2021 (6) TMI 881 - AT - Income Tax

Accrual of income - real income - Addition to total income on account of capacity charges deemed generation charges and capacity index incentives - assessee is following mercantile system of accounting - as submitted by the assessee that UERC (Terms and Conditions for determination of Hydro Generation Tariff) Regulation 2004 Regulation 20(2) provided for capacity charges Regulation 29(1) provided for capacity index incentives and Regulation 31(1) provided for deemed generation - HELD THAT - In the financial statements capacity charges deemed generation charges and capacity Index incentive have been shown as a disclosure in the balance Sheet as an amount claimable by the assessee from UPCL which has not been acknowledged but disputed by the UPCL since inception and the matter has been referred to the Regulatory Authority for settlement from time to time. Facts on record demonstrate that since the methodology was to be determined and there were several technical aspects which were to be finalized due to lack of clarity in the regulations the determination of amount on account of capacity charges deemed generation charges and capacity index incentives could not be quantified. The issue was disputed by UPCL. UERC is a regulatory authority which fixes the tariff on annual basis in accordance with the Terms Conditions for determination of Hydro Generation Tariff Regulation 2004. The method of calculation of these charges was not clear and as such this matter became the subject matter of dispute. The assessee filed a petition before the UERC on 25th March 2014 due to prolonged dispute between UPCL and UJVNL and had also sought necessary directions from the UERC on the applicability and payability of capacity charges deemed generation charges and capacity Index incentive. We find merit in submissions made by the Ld AR that since the basis modality and the amount on which the capacity charges deemed generation charges and capacity Index Incentives were to be determined/ quantified it was difficult for the assessee to ascertain the correct and actual amount of charges recoverable from UPCL. We are therefore unable to sustain the addition made by the AO. AR has also brought on record the fact that the assessee has started receiving the disputed amounts from UPCL in monthly installments w.e.f August 2015 and that the assessee has voluntarily agreed to disclose the entire amount of capacity charges Deemed Generation Charges and capacity index incentive charges during the FY 2015-16 relevant to AY 2016-17. Once the correct amount of income has already been offered to tax in AY 2016-17 we find no merit in the addition made by the AO in the present order of assessment. We therefore allow ground of the appeal and direct the AO to delete the addition made.

Summary

Issues Involved:
1. Improper opportunity provided to the appellant at the time of assessment.
2. Addition of ?40,66,56,344/- on account of capacity charges, deemed generation charges, and capacity index incentives.
3. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act.
4. Allowance of depreciation on assets with NIL actual cost as per section 43(1) of the Income Tax Act.

Detailed Analysis:

1. Improper Opportunity Provided to the Appellant:
The appellant claimed that they were not given a proper opportunity to justify their return of income during the assessment. However, this ground was dismissed as it was considered general without specific grievances on the merits of the case.

2. Addition of ?40,66,56,344/- on Account of Capacity Charges, Deemed Generation Charges, and Capacity Index Incentives:
The assessee disputed the addition made by the Assessing Officer (AO) for the mentioned amount. The AO observed that the assessee, following a mercantile system of accounting, had not included these items in its total income computation. The assessee argued that the income had not accrued due to pending disputes with the parties. The AO, however, added the amount to the income, stating that the assessee had recognized these charges in their books and was attempting to recover them from UPCL.

On appeal, the CIT (A) upheld the AO's addition, noting that the income had accrued to the assessee and was chargeable to tax. The CIT (A) referenced past decisions and stated that the regulatory authority, UERC, had determined these charges as payable. The CIT (A) dismissed the assessee's argument that the income was uncertain and should not be recognized.

The tribunal, however, found merit in the assessee's submission that the charges were disputed and the methodology for calculation was unclear. The tribunal referenced the Supreme Court's judgment in Godhra Electricity Co. Ltd. v. CIT, which held that no real income had accrued to the assessee due to ongoing disputes. The tribunal noted that the UERC had settled the dispute in 2015, and the assessee had started receiving payments in installments from August 2015. The tribunal concluded that the correct amount of income had already been offered to tax in AY 2016-17, and thus, the addition made by the AO was not sustainable. Consequently, the tribunal directed the AO to delete the addition of ?40,66,56,344/-.

3. Initiation of Penalty Proceedings under Section 271(1)(c):
The initiation of penalty proceedings was challenged by the assessee but was dismissed by the tribunal, stating that penalty proceedings are separate from the assessment proceedings.

4. Allowance of Depreciation on Assets with NIL Actual Cost:
The revenue challenged the CIT (A)'s decision to allow depreciation on assets with NIL actual cost as per section 43(1) of the Income Tax Act. The tribunal noted that this issue had been consistently decided in favor of the assessee in previous years. The tribunal referred to its recent decision in ITA No. 5124/Del/2015 for AY 2004-05, which applied mutatis mutandis to the present appeal. As a result, the tribunal found no merit in the revenue's appeal and dismissed it.

Conclusion:
The tribunal allowed the assessee's appeal regarding the addition of ?40,66,56,344/- and dismissed the revenue's appeal concerning the depreciation on assets. The final result was in favor of the assessee, with the tribunal directing the deletion of the disputed addition and upholding the allowance of depreciation.