9911796707
TMI Blog2024 (8) TMI 1018X X X X Extracts X X X X X X X X Extracts X X X X ..... g and the same is chargeable to tax whether it is received or receivable - HELD THAT: - We observe that the assessee has not recovered any LPSC in the past and as per the accounting standard and norms, the assessee has to declare its income not only based on accrual system, also supported by the concept of certainty of recovery. In the similar facts on record, the Hon ble Supreme Court held in the case of Godhara Electricity Co. Ltd. [ 1997 (4) TMI 4 - SUPREME COURT] that there was real accrual of income to the assessee Co. in respect of the enhanced charges for supply of electricity, has to be considered by taking the probability or improbability of realisation in a realistic manner. Tribunal had rightly held that the claim at the increased rate made by the assessee Co., on the basis of which necessary entries were made, represented only hypothetical income and the impugned amount as brought under tax by the ITO did not represent the income which had really accrued to the assessee during the relevant previous year - mere accrual does not make the income chargeable to tax but also supported by the concept of certainty of recovery . Therefore, we are inclined to allow the grounds ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sustain the addition made by the AO. Therefore, we direct AO to only verify the Project Bamnauli and allow the claim of the assessee as per law after providing proper opportunity of being heard to the assessee. In the result, ground raised by the assessee is partly allowed as per above directions. Deduction claimed u/s 80IA(4)(iv) - addition of amount of notional interest accounted for in the accounts of the company during the Financial Year 2017-18 on the liability to be discharged by the Assessee to its contractors in future by adopting IND AS with effect from the financial year 2015-16 - HELD THAT:- Deduction u/s 80IA is allowable to the assessee on the basis of eligible unit. In the present case, the assessee has two eligible units eligible to claim deduction u/s 80IA, therefore the computed income under the Act is towards the income generated for the purpose of eligible business u/s 80IA. After careful consideration, we are of the view that the assessee has rightly determined the eligible profit from the eligible business by adopting the declared profit as per Profit and Loss Account statement and added back the notional finance cost, which is otherwise not allowable expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the grounds raised by the assessee on the issue of depreciation u/s 32(1) as well as allowable depreciation in the computing the book profit u/s 115JB of the Act are remitted back to AO to verify the same and allow them as per law. It is needless to say that assessee may be given proper opportunity of being heard. Accordingly, the ground raised by the assessee is allowed for statistical purpose. - Shri S. Rifaur Rahman, Accountant Member And Shri Sudhir Pareek, Judicial Member For the Assessee : Shri Ajay Vohra, Sr. Adv., Shri S. Krishnan, Adv. Shri Shaurya Jain, CA For the Respondent : Ms. Nimisha Singh, CIT-DR ORDER PER S. RIFAUR RAHMAN, AM: 1. This appeal has been filed by the Assessee against the order of Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC) Delhi [ Ld. CIT(A) , for short], dated 29/03/2023 for Assessment Year 2018-19. 2. The Ld. CIT(A) has sustained the following additions made by the Assessing Officer, the same are given below: Sl. Particulars Amount(Rs.) 1. Addition on account of non-recognition of late payment surcharge (LPSC) 6 79 65 74 000/- 2. Disallowance of proportionate interest u/s 36(1)(iii) of the Act 17 66 79 721/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aimed by the assessee on retention liability project in the Profit Loss A/c but had reverted back while computing eligible profit for deduction as the same was not allowable as expenditure under the Income Tax Act. 07. That the Ld. CIT(A) has erred in confirming the order of AU making addition of Rs. 17,67,88,271/- being foreign exchange loss incurred by the assessee on payment of foreign exchange to BHEL as per contract for acquisition of capital asset from abroad treating the same as capital expenditure ignoring the provisions of section 37 as well as section 43AA of the Income Tax Act r/w ICDs-VI issued u/s 145(2) of the Act. 08. That the Ld. CIT(A) and AU have erred in disallowing the depreciation of Rs. 233,07,94,409/- by applying the depreciation rate applicable for SLM method of depreciation to the opening WDV of the asset when the same was to be applied to the actual cost of assets. 09. That the Ld. CIT(A) and AU have erred in law and on facts in disallowing the depreciation of Rs. 3,04,57,234/- to the income of assessee under normal provisions and to the book profit u/s 115JB of the Act by disallowing 50% of the depreciation in respect of assets which were acquired by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t at Rs. 1078.21 Cr. after making additions of Rs. 959.11 Cr to the income of assessee under normal provisions. Assessing Officer also made additions of Rs. 6,82,70,31,234/- to the book profit u/s 115JB of the Act. 9. Aggrieved by this order, assessee filed an appeal before CIT(A), however, he sustained all the additions made by the Assessing Officer. 10. With regard to ground No.2 raised by the assessee, it is interconnected with Ground No.3, hence adjudicated together. As stated above in the facts, the issue raised by the assessee relating to non acceptance of additional evidence by the Ld CIT(A) and issue relating to LPSC. At the time of hearing, with regard to ground No.2, the Ld. AR submitted that Ld CIT(A) has sustained the additions without assigning any reasons of his own, ignoring the submissions made by the assessee as well as evidences/documents filed by the assessee. Further submitted that during the proceedings, assessee has filed certain additional evidences, which were not allowed by the CIT(A) to be admitted. The said evidences are as under:- i) Copy of Power Purchase Agreements (PPAs) entered into by the assessee with BRPL/BYPL (DISCOMS in short). ii) Relevant exce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he First Appellate Authority conferred by section 250 is not affected or disturbed by Rule 46A refer Smt Mohinder Kaur vs Central Government (1976) 104 ITR 120 (ALL)). Infact, Rule 46A (4) specifically lays down that its provisions shall not affect the power of the First Appellate Authority to call for the production of any document or the examination by him of any witness in order to enable him to dispose off the appeal before him or for any other substantial cause. It means that Ld. CIT(A) was well within his powers to accept the additional evidence produced by the assessee. 