Case Law Details
DCIT Vs Dakshin Haryana Bijli Vitran Nigam Ltd. (ITAT Delhi)
The main issue under consideration is whether the addition of Rs.5.87 crores made by the Assessing Officer on account of prior period expenses of fixed assets is justified?
The assessee pointed out before the Assessing Officer that it was not prior period expenditure but the amount related to non-existing fixed assets which were written off in the year under consideration.
In support, the assessee filed the Minutes of Meeting alongwith the list of fixed assets written off. The assessee offered the explanation that though it was following Mercantile system of accounting but because of non-receipt of details and pending litigation, etc., the list of fixed assets got crystallized during the year and hence, the same was booked as an expenditure. Undoubtedly, the assessee had not claimed any depreciation on the fixed assets as the assets were found short. The Assessing Officer denied the claim of the assessee on the grounds that it had claimed depreciation on the said assets, as against the plea of the assessee, it had never claimed any depreciation on such assets. The CIT(A) accepted this plea of the assessee as the original cost as well as the net book value was the same.
The assessee has written off the assets which were not found/traceable and as the assets were scattered over different areas, the entire exercise of listing of such fixed assets got crystallized during the year and hence, the booking of the expenditure under head prior period expenses of fixed assets, merits to be allowed in the hands of the assessee. Therefore, ITAT confirm the order of CIT(A) and dismiss Ground of appeal raised by the Revenue.
FULL TEXT OF THE ITAT JUDGEMENT
The cross appeals filed by the assessee and the Revenue are against the order of CIT(Appeals), Faridabad, dated 30/03/2016, relating to Assessment Year 2006-07, passed u/s 147 r.w.s. 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’).
2. The grounds of appeal raised by the Revenue are as under:-
1. On the facts and in the circumstances of the case, the Ld.C1T(Appeals) has erred in deleting the addition of Rs.5,87,86,644/- made by the AO on account of Prior Period Expenses of fixed assets; ignoring the fact that these expenses are capital in nature and, therefore, not allowable as deduction.
2. On the facts and in the circumstances of the case, the Ld.C1T(Appeals) has erred in deleting the addition of Rs. 7,65,83,965/- made by the AO on account of prior period’s expenses under the heads purchase of power, employees cost and interest expenses; ignoring the fact that the assessee has been following mercantile system of accounting and, therefore, the prior period’s expenses are not allowable as
3. On the facts and in the circumstances of the case, the Ld.CIT(Appeals) has erred in deleting the disallowance of Rs.48,70,125/- made by the AO on account of expenses claimed under the head “loss due flood, cyclone & fire”; ignoring the fact that the loss sustained pertains to loss of poles, wires etc. and these assets are capital in nature on which the assessee has been claiming depreciation and, therefore, the loss if any, is required to be reduced from the WDV of the assets instead of debiting it to the P&L account.”
3. The grounds of appeal raised by the assessee are as under:-
“That on the facts and in the circumstances of the case and in law the learned CIT(A) erred in confirming the following actions of the Assessing Officer‑
(i) initiating proceedings u/s 148 of the Income-tax Act, 1961 and passing order u/s 143(3)/148 of the Act;
(ii) Confirming disallowance on account of outstanding Municipal Tax liability in a sum of Rs. 11,62,98,617/- by invoking provisions of section 43B of the Act.
Both the actions of the AO being arbitrary, erroneous and untenable, it is prayed that the same must be quashed.”
4. The cross appeal filed by the assessee and the Revenue were heard together and are being disposed of by this consolidated order for the sake of convenience.
5. First, we shall take up the appeal of the assessee. The first issue raised by the assessee is against the reassessment proceedings initiated u/s 147/148 of the Act. The second issue which is raised by the assessee is against the disallowance made on account of outstanding municipal tax liability of Rs.11.63 crores by invoking the provision of section 43B of the Act.
