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TMI Blog2011 (11) TMI 721X X X X Extracts X X X X X X X X Extracts X X X X ..... owed, a sum of Rs. 13.86 crores actually realized as surcharge by the assessee has been offered for assessment as against the surcharge raised amounting to Rs. 239.76 Crores (transferred under GH 62.240 to 270 in Schedule 19 as Surcharge). Further, assessee waived a sum of Rs. 0.72 Crores out of the bills and the balance amount of Rs. 225.18 Crores has been transferred to Account Head "GH 23.934"called as "for Surcharge not realized". The account statements contain Schedule-30 which is captioned in notes in accounts. Under Serial No.20 therein, it is stated that since this amount has not been charged to the Profit & loss Account for the year under consideration, therefore, it is not added to the taxable income while computing tax liability for the subject year. 2.2. The Assessing Officer during the course of the assessment proceedings made various inquiries on this issue, to which assessee replied that accounting was done on realization/collection basis as per the prudential norms since last two years. Accordingly, Surcharge collected at Rs. 36.86 Crores during the Financial Year 2005-06 has been reported as income and one as raised through bills at Rs. 239.76 Crores (gross) has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hwari v. Nari Kelly Estate (1993) 199 ITR 383; State of Kerala Vs. B. Tea Products Co. Ltd. 59 ITR 25 (SC); 2.6. The AO further held that the Delhi High Court decision in CIT v. Modi Rubber Limited, 230 ITR 817 was not applicable to the facts of this case as 'Surcharge' was leviable as per rules and there was no option to consumers for acceptance of terms of supply. The decision of the Apex Court in Godhra Electricity Company v. CIT (supra) was also held to be not applicable because in assessee's case neither there were suits filed nor there any decrees. AO distinguished the decision in Poona Electric Supply Company v. CIT, 57 ITR 521 SC by stating that no rebate on account of the portion excess over clear profits has been provided to the consumers by the .assessee company and so the decision was not applicable. The alternative plea that if the entire surcharge were to be reckoned as income, then corresponding rebate U/S 36(1)(vii) be also allowed simultaneously, did not appeal to the AO on the ground that the stipulations u/s 36(2) of the Act were not fulfilled. The right to make a claim was also rejected by the AO on the ground that such could be done only through a revised retu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dopted mercantile system of accounting, which implies recognition of revenue on the basis of accrual of the receipt. In this case, the sur-charge is levied as per the electricity rules. The percentage of sur-charge payable on the delayed payment of electricity charges is prefixed and is printed on the bill. The levy of sur-charge is thus ascertained liability of consumer and prefixed by rules. Therefore, when the bill is paid belatedly by the consumer, sur-charge becomes an ascertained payment and is thus a recognizable receipt. Reliance is placed on Hon'ble Supreme Court judgment in the case of CIT Vs. Woodward Governor India P. Ltd. (2009) 312 ITR 254 (SC) for the proposition that in mercantile system of accounting, what is due is brought into credit before it is actually received. It brings into debit an expenditure for which a legal liability has been incurred before it is actually disbursed. Learned DR contends that Woodward case lays down a converse analogy for the income also, which implies that it brings into credit an item of receipt for which a legal right has accrued. 3.4. Further reliance is placed on Hon'ble Supreme Court judgment in the case of CIT Vs. G.R. Karthikey ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nally in Supreme Court in 297 ITR 176 in J.K. Industries Ltd. Vs. UOI. This case has upheld the sanctity and utility of accounting standards unless they are ultravires the provisions of companies Act and Constitution of India. There is no allegation that accounting standards followed by the assessee suffer from such infirmity. 4.3. The assessee is pursuing mercantile system of accounting yet revenue recognition for surcharge is done as per AS-l and AS-9. The method pursued is in conformity with Hon'ble Supreme Court judgment in UCO Bank v. CIT 237 ITR 889 and Hon'ble Delhi High Court 230 ITR 817CIT Vs. Modi Rubber Ltd. AO erred in holding that it is not for the consumer of electricity to accept or not to accept the surcharge which is levied as per rules. If the internal rules are so coercive for consumers then how can it be possible that out of total demand of Rs. 230 crores, less than Rs. 14 crores have been actually collected. This clearly establishes that surcharge payment was not mandatory. The AO failed to appreciate that the accrual of real income is virtually negated by the payer when such a case becomes a suit filed account. The decision in 57 ITR 521 is also one concernin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cantile system of accounting should spare recognition of such doubtful income. 4.9. The prudential norms as envisaged under AS-I, Item 5, have been given due legal recognition. The Punjab and Haryana High Court in ClT v. Punjab Financial Corporation Ltd., (2009) by holding that only realizable is taxable. 