TMI Blog2017 (8) TMI 1614X X X X Extracts X X X X X X X X Extracts X X X X ..... per Part-Il Part-Ill of Schedule-VI of the Companies Act, 1956. Since, the AO has found that the assessee did not follow the Accounting Standard properly, it had not recognised the income properly and it had not prepared its financial statements as per Part II and Part III of Schedule VI to the Companies Act, 1956 and made the impugned additions and the assessee has not challenged such findings with relevant material, its pleas are untenable and hence rejected. The income which has to be assessed in a particular year can not be assessed in any other year. Therefore, the impugned items of income are assessable in this assessment year and hence the additions made u/s 115 JB are also confirmed.- Decided in favour of assessee. - I.T.A. No. 2721/Mds/2016, I.T.A. No. 3067/Mds/2016 - - - Dated:- 22-8-2017 - Shri N.R.S. Ganesan, Judicial Member And Shri S. Jayaraman, Accountant Member Appellant by: Shri G.M. Das, CIT Respondent by: Shri G. Baskar, Advocate ORDER S. Jayaraman, The assessee filed this appeal against the order of the Commissioner of Income Tax (Appeals)-3, Chennai in ITA No. 9/13-14/CIT(A)3, dated 30.06.2016. The revenue also filed a cross ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds: 2. Addition towards cash discount and wrong amount in the CIT(A) order: The learned CIT(A) erred in confirming the addition towards disputed matter relating to cash discount without appreciating that TANGEDCO was making payments after deducting towards cash discount on adhoc basis, arbitrarily, since 2001, despite not been entitled to as per the provisions of the PPA 3. Addition towards Return on Equity The CIT(A) erred in confirming the addition towards Return on Equity (₹ 9.09 crores under dispute before TNERC) without appreciating that the definition of Equity as per the PPA is restricted to the subscribed and paid up capital on the date of Commercial Operations. 4. No decision made on appeal relating to Equity Incentive The CIT(A) erred in not deciding on the issue relating to equity incentive amounting to ₹ 2.62 crores that was raised as part of Grounds of Appeal before him. 5. Wrong amount relating to Capital Cost The CIT(A) erred in considering RS.66 crores as capital cost instead of ₹ 50 crores. 6. Wrong description of item relating to Fuel cost described by CIT(A) as Fuel Handling Charges The learned CIT(A) erred in conf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the Hon'ble IT AT had only remitted the issue to the file of the Assessing Officer, the Ld. ClT(A) erroneously exercised the power of setting aside the issue to the file of the Assessing officer, when such power is not available to the Ld ClT(A), under the provisions of the IT Act 1961, from 01.06.2001. 3.2 The Id.CIT (A) erred in not appreciating the assessee's claim in its stay petition as well as writ petition for stay of demand, filed before the Hon'ble High Court. that it had recognised the revenue subsequently and offered it for taxation in the A.Y 2013-14. 3.3 Having regard to the mercantile system of accounting regularly followed by the assessee, the ld CIT(A), ought to have upheld the action of the Assessing Officer in bringing to tax, the income' arising from reversal of additional cost, assessable in the hands of the assessee for AY 2009-10 on accrual basis, especially, when the said income is offered on receipt basis, in the subsequent assessment year. 5. The revenue filed a petition seeking condonation for the delay in filing the cross appeal by 39 days. We heard the rival submissions and condone the delay on merits. 6. The assessee expla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 364.40 crores. Based on the norm of 70:30 Debt Equity mix, the Equity was determined at ₹ 409.32crores (i.e 30% of ₹ 1.364.40 crores). This equity was brought in subsequent to the date of commercial operations. Having regard to the above, PPN has been invoicing TANGECO reckoning ₹ 409.32 crores as Equity. The ROE component of the tariff was arrived at accordingly. The differential billing based on Equity of ₹ 352.50 crores and ₹ 409.32 crores for the year (i.e AY 2009- 10) was ₹ 909 crores. Since the billing was not to the letter of the PPA (though it was consistent with the intent of the PPA) and since TANGEDCO had still been disputing the capital cost it was imperative that income to the extent of ₹ 9.09 crores not be recognised following the uncertainty relating to capital cost. In fact, the dispute relating to the final quantum of capital cost is contested before the TNERC and was awaiting adjudication as at the date of finalization of the accounts for the year under appeal and continues even now . 6.2 Additions relating to Specified Taxes of ₹ 4,76,28,590/' The company is entitled to reimbursement of income taxes paid s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... VFC made to TANGEDCO and relates to mooring charges incurred in respect of naphtha unloading. However, the amount claimed was in excess of our eligible claim as per the terms of the PPA and hence the same was not recognised as revenue during the year under scrutiny. 6.6 Addition towards cash discount ₹ 17,15,83,128 TANGEDCO is the sole customer of the Appellant and its revenue depends solely upon them. The Appellant had raised monthly tariff invoices on TAGEDCO pursuant to the provisions of the PPA it had entered into for the sale of electricity. Under Clause 102 (a) of the PPA ,TANGEDCO was entitled to a cash discount of 2.5% of the invoice value provided the payment is made in full within five business days from the presentation of invoice and cash discount of I % of the invoice value if payment is made after 5 days but within 30 days (Due date) . TANGEDCO was making payments on an adhoc basis by arrogating to itself the cash discount unilaterally. The set off of the payments against individual bills was not provided by TANGEDCO. Hence, the appellant had to adjust the receipts on First In First Out basis (FIFO). From the invoice amount raised and the adhoc payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e PPA relates to compensation, payment billing. After reading various clauses of Article 10 of the power purchase agreement , the AO held that the assessee's revenues are safeguarded in the following ways. 1 Every bill of the assessee was to be honoured in full by TANGEDCO even In the event of any dispute as to all or any of the bills. 