ACIT Vs Maharashtra State Electricity Transmission Company Ltd (ITAT Mumbai)
As assessee is following mercantile system of accounting, liability which has arisen during the year under consideration is allowable even though the same may have to be discharged at a future date.
Facts-
The assessee is one of the successor companies to the erstwhile Maharashtra State Electricity Board (MSEB). On the demerger, the assets of MSEB to the extent it pertained and were specifically allocable to the transmission undertaking and were transferred to the assessee. Similarly, liabilities of MSEB to the extent they pertained to/were directly relatable to the transmission undertaking were transferred to the assessee. Accordingly, the sum of Rs.8.80 lakh being legal and professional fees, though pertaining to the erstwhile MSEB was debited to the Profit & Loss Account of the assessee on the basis of the apportioned brought forward losses and unabsorbed depreciation. The professional fees invoices dated 31/03/2010 were raised by the assessee’s Tax Consultant i.e., M/s. P.C. Hansotia & Co., for various professional services rendered by it in representing the erstwhile MSEB before various appellate authorities. The Assessing Officer passed order u/s. 143(3) on the basis of the Comptroller and Auditor General (CAG) report u/s. 619(4) of the Companies Act, 1961 made the addition of the aforesaid legal and professional charges by treating the same to be prior period expenses.
The CIT allowed the appeal filed by the assessee on this issue. Being aggrieved, the Revenue is in appeal before the Tribunal.
Another ground raised by the Revenue is pertaining to deletion of addition of Rs. 12.86 crores on account of notional increase in employee’s cost.
Another ground raised by the Revenue is pertaining to deletion of disallowance of Rs. 5,54,08,761/- being provision for interest shortfall on Provident Fund liability.
Conclusion-
In such a scenario, if the Tax Consultant following its general practice raises the invoice upon conclusion of the matter after passing of the order by the concerned authority, we are of the considered view that such expenditure cannot be treated as prior period expenses. Particularly, it is only when the invoices for legal and professional services are raised by the Consultant, the liability arises / crystallizes in the hands of the assessee and it is only in that year such expenditure will be allowable to the assessee.
With regard to notional increase in employee’s cost it is held that in the present case, it is not in dispute that the said entry is a notional entry. Thus, all the consequences in respect of the notional entries will follow and such an entry cannot be treated as an income if in excess / surplus.
With regard to interest shortfall on provident fund liability it is held that as the assessee is following mercantile system of accounting, in view of the decision of the Hon’ble Supreme Court in Bharat Earth Movers v/s CIT, [2000] 112 Taxmann 61 (SC), such a liability which has arisen during the year under consideration is allowable even though the same may have to be discharged at a future date.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The present cross appeals have been filed by either parties challenging the impugned order dated 03/02/2015, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals)–22, Mumbai (“learned CIT(A)”), for the assessment year 2010–11.
ITA no.2782/Mum./2015
Revenue’s Appeal – A.Y. 2010–11
2. In its appeal, the Revenue has raised the following grounds:–
1. On the fits and in the circumstances of the case and in law, the Ld. CIT(A) erred deleting the addition of Rs.8.80 lakhs of legal and professional charges without appreciating the fact that the allowance must be granted in the year in which the liability is incurred, irrespective of the question whether the disbursement has been made or not.
2. On the facts and circumstances of the case and in law, the CIT(A) erred in deleting the addition of Rs. 1530.50 lakhs on account of overstatement of interest and finance charges.
3. On the facts and circumstances of the case the CIT(A) has erred in deleting the disallowance of prior period expenses of Rs. 28,71,38,221/-
4. On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the addition of RS. 12,86,00,000/- on account of the employee cost by holding that it was notional and not realized.
5. On the facts and circumstances of the case and in law, the CIT(A) erred in deleting the disallowance of Rs.5,54,08,761/- being provision for interest shortfall on provident fund liability without appreciating the fact that no evidence or details were furnished to establish that liability was ascertained.
6. On the facts and circumstances of the case and in law, the CIT(A) erred in merely directing the AO to examine the facts with regard to the addition of Rs.40 Crores being the advances paid by the assessee for lease finance project to M/s Infrastructure Leasing and Financial Services, without any clear finding after going into the merits of the case.