11. On the other hand, Ld DR supported the findings of Ld CIT(A) in rejecting the additional evidences and submitted that the assessee has not followed the due process of law in this regard. 12. Considered the rival submissions and material placed on record, we observed that the Ld CIT(A) has rejected the evidences submitted before him without granting proper opportunity to the assessee as well as analyzing the evidences submitted before him. In our considered view, the evidences submitted by the assessee goes to the root of the matter and Ld CIT(A) could have dealt with the issue on merits instead of rejecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 12.05.2016 in I.A. No. 01 of 2015 in Contempt Petition (C) No.83/2015 in W.P. (C) No. 104 of 2014, Hon'ble Supreme Court had directed the DISCOMS to pay 70% of the current principal dues. Thus, recovery of LPSC, during the year, remained uncertain. 13.4. As per the accounting policy adopted and disclosed by the assessee, amount of monthly bills raised by the assessee for sale of power to the DISCOMS are accounted for as income however, LPSC was recognized as income only when the same is actually received following IND- AS-115, AS-9, ICDs-IV, ICAI guidance note Section 5 r/w section 145 of the Income Tax Act though the DISCOMS were depositing TDS to the credit of company against LPSC which was offered by the assessee as income, from the records, they were not releasing the amount towards LPSC on which TDS had been deposited. Necessary disclosure to this effect had been incorporated in Note-27 of the audited financial statements of the assessee. 13.5. During the assessment proceeding, Assessing Officer directed the assessee vide notice-dated 21.12.2020, dated 22.02.2021 and notice-dated 05.04.2021 to show-cause as to why the amount of 679,65,74,000/- be not recognized as re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at all there cannot be a tax, even though in book keeping, an entry is made about a hypothetical income which does not materialize. ii) In the case of Godhara Electricity Co. Ltd. vs CIT (1997) 225 ITR 746 (SC), Supreme Court relied upon the following cases:- CIT vs Shoorji Ballabhdas Co. (1962) 46 ITR 144 (SC) CIT vs Birla Gwalior (P) Ltd. (1973) 89 ITR 266 (SC) Morvi Industies Ltd. vs CIT (1971) 82 ITR 835 (SC) Poona Electric Supply Company Ltd. vs CIT(1965) 57 ITR 521 (SC) Kashiparekh (H.M.) Co. Ltd. vs CIT (1960) 39 ITR 706 (Bom) State Bank of Travencore vs CIT(1986) 158 ITR 102 (Ker) Supreme Court held in this case that the question, whether there was real accrual of income to the assessee Co. in respect of the enhanced charges for supply of electricity, has to be considered by taking the probability or improbability of realisation in a realistic manner. Tribunal had rightly held that the claim at the increased rate made by the assessee Co., on the basis of which necessary entries were made, represented only hypothetical income and the impugned amount as brought under tax by the ITO did not represent the income which had really accrued to the assessee during the relevant prev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puted in accordance with the mercantile or cash system of accounting regularly employed by the assessee and shall be subject to the income computation and disclosure standards (ICDS) notified by the government. iii) Under ICDS-4 notified u/s 145 of the Act, realization certainty is the necessary predicament for recognition of revenue. iv) Clause 4 of ICDs-4 (revenue recognition) notified u/s 145(2) provides that revenue shall be recognized when there is reasonable certainty of the ultimate collection . v) Clause 9.2 of AS-9 states that where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e.g. for escalation of price, export incentives, interest etc, revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognize revenue only when it is reasonably certain that the ultimate collection will be made. When there is no uncertainty as to ultimate collection, revenue is recognised at the time of sale or rendering of service even though payments are made by installment. vi) Para 9.5 of AS-9 states that when recognition of revenue is postponed due to the effect of u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gnition which states that if at the time of raising of any claim for revenue from sales or service transactions, it is un-reasonable to expect ultimate collection, revenue recognition should be postponed xvi) Guidance note on accrual basis of accounting issued by ICAI vindicates the above view as under: - 4.5 Recognition of revenue requires that revenue is measurable and that at the time of sale or the rendering of service or the use of resources of the enterprise by others, it would not be unreasonable to expect ultimate collection. xvii) Thus, from all the corners a financial reporting framework applicable to the assessee Co., it emanates that in case probability of realization of a receipt is uncertain at the time of raising of claims, then revenue recognition on account of it shall be postponed until such uncertainty is resolved. D) When matter is sub-judice , no revenue can be recognized. i) It is a settled principle that where a suit has been filed, the right to get the amount for the period after the institution of the suit would depend not on the agreement between the parties but on the discretion of the Court. ii) In CIT vs