2024 (5) TMI 1294 - AT - Income Tax

Accrual of income - Chargeability of income-tax attributable to surcharge income offered by the assessee on receipt basis - real v/s hypothetical income - assessee argued that the surcharge, calculated at 15% per annum for delayed payments, should be taxed only upon actual receipt - AO has rejected the assessee s method of accounting for surcharge and did not take into account the accounting standards as applicable to the assessee company - HELD THAT - As decided in DAKSHIN HARYANA BIJLI VITRAN NIGAM LTD., HISAR 2014 (11) TMI 58 - PUNJAB HARYANA HIGH COURT basic principles of accrual or mercantile system as laid down by various authorities are to be applied in a careful manner. The assessee being a sate PSU; the surcharge on delayed payment being disputable item; was not mandatorily payable at the time of payment of electricity consumption bill; was not an accrued receipt in view of the accounting policy accepted by the revenue. Therefore, such amount of surcharge cannot be held to be taxable as it is not the real income of the assessee and is hypothetical by nature in given facts and circumstances. Thus as AO has to verify the fact as to when the surcharge was realized and offered as income. Thus while allowing the grounds in all the appeal covered by this issue, we direct the assessing officer to consider the claim of the assessee after verifying the year in which the surcharge income has been offered to tax. Addition u/s 14A r.w.r. 8D - Revenue is aggrieved with the findings of the learned first appellate authority wherein relief is granted to assessee by reducing the quantum of disallowances made by the assessing officer and the assessee is aggrieved with the additions sustained - Assessee requested that additional evidence i.e. the certificate of the CA issued with respect to the expenses incurred for the purpose of exempt income may kindly be taken on record - HELD THAT - Considering the totality of the facts and circumstances, we admit the additional evidence filed by the assessee i.e. the certificate of the CA and restore the issue to the assessing officer for examining it afresh. Needless to say that the Assessing Officer will grant sufficient opportunity to the assessee while giving effect to the directions of this order. In Assessment Year 2014-15, Ld. Counsel has raised additional contention that the investments were made from the own funds of the assessee and not from the borrowed funds and hence no disallowances is permissible in view of the judgment of HDFC Bank 2014 (8) TMI 119 - BOMBAY HIGH COURT That being the settled position of law to which Ld. DR has not rebutted anything. We direct the assessing officer also to examine the position of own funds in the impugned years while deciding the disallowance made u/s 14A of the Act. Appeals are allowed for statistical purposes.

Summary

Issues Involved:
1. Chargeability of income-tax attributable to surcharge income offered by the assessee on a receipt basis.
2. Disallowance of certain expenses by invoking the provisions of Rule 8D read with Section 14A of the Income-Tax Act, 1961.

Detailed Analysis:

Issue 1: Chargeability of Income-Tax Attributable to Surcharge Income

The primary issue is whether the surcharge for delayed payment should be taxed on an accrual basis or receipt basis. The agreement for the sale/purchase of energy includes a clause for a 15% per annum surcharge on delayed payments. The assessee argued that the surcharge should be accounted for only when actually received from the customer, as the primary purpose of the surcharge is to ensure the realization of dues, and the actual receipt varies case by case.

The assessee cited the judgment of the Hon'ble Punjab & Haryana High Court in the case of CIT vs. Dakshin Haryana Bijli Vitran Nigam Ltd., which held that surcharge income should not be taxed unless actually received. The court emphasized that income tax is fundamentally a levy on income, and hypothetical income should not be taxed merely because it is recorded in the books.

The Tribunal found that the facts of the present case were similar to those in the Dakshin Haryana Bijli Vitran Nigam Ltd. case. It directed the Assessing Officer to verify when the surcharge was realized and offered as income. The grounds related to this issue were allowed, and the Assessing Officer was instructed to consider the claim of the assessee after verification.

Issue 2: Disallowance of Expenses Under Rule 8D Read with Section 14A

The second issue pertains to the disallowance of expenses by invoking Rule 8D read with Section 14A of the Income-Tax Act. Both the assessee and the Revenue appealed regarding the assessment years 2011-12 to 2015-16. The Revenue contested the relief granted to the assessee by reducing the quantum of disallowances, while the assessee challenged the sustained additions.

The assessee's counsel argued that similar disallowances had been dealt with by the ITAT in earlier assessment years (2008-09 to 2010-11), where additional evidence, specifically a CA certificate certifying the quantum of expenses incurred vis-a-vis earning of exempt income, was considered. The Tribunal admitted the additional evidence and restored the issue to the Assessing Officer for fresh examination, ensuring sufficient opportunity for the assessee to present their case.

For the assessment year 2014-15, the assessee raised an additional contention that the investments were made from their own funds, not borrowed funds, citing the judgment of the Hon'ble Punjab & Haryana High Court in CIT vs. HDFC Bank. The Tribunal directed the Assessing Officer to examine the position of own funds while deciding the disallowance under Section 14A.

Conclusion:

The appeals were allowed for statistical purposes, with the Assessing Officer directed to verify the facts and re-examine the issues based on the Tribunal's directions. The order was pronounced in the open court on 27/05/2024.