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TMI Blog2015 (9) TMI 1682X X X X Extracts X X X X X X X X Extracts X X X X ..... n the returns in anticipation and not realised finally cannot be taxed. Basic principle of taxation jurisprudence lays down that income which an assessee could have,but has not earned cannot be made taxable as income accrued to him. In other words what has really accrued to an assessee has to be found out and what has accrued must be considered from the point of view of real income taking the probability or improbability of realisation in a realistic manner. See MOTOR CREDIT CO. PVT. LIMITED [ 1980 (4) TMI 64 - MADRAS HIGH COURT] In the case before us the assessee came to know about the fact-that the income accrued to it in pursuance of agreement entered in to with World Bank would not be received-during the year under appeal. Therefore in our opinion the FAA has rightly held that the assessee was entitled to show lesser receipt during the year. Confirming his order we decide first ground of appeal against the AO. Addition being interest of borrowed capital - assessee claimed expenditure in respect of various capital projects undertaken by it and which were capitalised in the books of accounts that same expenditure was claimed u/s. 36(1)(iii) - Rejection of claim made by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evidences. Before us,also no material was produced to prove that crystallization had actually taken place during the year. In our opinion,an assessee has to show the manner in which the earlier years expenditure was quantified in the year under appeal. Without these facts no expense can be allowed. Following particular guide line or rule governing a particular activity does not absolve the assessee from filing of documentary evidence in support of its claim for an expenditure- especially when the AO had directed it to file the same during the assessment proceedings. In the cases relied upon by the assessee the Hon ble courts or the Tribunal had not dealt with the issue of crystallisation of expenses in a particular year. Thus, the facts are totally distinguishable. Considering the peculiar facts of the issue before us,we hold that the AO was justified in disallowing the of prior period expenses,because the assessee had failed to establish that these expenses actually crystallised during the year under consideration. Since it was following the mercantile system of accounting it had to establish that these liabilities pertaining to the previous year actually crystallised during the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is order we decide last ground in favour of the assessee. - ITA No. 3813/Mum/2009, ITA No. 1647/Mum/2010, ITA No. 1648/Mum/2010, CO No. 11/Mum/2010, CO No. 196/Mum/2010, CO No. 197/Mum/2010 - - - Dated:- 30-9-2015 - S/Sh. Rajendra,Accountant Member And Saktijit Dey,Judicial Member Assessee by: Shri S. E. Dastur Revenue by: Shri N. P. Singh-CIT-DR JUDGMENT Rajendra, Challenging the orders of the CIT(A)-I,Mumbai the Aseesing Officers(AO.s.) have filed appeals for the above mentioned years. The assessee has filed Cross-Objections (CO.s.). Grounds of the Appeals and CO. s. filed by both the parties for the above three Assessment Years (AY.s.)are almost same so we are adjudicating them by a common order. Ground of appeals filed by them read as under: ITA/3813/Mum/2009-AY. 01-02 1. Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in directing the Assessing Officer to allow the deduction of ₹ 373. 25 crores in A. Y. 2001-02 whereas the claim actually pertains to earlier years. 2. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the addition of ₹ 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,876/- suffered by the Appellant on account of flood, cyclone, fire, etc. : 2 : 1 The Commissioner of Income-tax (Appeals) has erred in confirming the disallowance of ₹ 6,95,876/- made by the Assessing Officer representing losses suffered by the assessee on account of flood, cyclone, fire, etc. 2 : 2 The assessee submits that considering the facts and circumstances or its case and the law prevailing on the subject the losses suffered by it on account of flood, cyclone, fire. etc . . were incurred by it during the course of its business and are allowable while computing its total income and the Commissioner of Income-tax (Appeals) ought to have held as such. 2: 3 The assessee submits that the Assessing Officer be directed to delete the disallowance so made by him and to re-compute its total income accordingly. 3 : 0 Re. : Disallowance of loss amounting to ₹ 4,08,168 /- suffered by the Appellant on account of storm, theft, accident, fire, etc. 3 : 1 The Commissioner of Income-tax (Appeals) has erred in partially confirming the disallowance made by the Assessing Officer out of the losses suffered b) the assessee on account of storm, theft, accident, etc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Officer. 1 : 2 The assessee submits that considering the facts and circumstances of its case and the law, prevailing on the subject the provisions of section 43B are not applicable to the electricity duty collected by it and the stand taken by the Assessing Officer in this regard is erroneous and not in accordance with law and the Commissioner of Income-tax (Appeals) ought to have held as such. 1 : 3 The assessee submits that the Assessing Officer be directed to delete the disallowance so made by him and to re-compute its total income accordingly. 