6. The Revenue is aggrieved by the order of CIT(A) in deleting the addition on account of prior period expenses of fixed assets totaling Rs.5.88 crores; on account of prior period expenditure of Rs.7.66 crores and on account of expenses claimed under the head loss due to flood, cyclone and fire, totaling Rs.48,70,125/-.
7. Briefly in the facts of the case, the assessee had furnished the return of income on 29/11/2006. Original assessment was completed u/s 143(3) of the Act on 22/12/2008. Thereafter, the AO recorded the reasons for reopening the assessment u/s 147 of the Act and issued notice u/s 148 of the Act dated 11/02/2013. The case of the assessee was taken up for scrutiny by issue of notice u/s 143(2)/ 142(1) of the Act. The assessee was government undertaking, engaged in the business of distribution of electricity in Haryana. The first reason recorded for reopening the assessment was debit of Rs.5.88 crores to prior period expenses by crediting the same amount to “Fixed Assets” being assets transferred to the assessee by HVPNL but not physically in existence. The explanation of the assessee in this regard was not accepted by the AO and hence the disallowance in the hands of the assessee. The second issue which was the basis of reopening the assessment was the expenditure debited as prior period expenditure of Rs.7.66 crores. The AO was of the view that where the assessee was maintaining its books of accounts on mercantile system of accounting then the deduction on account of expenses relevant to period other than the relevant assessment year, was not allowable. The plea of the assessee that it was a contingent liability for expenses wherein the same accounting treatment was being followed, was not accepted and sum of Rs.7.66 crores was disallowed in the hands of the assessee. The third item of disallowance was loss on sale of fixed assets totaling Rs.48,70,125/-. The explanation of the assessee was that the same was on account of loss occurring due to fire, accident and natural calamities and was not a capital loss. The assessee explained that the said expenditure was similar to that of repair and maintenance. However, this plea of the assessee was also not accepted and hence the addition. The next item which was recorded as reasons for reopening the assessment was the liabilities of Rs.11.62 crores which was debited under the head Municipal Taxes and other liabilities. The AO noted that the aforesaid amount was not deposited and hence was required to be disallowed u/s 43B of the Act.
8. The CIT(A) accepted the explanation of the assessee and deleted the addition on account of prior period expenses of Rs.5.88 crores, prior period expenditure of Rs.7.66 cores and loss on sale of fixed assets of 48,70,125/-. However, the addition on account of Municipal Taxes and other liabilities totaling Rs.11.62 crores has been upheld in the hands of the assessee.
9. Both the assessee and the Revenue are in appeal against the respective portion of the order of the CIT(A).
10. The Ld. AR for the assessee took us through the reasons recorded for reopening the assessment, copy of which was filed during the course of hearing and pointed out that this was the case wherein the reasons were recorded after the period of four years from the end of the assessment year and in such cases, the reopening of assessment was possible only if there was failure on the part of the assessee to make full and true disclosure. He stressed that where the assessee had disclosed all the facts at the first instance itself i.e. in the audited balance sheet, directors report and the audit report and which was available before the Assessing Officer, as the said documents were part of the return of income filed by the assessee, then no initiation of reassessment proceedings could be carried out against the assessee. He took us through the annual report of the assessee for the financial year 2005-06 and each of the items, which were the basis of recording the reasons for reopening the assessment and stressed that when there was clear disclosure in the return of income, then no reassessment proceedings could be initiated. He fairly admitted that in case the reassessment was made within a period of four years from the end of the assessment year, then the situation is different; but when the reassessment was beyond the period of four years from the end of the assessment year, then it has to be established that there was failure on the part of the assessee to disclose material facts. He again referred to the reasons recorded for reopening the assessment and pointed out that the Assessing Officer himself refers to the material facts disclosed by the assessee. He also pointed out that though the Assessing Officer says that even auditor did not disclose the material facts, but the auditor’s report is already there on record and all the events were clearly reported.