Bengal Jute Mills Company Ltd. (No.1) (1987) 165 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a subsequent year. Assessee is also relying upon the following case:- Parashuram Pottery Works Ltd. vs. ITO (1977) 106 ITR 01 (SC) Pr. CIT vs Quest Investment Advisors Ltd. (2018) 409 ITR 545 (Bom) Bharat Sanchar Nigam Ltd. vs UOI (2006) 282 ITR 273 (SC) CIT vs Excel Industries Ltd. (2013) 358 ITR 295 (SC) CIT vs Realest Builders Services (2008) 307 ITR 202 (SC) DCIT Circle-33 vs India housing (2020) 113 Taxmann.com 535 (ITAT-Kolkata) Bodal Chemicals Ltd. vs Addl CIT (2019) 112 Taxmann.com 217 (ITAT-Ahmedabad) Travencore Textiles P. Ltd. vs ITO (ITA No.3193/Chny/2018) (ITAT-Chennai) AVTEC Limited vs DCIT (2015) 370 ITR 611 (Del) F) Even if the statutory auditors have made some observation in the accounts in respect of LPSC not shown as income, the said observation has not been accepted by the CAG of India as well as the tax auditor. i) Rather they have accepted the system of accounting followed by the assessee company. ii) ii) In so far as observation by the statutory auditor is concerned, it is stated that assessee Co. is a government Co. u/s 2(45) of the Companies Act, more than 50% of the share capital is held by government of NCT of Delhi. As per the provisions of section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Millan Company (1958) 33 ITR 182 (SC) CIT vs Manish Buildwell (P) Ltd. (2011) 63 DTR 369 (Del), Manu/De/4468/2011 iii) In the assessment orders, the Assessing Officer has number of times stated that assessee Co had to recognize recoverable LPSC as income and could have claim deduction for the same as bad debts separately u/s36(1)(viia) of the Act. iv) It is submitted that it would have ended in the same result but it is a well recognized principle that no income can be subjected to tax if its realisation is uncertain. Further by recording the said transaction as bad debts, it would have amounted to unilaterally waiving off its right to recover the said amount from the DISCOMS when the outcome of contempt petitions filed by the Delhi Power Utilities have not been concluded and that the DISCOMS have also not waived off their liabilities. It would have resulted into huge financial implications. v) In any case, the treatment on account of bad debts u/s 36(1)(viia) is also based on the accounting treatment and the same would have yielded into same results. Hon'ble Supreme Court in the case of CIT vs Sarkar Builders (2015) 375 ITR 392 (SC) have held that the assessee should not be pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen it is most humbly requested that the alleged income from LPSC amounting to Rs. 679,65,64,000/- shall be allowed as deduction u/s 80IA of the Act. ii. Since the assessee Co. is engaged in the business of generation and sale of power, it is eligible for deduction u/s 80IA of the Act. The business model of the assessee Co. is not in dispute; it is also not the case of the Assessing Officer that LPSC has not been derived from the business of generation and sale of power. Hence, the action of Assessing Officer in inflating the income of the assessee Co. without enhancing corresponding deduction u/s 80IA of the Act is in sheer violation of the requirement of law. iii. Income of an assessee can be enhanced either by way of making an addition to the returned income or by making a disallowance in respect of any component of expense. In both the scenarios profit and gains derived by the assessee under the Income Tax Act gets inflated, and the same become eligible for enhanced deduction under Chapter-VIA of the Act. iv) IV Mumbai Bench of ITAT in the case of ITO vs Anthelio Business Technologies (P) Ltd. (2017) 78 Taxmann.com 203, relying upon the Circular No.37/2016 issued by CBDT held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xability is in dispute. Moreover, this treatment has been consistently followed by the assessee and accepted by the Department, the view taken by the Assessing Officer is permissible in law and therefore, action u/s 263 does not lie. iii. In CIT vs Karnataka Power Transmission Corporation Ltd. (2020) 122 Taxmann.com 99 (Kar ) there was uncertainty with regard to recovery / collection of outstanding amount, hence assessee for the assessment year in question decided not to recognize revenue of Rs. 52.89 Cr for wheeling charges. Hon'ble High Court held that the income did not accrue to the assessee but was a hypothetical income which could not have been subjected to tax and in view of AS-9, assessee has rightly decided not to recognize the revenue of Rs. 52.89 Cr for wheeling charges for the relevant assessment year. iv Similar observations are made by Delhi Bench of ITAT in the case of ACIT vs Uttaranchal Jal Vidyut Nigam Ltd. (2022) 138 Taxmann.com 448. It is submitted that in the present case, the method of accounting followed by the assessee was completely in conformity with the provisions of section 5 r/w section 145 of the Act. If the books of accounts are maintained on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . have been duly admitted by its management, by its tax-auditor and also by C AG without raising any qualification in this regard. v. Reliance placed by the Assessing Officer on the judgement of Supreme Court in the case of Apollo Tyre is misplaced. Rather it supports the case of the assessee. The Assessing Officer is duty bound to rely upon the authenticity of books of accounts prepared by the assessee under the Companies Act. It is a trite law that only those adjustments can be made to the net profit of the assessee, which are permissible under Explanation 1 to section 115JB of the Act. The book profit of the assessee Co. cannot be tinkered with any particular item which is not encompassed within the said Explanation. vi. As stated by the Supreme Court in the case Apollo Tyres Ltd. vs CIT (2002) 255 ITR 273 (SC) Assessing Officer has no power to tinker with the computation of book profit made by the assessee, once the accounts of the company are made in accordance with the provisions of Companies Act. The Assessing Officer does not have the jurisdiction to go behind the net profit shown in the Profit Loss A/c except to the extent provided in the Explanation to section 115J. vii. