2019 (12) TMI 1233 - AT - Income Tax

Reopening of assessment u/s 147 - disallowance made on account of outstanding municipal tax liability invoking the provision of section 43B - HELD THAT - In the present facts, we find that the assessee had disclosed all the items which were considered as reasons for re-opening the assessment, in its audited accounts and even the auditor had given a report of the same. In such a scenario, we hold that there is no merit in the re-assessment proceedings carried out against the assessee where the AO refers to the facts disclosed by the assessee and then record the reasons for re-opening the assessment, such an action cannot be upheld under the provision of section 147 of the Act, in case where four years have lapsed from the end of the assessment year. Accordingly, we find no merit in the re-assessment proceedings carried out u/s 147 of the Act against the assessee. The assessee after collecting the amount had not debited it to the P L Account and whatever amount was not collected, was shown as receivable and contra entry was passed as payable to the State. Once the amount had been debited to the P L Account of the assessee, then the provision of section 43B of the Act were not attracted. In any case, the assessee was only a collecting agent on behalf of the State and it was the amount which was not collected, which was shown as receivable and also on the other side shown as payable to the State. The liability if any, would arise after the amount is collected and that also of the State. In such circumstances, the provision of section 43B of the Act could not be applied and the amount could not be disallowed in the hands of the assessee. Similar accounting has been carried out by the assessee in its books of accounts from Assessment Year 1999-2000 and no disallowance has been made in any of the year. Hon ble Calcutta High Court in the case of CESC Ltd. vs CIT 2015 (5) TMI 795 - CALCUTTA HIGH COURT has held that where the assessee merely acts as Collecting agent for the State Government and pays the same to the State Government on collection, then, the licencee merely acts as a conduit and the electricity duty was not chargeable to the licencee. It was concluded by holding that electricity duty not being a sum payable by the assessee as a primary liability by way of tax, duty, cess or fee, then provisions of section 43B of the Act were not attracted to the licencee/assessee in respect of the electricity duty collected by it for being passed on to the State Government. Applying the said proposition to the issue before us, we hold that there is no merit in the orders of the authorities below in making the aforesaid disallowance u/s 43B. Addition on account of prior period expenses of fixed assets - Revenue is aggrieved that where the fixed assets were capital in nature, the said expenditure could not be allowed in the hands of the assessee - AO denied the claim of the assessee on the grounds that it had claimed depreciation on the said assets, as against the plea of the assessee, it had never claimed any depreciation on such assets - HELD THAT - CIT(A) accepted the plea of the assessee as the original cost as well as the net book value was the same. CIT(A) also perused the fixed assets register in this regard as on 31.03.2005. The statutory auditor had also reported that the assessee had not claimed any depreciation on the fixed assets of ₹ 5.88 crores till the Financial Year 2004-05. In such scenario, the claim of the assessee was allowed. Revenue has failed to rebut the findings of the CIT(A). In the absence of the same and where the assessee in the audited account had not claimed any depreciation on such assets, the order of the Assessing Officer cannot be upheld. The assessee has written off the assets which were not found/traceable and as the assets were scattered over different areas, the entire exercise of listing of such fixed assets got crystallized during the year and hence, the booking of the expenditure under head prior period expenses of fixed assets, merits to be allowed in the hands of the assessee. We confirm the order of CIT(A) and dismiss Ground of appeal No.1 raised by the Revenue. Addition on account of prior period expenses - case of the AO was that where the assessee was following Mercantile System of accounting, no such expenditure on account of prior period expenditure could be allowed in the hands of the assessee - HELD THAT - The first fact is that as against the prior period expenses of ₹ 7.66 crores, the assessee has also shown the prior period income of ₹ 7.74 crores and the net amount which is credited to the P L A/c was ₹ 8,79,015/-. Secondly, due to power purchase of prior period, the sum involved was ₹ 1.64 crores which was paid because there was difference in quantity as recorded by DHBVN and HPGCL from the total purchase 2227 crores. The reconciliation error amounts to only 0.07%, which is acceptable, when the quantity purchased is so high. The assessee had shown this Contingent liability in its balance sheet and since the liabilities crystallized during the year under consideration, the said prior period expenses was allowable in the year under appeal. Further, expenditure booked by the assessee was arrear paid of ₹ 7,15,062/-, interest of ₹ 20,160/- and refund of ₹ 1,61,915/-. All these amounts as per the findings of CIT(A) crystallized during the year. The Revenue has failed to controvert the findings of the CIT(A) in this regard; upholding the same, we dismiss Ground of appeal No.2 raised by the Revenue. Expenditure booked on loss of sale of assets - case of the AO was that no such loss could be debited to the P L A/c - HELD THAT - The explanation of the assessee on the other hand was that the aforesaid losses were on account of flood, cyclone, fire etc. and it was a case of repairs and replacement and not the case of loss of fixed assets per se. We find merit in the plea of the assessee and the nomenclature of the expenditure cannot decide the nature of expenses. What is to be seen is the nature of expenditure and since the same was in the field of Revenue expenditure, the same merits to be allowed in the hands of the assessee. Ground of Appeal No.3 raised by the Revenue is thus dismissed.

