TMI Blog2011 (11) TMI 721X X X X Extracts X X X X X X X X Extracts X X X X ..... v. ORDER PER R.P. TOLANI, J.M : This is Revenue s appeal against CIT(A) s order dated 6-11-2009 relating to A.Y. 2006-07. Sole ground raised is as under: On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of ₹ 2,25,18,23,535/- made by the AO on account of non-realization of provision of surcharge. 2. Brief facts, are that the assessee is a Haryana Govt. undertaking incorporated on 15-3-1999; the objects, inter alia, include distribution of electricity in ten districts of Southern Haryana. Assessee maintains a/c books on mercantile system. In the bills assessee has a practice of levy of surcharge for delayed payment of electricity bills by consumers after the due date. Assessee s method of accounting, raising of electricity bills remain same as in earlier years. 2.1. As a practice, regularly followed, a sum of ₹ 13.86 crores actually realized as surcharge by the assessee has been offered for assessment as against the surcharge raised amounting to ₹ 239.76 Crores (transferred under GH 62.240 to 270 in Schedule 19 as Surcharge). Further, assessee waived a sum of ₹ 0.72 Crores out o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the real income was exigible to tax. Assessee further relied on the decision of the Apex Court in Poona Electricity Supply Co. Ltd. v. CIT 57 ITR 521 for the proposition that rebate to customers could not be considered as part of taxable income. 2.5. The AO rejected all these contentions and observed that under the Mercantile System of Accounting where the right to receive money matured, the income embedded in the receipt accrued and was taxable even though it may not be realized. According to the AO as soon as Surcharge is levied in bills for delayed payment, the assessee is vested with the right to receive money which was taxable even though not realized from the consumer. The AO also relied upon the ratio of decisions in the cases of CIT v. Govind Prasad (1988) 177 ITR (All);CIT v. Bharat Petroleum Corpn. Ltd. (1993) 202 ITR 492 (Cal.); Morvi Industries Ltd. Vs. CIT (1971) 82 ITR 835 (SC); Cag IT v. Raj Rajeshwari v. Nari Kelly Estate (1993) 199 ITR 383; State of Kerala Vs. B. Tea Products Co. Ltd. 59 ITR 25 (SC); 2.6. The AO further held that the Delhi High Court decision in CIT v. Modi Rubber Limited, 230 ITR 817 was not applicable to the facts of this case as Surcharg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the accounting policy adopted by the assessee cannot over-ride the specific law. Reliance is placed on the decision of Hon ble Supreme Court in the case of Tuticorin Alkali Chemicals Vs. CIT 227 ITR 127 for the proposition that when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipts are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice, which cannot over-ride sec. 56 or any other provision of the Act. 3.2. Learned DR thus contends that though assessee had changed this method since A.Y. 2004-05, there was nothing wrong in AO s questioning the term of sur-charge in the manner adopted by assessee and principle of res-judicata will not apply to this addition. 3.3. Coming to the merits of the addition, learned DR contends that it has not been disputed that the assessee has adopted mercantile system of accounting, which implies recognition of revenue on the basis of accrual of the receipt. In this case, the sur-charge is levied as per the electricity rules. The percentage of sur-charge payable on the delayed payment of electric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can be said to arise or accrue. There must be an acknowledgement of the debt by the payee to the payer for accrual . Reliance was placed on Apex Court judgment in the case of E.D. Sassoon co. v. A.V. Viswanatha Sastri Anr. 26 ITR 27. The same principle was reiterated by the Apex Court in CIT v. Ashokbhai Chimanbhai where the Court pointed out that Income becomes taxable on the footing of accrual only after the right of the tax payer to the income accrues or arises and in the case of an agreement which makes profit is receivable on the happening of a contingency it cannot be held to have accrued . 4.2. The method of accounting pursued by Nigam is in conformity with accounting and commercial principles and is in consonance with the applicable accounting standard. It is well recognized through a catena of judgments that the taxable income is required to be computed in terms of the standard prescribed by the accounting standards and finally in Supreme Court in 297 ITR 176 in J.K. Industries Ltd. Vs. UOI. This case has upheld the sanctity and utility of accounting standards unless they are ultravires the provisions of companies Act and Constitution of India. There is no allegati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ized standard, states as under on this issue: Item 5: The major considerations in selecting accounting policies are prudence, substance over form and materiality. 4.6. It is contended that prudence refers to the accounting convention according to which profits are not anticipated but recognized only when realized. Provision is made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information. 