent, including the Tribunal’s decision in NTPC Vidyut Vyapar Nigam Ltd.
8.2 The Ld. AR assailing the addition made by the Assessing Officer and supporting the order of the Ld. CIT(A) submitted that the entire addition on account of the sale of fly ash has been made on a complete misappreciation of facts as well as the settled legal position.
8.3 It was submitted that the Assessing Officer has proceeded on the assumption that since fly ash is a by-product of the business, the sale proceeds automatically partake the character of revenue receipt. However, such a conclusion, according to the Ld. AR, is superficial and ignores the statutory framework governing the utilization of such receipts.
8.4 The Ld. AR submitted that the assessee had categorically explained before the Assessing Officer that the “Fly Ash Fund” was created in pursuance of Notification S.O. 2804(E) dated 03.11.2009 issued by the Ministry of Environment and Forests, Government of India, which mandates that the proceeds from sale of fly ash are to be credited to a separate fund and utilized strictly for specified environmental and infrastructural purposes.
8.5 It was further submitted that during the course of assessment proceedings, the assessee had furnished a detailed reply explaining that the amounts credited to such a fund are not available for free use and are required to be utilised in accordance with the Government notification, and therefore, such receipts cannot be treated as income. However, the Assessing Officer, without properly dealing with the explanation, summarily rejected the same.
8.6 The Ld. AR submitted that even as per the assessment order, the Assessing Officer has accepted that the assessee had incurred expenditure out of the fly ash fund and that the fund balance had increased during the year. However, despite noting these facts, the Assessing Officer has failed to appreciate that the assessee acts merely as a custodian of the fund and the amounts therein are in the nature of earmarked liability.
8.7 It was further submitted that the Assessing Officer has placed undue emphasis on the accounting treatment, whereas it is a settled law that accounting entries are not determinative of taxability. At the same time, the Assessing Officer has also failed to appreciate that the assessee has consistently followed the prescribed accounting treatment in accordance with statutory notification and audited accounts.
8.8 The Ld. AR further submitted that the Assessing Officer has not brought any material on record to demonstrate that the assessee had unfettered control over the said funds or that the same were used for its business purposes. In absence of such finding, the conclusion that the receipts constitute income is wholly unjustified.It was also contended that the Assessing Officer has not disputed the existence or applicability of the Government notification governing the utilization of fly ash proceeds. Once the statutory mandate requires the assessee to credit the receipts to a specific fund and utilise the same for designated purposes, the character of the receipt cannot be treated as income in the hands of the assessee.
8.9 Supporting the findings of the Ld. CIT(A), the Ld. AR submitted that the first appellate authority has rightly appreciated the factual and legal position and has correctly held that such receipts are in the nature of liability and not income. The Ld. CIT(A) has also rightly relied upon the decision of the Hon’ble ITAT in the case of NTPC Vidyut Vyapar Nigam Ltd., where on identical facts, it has been held that such receipts are not taxable.
9. We have heard the rival submissions and perused the material available on record, including the assessment order and the order passed by the Ld. CIT(A). The issue arising for our consideration, though lying in a narrow compass, raises an important question regarding the true character and taxability of the receipts in question.
9.1 In order to determine the true nature and character of the receipts arising on account of the sale of fly ash amounting to ₹38.68 crores, it is imperative to first appreciate the process by which such fly ash comes into existence. The assessee is engaged in the business of generating power wherein coal constitutes the primary raw material. In the process of generating electricity, coal is combusted, producing not only electricity but also a by-product, fly ash. The generation of fly ash is thus intrinsically and inextricably linked with, and incidental to, the core business activity of the assessee. It is also an undisputed position that the assessee has generated and sold such fly ash during the course of its business operations and has realized consideration there from. The receipt in question is, therefore, intrinsically connected with the business activity of the assessee and, prima facie, bears the character of a business receipt.