2 : 0 Re. : Disallowance of loss amounting to ₹ 22,392/- on account of obsolescence of fixed assets: 2 : 1 The assessee submits that considering the facts and circumstances or its case and the law prevailing on the subject the losses suffered by it on account of obsolescence of fixed assets is wholly and exclusively for the purpose of business and its therefore allowable as such and the CIT (A) ought to have held as such. 2. 3 The assessee submits that the Assessing Officer be directed to delete the disallowance so made by him and to re-compute its total income accordingly. 3. 0 Re: Disallowance of loss amounti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vailing on the subject the loss suffered by it on account of obsolescence of fixed assets is wholly and exclusively for the purpose of its business and is therefore allowable as such and the Commissioner of Income-tax (Appeals) ought to have held as such. 2: 3 The assessee submits that the Assessing Officer be directed to delete the disallowance so made by him and to re-compute its total income accordingly. 3 : 0 Re. : Disallowance of a sum of ₹ 2,11,84,943/- being write off of intangible assets: 3 : 1 The Commissioner of Income-tax (Appeals) has erred in confirming the disallowance ₹ 2,11,84,943/- made by the Assessing Officer representing intangible assets written off during the year. 3 : 2 The assessee submits that considering the facts and circumstances of its case and the law prevailing on the subject the amounts of intangible assets written off during the year are allowable while computing its total income and the Commissioner of Income-tax (Appeals) ought to have held as such. 3 : 3 The assessee submits that the Assessing Officer be directed to delete the disallowance so made by him and to re-compute its total income accordingly. 3 : 4 Wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e submissions of the assessee and the assessment order,he held that the assessee,being a government undertaking,was governed by Specific Acts and the orders of the State Government that the Electricity Supply Act,1948 prescribed that its net revenue should not be less than 3% and electricity tariff to be collected from the customers was to be adjusted accordingly that the State Govt. would give subsidy to the assessee so as to maintain the revenue of 3% that it was regularly accounting for revenue of 3% only in the earlier years that for the AY. 1998-99 to 2000-01 it accounted for the revenue for the first time @ 4. 5% that same was necessitated because of loan taken from World Bank(WB) that as per the condition of the WB it had to show revenue @4. 5%, that it filed its return of income for earlier years showing subsidy @4. 5% that later on State Govt. decided that it would be given subsidy @ 3% only that the assessee had filed documentary evidence in that regard that initially the assessee had credited subsidy @4. 5 % and actually it received subsidy @ 3% that it had written back 1. 5% and claimed as expenditure in the year under appeal, that the observation made by the AO that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ode of computing the taxable income and the point of time at which the tax liability is attracted. It cannot determine or affect the range of taxable income or the ambit of taxation. Where no income has resulted it cannot be said that income has accrued merely on the ground that the assessee had been following the mercantile system of accounting. Even if the assessee makes a debit entry to that effect, still no income can be said to have accrued to the assessee. If no income has materialised there can be no liability to tax on a hypothetical income. It is not the hypothetical accrual of income based on the mercantile system of accounting followed by the assessee that has to be taken into account, but what should be considered is whether the income has really materialised or resulted to the assessee. The question whether real income has materialised to the assessee has to be considered with reference to commercial and business realities of the situation in which the assessee has been placed and not with reference to his system of accounting. In the case before us the assessee came to know about the fact-that the income accrued to it in pursuance of agreement entered in to with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Income-tax Act, 1961, has to be read on its own terms : it is a code by itself. It makes no distinction between money borrowed to acquire a capital asset or a revenue asset. All that the section requires is that the assessee must borrow capital and the purpose of the borrowing must be for business which is carried on by the assessee in the year of account. Unlike section 37 which expressly excludes an expense of a capital nature, section 36(1)(iii) emphasises the user of the capital and not the user of the asset which comes into existence as a result of the borrowed capital. The Legislature has therefore, made no distinction in section 36(1)(iii) between capital borrowed for a revenue purpose and capital borrowed for a capital purpose . An assessee is entitled to claim interest paid on borrowed capital provided that the capital is used for business purpose irrespective of what may be the result of using the capital which the assessee has borrowed. Actual cost of an asset has no relevancy in relation to section 36(1)(iii) . The proviso inserted in section 36(1)(iii) by the Finance Act, 2003, with effect from April 1, 2004, will operate prospectively. Respectfully fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee and the assessment order the FAA held that the assessee had computed the loss after disallowing and adding back short provisions for income tax amounting to ₹ 156. 