6.1 On the facts and circumstances of the case and in law, the CIT(A) erred in merely deleting the addition made by the AO of Rs. 40 Crores with regard to the advances paid by the assessee to M/s Infrastructure Leasing and Financial Services, by holding that the advances paid by the assessee to M/s. Infrastructure Leasing and Financial Services, by holding that the advances paid to M/s. ILFS are capital in nature, without assigning any reason for the finding.‖
3. The assessee is a subsidiary of Maharashtra State Electricity Holding Co. Ltd., and is engaged in transmission and distribution of electricity in the State of Maharashtra. For the year under consideration, the assessee filed its return of income on 29/09/2010, declaring total income of Rs.148,99,92,376.
4. The issue arising in ground no.1, raised by the Revenue is pertaining to deletion of addition of Rs.8.80 lakh in respect of legal and professional charges.
5. The brief facts of the case pertaining to the issue, as emanating from the record are: The assessee is one of the successor companies to the erstwhile Maharashtra State Electricity Board („MSEB‘) and was formed in the previous year relevant to assessment year 2006–07 on the demerger / unbundling of the said MSEB. On the demerger / unbundling, the assets of MSEB to the extent it pertained and were specifically allocable to the transmission undertaking were transferred to the assessee. Similarly, liabilities of MSEB to the extent it pertained to/were directly relatable to the transmission undertaking were transferred to the Maharashtra State Electricity Transmission Company Ltd. ITA no.2782/Mum./2015 ITA no.2942/Mum./2015 assessee. Accordingly, the sum of Rs.8.80 lakh being legal and professional fees, though pertaining to the erstwhile MSEB was debited to the Profit & Loss Account of the assessee on the basis of the apportioned brought forward losses and unabsorbed depreciation. The professional fees invoices dated 31/03/2010, were raised by the assessee‟s Tax Consultant i.e., M/s. P.C. Hansotia & Co., for various professional services rendered by it in representing the erstwhile MSEB before various appellate authorities for the assessment years 1999–2000, 2000–01 and from assessment years 2002–03 to 2006–07. The Assessing Officer, vide order dated 14/03/2013, passed under section 143(3) of the Act, inter–alia, on the basis of Comptroller & Auditor General („C&AG‘) report under section 619(4) of the Companies Act, 1961 made the addition of the aforesaid legal and professional charges by treating the same to be prior period expenses pertaining to the period from the assessment years 1999–2000 to 2006–07.
6. In appeal before the learned CIT(A), the assessee submitted that the invoices were raised by the Tax Consultant only after the various orders were passed by the Tax Department during the year ended 31/03/2010, and thus, the expenditure was crystallized during the year under consideration. The learned CIT(A), vide impugned order, allowed the appeal filed by the assessee on this issue. Being aggrieved, the Revenue is in appeal before us.
7. During the course of hearing, Shri C.T. Mathews, the learned Departmental Representative (“learned D.R.”), by vehemently relying upon the order passed by the Assessing Officer submitted that the addition was made on the basis of views expressed in C&AG report and the impugned expenses pertained to the period prior to the relevant assessment year and thus is not allowable in the year under consideration.
8. On the other hand, Shri Ketan Ved, learned Authorised Representative (“learned A.R.”) appearing for the assessee relied upon the order passed by the learned CIT(A) on this issue.
