2024 (4) TMI 1274 - AT - Income Tax

Nature of receipts - receipts i.e. Supply affording charges and Electrification charges - Capital receipts OR Revenue receipts - CIT (A) deleting the addition made by the AO on account of supply affording charges and electrification charges by treating the same as revenue receipt as against the capital receipt claimed by the assessee HELD THAT - Accordingly in the facts and circumstances of the case where these charges are collected from the consumers on account of capital expenditure incurred by the assessee in setting up of distribution system/infrastructure then the same cannot be treated as revenue receipt and assessee has rightly capitalized the same and reduced from the cost of fixed assets for the purpose of claiming the depreciation. Hence we do not find any error or illegality in the impugned orders of the CIT (A) qua this issue. Decided against revenue.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in these appeals, common to all four appeals by the revenue and the cross appeal by the assessee, are:

• Whether the receipts termed as "Supply Affording Charges" and "Electrification Charges" collected by the assessee from consumers should be characterized as capital receipts or revenue receipts for income tax purposes.
• Whether the CIT (A) was justified in deleting the addition made by the Assessing Officer (AO) treating these charges as revenue receipts and instead holding them to be capital receipts.
• In the cross appeal, whether the disallowance of depreciation claimed by the assessee was justified.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Nature of Supply Affording Charges and Electrification Charges (Capital vs. Revenue Receipts)

Relevant Legal Framework and Precedents:

The Tribunal examined the issue primarily under the framework of the Income Tax Act, 1961, especially Section 43(1) relating to the valuation of depreciable assets, and the regulatory provisions under the Madhya Pradesh Electricity Act, 2003, and the Madhya Pradesh Electricity Regulatory Commission (MPERC) Regulations. The key precedents relied upon include:

• Hoshiarpur Electric Supply Co. vs. CIT (Supreme Court): Held that amounts received from consumers for installation of service lines are capital receipts, not trading receipts, as they represent reimbursement of capital expenditure on assets of lasting value.
• Monghyr Electric Supply Co. Ltd. vs. CIT (Patna High Court): Held that amounts paid by consumers for service connections are capital receipts and not revenue receipts.
• Commissioner of Income-tax vs. Poona Electric Supply Co. Ltd. (Bombay High Court): Contributions received for constructing new supply lines were capital receipts.
• Tribunal decisions in DCIT vs. Sabarmati Gas Co. Ltd. and DCIT vs. BSES Yamuna Power Ltd. dealing with similar issues of consumer contributions for capital assets in electricity distribution.

Court's Interpretation and Reasoning:

The Tribunal carefully examined the nature of the charges in light of the MPERC Regulations, which expressly authorize the distribution licensee (the assessee) to recover these charges in advance from consumers for providing new electricity connections or enhancing existing connections. The Regulations define these charges as recoveries towards the cost of development, strengthening, and creation of fixed capital assets such as electric lines, distribution systems, transformers, and other electrical plants.

The Tribunal noted that these charges are one-time, non-recurring payments made by consumers specifically to fund capital expenditure incurred by the assessee for infrastructure development. The amounts collected are required by regulation to be kept in separate accounts and used exclusively for augmenting or creating fixed assets. The assessee capitalizes these charges by reducing them from the cost of fixed assets and claims depreciation accordingly.

The AO's contrary view was that these receipts were revenue in nature because they were collected as "charges" for services facilitated to consumers and included some items of stock-in-trade or circulating assets. However, the Tribunal found that the AO's reasoning lacked evidentiary support and failed to distinguish the relevant precedents. The AO did not demonstrate how the receipts related to circulating assets or trading activities rather than capital assets.

The Tribunal emphasized that the characterization of receipts depends on whether they arise from fixed assets or circulating assets. Fixed assets generate capital receipts, while circulating assets generate revenue receipts. Since the charges were connected to creation of fixed assets, they are capital receipts.

