Ita/196/2013 Of The Commissioner Of Income-Tax v. Karnataka Power Transmission

IN THE HIGH COURT OF KARNATAKA AT BENGALURUDATED THIS THE 27 DAY OF OCTOBER 272020 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND| THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASADLT.A. NCO.196 OF 2013 BETWEEN: 1.|THE COMMISSIONER OF INCOME-TAX C.R.BUILDING QUEENS ROAD BANGALORE. 2 |THE ASST. COMMISSIONER OF INCOME TAX. CIRCLE - 11 (5) RASHTROTHANA BHAVAN NRUPATHUNGA ROAD BANGALORE. (BY Mr.K.V.ARAVIND, ADV.,) .., APPELLANTS~ AND* KARNATAKA POWER TRANSMISSIONCORPORATION LID.,.7TH FLOOR, KAVERI BHAVAN|K.G.ROADBANGALORE - 560 OQO9 (BY Mr.K.K.CHYTHANYA, ADV.) ~. RESPONDENT THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT,|1961 ARISING OUT OF ORDER DATED 30.11.2012 PASSED IN ITA. NO.1240/BANG/2010 FOR THE ASSESSMENT YEAR 2001-02,PRAYING THAT THIS HON’ BLE COURT MAY BE PLEASED TO:(1) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW.STATED THEREIN.» (11) ALLOW THE APPEAL AND SET ASIDE THE ORDERS.PASSED BY THE ITAT, BANGALORE IN ITA NO.1240/BANG/2010—DATED 30.11.20L2 AND CONFIRM THE ORDER OF THE APPELLATE.COMMISSIONER CONFIRMING THE ORDER PASSED BY THE.APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY.THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE -11(5),.BANGALORE. THIS ITA COMING ON FOR FINAL HEARING, THIS DAY,|ALOK ARADHE J.,DELIVERED THE FOLLOWING: | JUDGMENT This appeal under Section 260A of the Income TaxAct, 1961 (nereinafter referred to as the Act for short)nas been preferred by the revenue. The subject matterof the appeal pertains to the Assessment year 2001-02. The appeal was admitted by a bench of this Court videorder dated 17.07.2013 on the following substantialquestion of law: (i) Whether the tribunal was correct in|holding that, in view of the uncertainty ofrecoveringthetransmission|Charges(wheeling charges), though it is accrued thesame Is not liable to tax In the current|AssessmentYearwithouttaking|Into considerationthemercantilesystemOF|accounting being followed by the assesseeand recorded a perverse finding ? (il)Whether the tribunal committed anerror in not taking into consideration that tn mercantile system of accounting on accrual,|income Is liable to tax irrespective of the cash being received? 2 |Facts leading to filing of this appeal brieflystated are that the assessee is a Karnataka State!Government undertaking and is engaged in the business|of transmission of electricity. The assessee filed its.return of income for the Assessment Year 2001-02 on.31.10.2001 declaring a loss of Rs.20,88,81,396/-.|Subsequently, it filed a revised return on 31.10.2002.declaring the total income as NIL after setting off thebrought forward unabsorbed depreciation of earlier|YCd[sofRs.2,16,63,815/-.Tneassessmen.gWaSprocessedunder.Section143(3)oftheAct.on26.17.7005|determiningtotalbuSINeSSprofit Of| Rs./72,02,83,028/- and after setting off unabsorbeddepreciation of Assessment Years 1988-89 and 1989-90.amountingtheincome.WaSdetermined to be ‘NIL’. The Commissioner in exercise of powers under Section 263 of the Act vide order dated17.11.2007 held that the order of assessment dated|26.12.2012 is erroneous and prejudicial to the interest|of revenue and consequently set aside the same with adirection to re-work the income in the light ofobservations made in the order. The Assessing Officer|vide order dated 31.17.7008|inter aliaheld that theassessee is following mercantile system of accounting.|The Assessing Officer made an addition of Rs.52.89|Crores on account of wheeling charges, as the same was.not offered by the assessee in the relevant Assessment.Year on the ground that it would recognize the revenue|of wheeling charges only when the same is collectedfrom the current Assessment Year onwards. [It wasfurther held that the assessee Naving followed the| accrual system of accounting i.e., the mercantile systemcannot pick and choose other system of accounting tosuit it needs and the wheeling charges became due tothe assessee once electricity supply is made available to.other agencies since, inherent expenditure towards.transportation / wheeling expenditure has been debitedto the books of accounts of the assessee and since, theassessee has utilized the amount as revenue, it cannotrefuse to treat tne same as income and cannot pe.permitted not to offer the same to tax merely on theground that the aforesaid revenue was not realized in.the relevant financial year. In the result, an amount of.Rs.52.89 Crores was added as wheeling charges to the|income of the assessee. 