TMI Blog2021 (6) TMI 881X X X X Extracts X X X X X X X X Extracts X X X X ..... determination of amount on account of capacity charges, deemed generation charges and capacity index incentives could not be quantified. The issue was disputed by UPCL. UERC is a regulatory authority which fixes the tariff on annual basis in accordance with the Terms Conditions for determination of Hydro Generation Tariff, Regulation 2004. The method of calculation of these charges was not clear and as such this matter became the subject matter of dispute. The assessee filed a petition before the UERC on 25th March 2014 due to prolonged dispute between UPCL and UJVNL and had also sought necessary directions from the UERC on the applicability and payability of capacity charges, deemed generation charges and capacity Index incentive. We find merit in submissions made by the Ld AR that since the basis, modality and the amount on which the capacity charges, deemed generation charges and capacity Index Incentives were to be determined/ quantified, it was difficult for the assessee to ascertain the correct and actual amount of charges recoverable from UPCL. We are, therefore, unable to sustain the addition made by the AO. AR has also brought on record the fact that the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound no. 1 of appeal is general as specific grievance on merits of the case has been raised in form of ground no. 2. As such ground no. 1 of the appeal is dismissed. 2.1 Ground no. 3 challenges action of initiation of penalty. Penalty proceedings are altogether separate hence ground no. 3 is also dismissed. 2.2 In ground no. 2, the assessee is aggrieved by the action of the Assessing Officer (AO) in making an addition to total income of ₹ 40,66,56,344/-on account of capacity charges, deemed generation charges and capacity index incentives. Relevant facts in this regard are that in the assessment order, the AO has observed that the assessee is following mercantile system of accounting. As regards capacity charges, deemed generation charges and capacity index incentives it is noted by the AO that the assessee has not included these items in its computation of total income and has, thus, not paid tax on it. When enquired, it was submitted by the assessee that this was on account of the fact that the income had not accrued on account of disputes pending with the parties upon whom the claim was raised. In order to factually establish existence of dispute it was submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PCL). However, the UPCL has failed and neglected to make payment of the subject charges pursuant to the bills of energy consumption for the month of July, 2005 onwards and unilaterally made deduction vide their letter no.71/ UPCL/ CGM (Comm)/ UVJNL/ GC dated 20.9.2005 for the payments made earlier. It also failed and neglected to pay these charges for all subsequent bills. In its letter no.1142/UPCL/ CGM (Comm.)/ P-3 dated 17.5.2005, the UPCL raised the following objections the component of capacity charges, CI charges and deemed generation for the 9 large/medium HEPs are being charged arbitrary without any legal sanctity of these calculation and charges . 2.4 It was further submitted before the AO that dispute and failure to make payment was continuing. UPCL had expressed vide their letter no.1102/UPCL/DF/22 dated 28.9.2005 of their inability to pay the subject charges unless the same were clarified by the Commission. Accordingly, a series of meetings took place between the senior officials of both organizations. Finally, UPCL admitted to the applicability of capacity charges but stated that the methodology for the computation of capacity charges was not specified in the R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ead with section 86(1) of the Electricity Act, 2003 for adjudication in this regard. Hence the issue was still in dispute. 2.6 The AO, however, was unimpressed. In his order of assessment, it was held by the AO that in books of accounts, the assessee has itself recognized capacity charges, deemed generation charges and capacity index incentives as its income and moreover that the assessee was fighting for getting these sums recovered as dues from UPCL. Since the assessee was following a mercantile system of accounting it was held that income had accrued to the assessee. The amount of ₹ 40,66,56,344/- was added to the income for the instant assessment year. 2.7 Being aggrieved, the assessee filed an appeal before the Ld. first appellate authority. The Ld CIT (A) upheld the addition made by the AO by observing as under: The issue of capacity charges, deemed generation charges and capacity index incentive has also been considered earlier by the Ld. CIT(A)-1 in Appeal No.328/CIT(A)-1/DDN/2011-12 dated 30.03.2012 and after considering the same, the CIT(A) has held that the same had accrued to the assessee and were therefore, chargeable to tax in its hands. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the tariff is a part of the regulatory regime, the parties to the transaction have little feeway. Hence, if the UPCL purchased electricity from the assessee, it was bound to pay the charges laid down by the UERC. It did not deny the liability. It had only raised questions about the procedure and methodology to be adopted for calculation/verification of these charges. The concerns of UPCL were considered and addressed by the UERC and the assessee s claim was found to be in order. It is true that the parleys continued well after the end of the previous year under consideration. But the fact remains that the UERC had approved of the assessee s claim in principle as early as 20.01.2006 and the assessee had raised its demand in line with the UERC clarification. UPCL is also a corporation owned by the state government just as the assessee is. In fact, both these corporations operate under the same ministry. That being so, it cannot be said that the accrual of the amount in question was in doubt or its recovery was uncertain. 