2015 (9) TMI 1682 - AT - Income Tax

Accrual of income - Disallowance of revenue subsidies and grants - short receipt of earlier years income that it was not expenditure of the year under appeal - AO asked the assessee to explain why the same should not be disallowed and added back to its total income - HELD THAT - Assessee was entitled to get subsidy @3% from the state government that as per the agreement with WB it was decided that it would get higher subsidy i. e. @4. 5%, that subsequently the state government reduced the subsidy to 3% that the assessee had in pursuance of the agreement, showed subsidy at higher rate that after resolution of the state government it decided to reverse the entries of subsidy disclosed in the earlier years. We have perused the resolution and it clearly shows that the assessee was informed by the state government about reduction in subsidy during the year under consideration only. Therefore, if the reduced the 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. Basic principle of taxation jurisprudence lays down that income which an assessee could have,but has not earned cannot be made taxable as income accrued to him. In other words what has really accrued to an assessee has to be found out and what has accrued must be considered from the point of view of real income taking the probability or improbability of realisation in a realistic manner. See MOTOR CREDIT CO. PVT. LIMITED 1980 (4) TMI 64 - MADRAS HIGH COURT In the case before us the assessee came to know about the fact-that the income accrued to it in pursuance of agreement entered in to with World Bank would not be received-during the year under appeal. Therefore in our opinion the FAA has rightly held that the assessee was entitled to show lesser receipt during the year. Confirming his order we decide first ground of appeal against the AO. Addition being interest of borrowed capital - assessee claimed expenditure in respect of various capital projects undertaken by it and which were capitalised in the books of accounts that same expenditure was claimed u/s. 36(1)(iii) - Rejection of claim made by the assessee on the ground that that the same 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) of the Act, that the 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 that even if the interest is allowable it would be disallowed u/s. 43B as proof of payment has not been produced - HELD THAT - This issue is directly covered by the judgment of the Hon ble Apex court delivered in the case of Core Health Care Ltd. 2008 (2) TMI 8 - SUPREME COURT unlike section 37 which expressly excludes an expense of a capital nature, section 36(1)(iii) emphasises the user of the capital and not the user of the asset which comes into existence as a result of the borrowed capital. The Legislature has therefore, made no distinction in section 36(1)(iii) between capital borrowed for a revenue purpose and capital borrowed for a capital purpose . An assessee is entitled to claim interest paid on borrowed capital provided that the capital is used for business purpose irrespective of what may be the result of using the capital which the assessee has borrowed. Actual cost of an asset has no relevancy in relation to section 36(1)(iii) - The proviso inserted in section 36(1)(iii) by the Finance Act, 2003, with effect from April 1, 2004, will operate prospectively - Decided against revenue. Disallowance of prior period expenses - HELD THAT - We find that the AO had disallowed the claim of the assessee as it had not filed any evidence in that regard that the FAA had held that the assessee had itself disallowed two item that the expenditure of earlier years could be allowed in subsequent years. 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. But for other expenses we have to consider the relevant facts. From the order of the FAA we do not find that such details were made available to him. Even if such details were filed he has not mentioned a single word about it. He has allowed the expenditure because law permits prior period expenses to be allowed. He totally forgot that the AO had made the disallowance because the claim made by the assessee was not substantiated by evidences. Before us,also no material was produced to prove that crystallization had actually taken place during the year. In our opinion,an assessee has to show the manner in which the earlier years expenditure was quantified in the year under appeal. Without these facts no expense can be allowed. Following particular guide line or rule governing a particular activity does not absolve the assessee from filing of documentary evidence in support of its claim for an expenditure- especially when the AO had directed it to file the same during the assessment proceedings. In the cases relied upon by the assessee the Hon ble courts or the Tribunal had not dealt with the issue of crystallisation of expenses in a particular year. Thus, the facts are totally distinguishable. Considering the peculiar facts of the issue before us,we hold that the 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. So,partly revering the order of the FAA we decide ground no. 3 in favour of the AO,in part. Disallowance of electricity duty u/s 43B - HELD THAT - Electricity duty is not being a sum payable by the assessee as a primary liability by way of tax, duty cess or fee, section 43B is not attracted to the assessee in respect of electricity duty collected by it for being passed on the State Govt. See KERALA STATE ELECTRICITY BOARD VERSUS DEPUTY COMMISSIONER OF INCOME-TAX 2010 (11) TMI 127 - KERALA HIGH COURT and M/S MAHARASHTRA STATE ELECTRICITY DISTRIBUTION CO. LTD. AND VICA-VERSA 2015 (10) TMI 597 - ITAT MUMBAI . D isallowance of loss suffered by the assessee on account of flood,cyclone/storm, theft etc. - HELD THAT - . As far as loss of stock in concerned we are opinion that same is to be allowed as revenue expenditure. So the order of the FAA is reversed to that extent. For the balance amount we hold that the assets were forming part of block of assets. Therefore, depreciation should be allowed with regard to them. We find that issue of the claim of depreciation about assets of block has been decided in favour of the assessee by the decision of Tribunal relied upon by the assessee. Ground no. 2-3 are allowed in favour of the assessee in part. Write off of intangible assets - AO disallowed the claim on the ground that the same was capital in nature - HELD THAT - In the matter of Raychem RPG Ltd 2011 (7) TMI 953 - BOMBAY HIGH COURT has held that of the software facilitated the assessee's trading operations or enabled the management to conduct the assessee's business more efficiently or more profitably then it was not in the nature of profit-making apparatus and that the expenditure was to be allowed. We find that lawyer s fees has been held to allowable expenditure in the matter of Bombay Cycle and Motor agencies Ltd. 1979 (1) TMI 64 - BOMBAY HIGH COURT . In that matter fees was paid to draw up lease agreement. We find that the FAA has followed the orders for AY. 99-00 and 2000-01 but has not distinguished the facts of the case of AY. 1997-98 and the facts of the matter under appeal. Order passed without giving any reason for not following the decision favouring the assessee comes under the category of non speaking order. The order of the FAA falls under that category hence cannot be endorsed. So, reversing his order we decide last ground in favour of the assessee.