66 crores and short provision of depreciation of ₹ 31. 02 crores, that the two amounts could not be added back again to the returned loss as done by the AO. With regard to other items he held that the treatment given to them by the assessee was in accordance with the guidelines framed for preparing the accounts of the electricity companies, that entirety of the assessee s operations and its huge network resulted in taking time to account for various expenses that the accounts of the assessee were audited by internal auditors and the statutory auditors under the Company Act and the Act that the Board Circular was also in favour of the assessee that the AO had not come out with any finding that any of those expenses was not allowable as deduction, that assessee could not be denied the deduction which had been claimed by following proper accounting standard. 4.2. Before us the Departmental Representative(DR) argued that the assessee had not proved the crystallisation of prior period expenses. The Aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al was right in holding that the assessee had correctly charged to its Profit and Loss account for the assessment year 1982-83, the expenditure on account enhanced rate of purchase of gas for the period 1. 7. 79 to 15. 9. 80? In the case of Toyo Engineering Ltd. (supra)the Tribunal had given a categorical finding that certain items like interest payment made overseas(₹ 2. 61 Crores) and payment towards subcontractors claims(5. 94 lakhs) crystallized during the year. The tribunal had disallowed one of the items and restored back on of the issue to the file of the AO. In the matter of Excel Industries (supra)the issue before the Hon ble Apex Court was income to be assessed u/s. 28(iv)of the Act. As far as matter of Bank of India(supra)in concerned it was held by the Tribunal that expenses of last year can be allowed in the subsequent year if the bills were not received in that particular year. 4.3. a. We are aware that it is one of the well recognised principle of taxation that earlier years' expenses can be allowed in the mercantile method of accounting in the year in which the liability is accepted and paid. But,at the same time it is also accepted principle of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r years expenditure was quantified in the year under appeal. Without these facts no expense can be allowed. Following particular guide line or rule governing a particular activity does not absolve the assessee from filing of documentary evidence in support of its claim for an expenditure- especially when the AO had directed it to file the same during the assessment proceedings. In the cases relied upon by the assessee the Hon ble courts or the Tribunal had not dealt with the issue of crystallisation of expenses in a particular year. Thus, the facts are totally distinguishable. Considering the peculiar facts of the issue before us,we hold that the AO was justified in disallowing the of prior period expenses,because the assessee had failed to establish that these expenses actually crystallised during the year under consideration. Since it was following the mercantile system of accounting it had to establish that these liabilities pertaining to the previous year actually crystallised during the year under appeal. So,partly revering the order of the FAA we decide ground no. 3 in favour of the AO,in part. CO No. 11/Mum/10-AY. 2001-02: 5. First ground is about disallowance of el ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provisions of section 43B of the Act were applicable to the electricity duty then AO should be directed to allow the duty paid during the year under consideration. After considering the submission of the assessee and assessment order the FAA held that electricity duty was collected by the assessee as per the bills issued by it to its consumers. Referring to the case of Chowranghee Sales Bureau (supra), he held that provisions of section 43B would be applicable to unpaid electricity duty that whenever the amounts had not been paid within a specified period no deduction could be allowed. Finally he partly upheld the order of the AO. 5.2. Before us the AR argued that assessee was not accounting for the duty collected by it, that it had not claimed same in the books of account, that duty was paid to the government in the year under appeal or the subsequent year, that for applicability of section 43B there should be some allowance. He referred to cases of Kerala State Electricity Board (329 ITR 91), Maharashtra State Electricity Distribution Co. Ltd. (ITA/762/Mum/2010-AY-06-07 dated 12. 8. 2015). DR supported the order of the FAA . 5.3. We have heard the rival submissions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y duty from the consumers on behalf of the Government of Maharashtra and was required to pay the same to the Government. It was further submitted that since the GOM itself was required to make payment to the appellant under a variety of accounts, or to certain poor or backward region/section of society, at Nil or subsidized charges, to be recovered from the government, the GOM settles its inter se accounts with the appellant on account of electricity duty by setting off/adjusting the amount receivable against the amount payable. The inter se payments were thus effected through set off of mutually receivable/payable balances, for which notifications were issued by the GOM from time to time. The process of issue of such notification was complex and time consuming, since it involved a variety of procedure with various authorities. During the appellate proceedings the appellant furnished a copy of notification dt. 31. 