2014 (7) TMI 768 - HC - Income Tax

Prior period expenditure - accounting policy - increase in tariff - Deduction on power tariff Accrual of liability Held that - All income and expenditure are accounted on accrual basis except for provision made for power tariff assessee was equivocal in its stand, as to the liability - it is only when the actual accrual takes place, that allowance can be permitted, irrespective of the actual payment - Such accrual would take place by the department, only when the matter is settled amicably between the parties to the contract or the adjudication has reached finality the Tribunal rightly disallowed the amount Decided against Assessee.

Issues:
1. Deduction claim of power tariff for earlier years.
2. Invocation of summary power to correct errors.
3. Accrual of liability for power tariff.

Issue 1: Deduction claim of power tariff for earlier years
The case involved a manufacturing unit challenging a power tariff revision by the State Electricity Board. The unit sought deduction of the tariff difference in their returns for the assessment year 1994-95, totaling Rs. 4,53,83,917. This amount included Rs. 3,03,47,000 for previous years and Rs. 1,50,37,000 for the current year. The Income Tax Officer disallowed the claim, leading to appeals up to the Tribunal. The applicant argued that the liability to pay the enhanced tariff was fixed, and thus, the deduction should be allowed. However, the respondent contended that deduction for contractual liabilities requires final settlement or adjudication, which had not occurred in this case. The courts noted the applicant's wavering stance on the liability, as evidenced by their annual report, and upheld the disallowance based on lack of clarity on liability accrual.

Issue 2: Invocation of summary power to correct errors
The Tribunal was questioned on invoking summary power to correct errors apparent on the face of the record. The applicant claimed that the issue was not debated before the Assessing Officer but arose during the appeal stage. The courts held that the invocation of summary power by the Assessing Officer was not justified as the matter had not been conclusively settled or acknowledged by the parties involved. The decision emphasized the need for finality in contractual matters before allowing deductions under the Income Tax Act.

Issue 3: Accrual of liability for power tariff
Regarding the accrual of liability for the power tariff, the courts reiterated that deductions are permissible only when the liability has accrued or when the amount has been paid. The applicant's inconsistent stance on the liability and lack of clarity in acknowledging the liability led to the disallowance of the deduction claim. It was emphasized that accrual for deductions should occur only after final settlement or adjudication, which was absent in this case. The decisions of the Income Tax Officer, Appellate Commissioner, and Tribunal were upheld based on established legal precedents.

In conclusion, the High Court of Andhra Pradesh ruled against the applicant, disallowing the deduction claim for the power tariff difference. The judgment highlighted the importance of clarity and finality in contractual liabilities before allowing deductions under the Income Tax Act.

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