9.2 The financial framework of the assessee is structured around the cost of inputs, operational expenditures, and the revenue realized from the sale of electricity to distribution companies. It is also a matter of common knowledge that, in order to cushion consumers from tariff shocks, the State Government may extend subsidies routed through electricity utilities by way of advance payments or reimbursements. The overall determination of revenue and profitability in the power sector is governed by tariff fixation mechanisms that take into account fuel costs, operational and administrative expenses, including salaries, maintenance, and other incidental outgoings, to ensure the recovery of costs along with a reasonable return. In this backdrop, receipts arising from the sale of by-products, such as fly ash, stand on a similar footing, inasmuch as they form part of the assessee’s overall revenue stream and contribute to the enhancement of its returns.
9.3 The principal contention advanced on behalf of the assessee is that such receipts were credited to a “Fly Ash Fund” pursuant to a Government notification and, therefore, partake the character of a liability rather than income. However, upon careful consideration, we find that the said contention is untenable. The controversy, therefore, narrows down to whether such receipts constitute income in the hands of the assessee or whether they are merely in the nature of application of income.
9.4 In our considered view, the distinction between accrual of income and its application is well settled. Income must first accrue or arise to the assessee before it can be applied. In the present case, once the fly ash is sold, the consideration received there from undeniably accrues to the assessee at the point of sale. There is no material on record to indicate that there exists any diversion of income at source by virtue of an overriding title. The payments are admittedly made by the purchasers directly to the assessee and not to any third party or statutory authority, thereby clearly establishing that the income first accrues to the assessee.
9.5 The so called restriction on the utilization of such receipts, as canvassed by the assessee, does not lead to the conclusion that there is a diversion of income by overriding title. At best, it represents an application of income after accrual. It is trite law that application of income, irrespective of whether it is voluntary or mandated, does not affect its taxability. Similarly, the contention that the impugned amount represents a liability is devoid of merit, inasmuch as no enforceable obligation to pay a definite sum to a third party has been demonstrated. The funds remain under the dominion and control of the assessee and are utilized by it, which militates against the plea that the receipts partake the character of a liability.
9.6 It is equally well settled that the accounting treatment adopted by the assessee in its books cannot override the statutory provisions of the Income-tax Act. The true nature and character of a receipt must be determined in accordance with legal principles and not merely on the basis of its presentation in the books of account. We further find that the Ld. CIT(A), while deleting the addition, has proceeded primarily on the basis of the Government notification and certain judicial precedents, without examining the crucial aspect as to whether the conditions necessary for establishing diversion of income by overriding title are satisfied in the present case. The reliance placed on the decision in the case of NTPC Vidyut Vyapar Nigam Ltd. is misplaced in the absence of any demonstrated parity of facts.
9.7 Accordingly, the consideration received from the sale of fly ash represents an independent and additional stream of revenue arising in the course of the assessee’s business operations, over and above its primary income from the sale of electricity, and squarely falls within the ambit of taxable business income. In view of the foregoing discussion, we find no infirmity in the findings of the Assessing Officer, who has correctly appreciated both the factual matrix and the applicable legal principles and has rightly brought the receipts from the sale of fly ash to tax as business income. The order of the Assessing Officer is, therefore, upheld.
9.8 The order of the Ld. CIT(A) deleting the addition is set aside and the addition made by the Assessing Officer is restored.
10. In the result, the present appeal of the revenue is allowed.
11. The facts as well as the grounds raised in the present appeal bearing number 305/Chd/ 2024 are identical to those adjudicated by us in ITA No. 304/Chd/2024. Therefore, for the sake of consistency and in the absence of any distinguishing feature having been brought to our notice, we respectfully follow our decision rendered in the aforesaid appeal. Accordingly, the reasoning and conclusions arrived at therein shall apply mutatis mutandis to the present appeal as well. Accordingly this appeal of the Revenue is also allowed.
12. In the result, both the above appeals of the Revenue are allowed.
Order pronounced on 27/04/2026
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