2006 (3) TMI 280 - AT - Income Tax

Summary

Issues Involved:
1. Allowance of 100% depreciation on service lines and street and signal lighting system.
2. Excessive line loss in transmission of electricity.
3. Amount credited to Contingency Reserve.
4. Deletion of addition on account of free electricity supplied to agriculturists and hut dwellers.
5. Deletion of bad debts.
6. Deduction under section 80P(2)(d) in respect of interest received from cooperative banks.
7. Subsidy received by the assessee.
8. Interest accrued on R.E.C. bonds.

Detailed Analysis:

1. Allowance of 100% Depreciation:
The first issue concerns the allowance of 100% depreciation on service lines and street and signal lighting systems for assessment years 1992-93, 1993-94, 1994-95, and 1995-96. The assessee's claim was initially disallowed on the grounds that these items could not be considered as independent units. On appeal, the Commissioner of Income-tax (Appeals) [CIT(A)] allowed the claim based on earlier years' decisions. However, the tribunal noted that the functional test must be applied to determine if these items could function independently. The matter was remanded back to the Assessing Officer to decide afresh based on the functional test.

2. Excessive Line Loss:
The second issue pertains to the excessive line loss in the transmission of electricity for assessment years 1992-93, 1994-95, and 1995-96. The Assessing Officer made disallowances based on estimated excessive line loss. The CIT(A) found that the line loss was lower than that of the Tamilnadu Electricity Board (TNEB). The tribunal upheld the CIT(A)'s decision, stating that additions cannot be made based on presumptions and that no material evidence was provided by the Revenue to support the disallowance.

3. Amount Credited to Contingency Reserve:
The third issue involves the amount credited to Contingency Reserve for assessment years 1994-95 and 1995-96. The CIT(A) allowed the deduction, treating it as a statutory charge. However, the tribunal, following the Supreme Court's decision in the case of Associated Power Co. Ltd., held that the amount credited to the Contingency Reserve is an appropriation of profits and not a deductible charge. The tribunal set aside the CIT(A)'s order and restored the Assessing Officer's decision.

4. Deletion of Addition on Free Electricity:
The fourth issue relates to the deletion of the addition on account of free electricity supplied to agriculturists and hut dwellers for assessment years 1993-94 and 1997-98. The CIT(A) deleted the addition, stating that there was no accrual of income as the assessee had no enforceable right to receive the subsidy. The tribunal upheld this view, citing the principle that only real income is chargeable to tax, not hypothetical income.

5. Deletion of Bad Debts:
The fifth issue concerns the deletion of bad debts for assessment year 1997-98. The CIT(A) allowed the deduction of bad debts written off, as the assessee had no right to receive the subsidy from the government for free electricity supplied. The tribunal upheld the CIT(A)'s decision, stating that all conditions under section 36(1)(vii) were satisfied.

6. Deduction Under Section 80P(2)(d):
The sixth issue involves the deduction under section 80P(2)(d) for assessment years 1992-93 and 1993-94. The CIT(A) held that the deduction should be allowed on a net basis after deducting expenses related to the interest. The tribunal upheld this view, following the Supreme Court's decision that gross total income must be determined in accordance with other provisions of the Act.

7. Subsidy Received by the Assessee:
The seventh issue pertains to the subsidy received by the assessee for assessment year 1997-98. The CIT(A) treated the subsidy as revenue receipt, as the expenditure incurred was claimed as revenue expenditure. The tribunal upheld this view, stating that the character of the subsidy must be determined by its purpose, and since the expenditure was claimed as revenue, the subsidy received should be treated as revenue receipt.

8. Interest Accrued on R.E.C. Bonds:
The eighth issue concerns the interest accrued on R.E.C. bonds for assessment year 1997-98. The CIT(A) held that the interest accrued in the hands of the assessee as the bonds were in the assessee's name. The tribunal upheld this decision, stating that the interest earned on the bonds is the income of the assessee and does not amount to diversion of income at source.

Conclusion:
- Revenue's appeals for assessment years 1992-93, 1993-94, 1994-95, and 1995-96 are partly allowed.
- Revenue's appeal for assessment year 1997-98 is dismissed.
- Assessee's appeals for assessment years 1992-93, 1993-94, and 1997-98 are dismissed.