2014 (11) TMI 92 - AT - Income Tax

Taxability of advance against depreciation (AAD) Advance against depreciation is reserve or not for computation of MAT u/s 115JB - Held that - Hon ble Supreme Court 2010 (1) TMI 281 - SUPREME COURT has given finding in the SLP filed after considering the observation of the Authority for Advance Ruling that advance against depreciation is not meant for uncertain purposes - Advance against depreciation is an amount that is under obligation right from the inception as the same shall be adjusted in future, hence, cannot be designated as reserve - advance against depreciation is nothing but an adjustment by reducing the normal depreciation including in the future years in such a manner that at the end of the useful life of the plant the same shall be reduced to nil - assessee cannot use the advance against depreciation for any other purposes except to adjust the same against future depreciation so as to reduce the tariff in future years. Once AAD is considered as income as is being alleged by Revenue the obvious implication will be that such income in the Balance Sheet is a reserve. It can t be that AAD is an income and then it vanishes. Income has to be carried to the Balance Sheet and such income carried to Balance Sheet will form part of the Reserve . Since AAD has been held by Supreme Court is not a reserve, this contention of the Revenue can t be accepted. Decided against revenue.

Summary

Issues Involved:
1. Taxability of "Advance Against Depreciation" (AAD).

Detailed Analysis:

1. Taxability of Advance Against Depreciation (AAD):

Background:
The assessee, a public sector enterprise, prepared its accounts as per the Companies Act, 1956, and was audited by the Comptroller and Auditor General of India. The company sold electricity at tariff rates notified by the Central Electricity Regulatory Commission (CERC), which included components like depreciation, AAD, and other expenses. A mechanism was introduced by the Government of India in 1997 allowing generating companies to collect AAD to manage loan repayments. This AAD was to be adjusted against future depreciation, thus reducing future tariffs.

First Round of Appeal:
The Income Tax Appellate Tribunal (ITAT) initially restored the issue to the Commissioner of Income Tax (Appeals) [CIT(A)] regarding the taxability of AAD. The CIT(A) deleted the addition made by the Assessing Officer (AO), which led to the revenue filing an appeal.

Revenue's Contention:
The revenue argued that AAD should be considered income and taxed in the year it was received, based on the Supreme Court's decision that AAD is "income received in advance."

Assessee's Argument:
The assessee contended that AAD was not a reserve or appropriation of profit but an advance meant for a specific future obligation. The Institute of Chartered Accountants of India (ICAI) had advised treating AAD as a liability, which the assessee followed. The AO, however, treated AAD as income for both regular income and book profit computation.

Authority for Advance Ruling (AAR) and Supreme Court:
The AAR ruled that AAD should be added to book profit for Minimum Alternate Tax (MAT) purposes. The assessee appealed to the Supreme Court, which ruled that AAD is not a reserve or appropriation of profit but an "income received in advance" to be adjusted in the future. The Supreme Court emphasized that AAD is a timing difference and should not be added to book profit under section 115JB of the Income Tax Act, 1961.

CIT(A) Decision:
The CIT(A), considering the Supreme Court's ruling, held that AAD could not be considered income for the assessment year under consideration. The CIT(A) noted that AAD is a timing difference and not a reserve, hence it should be treated as a liability and not added to the regular income computation.

ITAT's Final Decision:
The ITAT upheld the CIT(A)'s decision, emphasizing the Supreme Court's findings that AAD is not a reserve and is an amount under obligation to be adjusted in the future. The ITAT concluded that AAD is a liability and not income, thus it should not be added to the normal income computation. The appeals of the revenue were dismissed.

Conclusion:
The ITAT confirmed that AAD is an advance meant for future adjustment and not an income or reserve. The CIT(A)'s deletion of the addition made by the AO was upheld, and the revenue's appeals were dismissed.

Order Pronouncement:
The order was pronounced in open court on September 30, 2014, dismissing all three appeals of the revenue.