2.4 In this connection, UPCL was asked to clarify what accounting treatment it had given to the amount in question. It replied that it had not recogn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus, by booking the amount as revenue and treating it as income, the assessee would not incur an irreparable tax loss. As far as the case of UPCL is concerned it could also, correspondingly, recognize the liability (even though it may have its concerns about the procedure and methodology of calculation) and, in case it did not have to pay the same, it could write back the amount and offer the same as income u/s 41 of the I.T. Act. 2.6 As regards the other logic, it is true that the assessee s income would constitute corresponding expenditure in the hands of UPCL. It is also true that, while the assessee has not shown the income, UPCL has also not booked the expenditure in its accounts. But, accounting and assessment of income has to be guided by the accounting principles and legal provisions; not by reciprocity. It is strange that assessee s claim was as per the UERC norms and yet it failed to account for the revenue. It is equally strange that the UPCL did not dispute the obligation to pay and yet it failed to provide for the estimated liability in its accounts. The issue in this case has to be decided on the basis of the facts and law and, while doing that, the fact that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... timated to be best judgment of the assessee and give effect to in the accounts. If the amount, when it is quantified finally varies with the estimate made earlier, appropriate adjustments in the accounts are to be made to factor in such variation. Hence, that cannot be a justification for not recognizing the revenue in question, especially in view of the fact that if the assessee failed to recovered the said amount in future it would be free to write the same off as bad debts and income tax law would allow deduction for the same as and when such eventuality arose. It is seen that this exercise of ascertainment of CC and CII to the mutual satisfaction of both parties has been conducted. This could have formed the basis of just judgment estimation of income from such sources and atleast those two charges could have been offered as income on the basis of such joint verification. Subsequently if the finally determined figures varied on account of misdeclaration, the cess claim could have been written as bad debt. In the circumstances, it is held that the plea of the assessee that it had followed the principles of AS9 and declared the amount in the balance sheet to the notes on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imable by the assessee from UPCL which has not been acknowledged but disputed by the UPCL since inception and the matter has been referred to the Regulatory Authority for settlement from time to time. Facts on record demonstrate that since the methodology was to be determined and there were several technical aspects which were to be finalized, due to lack of clarity in the regulations, the determination of amount on account of capacity charges, deemed generation charges and capacity index incentives could not be quantified. The issue was disputed by UPCL. UERC is a regulatory authority which fixes the tariff on annual basis in accordance with the Terms Conditions for determination of Hydro Generation Tariff, Regulation 2004. The method of calculation of these charges was not clear and as such this matter became the subject matter of dispute. The assessee filed a petition before the UERC on 25th March 2014 due to prolonged dispute between UPCL and UJVNL and had also sought necessary directions from the UERC on the applicability and payability of capacity charges, deemed generation charges and capacity Index incentive. We find merit in submissions made by the Ld AR that since the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acity charges, deemed generation charges and capacity Index incentive by SLDC, UPCL and UJVNL in 18 equal monthly installments. On the basis of verified data, year wise bills for CC, CII has been raised in suppression of bills raised earlier and detail of bills raised before and after verification for the period from FY 2004-05 to FY 2012-13 is as under: Financial year Total Capacity charges Capacity Index Incentive Old Bill Revised Bill 2004-05 227,232,641 15,42,96,401 2005-06 66,705,707 4,57,18,570 2006-07 115,138,682 9,02,41,357 2007-08 99,150,697 8,24,69,988 2008-09 359,035,896 6,70,28,088 2009-10 633,606,018 28,83,27,802 2010-11 406,656,344 9,27,10,039 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to F.Y.2012-13 under the head capacity charges, deemed generation charge and capacity index incentive to be taxed in F.Y.2015-16 I.e., on receipt basis and has also paid two installments of advance tax after including the capacity charges in the income of the company for F.Y.2015-16. Hence no addition has been made on this account during the year under consideration. 5.3 Similar findings have been given by the AO in orders for assessment dated 21st March 2016 and 17th March 2016 passed u/s 254/143(3) for AYs 2008-09 and 2009-10.Once the correct amount of income has already been offered to tax in AY 2016-17, we find no merit in the addition made by the AO in the present order of assessment. We, therefore, allow ground no. 2 of the appeal and direct the AO to delete the addition made of ₹ 40,66,56,344/-. 6.0 We now take up for consideration the appeal filed by the revenue. The grounds raised by the department are as under: 1. The Ld. CIT(A) has erred in law and on facts by allowing depreciation on assets of which the actual cost as per section 43(1) of the I.T. Act, 1961 was NIL. 2. The order of the Ld. CIT (A) be set aside and that of the AO restored ..... X X X X Extracts X X X X X X X X Extracts X X X X
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