4.7. Substance over form implies that the accounting treatment and presentation of transactions should be governed by their substance and not merely by their legal form. 4.8. Gujarat High Court in the case of Echke Ltd v. ClT [2009J 310 ITR 44 has pointed out that the mercantile system requires accounting only of realizable income so that amounts which are unlikely to be realized cannot be treated as having accrued. Apart from bonafides, even the mercantile system of accounting should spare recognition of such doubtful income. 4.9. The prudential norms as envisaged under AS-I, Item 5, have been given due legal recognition. The Punjab and Haryana High Court in ClT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... G POLICY and Accounting Standard-9 on REVENUE RECOGNITION issued by the Institute of Chartered Accountants of India which ahs resulted in revenue recognition of ₹ 107.78 crores during the year 2001-2002 or understatement of losses by that amount and overstatement of sundry debtors in balance sheet. The audit committee was informed that presently even the surcharge is accounted for on the basis of accrual and that the present accounting practice does not allow keeping the surcharge on the basis of receipt. However, the Audit committee felt that in future, recognition of delayed payment surcharge be done on receipt basis only and if required, the billing system of the Company be modified accordingly. 4.12. A perusal of the Committee s recommendation, have been duly accepted by the Board of Directors and in due course by the highest authority in respect of electricity issues of State of Haryana. Such a procedure makes the acceptance of these recommendations as part of the public policy of state of Haryana and cannot be used to recognize revenue company to the state govt. policy on this issue. It has not been disputed that in State of Haryana, consumer bills issued by asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evy of surcharge which is akin in terms of declared public policy and waiver offered by the state govt. and Electricity Board. 4.15. It is contended that the assessee in A.Y. 2004-05 filed original return, thereafter a revised return. Assessee s method of accounting was accepted in a detailed order u/s 143(3) in which various other allowances/ deductions have been amended. Thereafter 154 order dated 27-3-2009 was also passed on this issue. Para giving history of the case is as under: Return declaring Nil income was filed by the assessee company on 1-11-2004, which accepted as such while processing the return u/s 143(1) of the Act on 31-1-2005. Consequent upon setting off brought forwarded losses relevant to the A.Y. 2000-01, the assessee declared its current year s income at nil. However, a revised return was filed by the assessee on 26-09-2005 declaring Nil income after adjusting brought forward losses to the extent of ₹ 4,61,07,450/- and sought carry forward of unabsorbed depreciation and unadjusted losses of the earlier years at the revised figure, which was also processed as such on 11-10-2006. Subsequently, the case was taken up for scrutiny under the prevalent B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment of surcharge is subject to protest/ waiver and is not mandatorily enforceable by assessee at the time of payment of bill. The surcharge exist in the rule and is printed in the bill but it has not been disputed that the assessee has regular mechanism to accept the bills without payment of sur-charge. The same is deferred till the consumer dispute is settled by the appropriate means which may be provided by the instructions of the declared policy of the government. 5.3. In view of these facts, coupled with the fact that assessee changed its method of accounting after seeking necessary approval of CAG, shows that as far as the assessee is concerned, the collection of sur-charge was contingent and did not accrue due to assessee. The liability will accrue on the basis of crystallization i.e. the payment of the surcharge or passing of a suitable order by the appropriate authority on the dispute raised by the customer. 5.4. Coming to the case laws, Hon ble Supreme Court in the case of Shoorji Vallabh Das Co. (supra) had to deal with an issue of managing agency commission transferred by the assessee to two other companies. Subsequent agreement after the end of accounting yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n accepted by the department is subject to variation by adopting different interpretation on any settled issue. 5.10. In our view the Woodward Governor case (supra), relied on by ld. D.R. is of no avail to revenue as itself lays down that profits and gains of any previous year are required to be computed in accordance with relevant accounting standards. Similarly, the case of G.R. Karthikeyan (supra) also will not benefit the revenue as it did not decide any controversy of accrual or mercantile system of accounting. The judgment deals with winning from gambling and batting income, there is no issue about accounts or accrual in this case. 5.11. Coming to learned DR reliance on the case of Tuticorin Alkali Chemicals (supra), the same deals with the receipts being in the nature of capital or revenue. The factum of receipt was not disputed and whether the receipt was capital or revenue, Hon ble Supreme Court held that while deciding the question, the same has to be on the basis of principle of law and not in accordance with the accountancy practice. In our vie the case before us pauses a picture on different facts which have been mentioned in detail above. 5.12. In our conside ..... X X X X Extracts X X X X X X X X Extracts X X X X
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