11. Coming to the merits of the addition i.e. against the disallowance made u/s 43B of the Act, the Ld. AR for the assessee stressed that the assessee was only a collecting agent on behalf of the State Government and the amount had to be paid by the State Authority. He further pointed out that the said item had not been debited to Profit & Loss Account but the assessee had declared whatever amount was not collected as receivable and was shown as payable to the State. In such circumstances, he stressed that the provisions of section 43B of the Act were not attracted. He further referred to the order of the CIT(A) and pointed out that he was incorrect in coming to conclusion that the assessee had failed to rely on any case laws. He stressed that before the CIT(A) and even before us, strong reliance is placed on the decision of the Hon’ble Calcutta High Court in the case of CESC Ltd. vs CIT, Kolkata, (2015) 125 DTR 41; (2015) 235 Taxman 6(Cal.) and also placed reliance on another decision of Kerala High Court in the case of Kerala State Electricity Board vs DCIT (2011-ITS-69-HC-Ker1). He stressed that from assessment year 1999-2000, no addition on this account was made.
12. The Ld. DR for the Revenue, on the other hand, stressed that grounds against reopening of assessment was not raised before the CIT(A). The Ld. DR for the Revenue has placed reliance on the order of the Assessing Officer/ CIT(A).
13. The Ld. AR for the assessee in reply stated that this ground was taken as part of original ground of appeal before the Tribunal but yes it was additional ground which may be admitted for adjudication.
14. We have heard rival contention and perused the record. The first issue which is raised in the present appeal is against invoking of jurisdictional u/s 147 of the Act. We find that the issue against the re-opening of assessment u/s 147 of the Act has been raised before us by way of an additional ground of appeal, though it is mentioned as part of the original grounds of appeal filed before the Tribunal. The said so-called additional ground of appeal do not require any adjudication on facts, hence the same is admitted as additional ground of appeal.
15. The original assessment under case was completed u/s 143(3) of the Act. The assessee was a Government organization and had declared income on the basis of audited balance sheet and P&L A/c and other annexures. The copy of the binded audited accounts are also placed before us. The perusal of reasons recorded for re-opening the assessment reflects that the Assessing Officer refers to the said audited accounts of the assessee for recording the reasons, which according to him were material for re-opening the assessment. The question which arises in such circumstances where the original assessment has been completed u/s 143(3) of the Act and thereafter, four years have passed, is the Assessing Officer justified in re‑opening the assessment on the basis of entries which were duly reflected in the audited balance sheet and P&L A/c and also part of the Auditor’s Report? Answer to the same is “No”. In case, period of four years has lapsed from the end of the Assessment Year then in such cases, the section itself demands, that the re-opening of the assessment can be made only if there was failure on the part of the assessee to make full and true disclosure. In the present facts, we find that the assessee had disclosed all the items which were considered as reasons for re-opening the assessment, in its audited accounts and even the auditor had given a report of the same. In such a scenario, we hold that there is no merit in the re-assessment proceedings carried out against the assessee where the Assessing Officer refers to the facts disclosed by the assessee and then record the reasons for re-opening the assessment, such an action cannot be upheld under the provision of section 147 of the Act, in case where four years have lapsed from the end of the assessment year. Accordingly, we find no merit in the re-assessment proceedings carried out u/s 147 of the Act against the assessee.
