2020 (2) TMI 1483 - AAR - Income Tax

Diversion of income by over- riding title - Taxability of Regulatory assets under approval RAUA retained while transferring the generation, transmission and distribution (GTD) undertaking - Whether the regulatory assets under approval (RAUA) which will be recovered by Adani Electricity Mumbai Limited (AEML) in trust for and on behalf of Reliance Infrastructure Limited (RInfra) will not be considered as income of AEML as and when sanctioned/recovered by it ? - HELD THAT - There is a difference between an amount which a person is obliged to apply out of this income and an amount which by the nature of obligation cannot be said to be part of the income of the assessee. Where by an obligation, income is diverted before it reached the assessee, it is deductible ; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. The second payment is merely an obligation to pay another a portion of one's income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable. In our view the regulatory assets under approval (RAUA) received by AEML will not be liable to tax in the hands of AEML but will be taxable in the hands of RInfra of income by overriding title. The first question raised by the applicant is answered in the affirmative. In view of our stand on question No. 1, the question No. 2 is inconsequential. Accordingly, the questions raised are answered as under - Question No. 1. - The regulatory assets under approval (RAUA) received by AEML will not be liable to tax in the hands of AEML but will be taxable in the hands of RInfra on account of diversion of income by overriding title.

Summary

Issues:
Taxability of regulatory assets under approval (RAUA) in the hands of Adani Electricity Mumbai Limited (AEML) and the treatment of the recovered amount in relation to Reliance Infrastructure Ltd. (RInfra).

Analysis:
The case involved the interpretation of whether the regulatory assets under approval (RAUA) retained by RInfra while transferring the generation, transmission, and distribution (GTD) undertaking to AEML should be considered as income of AEML or RInfra. The applicant raised two key questions regarding the taxability and treatment of the RAUA. The applicant argued that the amount representing RAUA, post transfer of GTD undertaking, belongs to RInfra and should be recovered by AEML in trust for and on behalf of RInfra. RInfra claimed that the disallowances made by MERC represent costs incurred by them, and thus, the recovered amount should be passed on to RInfra. AEML, acting as a trustee of RInfra, contended that if the RAUA recovered is treated as income in their hands, the amount passed on to RInfra should be allowed as a business expenditure incurred by AEML for its distribution of electricity.

The Revenue, on the other hand, argued that the RAUA should be considered as income of RInfra due to diversion of income by overriding title. Referring to legal precedents, the Revenue contended that the RAUA, once decided by the Appellate Tribunal for Electricity (ATE) or the Supreme Court, forms part of the recovery of costs incurred by RInfra and cannot be considered as revenue of AEML on transfer of the undertaking. The Revenue highlighted that since RInfra had performed all functions, owned assets, and incurred risks related to RAUA, the profit should be attributed to RInfra.

The Authority for Advance Rulings analyzed the nature of the obligation and the concept of diversion of income by overriding title. The ruling stated that the RAUA received by AEML would not be taxable in their hands but in the hands of RInfra due to diversion of income by overriding title. Consequently, the first question raised by the applicant was answered in the affirmative, leading to the conclusion that the RAUA would be taxable in the hands of RInfra. As a result, the second question raised by the applicant was deemed inconsequential based on the decision regarding the first question.

In summary, the judgment clarified the taxability of RAUA, determining that it would be taxable in the hands of RInfra due to diversion of income by overriding title, resolving the key issues raised by the applicant regarding the treatment of the recovered amount in relation to the transfer of the GTD undertaking.