Summary

Issues Involved:
1. Validity of reassessment proceedings initiated under Sections 147/148 of the Income Tax Act.
2. Disallowance of outstanding municipal tax liability under Section 43B of the Act.
3. Deletion of additions made by the Assessing Officer (AO) on account of prior period expenses of fixed assets.
4. Deletion of additions made by the AO on account of prior period expenses.
5. Deletion of additions made by the AO on account of expenses claimed under the head "loss due to flood, cyclone, and fire".

Issue-wise Detailed Analysis:

1. Validity of Reassessment Proceedings:
The first issue raised by the assessee was against the reassessment proceedings initiated under Sections 147/148 of the Act. The assessee argued that the reassessment was initiated beyond four years from the end of the assessment year without any failure on their part to make a full and true disclosure. The Tribunal noted that the original assessment was completed under Section 143(3) and all relevant facts were disclosed in the audited balance sheet, director’s report, and audit report. Since the reassessment was based on these disclosed facts, the Tribunal held that the reassessment proceedings were not justified and lacked merit.

2. Disallowance of Outstanding Municipal Tax Liability:
The second issue involved the disallowance of ?11.63 crores on account of outstanding municipal tax liability by invoking Section 43B of the Act. The assessee contended that they acted merely as a collecting agent for the State Government and the amount was not debited to the Profit & Loss Account. The Tribunal referred to the decision of the Hon’ble Calcutta High Court in CESC Ltd. vs CIT and the Kerala High Court in Kerala State Electricity Board vs DCIT, concluding that the provisions of Section 43B were not applicable as the assessee was not the primary liable party. Consequently, the Tribunal allowed the assessee's appeal on this issue.

3. Deletion of Additions on Account of Prior Period Expenses of Fixed Assets:
The Revenue’s appeal challenged the deletion of ?5.88 crores added by the AO as prior period expenses of fixed assets. The assessee explained that these were non-existing fixed assets written off during the year, and no depreciation was claimed on these assets. The Tribunal found that the assessee’s claim was supported by the fixed assets register and the auditor’s report, which confirmed no depreciation was claimed. Thus, the Tribunal upheld the CIT(A)’s decision to delete the addition.

4. Deletion of Additions on Account of Prior Period Expenses:
The Revenue also appealed against the deletion of ?7.66 crores added as prior period expenses. The Tribunal noted that the prior period expenses included a provision of ?5.88 crores, which was already considered separately. The remaining expenses were related to power purchase, arrears, and interest, which crystallized during the year. The Tribunal found that the CIT(A) had rightly allowed these expenses as they were duly substantiated and crystallized during the relevant year. Hence, the Tribunal dismissed the Revenue’s appeal on this ground.

5. Deletion of Additions on Account of Loss Due to Flood, Cyclone, and Fire:
The final issue raised by the Revenue was against the deletion of ?48,70,125/- claimed as expenses due to loss from flood, cyclone, and fire. The assessee argued that these were revenue expenses related to repairs and replacements, not capital losses. The Tribunal agreed with the assessee, noting that the nature of the expenses was revenue and not capital. Therefore, the Tribunal dismissed the Revenue’s appeal on this issue.

Conclusion:
The Tribunal allowed the assessee’s appeal, quashing the reassessment proceedings and reversing the disallowance of municipal tax liability. The Tribunal dismissed the Revenue’s appeal, upholding the CIT(A)’s deletion of additions related to prior period expenses of fixed assets, prior period expenses, and loss due to natural calamities. The order was pronounced in the open court on 24th December 2019.