2025 (6) TMI 1060 - HC - Income Tax

Accrual of Income accrued as per the mercantile system and the accounting concepts prescribed by the Companies Act - assessee contended that the appellate authority erred in affirming the addition in relation to the recoverable excess electricity charges on the basis of the decision of Manganese Ore India Ltd. vs. State of M. P. Ors. 2016 (11) TMI 543 - SUPREME COURT - Tribunal allowed the assessee s appeal HELD THAT - Tribunal noted that the assessee had correctly adjusted the amount receivables from the M.P. State Electricity Board against electricity charges payable by them for the assessment year 2017-18 and the remaining unadjusted amount was subsequently adjusted during the assessment years 2018-19 and 2019-20. Therefore the tribunal found that the assessee has not claimed the electricity expenses for all the three assessment years which indirectly mean that the income of the assessee has increased the total amount receivable by the assessee from the M.P. State Electricity Board. Therefore the tribunal came to the conclusion that on facts it would tantamount to double addition in the case of the assessee because the same has already been offered to tax during the assessment years 2018-19 and 2019-20 in terms of the direction issued by the Hon ble Supreme Court in its order dated 10.11.2016. Thus tribunal was right in taking note of the directions issued by the Hon ble Supreme Court and granted relief to the assessee. No substantial question of law arises for consideration in this appeal.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions addressed by the Court were:

a. Whether the Income Tax Appellate Tribunal erred in law by not appreciating that the income of Rs. 123,15,10,000/- had accrued to the assessee in the financial year 2016-17 (assessment year 2017-18) in accordance with the mercantile system of accounting and the accounting principles prescribed under the Companies Act, particularly in light of the Supreme Court's decision in Manganese Ore India Ltd. vs. State of M.P. & Ors. dated 10.11.2016.

b. Whether the Tribunal erred in deleting the addition of Rs. 73,68,76,693/- which had not been offered to tax by the assessee during the financial year 2016-17, despite this being the year of accrual of income as per accepted accounting norms.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Accrual of Income under Mercantile System and Supreme Court Precedent

Relevant legal framework and precedents: The mercantile system of accounting recognizes income when it is earned, regardless of receipt, as prescribed under the Companies Act. The Supreme Court's ruling in Manganese Ore India Ltd. clarified that the assessee was entitled to be charged electricity at manufacturing unit rates rather than commissioning rates, entitling it to a refund/adjustment for excess payments made.

Court's interpretation and reasoning: The Tribunal examined the Supreme Court's directions, which mandated that the excess electricity charges paid by the assessee be refunded or adjusted against future electricity dues. The Tribunal observed that the assessee had adjusted the receivable amount from the electricity board against the electricity charges payable in assessment year 2017-18, with the balance adjusted in subsequent years (2018-19 and 2019-20). This accounting treatment was consistent with the mercantile system and the Supreme Court's directions.

Key evidence and findings: The Tribunal noted that the assessee did not claim the electricity expenses for all three assessment years, implying that the income had effectively increased by the amount receivable from the electricity board. The Tribunal found that the amount had been correctly accounted for in accordance with the Supreme Court's order and the accepted accounting principles.

Application of law to facts: Applying the principles of accrual accounting and the Supreme Court's directions, the Tribunal concluded that the income had not accrued in the financial year 2016-17 alone but was spread over subsequent years through adjustments. The Tribunal held that the revenue's addition was therefore not justified.

Treatment of competing arguments: The revenue argued that the entire amount had accrued in 2016-17 and should have been offered to tax in that year. The Tribunal rejected this, emphasizing the Supreme Court's directions and the mercantile system which allowed for adjustment over multiple years. The Tribunal found the revenue's approach would lead to double taxation.

Conclusions: The Tribunal correctly applied the law and accounting principles, and the revenue's contention was held to be legally unsustainable.

Issue (b): Deletion of Addition of Rs. 73,68,76,693/- Not Offered to Tax

Relevant legal framework and precedents: Under the Income Tax Act, income must be offered to tax in the year of accrual as per accepted accounting norms. The Supreme Court's ruling in the Manganese Ore India Ltd. case was again pivotal, providing a framework for treatment of excess electricity charges.

Court's interpretation and reasoning: The Tribunal found that the addition of Rs. 73,68,76,693/- was deleted because the amount had not been offered to tax in the financial year 2016-17, but was subsequently adjusted and taxed in later years as per the Supreme Court's directions. The Tribunal reasoned that taxing the amount again in 2016-17 would amount to double addition.

Key evidence and findings: The Tribunal relied on the fact that the assessee had correctly adjusted the amount in subsequent assessment years and that the total income had been subjected to tax across the relevant years.

Application of law to facts: The Tribunal applied the principle against double taxation and the Supreme Court's directions to hold that the deletion of the addition was justified.

Treatment of competing arguments: The revenue contended that since the amount accrued in 2016-17, it should have been taxed then. The Tribunal rejected this, emphasizing the adjustment mechanism and the mercantile accounting system.

Conclusions: The deletion of the addition was upheld as legally correct and consistent with the accounting and judicial framework.

3. SIGNIFICANT HOLDINGS

The Court upheld the Tribunal's order, dismissing the appeal filed by the revenue. The following core principles and determinations were established:

"The learned tribunal noted the facts and the decision of the Hon'ble Supreme Court wherein the Hon'ble Supreme Court held that the assessee was being charged for the electricity at the rates meant for commissioning but the assessee are liable to be charged at the rate applicable for manufacturing units. Consequently, the assessee was entitled to the refund/adjustment of the excess amount of electricity dues paid for the preceding three years namely, 2017-18, 2018-19 and 2019-20."

"The tribunal found that the assessee has not claimed the electricity expenses for all the three assessment years which indirectly mean that the income of the assessee has increased the total amount receivable by the assessee from the M.P. State Electricity Board."

"On facts it would tantamount to double addition in the case of the assessee because the same has already been offered to tax during the assessment years 2018-19 and 2019-20 in terms of the direction issued by the Hon'ble Supreme Court in its order dated 10.11.2016."

"We find no question of law much less substantial question of law arises for consideration in this appeal."

The Tribunal's approach harmonized the principles of mercantile accounting, the directions of the Supreme Court, and the provisions of the Income Tax Act to avoid double taxation and correctly determine the year of income accrual. The appeal was dismissed accordingly, confirming that the income should be recognized and taxed in accordance with the adjustment mechanism prescribed by the Supreme Court and accepted accounting norms.