9. We have considered the rival submissions and perused the material available on record. The relevant assessment year is the fifth year of existence of the assessee company pursuant to demerger of MSEB. It is not in dispute that pursuant to demerger, assets and liabilities of MSEB to the extent it pertained to and were specifically allocable to the transmission undertaking were transferred to the assessee. At this point, reference to the provisions of clause 2(19AA) of the Act is relevant which, inter–alia, provide that upon demerger all the property and liabilities relatable to the undertaking, being transferred by the demerged company, immediately before the demerger, becomes the property and liability of the resultant company by virtue of the demerger. Thus, as a result, the professional fees invoices were raised on the assessee for the various professional and legal services provided by the Tax Consultant to the erstwhile MSEB for the assessment years 1999–2000, 2000–01 and from assessment years 2002–03 to 2006–07. As is evident from the record, the said invoices were raised by the Tax Consultant on 31/03/2010. As per the assessee, the said invoices were raised after various orders were passed by the Income Tax Department in the proceedings for the aforesaid assessment years and thus the expenditure has only crystallized during the year under consideration, which is an allowable expenditure. As noted above, the Assessing Officer has disallowed the claim by treating such expenses as prior period expenses i.e., not pertaining to the year under consideration. It cannot be denied that it is a general practice among the Consultants to raise their invoices upon conclusion of the matters before the concerned authorities after the orders are passed by the said authorities. It is highly unlikely in such a case that the orders are passed by the concerned authority within the very same assessment year to which the matter pertains. Even if we consider the assessment year under consideration, as an example, the assessment order was passed on 14/03/2013, and the impugned order was passed on 03/02/2015, while the assessment year under consideration is 2010–11. In such a scenario, if the Tax Consultant following its general practice raises the invoice upon conclusion of the matter after passing of the order by the concerned authority, we are of the considered view that such expenditure cannot be treated as prior period expenses. Particularly, it is only when the invoices for legal and professional services are raised by the Consultant, the liability arises / crystallizes in the hands of the assessee and it is only in that year such expenditure will be allowable to the assessee. In view of the above, we find no infirmity in the order passed by the learned CIT(A) on this issue. Accordingly, ground no.1, raised in Revenue‟s appeal is dismissed.
10. The issue arising in ground no.2, raised by the Revenue is pertaining to deletion of addition of Rs.1530.50 lakhs on account of overstatement of interest and finance charges.
11. The brief facts of the case pertaining to the issue, as emanating from the record are: Pursuant to the aforesaid demerger, some of the liabilities of the erstwhile MSEB which were transferred / allocated to the assessee were not discharged by the assessee and were accordingly being reflected in its accounts as outstanding. One of these liabilities of Rs.1530.50 lakhs, which comprised of the following:–
a) Interest accrued but not due on Indian currency loss from Infrastructure Leasing and Financial Services Ltd. of Rs.42 lakh; and
b) Interest accrued but not due on private bonds of Rs.14.88 lakh.
The Assessing Officer vide order passed under section 143(3) of the Act made the addition on the basis of views expressed in C&AG report.
12. The learned CIT(A) vide impugned order deleted the addition made by the Assessing Officer by following its earlier decision rendered in assessee’s own case for the assessment year 2008–09. Being aggrieved, the Revenue is in appeal before us.
13. The learned D.R. during the course of hearing by vehemently relying upon the assessment order submitted that the assessee follows mercantile system of accounting and in view of the C&AG report, there is a clear overstatement of interest and finance charges and understatement of profits by the assessee.
14. On the other hand, the learned A.R. submitted that this issue has been decided in favour of the assessee in the preceding assessment year by Co–ordinate Bench of the Tribunal.