3The assessee thereupon filed an appealbefore the Commissioner of Income Tax (Appeals) who.by an order dated 31.08.2010 upheld the order of theAssessing Officer. Being aggrieved, the assessee filed anappeal before the Income Tax Appellate’ Tribunal (hereinafter referred to as the tribunal’ for short). TheTribunal vide impugned order dated 30.11.2012 heldthat no expenditure is incurred by the assessee for.transmission of electricity to other states and assesseehas not debited any expenditure towards transmission ofelectricity to other states. It was further held that therewas a dispute with regard to wheeling charges amongst|all the constituent states of Southern Regional Electricity|Board. It was also neild that there was an uncertainty ofreceiving the transmission charges though the assessee|has raised its demand for the same, therefore, theassessee Nas rightly divested itself from recognizing the|Same as income during the relevant Assessment Year as it would have resulted in distortion of profits. It was also.held that an hypothetical income would not arise to theassessee merely because it has accounted in its books ofaccounts, but it should arise and accrue to the assessee.The tribunal also took note otf134th meetingOf |Southern Regional Electricity Board and held that the| issue of sharing of wheeling charges by the constituent|states itself was scrapped and the assessee has notraised any demand for wheeling charges in the following years and had placed on _ record the orders’ assessment for the subsequent years i.e., 2003-04 and.2004-05, which were completed by the authoritieswithout making any addition on account of wheeling|charges. It was further held that revenue having:accepted the assessees method of accounting for theAssessment Year 2003-04 and 2004-05 cannot take a'different stand only for the assessment year 2001-02.Thus, it was held that the assessee has not deviatedfrom its method of accounting but Nas only recognized|the revenue earned by it during the relevant Assessment.Year and there is no infirmity in the method of.accounting. In the result, the appeal preferred by the|assessee was partly allowed. In the aforesaid factualbackground, the revenue is in appeal before us. 4Learned counsel for the revenue submittedthat the assessee has been following mercantile system.of accounting and therefore, the income accrues, onraising a demand on the other parties. It is also urged|that the doubtfulness of the assessee to receive the|amount is immaterial under the mercantile system of.accounting and the only remedy available to the|assessee is under Section 36 of the Act. It ts further!submitted that once the assessee has recognized tneright to receive, the income accrues and the same is'taxable irrespective of the fact whether or not the sameis actually accrued to the assessee. It is also contendedthat reference to other Assessment Years by the tribunalis immaterial and the amount / demand made by theassessee was legally due to it and therefore, the same.accrued to it. In support of aforesaid submissions,rellance|has.beenplacedON)decisions.'MORVIINDUSTRIESLTD,VS,COMMISSTONEROFINCOME-TAX', (1971) 82 ITR 835 (SC), ‘KESHAV MILLS LTD. VS. COMMISSIONER OF INCOME-TAX.,(1953) 23 ITR 230 (SC)and‘COMMISSIONER OFINCOME-TAX VS.A.GAJAPATHY NAIDU’, (1964) 53°ITR 114 (SC). MILLS LTD. VS. COMMISSIONER OF INCOME-TAX.,(1953) 23 ITR 230 (SC)and‘COMMISSIONER OFINCOME-TAX VS.A.GAJAPATHY NAIDU’, (1964) 53°ITR 114 (SC). 5.|On the other hand, learned counsel for theassessee has submitted that the mercantile system and.accrual system of accounting are synonymous. In this|connection, reference has been made to guidance noteon accrual system of accounting and our attention Nas|been invited to clause 2.1 and clause 3 of the aforesaid.note. It is also pointed out that notification dated29.09.2016 issued by Central Board of Direct Taxes(CBDT) applies to the assessee’'s who follow themercantile system of accounting and as per theAnnexure annexed to the aforesaid notification, accrualrefers to assumption that revenues and costs areaccrued that is recognized that they are earned orincurred and recorded in the Previous Year to which theyrelate. Our attention has also been itnvited to the annexure to the aforesaid notification and it has been|contended that the revenue shall be recognized when.there is a reasonable certainty of its ultimate collection,It is also urged that object sought to be achieved by accounting standards, which is mandatory is to see thataccounting income is adopted as taxable income and notmerely as basis from which taxable income is to be.computed. In this connection, reliance has been placedON)thedecisionoftneSupremeCourt|In|‘J.K.INDUSTRIES LTD. VS. UNION OF INDIA‘, 297ITR 176 (SC).It is also urged that hypothetical incomecannot be brought to tax as income and only real|income can be taxed. In this connection, reference has|been made on decision of the Supreme Court in.