Authority For Advance Rulings
Jodhpur Vidyut Vitran Nigam Ltd., In Re
Section 36(1)(iii), 37(1), 115JB
Asst. Year 2004-05
P.V. Reddi, J., Chairman; J. Khosla, Member
AAR No. 801 of 2009
20th November, 2009
Counsel Appeared :
Pradeep Dinodia & R.K. Kapoor, for the Applicant : M.N. Maurya, for the CIT concerned
RULING
J. Khosla, mEMBER :
The applicant is a Government company engaged in the business of power distribution in the State of Rajasthan. The Rajasthan State Electricity Board was split into three companies, namely, Electricity Generating Company, Electricity Transmission Company and Distribution Companies as per the provisions of Rajasthan Power State Reforms Act, 1999. Out of the three distribution companies, the applicant is one, said to be the successor of the erstwhile Rajasthan State Electricity Board. The IT return filed by it for the asst. yr. 2004-05 was adjudicated by the AO and order under s. 143(3) of the IT Act, 1961 (‘Act’ for short) was passed on 29th Dec., 2006 against the company. An appeal filed against this impugned order before the CIT(A), Jodhpur yielded partly in its favour. Further appeal before the Tribunal, Jodhpur is pending. The assessing authority invoked s. 115JB of the Act on the premise that there was book profit and made assessment on notional income under that section. He disallowed the alleged excess depreciation claimed and made his own calculations on the ground that the Accounting Standard No. 12 which was required to be followed as per the Companies Act has not been followed, as seen from the auditor’s note. On such recalculation by the AO, the book profit got increased by Rs. 12,12,93,578. The AO disallowed the adjustment of prior period expenses and added the same to book profit as it was considered to be not allowable for the year in question. Assessing authority also disallowed the interest paid to Rajasthan Rajya Vidyut Prasaran Nigam Ltd. towards the FDR loans raised by it from financial institutions. The total taxable income was determined at Rs. 18,02,78,335. The appellate authority confirmed the order of the assessing authority while rejecting all the contentions of the applicant.
2. Against this background the applicant has filed the application under s. 245Q(1) of the Act before this Authority for ruling on the following questions in the capacity of a resident in terms of s. 245N(b)(iii) of the Act :
“(1) Whether claim of depreciation under s. 32 amounting to Rs. 7,19,85,930 is allowable to the assessee company, keeping in view the amount involved under the head cost variance reserves capital contribution towards services connection and capital subsidy and grants towards cost of capital assets ?
(2) Whether the amount of interest paid to RRVPN Rs. 11,68,841 on the amount of FDR loan raised by RRVPN from financial institutions on behalf of assessee company is allowable to the assessee company ?
(3) Whether audited accounts can be disturbed by the AO for the purpose of calculation of MAT under s. 115JB ?
(4) Whether the amount debited under the head ‘Prior period expenses’ can be added back for the purpose of book profit under s. 115JB ?
(5) Whether amount of depreciation which is nowhere debited in the books of accounts but derived during assessment proceeding by the AO can be added back for the purpose of book profit under s. 115JB ?”
It is stated by the applicant that this company is formed on ‘no profit no loss’ basis. The Rajasthan State Electricity Board had been incurring huge losses and was surviving on the financial support of the Government of Rajasthan and this company being one of its successors continue to receive the financial assistance. The cumulative losses since inception of the company which have been shown as recoverable in the audited accounts are Rs. 1,271.04 crores and the book loss for the year under consideration amounted to Rs. 303.76 crores and these losses are shown as recoverable from the Government of Rajasthan as per the printed balance sheet. It is argued that the AO has erroneously ignored the losses and assessed it under s. 115JB of the IT Act. So far as the 1st question regarding depreciation under s. 32 is concerned, this question was not pressed by the applicant in the further submissions made by it and the question No. (1) is withdrawn by the applicant. Therefore, it is unnecessary to discuss this issue further.
Question No. 2 : Whether the amount of interest paid to RRVPN Rs. 11,68,841 on the amount of FDR loan raised by RRVPN from financial institutions on behalf of assessee company is allowable to the assessee company.
