2014 (4) TMI 683 - HC - Income Tax

Power u/s 263 of the Act Withdrawal of additional depreciation Reference made for revision of sales - Whether the CIT fell into error in invoking his power u/s 263 of the Act modifying the assessment order by withdrawing the additional depreciation and further directing the AO to examine the allowance on account of revision of sales afresh Held that - NTPC could not be accused of withholding information or material information, or providing incomplete facts - there was some tentativeness in the CERC Regulations about the tariff rates and conditions that were to be applied for the period 01-04-2004 onwards - The previous Tariff Regulations framed in 2001 were to end on 31.03.2004; yet by the latter date, even though the conditions for tariff applicability had been more or less finalized, the final tariff order, notifying the rates and some final principles, had not been brought into force - the CERC directed that the existing conditions were to be applied till 30.9.2004. NTPC had no choice in the matter but to carry on billing in terms of the previous notification on a provisional basis up to 31.03.2005 or till the approval of tariffs; such billing figures were to be subject to adjustment after final tariff determination - inherently there was a degree of uncertainty and incompleteness in the process - This was reflected in the return when the adjustment of the billing became necessary on account of the application of the CERC notification. NTPC s argument that the tariff for power plants from 2004-09 was lower than the tariff norms for 2000-04 has not been disputed by the Revenue - Even a bare look at the later Tariff Regulations shows that the rate of return was revised downwards - NTPC submits that it accounted sales for electricity for Rs.2212.8 crores based upon the previous experience in tariff fixation orders of CERC - This was even though the billed amount was Rs. 2306.6 crores - The estimate was bona fide and made on a realistic assessment of sales estimation that could be realized in terms of accepted tariff notifications - There was nothing erroneous or prejudicial to Revenue s interest in such estimate. Power generation companies owned or controlled by the Central Government are a sub-species of business entities for which a separate provision has been enacted by the Act - the income of utilities, especially ones subject to stringent public control, are tightly regulated in terms of what are the accounting methods to be adopted, how depreciation is to be claimed, allowances rate of return on capital, etc. -All the aspects are subject to CERC Regulations - the transition between the old (2001) CERC Regulations, and the later ones (2004-2009), had not been fully worked out by the CERC as to what had to be recovered by NTPC and other entities it is directed that the previous regime be followed - for a portion of previous accounting periods, provisional figures were being indicated as income estimates, and depending on how the final figures were worked out at times, higher figures would be offered as amounts received in excess of the sum estimated and reported during other periods - Relying upon Shree Sajjan Mills Ltd v. CIT 1985 (10) TMI 2 - SUPREME Court - A provision made on a reasonable basis, it would be in the nature of an ascertained liability and that in a mercantile system of accounting, provision for liability ascertained during the course of the relevant accounting period, which is payable at a future is permissible. The court is satisfied that the AO s order was made after appropriate inquiry; the absence of discussion regarding downward revision of sales figures in this case did not make it any less vulnerable to correction u/s 263 - The view taken by him is one which is endorsed by law, as the CERC Regulations left the NTPC with little choice to make such revision awaiting a final determination in regard to the whole period after the expiry of the assessment in that instance - The Commissioner acted erroneously in exercising revisional power u/s 263 Decided in favour of Assessee.

Issues Involved:
1. Invocation of Section 263 of the Income Tax Act by the Commissioner.
2. Withdrawal of additional depreciation under Section 32(1)(iia) of the Income Tax Act.
3. Provisional revision of sales by NTPC and its impact on the assessment.

Detailed Analysis:

1. Invocation of Section 263 of the Income Tax Act by the Commissioner:
The primary issue in this case is whether the Commissioner of Income Tax erred in invoking his power under Section 263 of the Income Tax Act, 1961, to modify the assessment order. The Commissioner believed that the Assessing Officer (AO) allowed additional depreciation and reduced sales without proper deliberation, rendering the order erroneous and prejudicial to the revenue's interest. The Commissioner issued a show-cause notice to NTPC, questioning the allowance of additional depreciation and the provisional revision of sales.

2. Withdrawal of Additional Depreciation under Section 32(1)(iia) of the Income Tax Act:
The Commissioner observed that NTPC claimed additional depreciation of Rs. 187,55,71,000 on new assets at Ramagundam and Talcher Super Power Plants under Section 32(1)(iia). However, the Commissioner opined that generation of power does not qualify as "manufacture or production of any article or thing" as required by the section. The Commissioner noted that the AO allowed this depreciation without proper examination, making the order erroneous and prejudicial to the revenue. Consequently, the Commissioner directed the AO to withdraw the additional depreciation.

3. Provisional Revision of Sales by NTPC and Its Impact on the Assessment:
NTPC had raised total sales bills amounting to Rs. 23066.03 crores based on earlier norms of the Central Electricity Regulatory Commission (CERC). However, since the final CERC order was pending, NTPC provisionally revised the sales downwards to Rs. 22128 crores without issuing corresponding credit notes to customers. The Commissioner found that the AO permitted this reduction without proper inquiry, resulting in an erroneous order prejudicial to the revenue. The Commissioner directed the AO to re-examine this issue.

ITAT's Ruling:
The Income Tax Appellate Tribunal (ITAT) upheld the Commissioner's order, stating that the AO failed to conduct a proper inquiry into the provisional revision of sales. The ITAT noted that the absence of inquiry rendered the AO's order erroneous and prejudicial to the revenue. The ITAT emphasized that when the AO fails to verify an issue, causing potential revenue loss, the assessment order can be set aside.

High Court's Analysis and Findings:
The High Court examined the relevant CERC regulations and found that NTPC had no choice but to follow provisional billing based on previous norms due to the pending final tariff determination. The court noted that NTPC's downward revision of sales was based on past experience and realistic assessment. The court also observed that NTPC disclosed all relevant facts in its annual report, and there was no withholding of information.

The High Court emphasized that the expression "error of law" resulting in prejudice to the revenue should not be given a wide connotation. Where two views are possible, the Commissioner should not exercise his power under Section 263. The court found that the AO's order was made after appropriate inquiry, and the absence of specific discussion on the downward revision of sales did not make the order erroneous.

Conclusion:
The High Court concluded that the Commissioner acted erroneously in exercising revisional power under Section 263. The orders of the Commissioner and the ITAT were set aside, and the AO's original order was restored. The appeal was allowed in favor of the assessee, NTPC.

← Previous Next →