2018 (3) TMI 1589 - HC - Income Tax

Computing the book profit u/s 115JB - MAT - whether the tariff charged by the assessee from 01.04.2005 and till the final order of the CERC is contingent and cannot be said to have crystallized or attained certainty and is, therefore, liable to be added back to the assessee s income? - Held that - The liability in the present case also has definitely arisen, although it would have to be quantified and discharged to adjust it at a future date, i.e., the date on which the CERC determined the tariff. It is not even suggested by the revenue that the liability was not likely to be incurred. Considering the nature of the assessee s enterprise and the mode of fixation of tariff, it is reasonably certain that the liability would arise. Nor is it suggested that the liability was not capable of being estimated with reasonable certainty. The assessee estimated the liability after taking all the relevant factors into consideration. Indeed, the liability was enhanced on account of the CERC fixing the tariff at a rate lower than that sought by the assessee. The difficulty in estimating does not convert the accrued liability into a conditional one as held by the Supreme Court. Further, as held by the Supreme Court, it is upon the tax authorities to arrive at a proper estimate of the liability having regard to all the circumstances of the case. It is not suggested that the liability was not properly estimated. - Decided in favour of assessee.

Issues Involved:

1. Dismissal of appeal regarding advance against depreciation.
2. Deletion of addition made by the Assessing Officer (AO) under section 143(3) on account of "Advance Against Depreciation."
3. Deletion of addition made by AO in normal income and book profit computed under section 115JB on account of tariff adjustments being unascertained liability.
4. Determination of whether the tariff adjustment liability has crystallized.
5. Deletion of disallowance made by AO in computing book profit under section 115JB on account of provisions for gratuity, leave encashment, post-retirement medical benefits, LTC, baggage allowance, and matching contribution on leave encashment.
6. Deletion of disallowance made by AO in computing book profit under section 115JB in respect of depreciation claimed on land.
7. Application of the decision in the case of M/s Apollo Tyres regarding the computation of book profit not as per the Companies Act.

Issue-wise Detailed Analysis:

1. Dismissal of Appeal Regarding Advance Against Depreciation:
The appellant contended that the Hon'ble ITAT erred in dismissing the appeal by observing that the CIT(A) was correct in holding that advance against depreciation cannot be added under the computation of normal income. The Supreme Court had held that 'advance against depreciation' is 'income received in advance,' thus making it subject to charge under Chapter-II as business income under Chapter-IV-D read with sub-clause (i) of subsection 24 of section 2 of the Income Tax Act. However, this issue was agreed to be answered in favor of the respondent-assessee based on a previous judgment dated 28.02.2018 in the assessee's case.

2. Deletion of Addition Made by AO Under Section 143(3) on Account of "Advance Against Depreciation":
The appellant argued that the ITAT wrongly deleted the addition of ?47.88 crores made by the AO under section 143(3) on account of "Advance Against Depreciation," ignoring the provisions of section 2(24) read with section 28 of the Income Tax Act, which includes profits and gains of any business or profession carried on by the assessee. This issue was also agreed to be answered in favor of the respondent-assessee based on the previous judgment.

3. Deletion of Addition Made by AO in Normal Income and Book Profit Computed Under Section 115JB on Account of Tariff Adjustments Being Unascertained Liability:
The respondent-assessee sells electricity to State Electricity Boards (DISCOMs), with tariffs determined by the Central Electricity Regulatory Commission (CERC). The assessee declared a loss and computed book profit under section 115JB. The AO added back ?51.80 crores to the book profit for computing minimum alternate tax, considering it a contingent liability. The CIT (Appeals) and the Tribunal upheld the assessee's contention that the tariff adjustment was an accrued liability as per the Companies Act and Accounting Standard-1. The Tribunal's decision was based on a similar issue previously raised and resolved in favor of the assessee.

4. Determination of Whether the Tariff Adjustment Liability Has Crystallized:
The court held that the liability had definitely arisen, although it would be quantified and discharged at a future date when the CERC determined the tariff. The liability was reasonably certain and capable of being estimated with reasonable certainty. The assessee followed the mercantile system of accounting and the principle of conservatism as per Accounting Standard-1. The Supreme Court's judgment in Bharat Earth Movers vs. Commissioner of Income-Tax supported this view, stating that a business liability that has definitely arisen should be allowed as a deduction even if it is to be discharged at a future date. The Delhi High Court's decision in NTPC Ltd. vs. Commissioner of Income Tax-V further supported the conclusion that the provision for a reasonably estimated liability is permissible.

5. Deletion of Disallowance Made by AO in Computing Book Profit Under Section 115JB on Account of Provisions for Gratuity, Leave Encashment, Post-Retirement Medical Benefits, LTC, Baggage Allowance, and Matching Contribution on Leave Encashment:
The appellant contended that the ITAT erred in deleting the disallowance of ?27.05 crores made by the AO in computing book profit under section 115JB for various provisions. This issue was agreed to be answered in favor of the respondent-assessee based on the previous judgment.

6. Deletion of Disallowance Made by AO in Computing Book Profit Under Section 115JB in Respect of Depreciation Claimed on Land:
The appellant argued that the ITAT wrongly deleted the disallowance of ?1.00 crore made by the AO in computing book profit under section 115JB for depreciation claimed on land, as no depreciation is allowable on land under the Companies Act. This issue was also agreed to be answered in favor of the respondent-assessee based on the previous judgment.

7. Application of the Decision in the Case of M/s Apollo Tyres Regarding the Computation of Book Profit Not as Per the Companies Act:
The appellant contended that the ITAT erred in applying the decision in the case of M/s Apollo Tyres when the computation of book profit was not as per the Companies Act and wrongly claimed depreciation on land. This issue was agreed to be answered in favor of the respondent-assessee based on the previous judgment.

Conclusion:
The court dismissed the appeal, answering questions 3 and 4 in favor of the assessee and against the revenue, and agreeing that questions 1, 2, 5, 6, and 7 were liable to be answered in favor of the respondent-assessee based on the previous judgment dated 28.02.2018. The court upheld the view that the tariff adjustment liability was an accrued liability and not a contingent one, and that the assessee's accounting practices were consistent with the relevant accounting standards and legal principles.

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