Summary

Issues Involved:
1. Deduction of Rs. 373.25 crores as revenue subsidies and grants.
2. Deletion of addition of Rs. 161.64 crores being interest on borrowed capital.
3. Allowance of prior period expenditure.
4. Disallowance of electricity duty under section 43B.
5. Disallowance of losses due to flood, cyclone, fire, etc.
6. Disallowance of write-off of intangible assets.

Detailed Analysis:

1. Deduction of Rs. 373.25 Crores as Revenue Subsidies and Grants:
The first ground of appeal pertains to the allowance of a deduction of Rs. 373.25 crores. The Assessing Officer (AO) disallowed the claim, stating that it was not an expenditure of the year under appeal but pertained to earlier years. The First Appellate Authority (FAA) held that the assessee, a government undertaking, was governed by specific acts and state government orders, and that the subsidy was initially accounted for at 4.5% as per a World Bank agreement but later revised to 3% by the state government. The FAA concluded that the reduction in subsidy was justified and deleted the addition made by the AO. The Tribunal upheld the FAA's decision, stating that income shown in anticipation but not realized cannot be taxed.

2. Deletion of Addition of Rs. 161.64 Crores Being Interest on Borrowed Capital:
The second ground of appeal involves the deletion of an addition of Rs. 161.64 crores being interest on borrowed capital. The AO disallowed the claim, stating that the interest could only be allowed if payable after the assets were put to use. The FAA, referring to section 36(1)(iii) and the Supreme Court's decision in Core Health Care Ltd., held that the proviso to section 36(1)(iii) was not applicable for the year under appeal and allowed the claim. The Tribunal upheld the FAA's decision, following the Supreme Court's judgment.

3. Allowance of Prior Period Expenditure:
The third ground of appeal deals with the disallowance of prior period expenses. The AO disallowed Rs. 944 crores as prior period expenses, stating that the assessee failed to provide details proving they crystallized during the year. The FAA held that the assessee's accounting treatment was in accordance with the guidelines for electricity companies and allowed the expenses. The Tribunal partially reversed the FAA's order, holding that the assessee failed to establish that the expenses crystallized during the year under appeal.

4. Disallowance of Electricity Duty Under Section 43B:
The first ground of the cross-objection pertains to the disallowance of electricity duty of Rs. 455.41 crores under section 43B. The AO applied section 43B, citing the Supreme Court's decision in Chowranghee Sales Bureau. The FAA upheld the AO's decision. The Tribunal, following the Kerala High Court's decision in Kerala State Electricity Board and the Tribunal's decision in Maharashtra State Electricity Distribution Co. Ltd., held that section 43B was not applicable to electricity duty collected by the assessee on behalf of the state government and reversed the FAA's order.

5. Disallowance of Losses Due to Flood, Cyclone, Fire, etc.:
The second and third grounds of the cross-objection involve the disallowance of losses of Rs. 6.95 lakhs and Rs. 4.08 lakhs, respectively, due to flood, cyclone, fire, etc. The AO disallowed the losses, stating they were capital in nature. The FAA upheld the disallowance. The Tribunal allowed the loss of stock-in-trade as revenue expenditure and directed that depreciation be allowed for the assets forming part of the block of assets.

6. Disallowance of Write-off of Intangible Assets:
The last ground of the cross-objection pertains to the disallowance of a write-off of intangible assets of Rs. 1.95 crores. The AO disallowed the claim, stating it was capital in nature. The FAA upheld the AO's decision. The Tribunal, referring to various judicial precedents, held that the expenses related to software and lawyer's fees were allowable and reversed the FAA's order.

Conclusion:
The appeals filed by the AO and the cross-objections by the assessee for all three assessment years were partly allowed. The Tribunal upheld the FAA's decisions on some issues while reversing others, providing a detailed analysis and rationale for each decision.