16. Coming to the merits of the addition upheld by the CIT(A) i.e. in respect of outstanding municipal tax liability of Rs.11.63 crores. The relevant facts of the issue are that the Governor of Haryana had notified that the committee shall impose tax on the consumption of electricity @ 5 paise for every unit of electricity consumed by any person within the limits of the municipality in the State of Haryana. The said tax had to be collected by Haryana Vidyut Prasaran Nigam Ltd. (in short “HVPNL”) and paid as an electricity duty payable to the State Government under the Punjab Electricity (Duty) Act, 1958. Similar practice was adopted in case of municipal taxes by the Municipal Committee/ Council while paying their dues on account of consumption of electricity to the Nigam as per Government of Haryana circular dated 16.05.2000. The Assessing Officer did not accept the plea of the assessee and held that since the said amount of municipal taxes collected by it, have not been deposited before the due date of filing of return of income, the same is liable to be disallowed u/s 43B of the Act. The CIT(A) has upheld the order of the Assessing Officer in this regard. The question which arises is whether the same is to be allowed as deduction in the hands of the assessee or not. The case of the assessee is that it was not the liability of the assessee to deposit the said municipal taxes collected by it on behalf of the state authorities. The assessee was acting as collecting agent and the amount had to be paid by the State authority. The assessee after collecting the amount had not debited it to the P 85 L Account and whatever amount was not collected, was shown as receivable and contra entry was passed as payable to the State. Once the amount had been debited to the P&L Account of the assessee, then the provision of section 43B of the Act were not attracted. In any case, the assessee was only a collecting agent on behalf of the State and it was the amount which was not collected, which was shown as receivable and also on the other side shown as payable to the State. The liability if any, would arise after the amount is collected and that also of the State. In such circumstances, the provision of section 43B of the Act could not be applied and the amount could not be disallowed in the hands of the assessee. Similar accounting has been carried out by the assessee in its books of accounts from Assessment Year 1999-2000 and no disallowance has been made in any of the year.
17. Further, the Hon’ble Calcutta High Court in the case of CESC Ltd. vs CIT (supra) has held that where the assessee merely acts as Collecting agent for the State Government and pays the same to the State Government on collection, then, the licencee merely acts as a conduit and the electricity duty was not chargeable to the licencee. It was concluded by holding that electricity duty not being a sum payable by the assessee as a primary liability by way of tax, duty, cess or fee, then provisions of section 43B of the Act were not attracted to the licencee/assessee in respect of the electricity duty collected by it for being passed on to the State Government.
18. Applying the said proposition to the issue before us, we hold that there is no merit in the orders of the authorities below in making the aforesaid disallowance u/s 43B of the Act. We reverse the same and allow Ground No.2 raised by the assessee on merits.
19. Now coming to the appeal of the Revenue wherein the first issue which is raised is against the order of the CIT(A) in deleting the addition of Rs.5.87 crores made by the Assessing Officer on account of prior period expenses of fixed assets. The Revenue is aggrieved that where the fixed assets were capital in nature, the said expenditure could not be allowed in the hands of the assessee.
20. In the facts and circumstances of the case, the assessee pointed out before the Assessing Officer that it was not prior period expenditure but the amount related to non-existing fixed assets which were written off in the year under consideration. It was explained that during the division of HVPNL into two units events were as under:-
“Sir, during the division of HVPNL into two units named DHBVNL and UHBVNL, HVPNL has transferred fixed assets to DHBVNL amounting to Rs.709.90 crores through opening balance sheet along with accumulated depreciation thereon up to 30.06.1999. Out of the same, constructed assets amounting to Rs.10.82 crores found included in the above referred figures without details in the Fixed assets Register (FAR).
The matter was taken up with the HVPNL for transfer back of these amounts of assets without details. They did not agree and instead insisted on to adjust the same internally. Thereupon physical verification/fixed assets reports of various divisions was received and various assets existing upto 01/ 07/ 1999 to the tune of Rs.4.94 crores were not found adjusted in respect of certain other divisions. The same have been adjusted against the above assets along with applicable depreciation during F. Y.2003-04 leaving a balance of Rs.5.88 crores. The same have been adjusted in F. Y 2005-06.”