The learned Authorised Representative of the applicant has shown us copies of the statements of April, 2003 onwards sent by Rajasthan Rajya Vidyut Prasaran Nigam Ltd. (for short ‘RVPN’) showing the receipt and payment on behalf of the applicant wherein against serial No. 38, ‘Interest on loan against FDR’ is shown. In the written submissions filed by the applicant and at the time of hearing, it was explained that the entire revenue collection by Jodhpur Discom (applicant) is first transferred to RVPN towards purchase of power from them. Then, RVPN has been providing funds to the applicant for operational activities. Further, it is stated that the erstwhile RSEB was having certain FDRs amounting to Rs. 224.31 crores. Out of this FDRs worth Rs. 194.31 crores were allocated to RVPN and FDRs of Rs. 30 crores were allocated to RVPN. RVPN had availed the demand loan from time to time against the pledge of aforesaid FDRs for working capital requirements of successor entities of RSEB (including the applicant) and paid interest on such demand loan. Interest passed on such loans was allocated to all entities equally as per the decision of the management. Then, it is submitted that the RVPN charged interest from the applicant by issuing Inter-Company Transfer Memos (ICTs), the copies of which are filed by the applicant at pp. 180 to 204 of paper book. It is argued by the learned Authorized Representative of the applicant that the expenditure by way of interest payment is incurred wholly and exclusively for the purpose of business of the assessee and the same needs to be allowed. The applicant in order to support his case has cited the decision of Delhi High Court in the case of CIT vs. Jai Parabolic Springs Ltd. (2008) 6 DTR (Del) 233 : (2008) 172 Taxman 258 (Del) wherein it is held that the revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred.
The learned Authorized Representative of the applicant has brought to our notice a xerox copy of an internal note of the General Administration Branch of Rajasthan Rajya Vidyut Mandal wherein order is passed for distribution of interest equally among the power companies. It is submitted that the loans against FDR have been primarily taken by RVPN to discharge the debt obligation, power purchase, freight charges and coal bills of the applicant. The interest is paid for the purpose of the business of the company. The CIT(A) has observed in his order dt. 30th March, 2007 that the assessee has failed to prove that payment of interest on FDRs by RVPN has been done for the purpose of business of assessee. It is well established principle of law that it is the duty of the person who has debited some expenditure to prove that expenditure was incurred for his business only and that burden has not been discharged. We extract below s. 36(1)(iii) of the Act which reads as follows : “Sec. 36. Other deductions— (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in s. 28— (i) and (ii) …. …. …. …. …. …. …. …. (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession : Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of new asset for extension of existing business or profession (whether capitalized in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.” It is argued by the Revenue that the loan was not raised by the assessee applicant but by the RRPVN and therefore the interest paid by the assessee is rightly disallowed under the provisions of s. 36(i)(iii) of the Act. No doubt the applicant did not clarify nor furnish any details before the assessing, appellate authorities to establish that the interest paid by RVPN on FDR loans and passed on to the applicant was for the business purpose of the assessee. However, on the facts presented by the applicant before this Authority with the supporting documents it is prima facie evident that the loans were taken by the RVPN for the business purpose of the applicant and that the applicant was liable to bear the interest liability. Though we are of the view that the deduction claimed deserves to be allowed under s. 36(1)(iii) of the Act, on the basis of the case set up by the applicant with supporting documents, we consider it just and proper to leave it to the AO to redo the assessment on this item in the light of material which has been placed before this Authority for the first time. The question is answered in affirmative subject to the verification of factual details.
8. Question No. 4 : Whether the amount debited under the head “Prior period expenses” can be added back for the purpose of book profit under s. 115JB. During the assessment proceedings, the applicant has shown profit before tax at Rs. 5,89,66,963 and has adjusted it to “prior period credit” of Rs. 5,89,66,963 which has resulted in net profit as ‘nil’. When it was pointed out by the AO to the applicant that expenditure of one year cannot be debited in other years, the applicant submitted a revised computation of income. In mercantile system, expenses can be debited in the year to which it pertains. Therefore, expenditure of earlier years cannot be allowed in any other year and hence the AO disallowed the deduction/adjustment of Rs. 5,89,84,758 and added it to the total income of the assessee. On appeal, the learned CIT(A) was of the view that the starting figure for calculating income under s. 115JB has to be the profit shown by the assessee. The CIT(A) rejected the assessee’s contention in this regard by observing as follows : “I have considered the entire facts and submission of assessee, as well as justification given by the learned AO and I am of the view that the assessee has to debit expenditure of a year in the year under consideration only, except in case where assessee did not know the liability in that year. The assessee in the instant case has not given any proof, neither before the learned AO nor before me to show as to how and why liability of these expenditure was not known to it in the year to which they pertain. Therefore, in view of the decision of the Hon’ble Tribunal, Delhi Bench in the case of Innovative Tech Pack Ltd. vs. Asstt. CIT (2002) 75 TTJ (Del) 585 : (2001) 79 ITD 445 (Del), I hereby dismiss the appeal of assessee and uphold the action of the learned AO.”