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s stated by the Assessing Officer, in its books of accounts, the assessee cannot be prejudiced of any differences in accounting treatment. In any case, it would result in the same income at the end. Moreover, claiming LPSC as bad debts would amount to waiving of right by the assessee for recovery. f) Even if statutory auditors has raised any qualification, the same has not been carried over by the C AG of India, the management of the assessee Co. as well as the tax auditors. The adjustment made by the Ld. Assessing Officer to the book profit does not fall under any of the limbs envisaged in Explanation 1 to section 115JB of the Act. Thus, as seen from any angle the impugned addition made by the Assessing Officer under normal provisions of the Act as well as u/s 115JB of the Act is injudicious and unwarranted and therefore, is liable to be deleted in the interest of justice. 16. On the other hand, the Ld. DR submitted that assessee followed mercantile system and the assessee has recorded its income on the concept of accrual in this regard. He brought to our notice page 33 of PB wherein assessee itself recognizes above said Revenues and he brought to our notice page 43 of the PB rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d declared the power purchase income alone and declared in its notes no 27 that the LPSC will be included in the taxable income as and when it recovers from the DISCOMS. 19. After considering the above facts and aspect on record, the AO rejected the same and proceeded to make the addition the LPSC relating to the current AY as income of the assessee with the observation that the assessee follows mercantile system of accounting and the same is chargeable to tax whether it is received or receivable. After considering the facts on record, we are of the view that no doubt in the mercantile system of accounting, the accrued portion of the income has to be declared as income however, it is also relevant and important that the certainty of recovery is relevant and important aspect before declaring and recognizing the same as income chargeable to tax. The AO has acknowledged the fact that the assessee has not recovered any LPSC in the past and still he proceeded to make the addition on the basis of method of accounting followed by the assessee. The assessee being a company has to follow the various accounting standards prescribed to prepare/submit its financial statements. Therefore, the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the purposes of additions to fixed assets, CWIP and capital advances. It was also clarified that even the borrowing made for working capital requirement had also not been utilized for the purpose of acquisition of aforesaid assets. The said additions were made out of equity funds and reserve funds of the assessee which were far in excess of the additions made. 22 . 2. Further, vide notice-dated 17.03.2021, Assessing Officer directed the assessee to explain as to why interest in respect of loan availed from Govt of NCT of Delhi (GNCTD) in the nature of project loan be not disallowed. 22.3. In response, Vide reply-dated 05.04.2021 assessee furnished details with respect to projects undertaken by it, stating that it had undertook two projects for development of power plants namely Bawana Project and Bamnauli Project. -With regard to Bawana Project, it was submitted that it is commissioned in the FY 2013-14 and therefore, interest till that date was capitalized in the cost of the project in preceding years. Expenditure incurred subsequent to commissioning of project in FY 2013-14 was made out of internal accruals, hence, there is no scope for any disallowance of interest. -With regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P) outstanding at the end of the year. b) Moreover, assessee Co. had also incurred certain expenditure on direct acquisition of fixed asset from outside vendors, in regular course of its business which have also been added to the fixed asset. c) In so far as CWIP is concerned, the following amount of expenditure had been incurred by the assessee on CWIP standing at the end of the year as under:- CWIP balance as on 31.03.2018 Amount (Rs.)(in lakh) Remarks Bamnauli project for development of PPS-II power plant 10,923.38 Refer Note 3 of audited financials (Pg 32 of PB) Bawana project for development of PPS III power plant Gross Less: completed portion capitalized and transferred to fixed asset (6955.59) 10529.84 Net Balance outstanding as on 31.03.2018 3574.24 Refer Note 3 of audited financials (Pg 32 of PB) 14497.62 d) In so far as addition to fixed assets are concerned, the assets worth Rs. 26.611.33 lakh had been added to the fixed assets during the year, the details of which are as under:- Additions to fixed assets during FY 2017-18 Amount (Rs.)(in lakh) Remarks Completed portion of Bawana project transferred from CWIP 6955.59 Refer Note 3 of audited financials (Pg 32 of PB) Other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2014, a total sum of 4,31,831 lakh had been incurred on the said project out of following sources: - i) Equity from GNCTD, ii) Loan from PFC, iii) Loan from GNCTD iv) From internal accruals Proportionate interest cost of Rs. 44,028 lakh in respect of loan availed from PFC and GNCTD had already been capitalized to the cost of such project and the same had not been doubted even by the Assessing Officer. iii) Interest on capital expenditure subsequent to FY 2013-14 was not required to be capitalized even in view of provisions of section 36(1)(iii) of the Act. In any case, subsequent capital expenditure was out of internal accruals and therefore, no interest was payable. g) Assessing Officer has applied average cost of debt to the investment in CWIP which is absolutely baseless and arbitrary in nature. h) Commissioning of project amounts to first put to use . Hence, even if subsequent capital expenditure is considered to be made out of borrowed funds, same cannot be disallowed u/s 