‘COMMISSIONER OF INCOME TAX VS. BOKAROSTEEL LTD.', 263 ITR 315 (SC). It is also argued that.decision relied upon by learned counsel for the revenue.do not apply to the fact situation of the case asAccounting Standard-9 was not in existence at the time| when the decisions were rendered. 6.|We have considered the SUDMISSIONS made.by learned counsel for the parties and have perused therecord. Admittedly, the assessee follows the mercantilesystem of accounting. It is pertinent to mention herethat in exercise of powers under Section 145(2) of theAct, the Central Government has issued Accounting>Standards, which are to be followed by the assesseefollowingmercantile.systemofaccountingvideNotification dated 25.01.1996. Clause 6(b) of theaforesaid Notification defines the expression ‘accrual’means that revenue and costs are accrued i.e.,recognized as they are earned or incurred and recordedin the financial statements of the period to which theyrelate. The Notification dated 29.09.2016 issued by.Central Board of Direct Taxes (CBDT), which applies to.the assessee's following the mercantile system ofaccounting also provides that the expression ‘accrual|refers to the assumption that revenue and costs are accrued that is recognized as they are earned or'incurred and recorded in the Previous Year, to which)they relate. The Supreme Court in Bokaro Steels Ltd.Supra has held that entry in a book which was made.about a hypothetical income which did not materialize|cannot be subjected to tax as the entry reflectshypothetical income and only real income can bebrought to tax. J.|Now we may advert to the facts of the case inhand. The Southern Regional grid in South India|comprises Karnataka, Andhra Pradesh, Tamil Nadu,Kerala and Pondicherry. The aforesaid states form anetwork for smooth transmission of exchange of electricity amongst the States, which includes drawl of.their share of energy from central generating station|owned by central public sector undertakings and theenergy flow and grid operations in the southern region.The.KarnatakaElectricityBoardwhich|owned.transmission lines in Karnataka decided to recover| J.|Now we may advert to the facts of the case inhand. The Southern Regional grid in South India|comprises Karnataka, Andhra Pradesh, Tamil Nadu,Kerala and Pondicherry. The aforesaid states form anetwork for smooth transmission of exchange of electricity amongst the States, which includes drawl of.their share of energy from central generating station|owned by central public sector undertakings and theenergy flow and grid operations in the southern region.The.KarnatakaElectricityBoardwhich|owned.transmission lines in Karnataka decided to recover| wheeling charges from State Electricity Board's of TamilNadu, Andhra Pradesh and Kerala to the tune ofRs.52.89 Crores. The assessee therefore, did not raise|any demand on account of wheeling charges and since,there was uncertainty with regard to recovery /collection of the outstanding amount, the assessee forthe Assessment Year in question decided not torecognize revenue of Rs.52.89 Crores for wheeling.charges. In the meeting held on 04.11.2000 and theSame was approved by the board of the assessee. Thus,the aforesaid income never accrued to the assessee ancwas in fact, an hypothetical income and not a realincome. Subsequently, on 16.03.2004 in 134th meeting|of Southern Regional Electricity Board, the arrangement.of cost sharing of wheeling charges by the constituentStates itself was scrapped and on the date when theAssessing Officer passed an order i.e., on 31.12.2008,the aforesaid decision was already in existence. Thus,from the aforesaid narration of facts, it is axiomatic that the income did not accrue to the assessee but was ashypothetical income, which could not have been.subjected to tax and in view of Accounting Standard-9,the assessee rightly decided not to recognize the|revenue of Rs.52.89 Crores for wheeling charges for therelevant assessment year. In view of preceding analysis, the substantialquestions of law are answered against the revenue and.in favour of the assessee. In the result, the appeal failsand is hereby dismissed. Sd/-— JUDGE. SS| Sd/-—JUDGE.