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TMI Blog2018 (5) TMI 2186X X X X Extracts X X X X X X X X Extracts X X X X ..... in National Hydro Electric Power Corporation Ltd. [ 2010 (1) TMI 281 - SUPREME COURT] as well as the subsequent decision of the Coordinate Bench in case of NHPC [ 2014 (11) TMI 92 - ITAT DELHI] and the latter decision has been rendered in the context of taxability of Advance against depreciation under the normal provisions of the Act. CIT(A) has rightly followed the ratio laid down in the said decisions wherein as held it is correct in holding that advance against depreciation cannot be added under the computation of the normal income. . We donot find any infirmity in the order of the ld CIT(A) and the same is hereby confirmed. The ground taken by the Revenue is thus dismissed. - SHRI VIJAY PAL RAO, JM AND SHRI VIKRAM SINGH YADAV, AM For The Assessee : Shri P.C. Parwal (CA) For The Revenue : Smt. Roli Agarwal (CIT) ORDER PER: VIKRAM SINGH YADAV, A.M.: This is an appeal filed by the Revenue against the order dated 29/09/2017 passed by the ld CIT(A), Bikaner for A.Y. 2008-09, wherein the Revenue has taken following grounds of appeal: ( i) Whether on the facts in the circumstances of the case and in law the ld. CIT(A) was justified in deleting the addition of ₹ 4594/- made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. (iii) of the Revenue s appeal, briefly stated facts of the case are that during the course of assessment proceedings, the Assessing Officer observed that in Schedule 16: Revenue from sale of power of the assessee s company audited financial statements, the assessee company has reduced a sum of ₹ 176.88 crores from the revenue from sale of power. The assessee was issued a show cause notice as to why the said amount of ₹ 176.88 crores shown as advance against depreciation deferred be not added to the total income. In response, the assessee company submitted that it is engaged in generation of power and supplying it to various distribution companies at the tariff notified by the Rajasthan State Electricity Regulatory Commission (RERC). The tariff rate is fixed on the basis of the expenses incurred by the assessee company which includes the interest cost and element of depreciation and advance against depreciation (AAD), besides other costs. It was submitted that the advance against depreciation is considered while determining tariff to generate the cash flows in the hands of the assessee company for repayment of loan raised for installation of power plant. This advanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... termined by Rajasthan Electric Regulatory Corporation (RERC) by way of tariff. Terms and conditions of fixation of tariff by RERC provide allowance of advance against depreciation over and above normal depreciation. Advance against deprecation is nothing but difference between the rate of depreciation and amount of repayment of loan. The assessee has reduced the said amount of Advance Against Depreciation(AAD) from the revenue of the current year by stating that the same will be reversed in subsequent year and credited to income (according to the assessee company this arrangement has been made as per the terms and conditions of agreement with RERC). On going the terms and condition of tariff it is noticed that it no where provides that the advance against depreciation so allowed to corporation will be adjusted against the subsequent year tariff. As per the scheme it appears that advance against depreciation allowed by way of tariff by RERC is only to improve the cash flow of the company and it is not adjustable in subsequent year's tariff as per the terms and conditions of determination of tariff. Thus the amount so received is current year revenue and not the revenue for subse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany however it does not provide the mechanism how the AAD allowed in a year will be reversed in subsequent years. In these guidelines there is no provision which deals with adjustment of AAD in subsequent years tariff. Thus, there is no specific provision which deals adjustment of AAD in subsequent year tariff hence AAD is nothing but revenue of the year under consideration. ( iv) The whole issue also needs to be seen in a totality where all these individual entities (Power Companies) have signed one umbrella agreement, under these circumstances it is difficult to fathom how one entity (JVVNL, JDVVNL, AVVNL) claims amount as an expense while an interlinked entity, the assessee company, in the same chain of operation does not claim it as its revenue. Further, on perusal of the umbrella agreement it is seen that the agreement allows for a financial stability to be provided to these power companies using different tools. However, the convenience of these financial tools cannot be used as an argument to bypass taxation which would be applicable on these individual entities. At each stage of discussion both written and oral the assessee company has made an effort to impress upon as to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , but is treated as revenue received in advance. Thus, that part of tariff which arises because of inclusion of advance against depreciation should be treated as revenue received in advance since the said advance will be adjusted in later years against the depreciation. Further the Hon ble Supreme in case of National Hydro Electric Power Corporation Ltd. Vs.CIT 320 ITR 374 have held that Advance against depreciation is an amount that that is under obligation, right from its inception to be adjusted against the future depreciation so as to reduce the tariff in future years. It is a timing difference. It is only the income received in advance. Similarly ITAT Delhi bench in case of ACIT vs. NHPC Limited 67 SOT 130 by following the decision of the Supreme Court referred supra, held that the assessee cannot use the advance against depreciation for any other purpose, which is possible in case of reserve, except to adjust same against future depreciation so as to reduce the tariff in future years and advance against depreciation cannot be added under computation of normal income. Considering all these facts and respectfully following the decision of the Hon ble Supreme Court and ITAT