The learned Authorized Representative of the applicant has submitted that the adjustment of Rs. 5.89 crores for the purpose of book profit under s. 115JB was completely erroneous as it represented bona fide adjustments of expenses pertaining to earlier years but which were accounted for on being apprised of them by RVPN and others through various letters and other communications. All such expenses became known to the assessee during the year after the finalization of financial accounts for the earlier years and could be accounted only for this period. The applicant has given item-wise details relating to the disputed expenses/liabilities along with the relevant documents as follows : (i) Rs. 1.29 crores—This expenditure booked under prior year adjustments came to the knowledge of applicant on receipt of letter from RVPN being letter No. 736 dt. 6th Nov., 2003 regarding stamp duty demand raised by the State Government on sale and lease back agreements executed by erstwhile RSEB during March, 1995 to September 1996. Out of the total stamp duty demand of Rs. 10 crores, the said amount was allocated to the applicant. (i) Rs. 2.05 crores—This expenditure was accounted for in view of the audit memo No. 14 dt. 25th Aug., 2003 of the audit party of Accountant General-II Rajasthan towards electricity duty on compounding charges for the years 1993-94 to 2002-03. The demand for such expenses came to the assessee for the first time in financial year 2003-04. Hence the deduction is permissible. (ii) Rs. 1.03 crores— The “Journal voucher for adjustment” on account of lease rent for the period 30th Sept., 2001 to 31st March, 2003 was received from RVPN through their letter dt. 18th Oct., 2003. Hence, the same was accounted for in the current year. (iii) Rs. 1.12 crores—Letter from RVPN was received on 7th May, 2004 regarding stamp duty payable on sale and lease back agreements executed by erstwhile RSEB for another period allocated to the share of the applicant.
The Revenue, as already noted, contends that the assessee has to debit expenditure of a year in the year under consideration only except in case where the assessee did not know the liability in that year. According to the applicant’s counsel, the liability was unascertained and could not be anticipated and therefore could not be taken into account in the previous years. It is argued that all the expenses were correctly accounted for as the demands were raised for these expenses for the first time on the applicant during the year under consideration and prior to finalization of accounts of the year under consideration. These expenses pertain to the transactions of the applicant carried out in earlier years. As per the requirements of law, these were disclosed as prior period adjustments and the same cannot be added back for the purposes of computation of book profits under s. 115JB. The Authorized Representative of the applicant has cited the decision of Delhi High Court in CIT vs. Khaitan Chemicals & Fertilizers Ltd. (2009) 221 CTR (Del) 501 : (2008) 307 ITR 150 (Del) wherein it was held that because of the prescribed accounting which had to be followed by the assessee in view of the provisions of s. 115JA(2) r/w s. 211 of the Companies Act, 1956, the assessee was required to show the prior period items/extraordinary items separately so that their impact on the current profit or loss could be perceived. For answering the question whether the prior period expenses/ liabilities can be claimed as business expenditure for the relevant assessment year, the point to be considered is whether the claims were ascertained and crystallized only during the year under consideration. The assessee who is maintaining the mercantile method of accounting could not have provided for such expenses in the earlier year’s accounts unless the liability to incur the expenditure was definite, certain or ascertained. No doubt, the explanation given by the applicant before the assessing authority in this regard was quite vague. Even before the appellate authority, the relevant details were not furnished. At the same time, the applicant has clarified the position before this Authority and filed the relevant communications and orders from RVPN and other concerned authorities raising the demands on account of statutory dues etc. The details in this regard have been set out earlier. Prima facie, it appears that the applicant is entitled to relief and the addition of this amount to the book profit cannot be sustained, if the factual position as stated by the applicant is correct. We are however of the view that the assessing authority should re-examine the claim in the light of the materials placed for the first time before this Authority and in the light of observations made herein. Accordingly, this Authority answers question No. 4 in the negative, subject to verification of factual details by the AO. Question No. 3—Whether audited accounts can be disturbed by the AO for the purpose of calculation of MAT under s. 115JB. Question No. 5—Whether amount of depreciation which is nowhere debited in the books of accounts but derived during assessment proceeding by the AO can be added back for the purpose of book profits under s. 115JB.