2 When invoices raised by the assessee have disputed, TANGEDCO was entitled to serve a notice on the company. 3 If resolution of dispute requires the assessee company to reimburse TANGEDCO, the assessee company was to pay the amount with Interest. 4 TANGEDCO does not have a right to dispute any invoice after a period of one year from the due date of any invoice. But in the assessee s case, apart from the PPA, the guarantee of Tamilnadu government was there as an additional support for TNEBs payment obligations under the agreement. 5 The fact that the assessee was not recognising Income in accordance with Schedule VI to the Companies Act have also been highlighted by the Statutory Auditors of the assessee in their main audit report to the members in paragraph 3 of their report as under: 3. Without qualifying our opinion, we i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n asset. This means, in effect, that recognition of income occurred simultaneously with the increase in assets arising on a sale of goods. 7.2 The Cash discount is related to decrease in an asset. This has a direct associatlon with TANGEDCO paying every bill within five days to be eligible for a cash discount of 2.5% or within one month from the due date to be eligible for a cash discount of 1%. When, not even one payment of TANGEDCO (Formerly TNEB) was made in time, there never arose an occasion for the decrease in revenue earned by the assessee. Thus non-recognition of revenue to the extent of ₹ 25.07 Crores and provision for cash discount to the tune of ₹ 17.16 Crores, clearly shows that the assessee did not follow the matching concept relating to recognition of revenue and expenses and Accounting Standards prescribed by the ICAI. 7.3 Prudence is the inclusion of a degree of caution in the exercise of judgements needed in making the estimate required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated. However, the exercise of prudence does not allow, for example, the creation of hidden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 76Crores. 7.4 What is perceived by the company as uncertainties are only perceived uncertainties. With a PPA backed by State Guarantee, there was never an uncertainty about the determination of revenue. Even in case of uncertainty, TANGEDCO had to pay up the amount and raise a dispute later. Delay in payment can never be called an uncertainty. On the one hand, the assessee claims there are uncertainties relating to the payments by TANGEDCO. But TANGEDCO was always considered in the financial statements of the assessee as a Secured considered good sundry debtor. 7.5 The assessee's claim that only after adjudication by the appropriate authority could the uncertainty be removed leading to the recognition of income appellate authorities did not create any new law or bestow any new right on the assessee, to remove the uncertainty in recognition of income by the assessee. They only reiterated the assessee's right to revenue (as stated by the PPA and guaranteed by the State Government) as and when the revenue earning activities were performed. 7.6 Note 22 of the Notes to accounts gives details of a provision of ₹ 70.00 Crores (Note 22(b)} for rebate created during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... admitted fact that appellant's accounts have not been prepared as per the requirements of Part-Il Part-Ill of Schedule-S of the Companies Act, 1956, which fact is reflected in the Auditors statement which is reproduced as under: 7.6 3. Without qualifying our opinion, we invite attention to, a. Notes 1.3, 3 , 3 (d), 10(ii), 10(iii)(a) of the Notes to Accounts (Schedule 18) with respect to the company's revenue recognition policy, non-recognition of revenue consequent to certain uncertainties and the corresponding receivables from Tamilnadu Electricity Board (TNEB), non-receipt of formal confirmation from TNEB for the balance amount due to the company along with a statement of account, the status of capital cost/tariff determination in accordance with the Power Purchase Agreement and certain claims made by the TNEB respectively. b. Note 24(a) and 24(c) of Notes to Accounts (Schedule 18) with respect to recognition of additional revenue based on review of certain allowances for uncertainties and the recognition of interest on delayed receipts for the reasons stated therein. As is seen herein above, there is a clear finding with regard to accounts of the appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nting year under the Companies Act, which is different from the financial year under the Income-tax Act. These companies generally prepare two sets of accounts - one for Companies Act and another for Income-tax Act. The reason being different accounting policies, standards, depreciation methods and rates are adopted in two sets of account so that higher profit is reported to shareholders and lower profit for the income-tax authorities. To curb the above practice, this recalculation of net profit under MAT was incorporated so that there should a consistency in accounting policies, standards, methods and rates of depreciation within the knowledge of income-tax authorities. [Para 18]. 10.2.4 In my considered opinion, the above cited decision is quietly applicable to the facts and circumstances of the appellant's case. Respectfully following the decision of the Hon'ble ITAT, Special Bench, Hyderabad, I confirm the action of the AO in so far as recognition of certain income cited supra for the purpose of working out Book Profit u/s 115JB of the Act. Hence, the grounds are dismissed. and submitted that the assessee did not follow the Accounting Standard properly, it had n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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