21. In support, the assessee filed the Minutes of Meeting alongwith the list of fixed assets written off. The assessee offered the explanation that though it was following Mercantile system of accounting but because of non-receipt of details and pending litigation, etc., the list of fixed assets got crystallized during the year and hence, the same was booked as an expenditure. Undoubtedly, the assessee had not claimed any depreciation on the fixed assets as the assets were found short. The Assessing Officer denied the claim of the assessee on the grounds that it had claimed depreciation on the said assets, as against the plea of the assessee, it had never claimed any depreciation on such assets. The CIT(A) accepted this plea of the assessee as the original cost as well as the net book value was the same. The CIT(A) also perused the fixed assets register in this regard as on 31.03.2005. The statutory auditor had also reported that the assessee had not claimed any depreciation on the fixed assets of Rs. 5.88 crores till the Financial Year 2004-05. In such scenario, the claim of the assessee was allowed.
22. The Ld. DR for the Revenue has failed to rebut the findings of the CIT(A). In the absence of the same and where the assessee in the audited account had not claimed any depreciation on such assets, the order of the Assessing Officer cannot be upheld. The assessee has written off the assets which were not found/traceable and as the assets were scattered over different areas, the entire exercise of listing of such fixed assets got crystallized during the year and hence, the booking of the expenditure under head prior period expenses of fixed assets, merits to be allowed in the hands of the assessee. We confirm the order of CIT(A) and dismiss Ground of appeal No.1 raised by the Revenue.
23. The issue vide Ground of appeal No.2 raised by the Revenue is against the deletion of addition of Rs.7.66 crores made on account of prior period The case of the Assessing Officer was that where the assessee was following Mercantile System of accounting, no such expenditure on account of prior period expenditure could be allowed in the hands of the assessee. The case of the assessee before us is two-fold. First of all, it is claimed from the details of the prior period expenses totaling to Rs.7.66 crores which is placed at page 61 of the paper book, that the sum of Rs.7.66 crores includes the provision of Rs.5.88 crores which was separately added by the Assessing Officer. We have in the above paras already upheld the order of the CIT(A) in deleting the addition of Rs.5.88 crores. We further hold that once an addition was made under the head provision of prior period expenses of fixed assets, no further addition could be made under the garb of prior period expenses. This addition is double addition, which is not allowable. Now coming to the balance expenditure which is claimed by the assessee; the CIT(A) vide para 19 of page 10 of appellate order has duly considered the totality of the facts. The first fact is that as against the prior period expenses of Rs.7.66 crores, the assessee has also shown the prior period income of Rs.7.74 crores and the net amount which is credited to the P&L A/c was Rs.8,79,015/-. Secondly, due to power purchase of prior period, the sum involved was Rs.1.64 crores which was paid because there was difference in quantity as recorded by DHBVN and HPGCL from the total purchase 2227 crores. The reconciliation error amounts to only 0.07%, which is acceptable, when the quantity purchased is so high. The assesse had shown this Contingent liability in its balance sheet and since the liabilities crystallized during the year under consideration, the said prior period expenses was allowable in the year under appeal. Further, expenditure booked by the assessee was arrear paid of Rs.7,15,062/-, interest of Rs.20,160/- and refund of Rs.1,61,915/-. All these amounts as per the findings of CIT(A) crystallized during the year. The Revenue has failed to controvert the findings of the CIT(A) in this regard; upholding the same, we dismiss Ground of appeal No.2 raised by the Revenue.
24. Now, coming to the last issue in Ground of appeal No.3 raised by the Revenue i.e. expenditure booked on loss of sale of assets. The case of the Assessing Officer was that no such loss could be debited to the P&L A/c. The explanation of the assessee on the other hand was that the aforesaid losses were on account of flood, cyclone, fire etc. and it was a case of repairs and replacement and not the case of loss of fixed assets per se. We find merit in the plea of the assessee and the nomenclature of the expenditure cannot decide the nature of expenses. What is to be seen is the nature of expenditure and since the same was in the field of Revenue expenditure, the same merits to be allowed in the hands of the assessee. Ground of Appeal No.3 raised by the Revenue is thus dismissed.
25. In the result, the appeal of the assessee is allowed and appeal of the Revenue is dismissed.
Order pronounced in the open court on 24th day of December, 2019.
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