Having regard to the submissions made by the applicant and the orders passed by the IT authorities, this Authority considers it necessary to delete question No. 3 and recast the question No. 5 by making it into two parts as follows “5(a) Whether the application of MAT provision under s. 115JB is justified; 5(b) Whether the depreciation which is nowhere debited in the books of accounts but arrived at during assessment proceedings by the AO can be added back for the purpose of book profit under s.115JB. (This question is the same as that framed by the applicant).”
12. Sec. 115JB to the extent relevant is as follows : “Sec. 115JB. Special provision for payment of tax by certain companies—(1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2007 is less than ten per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of ten per cent. (2) Every assessee, being a company, shall for the purposes of this section prepare its P&L a/c for the relevant previous year in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act, 1956 (1 of 1956) : Provided that while preparing the annual accounts including P&L a/c— (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including P&L a/c; (iii) the method and rates adopted for calculating the depreciation, shall be the same as have been adopted for the purpose of preparing such accounts including P&L a/c and laid before the company at its annual general meeting in accordance with the provisions of s. 210 of the Companies Act, 1956 (1 of 1956). Provided further ……………… (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including P&L a/c; (iii) the method and rates adopted for calculating the depreciation, shall correspond to the accounting policies, Accounting Standards and the method and rates for calculating the depreciation which have been adopted for preparing such accounts including P&L a/c for such financial year or part of such financial year falling within the relevant previous year. Explanation—For the purposes of this section, ‘book profit’ means the net profit as shown in the P&L a/c for the relevant previous year prepared under sub-s. (2) as increased by— (a) the amount of income-tax paid or payable, and the provision therefor, or (b) the amounts carried to any reserves, by whatever name called (other than a reserve specified under s. 33AC); or (c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or (d) ………………
13. The section presupposes that there is a book profit which means the net profit as shown in the P&L a/c prepared under sub-s. (2) as increased by the various amounts specified in cls. (a) to (g). If any amount referred to in cls. (a) to (g) is debited to P&L a/c, the amounts mentioned in cls. (i) to (vii) have to be reduced. Sub-s. (4) of s. 115JB states that every company to which the section applies shall furnish a report in the prescribed form from an accountant [as defined in Explanation below s. 282(2)] certifying that the book profit has been computed in accordance with the provisions of this section. Such report shall be furnished along with return of income. It is the case of the applicant that the company has been running in losses from year to year and the losses for the relevant year are reflected in the subventions receivable from the State Government. A perusal of P&L a/c shows that the income from its business operations is less than the operational expenses by about Rs. 529 crores. Actually there is no profit before or after tax though it is so mentioned in the P&L a/c on account of taking the subventions from the Government as revenue. In fact, if the AO wanted to go behind the P&L a/c, he should have reached the conclusion that there were losses but not profit to any extent. In any case, the net profit has been arrived at ‘zero’ by adjusting the prior period expenses of Rs. 5,89,66,963. This is one aspect which the assessee and appellate authorities should have looked into. Secondly, the assessing authority in making the revised calculations by taking the book profit at Rs. 5,89,66,963 (shown as profit after tax in P&L a/c), the prior period expenses (discussed under question No. 4) have not been allowed as deductible expenditure. While dealing with question No. 4, this Authority has expressed the view that in the light of the material now furnished by the applicant, the claim is prima facie sustainable, but the factual details have to be verified and therefore the claim has to be considered afresh. If that amount is taken as allowable expenditure, it will have inevitable bearing on the book profit/loss. Thirdly, the underlying basis for recalculation of the depreciation by rejecting the figures in the P&L a/c will not hold good if the applicant’s contention regarding the accounting principles to be adopted is to be accepted. The main reason for recomputing and reducing the depreciation amount seems to be that the subsidy received by the applicant towards the cost of capital assets has not been reduced from the cost. It is the case of the applicant that the claim of depreciation by the applicant was perfectly in order as per the accounting principles contained in Electricity (Supply) Annual Accounts Rules, 1985. Para 2.36 of Annex. III to the rules dealing with “Basic accounting principles and policies” lays down the manner of accounting for cost of capital asset and basis of claiming depreciation. Para 2.36 occurs under the heading “Contribution, grants and subsidies towards cost of capital assets”. Following paras in Annex. III to the said rules are reproduced below : “2.33. Contributions, grants and subsidies towards cost of capital assets shall be treated in accordance with the policies laid down in the following paras. 2.36. Accounting for cost of a capital asset shall be done in the normal course without considering any contribution, subsidy or grants towards the cost of the asset. Depreciation shall also be charged in the normal course on the ‘full cost’ of the asset.”
