2022 (6) TMI 949 - AT - Income Tax

Recognition of income - scope of AS -9 - addition being the amount already realized and shown as income in the FY 2013-14 as per arbitration award - HELD THAT - As noted that it is not the case that the assessee had made a fair, honest estimate of it s loss, so that it is only the difference, plus or minus, that would require to be claimed set-off of or offered as income on award of compensation. That is, the assessee invokes AS-9 without following the accounting precepts, making a reasonable accounting estimate in the light of the facts of the case and the law in the matter. The matter thus reduces to one of reasonableness subject to the terms of the agreement, being the guiding criteria. It is only where so that it can be said that, applying AS-9, any amount beyond this sum cannot, despite its claim, be regarded as arisen to the assessee, being uncertain as to its realisation, de hors which it becomes a bald claim. We have on facts found that to be the grievance or cause of objection of the buyer-company. Though it may appear that the decision by the first appellate authority, which stands confirmed by us, has been due to the availability of the award, it is not so. The award only provides a ready figure of a reasonable compensation and, thus, adopted as a surrogate measure therefor, which would otherwise need to be worked out, and toward which we have suggested a formula based on PSA itself. The loss awarded by the Commission is on 109.74 MU (million units), which were agreed to be sold at Rs. 5/5.50 per unit. The profit (loss) as per the P L A/c, assuming the sale of excess power at that rate, as against that obtaining, would easily yield the extent of the loss suffered by the assessee, which, where in excess of Rs. 2 per kwh (Rs. 21.89 cr.), is to be capped at that sum. The assessee made an exorbitant claim, which led to its non-acceptance. It is for this reason that we have found the facts of the case and, therefore, the issue at hand, as squarely covered by Chunilal V. Mehta Sons P. Ltd. ( 1971 (8) TMI 4 - SUPREME COURT with reference to which, as indeed the order of MPERC read with PSA, the parties were required to address their arguments during hearing, though choose to do so de hors the same. There is no mention of the nature and extent of the dispute in FGP Ltd. 2008 (6) TMI 343 - BOMBAY HIGH COURT in which case the Hon'ble Court did not have the benefit of the arbitral award, available in the instant case even before the AO. The matter of accrual, pertain as it does to the accrual of a right to income, is necessarily to be defined in terms of money value, de hors which it carries no meaning. It is for example nobody s case that there is no accrual of a right to the assessee to any sum on the non-scheduling of agreed power by LANCO, and which, to the extent it does, is only for the current year. We, accordingly, find no reason for any interference with the order of the ld. CIT(A), who has, following Chunilal V. Mehta Sons P. Ltd. 1971 (8) TMI 4 - SUPREME COURT unfortunately not relied upon by either party before us, held the accrual of income only at Rs. 14.06 cr. and, further, for AY 2011-12. We decide accordingly. Provision for terminal benefits to it's employees disallowed for want of production of payment vouchers - suo moto disallowance made by assessee - HELD THAT - We know, some part of the balance provision for the current year, i.e., Rs. 20.60 lacs (Rs.130.89 lacs Rs. 110.29 lacs) may have been paid by the due date of filing of the return for current year u/s. 139(1), in which case the same also qualifies for deduction u/s. 37(1) r/w s. 43B. The order of the ld. CIT(A), who has allowed the assessee a relief of Rs. 21.47 lacs is, thus, on the face of it, incorrect. He, in doing so, allows the assessee credit for Rs. 130 lacs paid on 31/03/2011, even as he specifically notes that the assessee did not file any confirmation for payment of Rs.130 cr. from the M.P. Terminal Benefit Trust during appellate proceedings. Rather, his order is wholly inconsistent with and without regard to that by the AO, the basis of disallowance by whom is the non-production of payment vouchers by the assessee before him, which finding or infirmity therefore survives the impugned order. Suo motu disallowance by the assessee - As the payment/s made against each provision, as also if the same is to an approved fund. It is only when armed with this information, which he is at liberty to verify, that the AO could allow the assessee s claim in respect of payment of Rs. 240.29 lacs (Rs. 130 cr. Rs. 110.29 cr.) made during the current year, as indeed that qua the current year provision made in the following year, i.e., up to the due date of filing the return of income u/s. 139(1). And which we, vacating the finding/s by the ld. CIT(A), subject to his satisfaction, direct the AO to and, further, to record his dissatisfaction, if any, per a speaking order, to the extent the said deduction is not allowed by him. Assessee s appeal is partly allowed

Summary

Issues Involved:
1. Accrual of income and recognition of compensation claim.
2. Provision for terminal benefits to employees.

Issue-wise Detailed Analysis:

1. Accrual of Income and Recognition of Compensation Claim:

The primary issue revolves around the recognition of income from a compensation claim by the assessee, a power trading company, against LANCO for shortfall in power purchase as per the Power Sale Agreement (PSA). The assessee raised a compensation claim of Rs. 86.56 crores, of which Rs. 5 crores were realized through a letter of credit. The remaining Rs. 81.56 crores were disputed by LANCO. The Assessing Officer (AO) considered Rs. 72.50 crores as accrued income for the year, based on an award by the Madhya Pradesh Electricity Regulatory Commission (MPERC) which settled the compensation at Rs. 14.06 crores.

The CIT(A) allowed relief for Rs. 63.44 crores, following the principle that only the amount determined by MPERC could be regarded as accrued income. The CIT(A) relied on the decision in CIT vs. Chunilal V. Mehta & Sons P. Ltd. [1971] 82 ITR 54 (SC), which emphasizes that income accrues when the right to receive it is established.

The Tribunal upheld the CIT(A)'s decision, stating that the assessee's reliance on Accounting Standard (AS) 9 was misplaced. The Tribunal noted that the compensation claim was not entirely in terms of the PSA and was considered exaggerated. The MPERC's award, based on actual loss, was deemed reasonable, and only Rs. 14.06 crores were considered accrued income for the relevant year. The Tribunal clarified that the excess claim of Rs. 72.50 crores could not be regarded as accrued and thus, no bad debt claim could arise for this amount. The Tribunal also referenced the Supreme Court's decisions in Fateh Chand vs. Balkishan Dass and Union of India vs. Raman Iron Foundry, which elucidate the principles of compensation under the Indian Contract Act.

2. Provision for Terminal Benefits to Employees:

The second issue pertains to the provision for terminal benefits amounting to Rs. 1,30,89,458, which was disallowed by the AO for want of payment vouchers. The CIT(A) allowed the claim partially, recognizing Rs. 1,09,42,819 as the closing balance, thus allowing a relief of Rs. 21,46,639.

The Tribunal scrutinized the provision account and noted that the payment of Rs. 130 crores was in respect of the opening provision, not the current year's provision. The Tribunal found that Rs. 165.75 lacs, part of the opening provision, had been disallowed by the assessee in previous years. The Tribunal directed the AO to verify the payments against the provisions and allow deductions subject to satisfaction of conditions under sections 37(1) and 43B of the Income Tax Act.

The Tribunal emphasized that deductions should be allowed for payments made during the year and for provisions made up to the due date of filing the return. The AO was instructed to verify the details and allow the claim accordingly, ensuring no double taxation occurs.

Conclusion:

The Tribunal upheld the CIT(A)'s decision on the accrual of income, recognizing only Rs. 14.06 crores as accrued for the relevant year. The Tribunal directed the AO to verify and allow the provision for terminal benefits based on actual payments and compliance with relevant sections of the Income Tax Act. The assessee's appeal was partly allowed, and the Revenue's appeal was dismissed.