36(1) (iii) of the Act. Section 36(1) (iii) reads as under: - (iii) the amount of interest paid in respect of capital borrowed for the purposes of the business or profession: Provided that any amount of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en commissioned in FY 2013-14 iii) Proportionate interest cost up to 31.03.2014 had already been capitalized by the assessee Co. iv) subsequent capital expenditure had been incurred out of internal accruals v) even if such capital expenditure is considered to be made out of borrowed funds, then also interest cannot be disallowed as commissioning of project in generation of electricity signifies put to use of asset. There is nothing in section 36(1)(iii) of the Act to disallow interest expenditure after such put to use. n) Source of funding in respect of Addition to Fixed Assets i) Addition of Rs. 26,611.33 lakh was made to fixed asset which includes Rs. 6,966.69 lakh pertaining to completed portion of Bawana Project transferred from CWIP ii) Assessee Co. had purchased other assets amounting to Rs. 19,655.74 lakh directly from outside vendors. These assets were put to use on the same date on which they were acquired or transferred. Even the Ld. Assessing Officer has not pointed out any item which had not been used on the date on which, it was acquired. iii) During the assessment proceeding itself, assessee had pointed out that the expenditure had been incurred out of internal accrua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e investments were made from the interest free funds available. vii) Various Benches of ITAT have taken a similar view, some of the cases are Tata Sky Ltd. vs ACIT (2020) 119 Taxmann.com 424 (Mum-ITAT) ITO vs Anunay Fab (P) Ltd. (2021) 133 Taxmann.com 412 (Ahd-ITAT) Bhagwati Gases Ltd. vs DCIT (2019) 105 Taxmann.com 183 (Kol-ITAT) Coffeeday Global Ltd. vs Addl CIT (2021) 130 Taxmann.com 277 (Kar-ITAT) ITO vs SEL Manufacturing Company Ltd. (2017) 88 Taxmann.com 822 (Chd-ITAT) viii) Allahabad High Court in the case of CIT vs Motor Sales Ltd. (2008) 304 ITR 123 (ALL) following ratio of the judgement of Hon'ble Supreme Court in the case of M/s S.A. Builders Ltd. vs CIT (288 ITR 01) (SC) and in the case of Munjal Sales Corpn (2008) 298 ITR 298 (SC) dismissed the appeal of the Revenue in the light of finding of CIT(A) that assessee had paid-up capital/reserves/surplus of ₹6.10 crore on which no interest was being paid and therefore, interest free advances made by it were covered. Assessee had not diverted any borrowed funds on which interest was paid for non-commercial purposes and therefore, there was no question of disallowance of interest out of interest paid by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad disallowed proportionate interest of Rs. 17,66,79,721/-, invoking the provisions of proviso to section 36(1)(iii) r/w Explanation 8 to section 43(1) of the Act. In the assessment proceeding, it was categorically stated that no borrowed funds had been utilised for investment in fixed assets /CWIP. Without prejudice to the above, in case, the said position is not accepted, then necessary direction be given to the Ld. Assessing Officer to allow depreciation on the amount of 17,66,79,721/- in current as well as subsequent years, which has stated to be capitalized under Explanation 8 to section 43(1) of the Act. ii) In view of the forgoing discussion, it is submitted that any dispute with regard to treatment of interest expenditure is ultimately academic as the same is revenue neutral over the years. 24. In summary, Ld AR submitted as under: 1. In so far as CWIP is concerned, the Bamnauli Project (PPSII) had been specifically financed from equity infusion by GNCT. 2. Remaining part of CWIP (Bawana Project-PPS-III) had already been commissioned in FY 2013-14, proportionate interest paid on borrowing up to that date had been duly capitalized by the assessee; subsequent capital expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , viz., a). direct purchase of fixed assets, b). In house development of project I (Bamnauli project) and c). In house development of project II (Bawana Project). As per the information submitted before us clearly shows that the Bawana Project was already commissioned in FY 2013-14 and to the extent of interest for the period was already capitalized. In this project there was direct utilization of equity funds, loan from PFC and GNCTD. The interest was already determined and capitalized at the time of commissioning of the project itself. Therefore, there is no requirement to make further capitalization in this project. The next project is Bamnauli Project, it was submitted that this project was fully financed out of equity introduced by GNCTD and no borrowed funds were utilized during this AY. The relevant evidence was submitted before CIT(A) and he has rejected the same. For the sake of justice, we observe that none of the tax authorities have verified this aspect and for the sake of clarity, we direct the AO to verify the claim of the assessee and allow the same as per law. The next issue is direct purchase of assets, once it is put to use, or deferred there is no concept of furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l before Ld CIT(A) and Ld.CIT(A) sustained the addition made by the assessing officer. 