2022 (1) TMI 37 - AT - Income Tax

Depreciation on assets for which the actual cost as per section 43(1) - Depreciation on demerger - AO has disallowed depreciation on the ground that the assessee had received assets free of cost from the Government of UP - HELD THAT - As decided in own case 2021 (12) TMI 1267 - ITAT DEHRADUN assets have been transferred from Uttar Pradesh Government (UPJVNL) to Uttaranchal Government (UJVNL). There is no claim of the depreciation twice by both the Governments - demerger led to division of assets in a fixed ratio and the same was duly accounted for both the entities as per the written down value (WDV) as on that date. The depreciation on de-merger cannot be a forgone benefit owing to de-merger, which is the result of state reorganization. Hence, we decline to interfere with the reasoned order of the Ld. CIT (A). - Decided against revenue. Capacity charges, deemed generation charges and capacity index incentive - As decided in assessee's own case 2021 (6) TMI 881 - ITAT DEHRADUN assessee has produced the copy of the Hon ble UERC order dated 27.04.2015 alongwith its revised year wise income of capacity charge, deemed generation charge and capacity index incentive duly agreed by UPCL and UJVNL. A copy of the agreed reconciliation statement between UPCL and UJVNL is also furnished alongwith the copy of bank statement in which the above amount of installment have been received by the UJVNL, in support of its claim, a written explanations have been submitted by the assessee on the issue of capacity charges, capacity index incentive and deemed generation charges is given as mentioned in the body of the order. The assessee has agreed to offer the income earned for the period from F.Y.2004-05 to F.Y.2012-13 under the head capacity charges, deemed generation charge and capacity index incentive to be taxed in F.Y.2015-16 i.e., on receipt basis and has also paid two installments of advance tax after including the capacity charges in the income of the company - we find no merit in the addition made by the AO in the present order of assessment - Decided against revenue.

Summary

Issues Involved:
1. Depreciation on assets with NIL actual cost as per Section 43(1) of the Income Tax Act, 1961.
2. Addition of capacity charges, deemed generation charges, and capacity index incentive to the total income.

Detailed Analysis:

Depreciation on Assets:
Background:
The assessee is a company incorporated by the Government of Uttarakhand for managing hydro power projects. The Central Government transferred hydro power plants to the assessee, and the return of income was filed accordingly. The Assessing Officer (AO) disallowed the depreciation claimed on these assets, arguing that the assets were acquired free of cost, thus the actual cost was NIL as per Section 43(1) of the Income Tax Act, 1961.

Arguments:
- The assessee argued that the assets were not free of cost as they were part of a demerger from UP Jal Vidyut Nigam Limited (UPJVNL) and were accounted for in the balance sheet with a corresponding reconstruction reserve.
- The CIT(A) had previously allowed depreciation on these assets in earlier years, and the ITAT had dismissed the department's appeal on this ground in AY 2005-06.

CIT(A) Decision:
The CIT(A) held that the situation was recognized as a demerger under Explanation 4 to Section 2(19AA) of the Income Tax Act, 1961. The assets were transferred at book value, and the creation of a reconstruction reserve was appropriate. The CIT(A) deleted the disallowance of depreciation, citing consistency with previous years' decisions and the ITAT's dismissal of the department's appeal.

ITAT Decision:
The ITAT upheld the CIT(A)'s decision, noting that the issue had already been adjudicated in the assessee's favor in previous years. The assets were not acquired free of cost, and the assessee was entitled to claim depreciation.

Capacity Charges, Deemed Generation Charges, and Capacity Index Incentive:
Background:
The AO added ?45,31,58,363 to the total income of the assessee, representing capacity charges, deemed generation charges, and capacity index incentive. The assessee had disclosed these amounts in the balance sheet notes, as they were disputed by UPCL and under regulatory review.

Arguments:
- The assessee argued that the charges were disputed and not acknowledged by UPCL, hence they could not be recognized as revenue. The matter was referred to the UERC for settlement.
- The assessee followed the mercantile system of accounting and adhered to accounting standards, recognizing revenue only when it was certain.

CIT(A) Decision:
The CIT(A) noted that UERC had settled the matter, and the final payable amount was ?7,44,41,302. The CIT(A) allowed relief for the remaining amount, noting that the assessee had already offered the entire disputed amount to tax in AY 2016-17 and paid self-assessment tax.

ITAT Decision:
The ITAT upheld the CIT(A)'s decision, citing the Tribunal's previous rulings in the assessee's favor. The ITAT agreed that the income could not be recognized until the dispute was resolved and the amount was certain. The assessee had already offered the income to tax in AY 2016-17, and taxing it again would lead to double taxation.

Conclusion:
The ITAT dismissed the Revenue's appeal, affirming the CIT(A)'s decisions on both issues. The assessee was entitled to claim depreciation on the assets, and the addition of capacity charges, deemed generation charges, and capacity index incentive to the total income was not sustainable. The judgment emphasized consistency with previous rulings and adherence to accounting standards and principles.