03. 2008 issued by the GOM in support of its contention. 29. It is further submitted before the Ld. CIT(A) that the assessee did not account for this amount through its profit and loss account and only the net amount was duly effected in the balance sheet and thus ele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng judgments: (i)CESC Ldt. Vs. CIT in ITA No. 82/110/83/84 of 2004/2005 (ii) Kerala State Electricity Board vs. DCIT reported in (2010) 329 ITR 91 (iii) A. W. Figgis Co. Ltd. vs. CIT reported in (2003) 256 ITR 268 (iv) CIT vs Ovira Logistics Pvt. Ltd. reported in (2015) 58 taxmann. com 206 33. It was further submitted by Ld. Counsel that the credit for the similar amount was granted by the AO in the assessment order passed for A. Y. 2007-08 copy of the assessment order is placed in paper book at page no. 161 to 175 on our attention has been drawn on page no. 174. On the other hand, Ld. DR relied upon the orders of authorities below and requested for confirming the order of Ld. CIT(A). 33A. We have gone through the arguments made by both the sides as well as the material placed before us. We have also considered the case laws relied upon by the ld. Counsel on this issue, copies of which have also been placed before us. It is seen that in the case of Kerala State Electricity Board (su. ),it was held by the Hon ble High Court that in these circumstances the provisions of s. 43B would not be applicable. We also placed reliance on the judgment of Hon ble Bomb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he opinion that Section 43B of the Income Tax Act is attracted to a case where payable is to be made to the State Government in the capacity of the State as a sovereign and not to a case where payment is to be made to the State Government in its capacity as a principal by an agent. In the instant case, the relationship between the State and the licensee is of a principal and agent/fiduciary and not that of a sovereign and a subject. 20) Looking at the issue from another angle, the electricity duty collected by the licensee from the consumers is so done by the licensee as an agent of the State and, hence, the same cannot be considered to a trading receipt in the hands of the licensee. It does not constitute income of the licensee and cannot be included in the licensee's income for the purpose of computation of income tax. It is not a business receipt of the licensee which the licensee collects on its own behalf in connection with its business of generating and supplying electricity. The licensee does not collect the electricity duty for its own consumption or utilization. If the licensee collects the duty but does not pay the same to the Government, the statute provides mech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring the year under appeal, that the AO had allowed depreciation on the assets that the assets were part of the block of assets that depreciation should be allowed as per provisions of section 43(6)(c) of the Act that loss of ₹ 4. 06 pertained to loss of stock-in-trade, that same was allowable. He referred to page no. 254 and 370 of the paper book and relied upon the cases of Unitex Products Ltd. (22 SOT 429); Packwell Printers (359 ITD 340). Departmental Representative(DR) supported the order of the FAA . 6.3. We have heard the rival submission. As far as loss of stock in concerned we are opinion that same is to be allowed as revenue expenditure. So the order of the FAA is reversed to that extent. For the balance amount we hold that the assets were forming part of block of assets. Therefore, depreciation should be allowed with regard to them. We find that issue of the claim of depreciation about assets of block has been decided in favour of the assessee by the decision of Tribunal relied upon by the assessee. Ground no. 2-3 are allowed in favour of the assessee in part. 7. Last ground of appeal is about write off of intangible assets of ₹ 1. 95 crores. During t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us and that the expenditure was to be allowed. We find that lawyer s fees has been held to allowable expenditure in the matter of Bombay Cycle and Motor agencies Ltd. (supra). In that matter fees was paid to draw up lease agreement. We find that the FAA has followed the orders for AY. 99-00 and 2000-01 but has not distinguished the facts of the case of AY. 1997-98 and the facts of the matter under appeal. Order passed without giving any reason for not following the decision favouring the assessee comes under the category of non speaking order. The order of the FAA falls under that category hence cannot be endorsed. So, reversing his order we decide last ground in favour of the assessee. 8. As the grounds raised by the AO. s and the assessee in the appeals and in the CO.s are almost similar to the ground raised by the them in the appeal and CO for the AY. 2001-02 so following our order for that year we partly allow their Appeals/CO. s for the above mentioned two years. As a result appeals filed by the AO and CO. s by the assessee filed for all the three AY. s. stand partly allowed. Order pronounced in the open court on 30th September,2015. - - TaxTMI - TMITax - Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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