The Tribunal also referred to the matching principle in accounting and the regulatory framework mandating uniform accounting treatment, which supports the assessee's position that these receipts are capital in nature.

Key Evidence and Findings:

• MPERC Notifications and Regulations defining and authorizing the recovery of Supply Affording Charges and Electrification Charges.
• Accounting treatment by the assessee, including capitalization of these charges and reduction from fixed asset cost.
• Precedents from Supreme Court and High Courts establishing that such consumer contributions for capital assets are capital receipts.
• Absence of any terms or agreements indicating these charges are for recurring services or trading activities.
• Submission of vouchers and accounting records by the assessee supporting the capital nature of these receipts.

Application of Law to Facts:

The Tribunal applied the legal principles and precedents to the facts, concluding that the charges collected by the assessee are contributions from consumers towards capital assets used in electricity distribution. These are one-time charges collected in advance, used exclusively for capital expenditure, and capitalized in the books of accounts. Therefore, these receipts cannot be treated as revenue receipts.

Treatment of Competing Arguments:

The AO argued that the receipts were revenue because they were labeled as "charges" and related to services rendered, including some stock-in-trade. The Tribunal found these arguments unsubstantiated and noted the AO's failure to provide clear evidence or distinguish the precedents cited by the assessee. The Tribunal also noted that the AO's reliance on the nature of the term "charges" without considering the regulatory context and accounting treatment was misplaced.

The assessee's argument, supported by regulatory provisions, accounting standards, and judicial precedents, was accepted as the correct characterization of the receipts.

Conclusions:

The Tribunal held that the Supply Affording Charges and Electrification Charges collected by the assessee are capital receipts. The addition made by the AO treating these as revenue receipts was not sustainable. The CIT (A)'s order deleting the addition was upheld. The Tribunal further held that since these charges reduce the cost of fixed assets, the depreciation claimed by the assessee is justified.

Issue: Disallowance of Depreciation in Cross Appeal for A.Y. 2007-08

The assessee raised grounds challenging the disallowance of depreciation by the AO and confirmation of the same by CIT (A). However, at the hearing, the assessee's authorized representative stated that these grounds were not pressed and requested dismissal of the appeal as not pressed. The revenue raised no objection. Accordingly, the cross appeal was dismissed as not pressed.

3. SIGNIFICANT HOLDINGS

On the nature of Supply Affording Charges and Electrification Charges:

"The charges so collected are to be kept in a separate account and used for the purposes of acquiring or creating Fixed Assets. The accounting treatment is same as that of the 'Works carried out with the consumer contributions'. This consumer contribution is being reduced by the company from the cost of asset for the calculation of depreciation as per Section 43(1) of the Act."

"The Supply Affording Charges and the Electrification Charges are one time charges from the customer, more in the nature of consumer contribution and are charged at the time of a new connection or upgradation of an existing connection, specifically meant for the funding of capital expenses. Admittedly, it shows the character of a capital receipt rather than that of a revenue receipt."

"The Apex Courts decision relied upon by the assessee are distinguishable facts having no relevance to the facts and circumstances of case under consideration." (AO's view rejected for lack of substantiation)

"The additions made by the AO cannot be sustained."

Core principles established:

• Receipts collected as one-time charges from consumers for creation or augmentation of fixed capital assets in electricity distribution are capital receipts.
• Such receipts should be capitalized by reducing the cost of fixed assets and depreciation claimed accordingly.
• Characterization of receipts depends on whether they arise from fixed assets (capital receipts) or circulating assets (revenue receipts).
• Regulatory provisions and accounting standards play a crucial role in determining the nature of such receipts.
• Judicial precedents firmly support the capital nature of consumer contributions towards infrastructure in electricity distribution.

Final determinations:

• The Tribunal dismissed all appeals by the revenue challenging the CIT (A) orders deleting additions on account of Supply Affording Charges and Electrification Charges.
• The cross appeal by the assessee challenging disallowance of depreciation was dismissed as not pressed.