14. The AO in rejecting the claim of depreciation by the assessee was mainly guided by the fact that as per the audit note, Accounting Standard No. 12 issued by ICAI which is one of the principles to be followed for the preparation of accounts under the Companies Act was not followed. It is noted in para 2 of the auditor’s report as follows :
“Para 2 : Contribution, grants, subsidies towards cost of capital assets Consumers contribution, subsidies and grants received/receivable from Government towards cost of fixed assets as shown separately under the head contribution, grants, subsidies towards cost of capital assets and is neither deducted from the gross value of the specific assets nor it is treated as deferred income on a systematic and rational basis over the useful life of the assets, which is not in accordance with the Accounting Standard No. 12 ‘Accounting for Government grants’ issued by ICAI.”
15. Apart from pointing out that factually Accounting Standard No. 12 has not been deviated, our attention has been drawn by the learned counsel for the applicant to another remark in the audit report. It is as follows : “As the company is governed by the Electricity Supply Act, 1948, the provisions of that Act have prevailed wherever the provisions of Companies Act, 1956 are inconsistent with the said Electricity Supply Act.” This part of the comment in the audit report has been overlooked by the IT authorities, it is pointed by the counsel. The applicant’s counsel thus submits that the applicant has been maintaining its accounts as per the provisions of Electricity Supply Act read with Electricity (Supply) Annual Accounts Rules, 1985 and the provisions of the Companies Act to the extent not inconsistent with the rules under Electricity Act. It is further submitted that while preparing the annual accounts, the requirement of the first proviso to s. 115JB(2) has been adhered to by the applicant. The counsel for the applicant in the written submissions as well as in the course of arguments invited the attention of this Authority to the relevant provisions in the Companies Act, Electricity Supply Act, and the Electricity (Supply) Annual Accounts Rules. It is clarified that although the Electricity Supply Act was repealed by the Electricity Supply Act, 2003, yet, as per s. 185(2)(d) of the Act of 2003, all rules made under sub-s. (1) of the earlier Act of 1948 shall continue to have effect until such rules are rescinded or modified. Sec. 69 of the Electricity Supply Act, 1948 deals with accounts and audit. The relevant rules in Annex. III of Electricity Supply Annual Accounts Rules (paras 2.33 and 2.36) have already been referred to above. Contrary to the said provision by which the applicant is bound, the AO had imported the concept of cost as found in the IT Act and companies Act and gave primacy to AS-12. The learned counsel has then brought to our notice the relevant provisions in the Companies Act itself which allow the application of the accounting rules and principles under the Electricity (Supply) Annual Accounts Rules. Sec. 211(1) of the Companies Act which specifies the form and contents of balance sheet and P&L a/c of Companies has this important proviso which reads : “Provided that nothing contained in this sub-section shall apply to any insurance or banking company or any company engaged in the generation or supply of electricity or to any other class of company for which a form of balance sheet has been specified in or under the Act governing such class of company.” Added to this, s. 616(c) of the Companies Act provides : “Sec. 616—The provisions of this Act shall apply : (a) ……………… (b) ……………… (c) to companies engaged in the generation or supply of electricity except insofar as the said provisions are inconsistent with the provisions of the Indian Electricity Act, 1910 or the Electricity Supply Act, 1948.”
16. The applicant, has thus made out a case for reading the relevant provisions of the Companies Act together with the provisions of Electricity Supply Act and the rules made thereunder in regard to the preparation of P&L a/c. When the Companies Act itself provides for departure in the case of companies engaged in the supply of electricity, it is difficult to rule out the application of the accountancy principles contained in the statutory rules framed under the Electricity (Supply) Act. The Authority is of the considered view that the submission made by the applicant’s counsel in this regard has considerable force. However, this contention as well as the other points referred to above have been raised for the first time before this Authority, that too subsequent to the filing of the application. Hence, they were not dealt with specifically by the AO and appellate authority. In these circumstances, this Authority being of the opinion that the submissions of the applicant deserve proper consideration and the AO as well as the appellate authority have not considered all the relevant aspects adverted to above, it is felt just and proper to declare the additions made to the book profit on account of depreciation and prior period expenses as unsustainable while leaving it open to the assessing authority to redo the assessment in the light of the material points discussed above and the observations made herein,
[Citation : 321 ITR 18]