15. We have considered the rival submissions and perused the material available on record. We find that on similar issue, the Co–ordinate Bench of the Tribunal in assessee’s own case in ACIT v/s Maharashtra State Electricity Transmission Co. Ltd., in ITA no.6834/Mum./2011, vide order dated 18/06/2021, for the assessment year 2008–09, observed as under:
“8. The revenue has assailed the deletion of an addition of Rs.15.30 crore that was made by the A.O u/s 68 of the Act. For a fair appreciation of the controversy leading to the impugned addition, we shall briefly cull out the facts germane to the same. During the course of the assessment proceedings, it was observed by the A.O that the Comptroller & Auditor General (for short „CAG‟) had observed that de hors any corresponding bond or loan existing in the „books of account‟ of the assessee company, an amount of Rs.15.30 crs was reflected as an outstanding liability. On being confronted, it was submitted
by the assessee that the aforesaid amount was an „Opening balance‟ of transfer Schemes that were received from the erstwhile MSEB. It was submitted by the assessee that the aforesaid amount appeared in the „account code 46.737‟ (interest accrued but not due on Indian currency loan ILFS) – Rs.0.42 crs. AND ―account code – 46.746‟ (private bonds interest accrued but not due) – Rs.14.88 crs i.e totalling Rs.15.30 crs, which were to be cleared at the time of finalization of the transfer scheme. For the sake of clarity, the reply filed by the assessee in context of the issue in question as was submitted before the A.O is reproduced as under:
This is as per the opening balances of Transfer Schemes received from the erstwhile MSEB. The said amount appears in the a/c code 46.737 (interest accrued but not due on Indian currency loan ILFS) – Rs.0.42 crs. & a/c code – 46.746 (private bonds int accrued but not due) – Rs.14.88 crs i.e total Rs.15.30 crs. This will be cleared at the time of finalization of the Transfer Scheme.‖
However, the A.O did not find favour with the aforesaid explanation of the assessee. Observing, that the liability of Rs.15.30 crore represented an unexplained credit that was neither in existence nor payable, the same was added by him under Sec. 68 of the Act. On appeal, it was observed by the CIT(A) that the assessee was one of the successor companies to the erstwhile MSEB and was formed in the previous year relevant to the A.Y 2006-07 on the demerger/unbundling of the said MSEB. It was observed by the CIT(A), that as claimed by the assessee, and rightly so, on the demerger/unbundling of MSEB, both its assets and liabilities, to the extent the same pertained and were specifically allocable to the transmission undertaking were transferred to the assessee. It was observed by the CIT(A) that some of the liabilities of the erstwhile MSEB that were transferred /allocated to the assessee were not discharged and were accordingly being reflected in its accounts as outstanding, and the liability of Rs. 15.30 crore was one of such outstanding liability. It was further observed by the CIT(A), that the interest accrued liability of Rs. 15.30 crore was on account of transfer of certain liabilities on unbundling/demerger of erstwhile MSEB and was appearing in the „balance sheet‟ of the assessee as an „opening balance‟ on 01.04.2017 and no fresh credit entries were passed during the year. In the backdrop of the aforesaid facts, the CIT(A) was of the view that since liabilities in question did not pertain to the year under consideration, the same, thus, could not have been added as an unexplained cash credit u/s 68 of the Act. It was, thus, observed by the CIT(A) that as submitted by the assessee, and rightly so, there were no unexplained credits and unexplained liabilities. Observing, that as per the audit objection raised by CAG the liabilities in question pertained to the earlier years, it was, thus, concluded by the CIT(A) that by no means an addition u/s 68 could have been made in the hands of the assessee. The CIT(A) while concluding as hereinabove had observed as under:
3.3. I have carefully considered the facts of the case. The A.O. made addition of Rs.15.30 crores u/s.68 of the Act holding the sum as unexplained credit. The A.O. made addition on the basis of audit objection raised by CAG. However, the CAG only pointed out that the corresponding loan of bonds were not existing in the relevant record against the liability of interest accrued at Rs.15.30 crores. The CAG stated that the correctness of the claim were not verifiable. The A.O. made addition u/s.68 on account of unexplained credit in the books of accounts. However, the question for consideration is whether there could be any unexplained credit in the books of account of the appellant, the appellant Government.
The appellant has explained that the interest Rs.15.30 crores was on account of transfer of certain unbundling of erstwhile MSEB. The said liabilities were appearing balance sheet as opening balances as on 01.04,2007 and no fresh entries were passed during the year. Since such liabilities were not pertaining to the year under consideration, the same could not have been considered in the year under consideration for the purpose of addition u/s.68 of the Act, Since the liabilities were pertaining to the earlier years, duly shown in the balance sheets of earlier year and also as opening balance in the year under consideration, the appellant correctly made entries of interest accrued on such old liabilities. Such liabilities were received by the appellant on account of unbundling of erstwhile MSEB, which fact was not disputed. In support of its claim of liabilities (on which interest accrued during the year) pertaining to the earlier years* the appellant has filed copies of balance sheets of the concerned year and has also explained that similar objection was raised by CAG in the F.Y.2Q06-07 pertaining to A.Y.2007-08 which is reproduced as under:
