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TMI Blog2022 (12) TMI 582X X X X Extracts X X X X X X X X Extracts X X X X ..... , 2003) and the rules framed thereunder, w.e.f. 10/6/2003, trifurcating it's business on functional lines, i.e., generation, transmission and distribution of power. Vide Notification dated 31/5/2005, the State Government of Madhya Pradesh (GoMP) handed-over the assets and liabilities of the erstwhile MPSEB to the respective entities to form their opening balance-sheet as on 01/6/2005, the transfer or effective date. The values, as indeed the composition of these assets and liabilities, were, to begin with, provisional for a period, and which could be amended by GoMP, varying/modifying the same as well as the incident terms and conditions. The assets and liabilities, so assigned, were, subject to the adjustments occasioned upon audit and finalisation, final and binding on all the stakeholders. The provisional opening balance-sheet of the assessee-company as on 01/6/2005 is as: (PB-I, pg. 47/PB-II, pg.8) BALANCE SHEET AS ON 01/06/2005 (PROVISIONAL) (Amount in Rs. Crore) LIABILITIES AMOUNT ASSETS AMOUNT EQUITY FROM GoMP 845 GROSS FIXED ASSETS 2,407 LONG TERM LOANS LESS: ACCUMULATED DEP. 1,076 PFC LOAN 321 NET FIXED ASSET 1,331 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per point No.14 of notes to accounts where it has been mentioned that loss of the year has been overstated by Rs. 4754.76 lakhs. Give details of same with year-wise breakup and give reasons why the same should not be added back to income of assessee. Assessee vide its reply dated 04/10/2010 submitted that sum of Rs. 4754.70 lacs was charged to P/L a/c to give effect of final opening balance sheet provided by Govt. of MP on 12/06/2008 and hence the same cannot be classified as prior item. Therefore, it could not be added back to income. The same situation is being explained in note No.14 of notes to accounts. The arguments of the assessee is not acceptable as the statutory Auditor has specifically qualified it as prior period item, also the said expenses does not pertain to asstt. year 2008-09 and the hence amount so claimed is disallowed and added to the total income of the assessee." It may be relevant to reproduce the said Note to the assessee's final accounts for the relevant previous year, i.e., fy 2007-08: (PB-I, pg.49) "14. As per AS-5 (Prior Period Items) Para no.16 the terms prior period items as defined in the statement, refers only to income or expenses which arise i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 6.1.4 I have carefully considered the facts of the case and the finds of the Assessing Officer as well as the arguments advanced on behalf of the appellant. I have also gone through details furnished on behalf of the appellant as per accounting Standards AS-4 and AS-5. Obviously the appellant company has done its accounting and hence not treated final Opening Balance Sheet adjustments as prior period items as they were not known to the company previously. Final opening balance sheet was notified by the State Government in the Official Gazette vide notification no. 292 dated 12th June 2008, i.e., in the FY 2008-09, as the books of the company for FY 2007-08 were not closed by that date. In this back-ground, the appellant company's giving full effect of change in opening balance in the year 2007-08 itself following mercantile system of accounting and following Accounting Standard 4, Contingencies and Events Occurring after the Balance Sheet date issued by Institute of Chartered Accountants of India, does not appear to be incorrect or inadmissible. In this regard, the following legal propositions may be referred to: (i) For answering the question whether the prior period exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hority below, i.e., as favourable to it. Shri Jain, the ld. counsel for the assessee, would, on enquiry, clarify during hearing that the General Provident Fund (GPF), as indeed gratuity/pension, is not only in respect of the assessee's employees but those of other entities as well; the assessee having been assigned the said liability on restructuring of MPSEB, and for which reference was made by him to cl.(k) of the Notification dated 12/6/2008 (PB-I, pg.65 & PB-II, pg.14), which reads as under:- "(k) The past unfunded pension liabilities of pensioners and employees of MPSEB existing as on 31st may 2005 are to be assessed by Actuarial valuation and is therefore retained with Residual MPSEB for the time being. The actual pension/gratuity payments shall be claimed by MP Power Transmission Co. Ltd. in its ARR till requisite fund equivalent to the past unfunded liabilities is built up in the manner provided in Rule 10 & 11 notified earlier vide No. 4003-FRS-17-13-2002 dated 13th June 2005." He would also take us to both the statutory auditor's report and the tax-audit report (PB-II, pg.160), reporting the over-statement of expenses, i.e., on account of the same relating to a prior p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed expenditure does not relate to the current assessment year, the ld. CIT(A) has allowed relief on the basis that the liability has crystalized only during the year under consideration. In fact, the sense that we got on hearing the parties, as indeed the documents referred to thereat, was that it is the increased liability/s as on 31/5/2005, i.e., in the opening statement of assets and liabilities (balance-sheet) as on 01/6/2005, to the extent modified by GoMP, that stands claimed by the assessee through debit to the profit & loss account, i.e., the operating statement, for the relevant year. The same, even as also observed by the Bench during hearing, are capital liabilities, of course at net of capital assets. As even, notwithstanding the fact that they stand - to the extent modified or varied, intimated and confirmed by GoMP only later, so that they could not be co-opted in the books of account on 31/5/2005 (31/3/2005), but only later, i.e., on 12/6/2008 (31/3/2008), would be of no consequence inasmuch as the same does not alter the nature of the liability (asset) as on capital account, but only its quantum. The Bench, rather, communicated this by way of a ready example: Asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Auditor as a prior period expenditure. Also, the same stand accrued during the said preceding years. The accounting of interest liability in their respect would only be in terms of underlying arrangement/s, i.e., under which the interest obligation on these liabilities arises. Interest being a function of time, would stand to accrue on the basis of time. The same, thus, though accounted for during the current year, stands since accrued, i.e., during the fys. 2005-06 & 2006-07. The question before us is if the same could be regarded as the assessee's liability/s arising to it for the current year. This is as the assessee following mercantile system of accounting, it is only in such a case that it could be allowed in the computation of it's income for the current year. The assessee's case is that the same stand notified on 12/6/2008 only and, therefore, accounted for on 31/3/2008 inasmuch as the accounts for fy 2007-08 had not been closed by that date (12/6/2008). That is, in view of the peculiar circumstances, the expenditure would stand not to be categorized as a prior period expenditure. In fact, the assessee would also have provided interest accrued on the enhanced capital liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary entity (Board). Even if the assessee's obligation under the terms the restructure/reorganisation of MPSEB, the same cannot be regarded as the liability, capital or, as the case may be, revenue, of the assessee's business, profits and gains of which, representing a source of income, are assessable to tax. The accounts, it may be appreciated, are in respect of the assessee's business. It is the income - which by definition is net of expenditure, of this business that would stand to be provided and taken into account. The expenditure on the salary or GPF of the employees of other entities and, correspondingly, interest thereon, cannot possibly be the liability of the assessee's business, even if statutorily assumed by the assessee. The Income Tax Act is, as is well-settled, a separate code in itself for the computation and assessment of income liable to charge to tax thereunder. The same would therefore, where so, need to be segregated. We may though hasten to add that if however a separate, dedicated funding in its respect, i.e., the capital liability/salary in respect of the employees other than the assessee's employees, stands provided for by GoMP on reorganisation, though it d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al. Needless to add, the requisite data, information and explanation/s for the purpose shall be furnished by the assessee, as also the necessary working. The AO shall make necessary verification in the manner deemed proper and, in case of any difference, extend reasonable opportunity to the assessee to present and explain it's working, deciding as per law issuing clear findings of fact. We decide accordingly. 4.7 The second component of the impugned sum is the liability in respect of the terminal benefits, being pension and gratuity, provided at defined rates for the two preceding years, i.e., fys. 2005-06 & 2006-07. Our adjudication qua interest per the preceding paras, shall, for the same reasons, equally apply thereto. No liability for the period prior to 01/6/2005, the effective date, could be allowed; the liability up to which date assumes the character of a capital liability. The provision for fy 2005-06, though, shall be restricted to 10 months, i.e., 01/6/2005 onwards. That is, the quantum of provision is to be governed by the underlying arrangement/s. We make it clear that the allowance of provision shall though be subject to specific provisions, if any, under the Act in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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