2018 (2) TMI 1351 - HC - Income Tax

Additions for Advance against depreciation (AAD) - MAT - Book profit u/s 115JB - whether is income received in advance , thus making the said income subject to Charge under Chapter-II, as business income under Chapter-IV-D read with sub clause (i) of sub-Section 24 of Section 2 of the Income Tax Act? - Held that - In our view, the matter is covered in favour of the respondent assessee by the judgment in the assessee s case National Hydroelectric Power Corp. Ltd. v. Commissioner Of Income-Tax (2010 (1) TMI 281 - SUPREME COURT) as held advance against depreciation (AAD) was not a reserve nor was an appropriation of profit. The assessee could not use AAD for any purpose (which was possible in the case of a reserve) except to adjust it against future depreciation so as to reduce the tariff in the future years. The AAD was an income received in advance. It was a timing difference. Although the Supreme Court had in that case considered the effect of Explanation-I to Section 115 JB, the observations apply equally to the question before us, namely, whether AAD constitutes income. Although in the context of Explanation-I to Section 115JB, the Supreme Court categorically held that AAD did not enter the stream of income for the purposes of determination of net profit at all . It is clear, therefore, that AAD was held not to constitutes income of the year in question. Further the Supreme Court also held that AAD is income received in advance. In other words, it is not income received for the relevant accounting year. It is in that context that the Supreme Court observed that there is a timing difference and that it represents the adjustment in future and that it is therefore not even carried through the profit and loss account. - Decided in favour of assessee.

Summary

Issues: Appeal against Tribunal's decision upholding CIT (Appeals) order allowing appellant's appeal against Assessing Officer's addition of advance against depreciation.

Analysis:

Issue 1:
The appellant raised substantial questions of law challenging ITAT's decision on the treatment of advance against depreciation. The Hon'ble Supreme Court's decision was cited, emphasizing that advance against depreciation constitutes income received in advance, subject to taxation under specific provisions of the Income Tax Act. The appellant argued that the ITAT erred in dismissing the appeal, contrary to the Supreme Court's ruling. However, the High Court noted that the matter was similar to a case previously decided by the Supreme Court, where it was held that advance against depreciation does not enter the stream of income for net profit determination. The High Court concluded that the questions were resolved in favor of the respondent assessee, upholding the CIT (Appeals) decision.

Issue 2:
The appellant contested the deletion of the addition made by the Assessing Officer under Section 143(3) concerning advance against depreciation. The appellant argued that such income should be taxable as per the provisions of the Income Tax Act, citing Section 2(24) and Section 28. The High Court referred to the Supreme Court's judgment in a similar case, emphasizing that advance against depreciation is not considered income for the relevant accounting year. The Court highlighted that the Supreme Court clarified that advance against depreciation is an adjustment for future depreciation, not meant for appropriation of profits, and does not constitute a reserve. Therefore, the High Court upheld the decision in favor of the respondent-assessee, dismissing the appeal.

In conclusion, the High Court dismissed the appeal, affirming the decision of the CIT (Appeals) and emphasizing the Supreme Court's interpretation that advance against depreciation does not constitute income for the relevant accounting year but is a timing difference for future adjustments.