27. At the time of hearing, Ld AR submitted as under: a) It is to be stated that the financial statement had been drawn-up by the assessee company in accordance with the Indian Accounting Standards (IND-AS), notified under the Companies (Indian Accounting Standards) Rules 2015. b) IND-AS 109 prescribes the accounting treatment for recording liabilities towards various vendors, according to which, any financial liability towards a vendor shall be initially recorded at its fair value, which shall represent the discounted value of sum payable to the vendor. Such sum shall be subsequently unwound over the years by applying market interest rate until the liability is fully settled. c) For instance, a sum of 121 is payable to the vendor at the end of two years, suppose market interest rate is 10%. As per the provisions of IND-AS 109, the present value of Rs. 121/- is to be computed by discounting Rs. 121/- over two years at the market interest rate of 10%. In the present example, such present value shall be worked out to be Rs. 100/-. Therefore, the liability towards the vendor shall be initially recor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) marked to market loss or an expected loss shall not be recognised unless the recognition of such loss is in accordance with the provisions of any other Income Computation And Disclosure Standard. iv) There is no specific ICDS wherein notional finance cost due to unwinding of vendor liability is allowed as deduction. Moreover, even section 36(1)(iii) provides deduction only in respect of actual interest incurred and not notional interest due to unwinding of vendor liabilities. v) In view of above, it is stated that an amount which has already been debited as finance cost to the Profit Loss A/c in the books of account but which is not allowable under the Income Tax Act shall be added back to the book profit for the purposes of computing taxable income as well as computing profit/gains derived from eligible business. The computation furnished by the assessee Co. itself reflects that the assessee had added this amount back to its income in the Computation of Income as well as in the computation of deduction u/s 80IA(4) (iv) of the Act. Thus IND-AS adjustment disallowable under the Income Tax Act is added back in the computation of gross total income under normal provisions. vi) Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . vs CIT (1971) 82 ITR 363 (SC) have held that existence or absence of entries in the books of accounts are not decisive / conclusive of a particular deduction if otherwise allowable as per existing law. ii) In the present case, assessee had claimed Rs. 7,98,24,639/- being unwinding of interest on retention liability project (IND-AS adjustment) as deduction which was reverted back in the computation of income while computing deduction u/s 80IA(4) (iv) of the Act as the same was notional loss and therefore, was not allowable as deduction. Assessing Officer and consequently the CIT(A) had ignored the expenditure part and held that the said amount is not the profit derived from industrial undertaking and therefore, deduction u/s 80IA is not allowable on this amount. By not allowing deduction of Rs. 7,98,24,639/- u/s 80IA of the Act, the Assessing Officer has made an attempt to tax a hypothetical income which is not sustainable in law. If seen from another angle, Assessing Officer in the present case, has reduced the same amount of Rs. 7,98,24,639/- from the income side. It would mean that the notional loss on account of unwinding of interest on vendor liabilities has been allowed to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es are allowed as deduction. In that scenario it is requested to allow credit for the sum already disallowed by the assessee in computation of gross total income against the impugned disallowance. Both the circumstances would yield the same amount of net taxable income under the Act and hence are completely revenue neutral. 29. On the other hand, Ld DR submitted the relevant facts on record and objected to the detailed submissions of Ld AR. He relied on the findings of lower authorities. 30. Considered the rival submissions and material placed on record, we observed that a sum of Rs. 7,98,24,639/ has been added by the Assessee in its computation of taxable income as the said amount is not allowable under the provisions of Income Tax Act, 1961 being the amount of notional interest accounted for in the accounts of the company during the Financial Year 2017-18 on the liability to be discharged by the Assessee to its contractors in future by adopting IND AS with effect from the financial year 2015-16. The Assessee was required to maintain its accounts on the basis of IND AS 109 (Indian Accounting Standards). As per the said accounting standards, the company was required to account for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said amount of notional interest was cancelled (Unwound) for each financial year to arrive and show the fair value of the Retention Money for such financial year. As on 31/03/2018 all retention liability was considered as current liability and therefore shown as Other Financial Liabilities (Note No.23) under current liabilities after unwinding of balance amount of Rs. 7,98,24,639/-. That means the liability to the extent of Rs. 7,98,24,639/- was increased in the liability side and notional financial loss was claimed in the books as finance cost. In our view, it is only an accounting adjustment and it has no impact as the computation of taxable income. 30.4. We observed that in the statement of computation of gross taxable income as well as determining the deduction u/s 80IA, the assessee had added back the above said finance cost (unwinding of interest cost) as the above said finance cost was notional and therefore, was not allowable as deduction under the provisions of Income Tax Act, 1961. 30.5. We observed that the deduction u/s 80IA is allowable to the assessee on the basis of eligible unit. In the present case, the assessee has two eligible units eligible to claim deduction u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of Sutlej Cotton Mills Ltd. vs CIT (1979) 116 ITR 01. 32. At the time of hearing, Ld AR submitted as under: a) Section 43A of the Act has no application where domestic/indigenous assets are constructed or loans availed are in Indian currency. i) Section 43A reads as under:- 43A Special provisions consequential to changes in rate of exchange of currency (1) Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange at any time after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency for making payment towards the whole or a part of the cost of the asset or for repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset (being in either case the liability existing immediately before the date on which the change in the rate of exchange takes effect), the amount by which the liability aforesaid is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... development rebate under section 33.'