Delh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r regulation 18 subject to a ceiling of 1/10th of loan amount as per Regulation 14 minus depreciation as per schedule Provided that advance against depreciation shall be permitted only if the cumulative repayment up to a particular year exceeds the cumulative depreciation up to that year, considering cumulative repayment as reduced by the accumulated depreciation transferred to licensee under transfer scheme. Provided further that AAD in a year shall be restricted to the extent of difference between cumulative repayment and cumulative depreciation up to that year. Provided also that in case a transitional loan in secured to meet wholly or partly the difference between the loan repayment and depreciation charges, then the interest liability of such transitional loans will be considered and the remaining difference, if any, between loan repayment liability (including that of transitional loan) and the depreciation shall only be considered towards AAD. Thus, by allowing AAD, the tariff rate is increased. This increased amount received on account of tariff fixation is not the income for the year and therefore it is accounted for in the books as deferred revenue. The amount of deferred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n subsequent year when such deferred revenue has been included in the income) by the assessee, the same has been taxed by the department resulting into double addition. Therefore, the addition made by the AO is unjustified. 4. The Supreme Court in case of National Hydro Electric Power Corporation Ltd. Vs. CIT 320 ITR 374 (PB 11-14) held that AAD is an amount that is under obligation, right from its inception to be adjusted against the future depreciation so as to reduce the tariff in future years. It is a timing difference. It is only the income received in advance. Thus, when the Supreme Court has held that the amount of AAD is income received in advance, the same cannot be included in the year in which the amount is received. It is only the income of the future years. Therefore, only for the reason that this decision is given with reference to calculation of book profit u/s 115JB, the principle laid down in this decision cannot be ignored. 5. The AO has referred to the decision of the AAR reported in 193 CTR 594. This decision has been overruled by the Supreme Court in the decision referred above. Therefore, when the decision relied by the AO has been overruled by the Supreme Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Hon'ble Supreme Court are contained at para 11 and 12 of its order, which is reproduced as under: 11. Since the amount of AAD is reduced from sales, there is no debit in the profit and loss account, the amount did not enter the stream of income for the purposes of determination of net profit at all, hence clause (b) of Explanation 1 was not applicable. Further, reserve as contemplated by clause (b) of Explanation 1 to section 115JB of the 1961 Act is required to be carried through the profit and loss account. At this stage, it may be stated that there are broadly two types of reserves, viz., those that are routed through the profit and loss account and those which are not carried via the profit and loss account, for example, a capital reserve such as share premium account. AAD is not a reserve. It is not an appropriation of profits. AAD is not meant for an uncertain purpose. AAD is an amount that is under obligation, right from the inception, to get adjusted in the future, hence, cannot be designated as a reserve. AAD is nothing but an adjustment by reducing the normal depreciation includible in the future years in such a manner that at the end of the useful life of the plan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account. The amount did not enter the stream of income for the purposes of determination of net profit at all, hence clause (b) of Explanation-I was not applicable. Further, reserve as contemplated by clause (b) of the Explanation-I to Section 115JB of the 1961 Act is required to be carried through the profit and loss account. At this stage it may be stated that there are broadly two types of reserves, viz, those that are routed through profit and loss account and those which are not carried via profit and loss account, for example, a Capital Reserve such as Share reserve. It is not appropriation of profits. AAD is not meant for an uncertain purpose. AAD is an amount that is under obligation, right from the inception, to get adjusted in the future, hence, cannot be designated as a reserve. AAD is nothing but an adjustment by reducing the normal depreciation includible in the future years in such a manner that at the end of useful life of the Plant (which is normally 30 years) the same would be reduced to nil. Therefore, the assessee cannot use the AAD for any other purpose (which is possible in the case of a reserve) except to adjust the same against future depreciation so as to r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad 'reserve'. The Supreme Court has categorically held that it is an amount that is under obligation right from the inception. The Supreme Court has further gone to analyse the nature of reserve . It has held that there are two types of reserves. One which is created out of profit and another which are capital reserve such as Share Premium Account. It has held that AAD is not a reserve created out of profit since AAD is not income but a liability. If the contention of the Revenue as is being argued is taken to the logical conclusion, then AAD will be income and hence part of Profit and Loss Account. The liability created will be a reserve by debit to the profit and loss account. The Supreme Court has categorically held that AAD is not a reserve . Once AAD is considered as income as is being alleged by Revenue the obvious implication will be that such income in the Balance Sheet is a reserve. It can't be that AAD is an income and then it vanishes. Income has to be carried to the Balance Sheet and such income carried to Balance Sheet will form part of the 'Reserve'. Since 'AAD' has been held by Supreme Court is not a reserve, this contention of the Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X
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