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TMI Blog2014 (11) TMI 92X X X X Extracts X X X X X X X X Extracts X X X X ..... vance against depreciation 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 ?" 2. Whether, on the facts and in the circumstances of the case, the Ld. CIT(A) was right in law in deleting the addition of Rs. 1,40,58,00,000/ - made by the Assessing Officer under section 143(3) [and not under section 115JB] on account of "Advance Against Depreciation" ignoring the provisions of section 2(24) read with section 28 of the Income Tax Act, 1961 ~ which provides that "income" includes profits and gains and the profits and gains of any business or profession carried on by the assessee at any time during the previous year is taxable ? 3. That the appellant craves for the permission to add, delete or amend the grounds of appeal before or at the time of hearing of appeal." 2. The brief facts of the case are as under :- Assessee is a public sector enterprise registered under the Companies Act, 1956. Its accounts are prepared in accordance with Parts II and III of Schedule VI to the Companies Act. The entire shareholding of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the future. Therefore, it cannot be designated as a reserve. The assessee is a public sector undertaking engaged in the business of generation of power. The tariff for the power is determined by the Central Electricity Regulatory Commission (CERC) and accordingly assessee has to sell electricity to the various State Electricity Boards at the tariff rates notified by the CERC. This tariff is worked out on the basis of the cost of plant which consists of depreciation, interest on loans, operation and maintenance expenses and also a fixed return on equity. The CERC determines the tariff for power generating companies. These power generating companies were not in a position to repay the installment of the loan for the borrowed loan for the purpose of setting up of power plant for generation of the electricity. To meet such crisis, the Central Government devised a mechanism to help power generating companies including the assessee to raise funds to meet its obligation of repayment of loan in time. By notification dated 26th May, 1997, these companies were permitted to collect an amount in advance in the years in which the normal depreciation (90% of the original cost of the Plant spre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er consideration. The relevant portion of the order of the CIT (A) read as under :- "4. I have carefully considered the above contentions of the Ld. A.R. and perused the impugned assessment orders passed u/s 143(3) in the instant case for all the abovementioned assessment years, and the subsequent orders passed by the CIT(A) and the Ld. ITAT on the issue of AAD for the purposes of section 115JB of the Income Tax Act, 1961 in respect of which the Worthy AAR Authorities vide their order dated 17-12-2004 had given the ruling in favour of the Revenue by holding that the AAD had to be included in the computation of book profit for MAT u/s 115JB of the Income Tax Act, 1961 in the year of its receipt. I have also gone through the Notification of the Central Government issued in 1997 for Fixation Tariff for the supply of electricity u/s 43A of the Electricity (Supply) Act, 1948 dated 23-05-1997 as well as the opinion of the "Expert Advisory Committee of Institute of Chartered Accountants of India" alongwith the accounting treatment of AAD as advised by the I.C.A.I. I have also perused the Tariff Notification of Central Electricity Regulatory Commission ("CERC") dated 26-03-2001 effective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re and taxability, which would also be relevant for the computation of regular income as per the provisions of section 143(3) of the Income Tax Act, 1961. Since the AAD is a timing difference, it is not a reserve, it is not carried through P & L account and it is income received in advance subject to adjustment in future, it cannot be added/disallowed also under the computation of normal income u/s 143(3) of the Income TaxAct, 1961. The above ratio of the Hon'ble Supreme Court, being equally invokabale and applicable in the regular assessments, the addition made by the A.O. in the orders u/s 143(3) for these three years on account of AAD stand cancelled too. 6. In the result, all the three appeals are allowed, giving a relief of Rs. 133,81,00,000/-, Rs. 140,58,00,000/- and Rs. 152,63,00,000/- respectively for the assessment years 2000-01, 2001-02 and 2003-04." 5. After hearing both the sides on the issue and considering the decisions of Hon'ble Supreme Court, we decide the issue as under. Hon'ble Supreme Court has given finding after considering the observation of the Authority for Advance Ruling in para 11 which is reproduced as under :- "11. Since the amount of "advanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. For this, the relevant observation of the Hon'ble Supreme Court is that there are broadly two types of reserves, viz., those that are routed through profit and loss account and those which are not carried vide profit and loss account, for example, a Capital Reserve such as Share Premium Account, advance against depreciation is not a reserve and it is not appropriation of profits. The above findings by the Supreme Court are clear and decide the issue. It has been held that AAD is not appropriation of profit meaning thereby AAD is not taken out of profit. That it is not a deduction out of profit. The Supreme Court has further held that AAD is an amount that is under obligation, right from the inception. Thus it is a liability and hence not income. When an amount is received by a person from another person, it can have two nature. It can be income. If so it has to be taken to the profit and loss account and from profit and loss account it goes to the balance sheet as reserve. Alternatively it is a liability a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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