. ii) From perusal of section, it is crystal clear that the said provision is applicable only when all the following conditions are satisfied:- a) the asset had been acquired by the assessee, b) such asset is acquired from the country outside India, c) such asset is acquired either on a) deferred credit term from the foreign supplier or b) loans availed in foreign currency. iii) As per the facts of the case, for in-house development of the power plant at Bawana, assessee had entered into a contract with BHEL on turnkey basis. The said work encompassed civil, structural and architectural design and construction, engineering, manufacturing, inspection, testing, packing, forwarding, dispatch, transportation, port handling, clearance, insurance, loading and unloading, handling and storage etc. iv) During the course of execution of contract, BHEL was required to import certain Plant Machinery/ equipment from abroad on account of which certain part of the consideration was payable by the assessee to BHEL in foreign currency v) Without pointing out any infirmity, Assessing Officer blindly made the addition. Hence, before the CIT(A), produced releva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that from perusal of the contract, it manifests that payment to the contractor was required to be made on achievement of certain milestones and in any case till the successful commissioning/guarantee test of the asset. The present case is not the case where assets had been acquired on deferred credit terms from the supplier. Further, development of power plant at Bawana was funded out of loan from Power Finance Corporation Ltd. (PFC). The said loan agreement was produced by the assessee before CIT(A) as additional evidence under Rule 46A of the Income Tax Rules however CIT(A) did not allow to admit such evidence. Perusal of contract reflects that the said loan had been availed in Indian currency i.e. rupees and not in foreign currency. Thus, all the three conditions required for applying section 43A are not satisfied and therefore, impugned addition is unwarranted. b) Foreign exchange loss is allowable u/s 43AA of the Act as well as ICDs i) as per the provisions of section 43AA of the Act, any foreign exchange gain/loss which is not covered by the provisions of section 43A is allowable as income/expense in accordance with ICDs notified u/s 145(2) of the Act. ii) Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be capitalised under IND-AS 21 dealing with effects of changing in foreign exchange rates . Such accounting treatment has been duly certified by statutory auditors of the company and no infirmity / discrepancy in the books of accounts has been pointed out by the Assessing Officer in this regard. vi) Moreover, sight cannot be lost of section 43(1) of the Act which defines the term actual cost of an asset and the same is circumscribed by 13 Explanations dealing with various specific situations. None of such Explanations provide that foreign exchange fluctuation loss in respect of assets constructed in India is required to be added to the cost of asset. vii) It is submitted that unrealized foreign exchange losses are allowable as revenue expenditure even u/s 37(1) of the Act. Hon'ble Supreme Court in the case of Oil Natural Gas Corporation Ltd. vs CIT (2010) 189 Taxmann 292 held that loss suffered by the assessee, maintaining accounts regularly on mercantile system and following accounting standards prescribed by ICAI, on account of fluctuation in rate of foreign exchange is an item of expenditure u/s 37(1), notwithstanding that liability has not been discharged in the year in w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reon. 33. Further, he submitted as under: Accordingly, it is concluded that the foreign exchange loss incurred by the assessee is to be allowed as revenue expenditure on the following grounds:- a) section 43A is not applicable as: - the asset constructed by the assessee (i.e. power plant) is located in India and not imported from abroad. -the components required for the construction of the said asset have been imported by the contractor (i.e. BHEL) and not by the assessee, - the asset constructed is not on deferred payment terms and the loan availed to finance the same is also in Indian currency. b) Once section 43A is not applicable, foreign currency loss on monetary as well as non-monetary assets is allowable u/s 43AA r/w ICDS-VI. c) Assessee follows mercantile system of accounting, books of accounts have not been rejected by the Assessing Officer and the accounting treatment adopted by the assessee is also in consonance with IND-AS 21. Moreover, none of the explanations in section 43(1) require capitalization of unrealized foreign exchange loss and the same is otherwise allowable u/s 37 of the Act as well. d) Without prejudice and in the alternative, depreciation is allowable on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 35.4. Accordingly, Assessee has recorded the 100% liability against the material received or services certified by the project manager. Out of this accounted liability, some amount already paid as advance payment or payment against dispatch and balance payable afterwards in the books on the date of commissioning of the project. It was submitted before us that the Assessee has held 5% towards liquidated damages till the final closure of the contract. Upto FY 2017-18 almost 90% payment against the contract on foreign currency was paid and balance shown as liability. 35.5. We observe that, as per the IND AS-21 on the Effects of Changes Foreign Exchange Rates, the assessee has to report, at the end of each reporting period, foreign currency monetary items shall be translated using the closing rate. The same standard provides that the exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial statements shall be recognized in profit or loss in the period in which they arise. 35.6 . At the time of hearing, the bench directed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... furnish depreciation chart, details in respect of addition to Plant Machinery, justification for put to use and claiming depreciation thereon along with copy of sample bills in respect thereto. 