4.10. AS-9, issued by the Institute of Chartered Accountants regarding revenue's recognition which refers to recognition of revenue from sale of goods as well as rendering of services postulates that there should not be any significant uncertainty existing with regard to the amount of the consideration that would be derived from the sale of the goods. The payment of surcharge is always resisted by the customer and assessee has a mechanism to accept the payments of bills in respect of only actual consumption charges and deferring the payment of surcharge. The bill may provide for levy of sur-charge but bills paid in respect of consumption charges are accepted by Nigam. The Nigam to maintain liquidity is thus constrained to collect dues on account of electricity consumption alone. Many a times the accumulated arrears of surcharge are written off in terms of Government directions i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c policy of state of Haryana and cannot be used to recognize revenue company to the state govt. policy on this issue. It has not been disputed that in State of Haryana, consumer bills issued by assessee are accepted at the time of delayed payment even without payment of sur-charge under protest. The fact that consumers can pay the electricity bills without payment of surcharge itself indicates that such levy can be deferred and in terms of public policy, the same can be waived partially or fully. Therefore, though the electricity bills prints payment of sur-charge, the levy is not enforceable immediately as in case of belated payments are subject to the protest, if any, which is raised by the consumer and such sur-charge is to be deferred. It is akin to sale bill generally issued by any establishment giving a standard note that in case of delayed payment of bills 18% to 24% interest may be charged after one month/ two months. A mention of such stipulation in any invoice does not make the levy enforceable and interest taxable on accrual. 4.13. This method of accounting was accepted by the AO in A.Y. 2004-05 without any protest, which has further been accepted in A.Y. 2005-06. Both ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on and unadjusted losses of the earlier years at the revised figure, which was also processed as such on 11-10-2006. Subsequently, the case was taken up for scrutiny under the prevalent Board's instructions. While finalizing the scrutiny assessment, the then AO determined taxable income at Rs. 7,32,61,944/- vide order dated 31-3-2004. However,, the income so determined was set off out of the brought forward business losses relevant to the A.Y. 2001-02 and Nil total income was declared; being the said brought forward losses exceeded the income determined u/s 143(3) of the Act and the balance losses and unabsorbed depreciation were allowed to be carried forward for the succeeding years." Department has not taken any action u/s 147 or 263 in respect of A.Yrs. 2004-05 and 2005-06. 4.16. The change in accounting was adopted in two years earlier based on prescribed norms of prudence by ICAI. The guidelines are recognized followed by general public policy, PSU, State PSU and the sur-charge being subject to the public policy, the disputed surcharge cannot be held to be the income accrued to the assessee. Reliance is placed on the following decisions: - CIT vs. Shoorji Vallabh Das & Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an issue of managing agency commission transferred by the assessee to two other companies. Subsequent agreement after the end of accounting year resulted in assessee's receiving lesser commission, though book entries of higher amount were made. Revenue sought to tax the higher income, Hon'ble Court held that assessee cannot be taxed on the basis of hypothetical income. In our view this judgment is applicable to the facts of assessee's case, keeping in mind following prepositions: (i) Assessee's method of accounting has been accepted by the department. (ii) Since the assessee could defer the payment of sur-charge under consumer protest, the taxing of such contingent receipt is a hypothetical income. 5.5. In case of UCO Bank (supra), in case of sticky advances, the interest income though provided in the books of accounts, were not assessable. 5.6. In case of Godhara Electricity Co. Ltd. (supra), though the tariff was revised and was enforceable by rules, its deferment by state of Gujarat was held to be resulting into non-accrual of deferred portion on the basis of real income concept. 5.7. In the case of Poona Electric Supply Co. (supra), also the Hon'ble Supreme Court held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ie the case before us pauses a picture on different facts which have been mentioned in detail above.
5.12. In our considered opinion, all the above judgments clearly favour the stand taken by the assessee. We may hasten to mention that looking at the intricacies the facts may vary, therefore, basic principles of accrual or mercantile system as laid down by various authorities are to be applied in a careful manner. The assessee being a state PSU; the sur-charge on delayed payment being disputable item; was not mandatorily payable at the time of payment of electricity consumption bill; was not an accrued receipt in view of the accounting policy accepted by the revenue. Therefore, such amount of surcharge cannot be held to be taxable as it is not the real income of the assessee and is hypothetical by nature in given facts and circumstances.
5.13. In view of the foregoings, we are of the view that the amount of surcharge not realized by the assessee, does not amount to accrued of receipt taxable as income. CIT(A) has rightly deleted the addition, which we uphold.
6. In the result, revenue's appeal is dismissed.
Order pronounced in open court on 30-11-2011. X X X X Extracts X X X X X X X X Extracts X X X X
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