2018 (11) TMI 205 - AT - Income Tax

Accrual of income - Reduction of efficiency gain amount in their profit and loss account - revenue model determined by the DERC - excess receipt to be accounted for while determining the tariff for the next year and not available to the assessee to spend in the way they desire - Held that - The assessee is under a statutory obligation to set apart 50% of the excess amount generated due to the overreaching of the targets, for the purpose of the consideration of the DERC to fix the future tariffs either to give relief to the consumers or otherwise. A reading of the statute, notification and the orders of the DERC clearly indicates that the assessee is not free to use this efficiency gain amount the way it likes. Whether or not a separate account is opened, when this amount is separately shown under this head in the books, it makes little difference in so far as the application of the ratio of Puna Electricity Supply Co. Ltd. (1965 (4) TMI 20 - SUPREME COURT) is concerned. Crux of the matter is that the assessee in both the cases has no right to appropriate the efficiency gain amount and such amount is at the disposal of the DERC though not physically but in respect of utilization thereof. We, therefore, are convinced that the ratio of Puna Electricity Supply Co. Ltd (supra) is squarely applicable to the case of the assessee before us and on that score, we allow the contention of the assessee that they have rightly reduced the efficiency gain amount in their profit and loss account. Addition u/s 14A r.w.r. 8D - Held that - AO recorded reasons for not accepting the statement of the assessee that no expenditure was incurred to earn the exempt income. AO also examined the cash flow statement furnished by the assessee. The reasons recorded by the assessing officer are in sufficient compliance with the requirement of 14A (2) of the act. Coming to the argument that Rule 8D is only prospective in its operation and has no application to the assessment year 2006-07, the Hon ble Apex Court in CIT vs. Essar Teleholdings Ltd (2018 (2) TMI 115 - SUPREME COURT OF INDIA) held that Rule 8D is prospective and applies only from the assessment year 2008-09. Inasmuch as Rule 8D has no application to the assessment year 2006-07, the disallowance under section 14A has to be computed on some reasonable basis as has been held in several decisions of the jurisdictional High Court including the one in Maxopp Investments Ltd vs. CIT 2011 (11) TMI 267 - DELHI HIGH COURT . We, therefore, set aside the impugned order and restore the matter to the file of the learned assessing officer for computing the fresh amount of disallowance under section 14A on a reasonable basis, after affording a reasonable opportunity of being heard to the assessee. Disallowance of depreciation on UPS - @60% OR 15% - Held that - As relying on ORIENT CERAMICS & INDUSTRIES LTD. 2011 (1) TMI 908 - DELHI HIGH COURT and BSES YAMUNA POWERS LLD. / BSES RAJDHANI POWERS LTD. 2010 (8) TMI 58 - DELHI HIGH COURT UPS is also an integral part of computer periphery system on which depreciation at 60% is allowable. We accordingly allow this ground. MAT - enhancement of profit under section 115 JB - Held that - As assessee is a company engaged in the business of distribution of electricity and in view of the decision reported in Kerala State Electricity Board vs. DCIT 2010 (11) TMI 127 - KERALA HIGH COURT , the provisions under section 115 JB have no application to the assessee. There is no dispute as to the nature of business conducted by the assessee

Issues Involved:
1. Addition of ?91.13 crores due to de-recognition of revenue.
2. Disallowance under Section 14A.
3. Depreciation on UPS.
4. Enhancement of profit under Section 115JB.
5. Levy of interest under Sections 234B and 234D.
6. Initiation of penalty proceedings under Section 271(1)(c).

Detailed Analysis:

1. Addition of ?91.13 crores due to de-recognition of revenue:
The assessee, engaged in the distribution and supply of electricity, reduced ?91.13 crores from its revenue, claiming it was to be utilized in future tariff determination as per the Delhi Electricity Regulatory Commission (DERC) guidelines. The Assessing Officer (AO) added this amount back, stating that tariff determination does not affect tax liability. The CIT(A) upheld this addition but allowed relief for ?34.89 crores, which the assessee had offered for tax in the current year to be adjusted in future years. The Tribunal, referencing the Delhi Electricity Reforms Act, 2000 and relevant notifications, concluded that the assessee was under a statutory obligation to set apart 50% of the excess revenue for future tariff adjustments. This amount could not be considered the assessee's income. The Tribunal applied the ratio of the Supreme Court's decision in Puna Electricity Supply Co. Ltd. and allowed the assessee's contention, directing the deletion of the ?91.13 crores addition.

2. Disallowance under Section 14A:
The AO disallowed ?29.17 lakhs under Section 14A, applying Rule 8D, for the dividend income of ?21,01,025/-. The CIT(A) upheld this disallowance. The Tribunal noted that Rule 8D is prospective and applies only from the assessment year 2008-09 as per the Supreme Court's decision in CIT vs. Essar Teleholdings Ltd. The Tribunal set aside the CIT(A)'s order and remanded the matter to the AO to compute the disallowance on a reasonable basis.

3. Depreciation on UPS:
The AO allowed depreciation on UPS at 15%, treating it as part of plant and machinery, not as a computer. The CIT(A) upheld this view. However, the Tribunal, following the Delhi High Court's decisions in CIT vs. Orient Ceramics and Inds. Ltd. and CIT vs. BSES Yamuna Powers Ltd., held that UPS is an integral part of the computer system, allowing depreciation at 60%.

4. Enhancement of profit under Section 115JB:
The Tribunal referenced the Kerala High Court's decision in Kerala State Electricity Board vs. DCIT, which held that Section 115JB does not apply to companies engaged in the generation and distribution of electricity. The Tribunal, following this precedent, directed the deletion of additions made to enhance book profits under Section 115JB.

5. Levy of interest under Sections 234B and 234D:
The Tribunal noted that interest under Sections 234B and 234D is statutory and consequential, requiring no adjudication.

6. Initiation of penalty proceedings under Section 271(1)(c):
The CIT(A) deleted the penalty levied by the AO. The Tribunal, noting the deletion of all additions in the quantum appeal, directed the AO to delete the penalty.

Conclusion:
The Tribunal allowed the assessee's appeal in part, deleting all additions made by the AO and directing the deletion of the penalty. Both appeals by the revenue were dismissed.

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