36.1 Assessee vide reply-dated 04.02.202, 26.02.2021 and 08.04.2021 submitted that it, being a power generating company, had claimed depreciation as per section 32(1) r/w Rule 5(la) and Appendix-IA of the Act. It was further submitted that during the year, total additions to fixed assets were made at 266.11 crores, date-wise details of which had been duly submitted in the tax audit report. 36.2 Amount of additions to fixed assets and depreciation thereon was claimed by the assessee in consonance with IND-AS 16 applicable to the assessee company. However, the Assessing Officer, vide show-cause notice-dated 05.04.2021 and 08.04.2021 worked out the depreciation at Rs. 162,34,00,032/- as against Rs. 398,46,51,672/- claimed by the assessee and accordingly, required the assessee as to why difference of Rs. 236,12,51,643/- be not disallowed and added back to the returned income. Out of the sum of 236,12,51,643/- -a sum of Rs. 3,04,57,234/- had been proposed to be disallowed on account of 50% of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raight line method (SLM) as per the provisions of section 32(1)(i) r/w Rule 5(IA) of the Income Tax Rules. As per this annexure, depreciation rate was to be allowed to the actual cost of the asset. b) Section 32(1)(i) states that in the case of assets of an undertaking engaged in generation or generation and distribution of power, depreciation is to be claimed at such percentage on the actual cost thereof to the assessee as may be prescribed. c) Rule 5(IA) states that the allowance under clause (i) of subsection (1) of section 32 of the Act in respect of depreciation of assets acquired on or after 15 day of April 1997 shall be calculated at the percentage specified in the 2nd column of the table in Appendix-IA of these rules on the actual cost thereof to the assessee as are used for the purposes of the business of the assessee at any time during the previous year. d) Since the assessee was engaged solely in the business of generation and distribution of power, depreciation was claimed as per Appendix-IA. e) It is not the case of Assessing Officer that the assessee was not engaged in the business of generation and distribution of power or the rates applied by the assessee were diffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per clause (iia) while computing book profit. Since there was no depreciation claimed by the assessee on account of revaluation of asset and therefore, same depreciation was claimed by the assessee in the Profit Loss A/c as per normal provisions as well as under MAT provisions. e) As stated by the Supreme Court in the case Apollo Tyres Ltd. vs. CIT (2002) 255 ITR 273 (SC) Assessing Officer has no power to tinker with the computation of book profit made by the assessee, once the accounts of the company are made in accordance with the provisions of Companies Act. The Assessing Officer does not have the jurisdiction to go behind the net profit shown in the Profit Loss A/c except to the extent provided in the Explanation to section 115J. f) This case was relied upon by the Supreme Court again in the case of Malyalam Manorama vs CIT (2008) 300 ITR 251 (SC) holding that the Assessing Officer while computing income u/s 115J, has only the power of examining whether the books of accounts have been certified by the authorities under the 1956 Act as having been properly maintained in accordance with the 1956 Act. The Assessing Officer, thereafter, has the limited power of making increases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthenticity of books of accounts prepared under the Companies Act and can make only those adjustments to the net profit which are permissible under Explanation 1 to section 115JB of the Act. Thus book profit of the assessee cannot be tinkered with any particular item which is not envisaged within the said Explanation. e) It is not the case of the assessee that any part of depreciation is attributable to any revaluation of asset. 39. Further he submitted that the order passed by CIT(A) is perverse in law and on facts. In this regard, assessee has taken the following ground: 15. That the Ld. CIT(A) and AO has erred in law and on facts in disallowing the depreciation of Rs. 3,04,57,234/- and adding back to the book profit u/s 115JB of the Act alleging the same to be excessively claimed despite the fact that book profit had been arrived at as per the provisions of the Companies Act and had been audited by the statutory auditor. a) The order passed by the Ld. CIT(A) is perverse in law and on facts as he ignored the detailed written submissions running into 200 pages filed by the assessee enclosing relevant documents and relying upon the irrelevant considerations. b) First, CIT(A) commit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets already put to use by adopting wrong methods. It was submitted before us that the assessee itself has claimed 50% of the depreciation for those assets which were added to the fixed assets after 01.10.2017. Since the assessee has already submitted the relevant depreciation schedule in the audit report, we are inclined to remit this issue back to the file of AO to verify the relevant depreciation schedule and also verify the relevant documents submitted to claim that the assets were already put to use on or before 31/03/2018. The assessee had already adopted the relevant method of claiming the depreciation as per the rates in Appendix 1A, AO has to verify the same afresh as per law after giving proper opportunity of being heard to the assessee. Accordingly the grounds raised by the assessee on the issue of depreciation u/s 32(1) as well as allowable depreciation in the computing the book profit u/s 115JB of the Act are remitted back to AO to verify the same and allow them as per law. It is needless to say that assessee may be given proper opportunity of being heard. Accordingly, the ground raised by the assessee is allowed for statistical purpose. 19. In the result, the appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
