2011 (1) TMI 1405 - AT - Income Tax

Tax on amount of differential sales - Difference between the old and the revised tariff - Price Escalation clause - sale as per Power Purchase Agreement (PPA) - assessee raised invoice applying a rate of 3.48 per unit in the books of account however the assessee accounted for sales only at 3.18 per unit - whether the differential amount of sales as per the Power Purchase Agreement applying which invoices for supply of power to APTRANSCO were raised can be treated as the income of the assessee for the assessment year 2005-06? HELD THAT - The CIT(A) has given elaborate reasoning before concluding that the income worked at the rate of 3.48/- per unit of power supplied had neither accrued to the assessee nor was receivable during the previous year and therefore no corresponding debt in respect of the differential amount stood created in the books of the purchaser i.e. APTRANSCO. Merely based on the invoices raised income cannot be deemed to accrue to the assessee when the differential income was subject matter of litigation and there is no certainty of the assessee being entitled to such income unless it succeeds in such litigation. Even if an assessee succeeds ultimately in the litigation a debt enforceable against the other party does not get created unless a claim in that behalf was raised before the same being barred by limitation. It is for this reason that an assessee to keep the issue alive has to raise the claim against the other party within the period of limitation which in its view is due to it according to the terms of the contract so as to get an enforceable right for the recovery of the amount as and when it succeeds in the litigation. Though invoices raised constitute fundamental record for maintenance of accounts in the normal course as observed by the Assessing Officer that logic does not hold good when the subject matter was under dispute and was under litigation before the judicial fora including the jurisdictional High Court and Hon ble Supreme Court during the relevant points of time. Assessee s method of accounting only the amount which was not subject matter of litigation and which in fact was received by it from the APTRANSCO in terms of the interim order of the A.P.High Court was in conformity with the Accounting Standard 9 - thus there are no infirmity in the order of the CIT (A) which is accordingly confirmed and the grounds of appeal of the Revenue are rejected. Revenue s appeal is dismissed.

Summary

Issues:
Interpretation of Power Purchase Agreement (PPA) terms for rate determination and invoicing discrepancy.

Analysis:
The appeal by the revenue was against the order of the CIT (A) IV Hyderabad for the assessment year 2005-06. The main issue was the disagreement regarding the rate per unit of power sold by the assessee to APTRANSCO as per the PPA terms. The assessee raised invoices at a rate of Rs. 3.48 per unit, while accounting for sales at Rs. 3.18 per unit, resulting in a difference of Rs. 1,07,31,120. The Assessing Officer added this difference to the total income of the assessee, considering the invoices as fundamental records for accounting purposes. However, the CIT (A) deleted this addition after considering that the income at the higher rate had not been received or was receivable during the relevant year, and no corresponding debt was created in APTRANSCO's books based on the raised invoices.

The revenue, aggrieved by the CIT (A) order, argued that the invoices raised at Rs. 3.48 per unit should be considered as the basis for income recognition, as they are fundamental records. The Departmental Representative emphasized that the differential amount should be treated as deemed income under Section 5 of the Act. On the other hand, the assessee contended that the higher rate in the invoices was to safeguard its claim in ongoing litigation and that revenue should only be recognized when receipt is certain, as per Accounting Standard 9.

The Tribunal considered both arguments and concluded that the income at the higher rate did not accrue to the assessee during the relevant year, especially since it was under dispute and subject to litigation. It was noted that even if the assessee succeeded in the litigation, an enforceable debt would only be created if a claim was raised within the limitation period. Therefore, the invoices raised were not sufficient to deem the income as accrued, and the assessee's method of accounting for the amount actually received was in line with accounting standards and legal precedents. The Tribunal upheld the CIT (A) order, dismissing the revenue's appeal.