Income which an assessee could have, but has not earned cannot be made taxable as income accrued

Brief of the case:

Assessee is a state electricity board governed by govt. laws and conditions. The appeals were pertains to AYs 2001-02 to 2002-03. ITAT decided various issues related to claim of revenue subsidies, interest on borrowed capitals and prior period expenses.

 Facts of the case:

•  Being a government undertaking assessee was governed by Specific Acts and the orders of the State Government.
• The Electricity Supply Act, 1948 prescribed that net revenue of the assessee should not be less than 3% and electricity tariff to be collected from the customers was to be adjusted accordingly. For this purpose State Govt. would give subsidy to the assessee so as to maintain the revenue of 3% and assessee was regularly accounting for revenue of 3% only in the earlier years i.e. for the AY 1998-99 to 2000-01.
• In the next year assessee was accounted for the revenue for the first time @ 4.5% because of loan taken from World Bank (WB). As per the condition of the WB it had to show revenue @4.5%.
• It filed its return of income for earlier years showing subsidy @4.5%,that later on State Govt. decided that it would be given subsidy @ 3% only.
• During the assessment proceedings the AO found that assessee has shown revenue subsidies and grants of Rs.(-) 373.25 crores as same was short receipt of earlier years’ income and it was not expenditure of the year under appeal.
• AO again found that the assessee had claimed expenditure of Rs.1,61,64,03,000/-in respect of various capital projects undertaken by it and which were capitalised in the books of accounts and same expenditure was claimed u/s.36(1)(iii).
• AO further found that the assessee had debited a sum of Rs.9,44,00,69,767/-as prior period expenses.

Contention of the revenue:

• The assessee had not claimed the disputed expenditure (revenue subsidies and grants) as bad debts and therefore claim is liable to be disallowed.
• The amount of interest of borrowed capital (Rs. 1,61,64,03,000/-) could be allowed only if it is payable in respect of the period after the assets have been put to use in terms of the provisions of Explanation 8 to section 43(1).
• Assessee could not follow two methods of accounting one for the purposes of its books and the other for the purposes of computing its total income.
• Even if the interest is allowable it would be disallowed u/s. 43B of the Act as proof of payment has not been produced.
• Prior period expenses/loss of Rs.944 crores could not be allowed as deduction in absence of any details filed by the assessee stating whether they were crystallised during the year.

Contention of the assessee:

• The assessee had credited subsidy @4.5 % and actually it received subsidy @ 3% so it had written back 1.5% and claimed as expenditure in the year under appeal.
• The observation made by the AO that it was a reduction of the receipt of earlier year was rather erroneous as the receipt had been disclosed in the returns of income on mercantile basis.
• Assessee received less than what was disclosed earlier in view of the decision of the state government taken during the year so loss claimed by the assessee was allowable.
• of Maharashtra had paid subsidy @4.5%for initial two AYs, that later on it informed the assessee that subsidy would be paid @3%,that the assessee had overlooked the profits reversed, that while filing the return it made necessary amendments.
• The prior period expenses had crystallised during the year under consideration and the same was in accordance with the method of accounting regularly followed by the assessee in the earlier years.
• It was the state wide organization having big network of number of offices, it had number of zonal officer, station offices etc. spread throughout Maharashtra and there was always a communication gap and some of the payments/income due or accrued of the year might not be accounted for during that year.
• Out of the total prior period expenses two items namely, depreciation under provided (Rs.31,02,01,481/-)and excess provision of income tax /short provision (Rs.1,56, 66,42,865/-) had been disallowed suo moto.

Held by CIT (A):

• CIT (A) deleted the addition made on account of claim of subsidies.
• Regarding claim of interest of borrowed capital CIT (A) referred to the provisions of section 36(1)(iii) and held that the proviso to the section was inserted w.e.f.01.04.2004 so same was not applicable for the year under appeal. He relied upon the case of Core Health Care Ltd.(298ITR194) where court have held that

“The proviso inserted in section 36(1)(iii) by the Finance Act, 2003, with effect from April 1, 2004, will operate prospectively.”

• The assessee had computed the loss after disallowing and adding back short provisions for income tax amounting to Rs.156.66 crores and short provision of depreciation of Rs.31.02 crores, that the two amounts could not be added back again to the returned loss as done by the AO.
• the treatment given to them by the assessee was in accordance with the guidelines framed for preparing the accounts of the electricity companies, that entirety of the assessee’s operations and its huge network resulted in taking time to account for various expenses,that the accounts of the assessee were audited by internal auditors and the statutory auditors under the Company Act and the Income-tax Act.

 Held by ITAT:

• The assessee was entitled to get subsidy @3% from the state government. As per the agreement with WB it was decided that it would get higher subsidy i.e. 4.5 %. Subsequently the state government reduced the subsidy to 3% hence, assessee in pursuance of the agreement, showed subsidy at higher rate. After resolution of the state government it decided to reverse the entries of subsidy disclosed in the earlier years.
• If the reduced unrealised subsidy-that was disclosed in the returns of incomes of earlier years, in the books of accounts for the year under appeal-it was justified.
• Income shown in the returns in anticipation and not realised finally cannot be taxed.
• Regarding issue of interest on borrowed capital ITAT confirmed the order of CIT (A).
• AO was justified in disallowing the of prior period expenses, because the assessee had failed to establish that these expenses actually crystallised during the year under consideration. Since it was following the mercantile system of accounting it had to establish that these liabilities pertaining to the previous year actually crystallised during the year under appeal.
• As fare as the suo motto disallowance is made, we are of the opinion that the FAA was correct in holding that no addition could be made in that regard.