2018 (12) TMI 1557 - AT - Income Tax

Computation of MAT - Addition on account of receipt of sale proceeds of production from trial run of the plant at Phase-II of the power project - whether the said receipt was revenue in nature and the same should have brought into the profit and loss account instead of taking it to the capital work in progress? - Held that - There are predetermined criteria laid down to evaluate the efficiency of the plant and to analyze the flaws. Once the trial run operations are conducted, the results give a roadmap to suitable modifications required in the project. If however, major changes are required by the plant after commissioning it would lead to huge expenses and thus this acts as a preventive step to evaluate the plant. The production of power from Phase II and III would vary depending on the predefined criteria. It is not for the AO to determine if the units generated from Trial Run are high in number or not. While, the production of power from Phase I would basically be to fulfill the requirement of its customer. It would also be pertinent to note that the Income derived from the Phase II after its commissioning has also been higher in the subsequent years. The same was verified from comparative receipts of each phase. We find that during the succeeding Assessment years i.e. AY 2008-09 and AY 2009-10, the total receipts from Phase II and Phase III operations is higher than that of Phase I. The AO on page 3 of its order dated 31.03.2015 has stated that a plant that has yet to come to operation obtaining such high receipts is abnormal. AO has on his own fancies and assumptions taken a stand that the receipts of 42,75,00,000/- is abnormal and unjustified. He has totally ignored the facts of the case, the operating capacity of the Phases and its subsequent receipts. The table below clearly reflects that due to higher capacity of power production, the income earned by the assessee through Phase II/ III is reasonably higher than that of Phase I. We find that the AO has made an adjustment to the book profit of the receipts of ₹ 42.75 crores while computing the income under section 115JB of the Act and the assessee has treated the receipts earned which is lined to the setting up of the business and accordingly capitalized by reducing from the balance of capital work in progress. This treatment of such income was disclosed in the preparation of annual accounts of the assessee, which is inconsonance with mandatory accounting standards applicable to the assessee. The assessee is following the accounting standards consistently and preparing its annual accounts accordingly. This annual accounts are audited as per the companies Act and approved by shareholders in the AGM held for this purpose. These amounts were submitted before the ROC. In view of these facts, we are of the view that this issue is squarely covered by the decision of Hon ble Supreme Court in the case of Apollo Tyres Ltd. Vs. CIT 2002 (5) TMI 5 - SUPREME COURT . We are of the view that the issue on merits as well as on jurisdiction is covered in favour of assessee and against Revenue.

Summary

Issues Involved:
1. Deletion of addition made by AO on account of receipt of sale proceeds from trial run of the plant.
2. Reopening of assessment.

Detailed Analysis:

1. Deletion of Addition Made by AO on Account of Receipt of Sale Proceeds from Trial Run of the Plant:

The Revenue's appeal contested the deletion by CIT(A) of an addition made by the AO, which treated ?42.75 crores received from the trial run of a power plant's Phase-II as revenue in nature and not capital. The AO argued that this income should be credited to the Profit and Loss account rather than being reduced from the capital work in progress (CWIP). The assessee, engaged in power generation, had initially filed its return for AY 2007-08, showing income under normal provisions and under section 115JB of the Income Tax Act, 1961. The AO later noticed that the income from power generation was reduced from CWIP instead of being credited to the P&L account, which led to the reopening of the assessment.

The CIT(A) deleted the addition, referencing the Supreme Court's decision in Apollo Tyres Ltd. vs. CIT (2002) 255 ITR 273 (SC), which held that the AO can only examine whether the books of account are certified by the authorities under the Companies Act. The AO cannot reassess the company's income beyond the net profit shown in the P&L account except as provided in the Explanation to section 115JB. The CIT(A) observed that the trial run income is inextricably linked to setting up the business and should be capitalized, reducing the balance of CWIP, consistent with mandatory accounting standards.

The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO erred in comparing the total receipts from different phases without considering the plant's capacity and the nature of trial run operations. The Tribunal reiterated that the trial run income should be capitalized and not treated as revenue receipts, aligning with the Supreme Court's ruling in Apollo Tyres Ltd. and the Bombay High Court's decision in CIT vs. Forever Diamonds Pvt. Ltd.

2. Reopening of Assessment:

The assessee's cross-objection regarding the reopening of the assessment was not argued and thus dismissed as not pressed.

Conclusion:

The Tribunal dismissed the Revenue's appeal, confirming that the trial run income should be capitalized and not treated as revenue receipts. The cross-objection raised by the assessee on the reopening of the assessment was dismissed as not pressed. The order was pronounced in the open court on 16-11-2018.