M/S Nhpc Ltd v. S.j.vazifdar, Chief Justice (Oral

ITA No.151 of 2015 (O&M) IN THE HIGH COURT OF PUNJAB & HARYANA AT CHANDIGARH ITA No.151 of 2015 (O&M) Date of Decision: 14.02.2018 The Commissioner of Income Tax, Faridabad …..Appellant M/s NHPC Ltd. versus …..Respondent CORAM:HON’BLE MR.JUSTICE S.J.VAZIFDAR, CHIEF JUSTICEHON’BLE MR. JUSTICE AVNEESH JHINGAN Present:-Mr.T.K.Joshi, Senior Standing Counselfor the appellant(s)- Revenue. Mr. Ved Jain, Advocate for the respondent (s). *** S.J.VAZIFDAR, CHIEF JUSTICE (ORAL) The appeal is against the order of the Tribunal upholding thedecision of the CIT (Appeals) which allowed the appellant's appeal againstthe order of the Assessing Officer. The matter pertains to the assessmentyear 2001-02. The Assessing Officer had added an amount of Rs.131.81crores on account of advance against depreciation which the CIT(A)deleted. 2.According to the appellant, the following substantial questions of law arises:- “1. Whether, on the facts and in circumstances ofthe case and in law, the Hon'ble ITAT was right inlaw in dismissing appeal of the Revenue observingthat 'in view of categorical finding of the SupremeCourt we hold that the CIT(A) was correct inholding that advance against depreciation cannotbe added under the computation of the normal income', whereas the Hon'ble Supreme Court in itsdecision dated 05.01.2010 has held that the'advance against depreciation' is 'income receivedin advance', thus making the said income subjectto 'Charge' under Chapter-II, as business incomeunder Chapter-IV-D read with sub clause (i) ofsub-Section 24 of Section 2 of the Income TaxAct?” 2. Whether, on the facts and in circumstances ofthe case and in law, the Hon'ble ITAT was right inlaw in deleting the addition of Rs.133,81,00,000/-made by the Assessing Officer under Section 143(3) (and not under Section 115JB) on account of“Advance Against Depreciation” ignoring theprovisions of Section 2(24) read with Section 28 ofthe Income Tax Act, 1961, which provides that“income” includes profits and gains and theprofits and gains of any business or professioncarried on by the assessee at any time during theprevious year is taxable?” The decision regarding question 2 follows the decision on question 1. 3.In our view, the matter is covered in favour of the respondentassessee by the judgment of the Supreme Court in the assessee's caseNational Hydroelectric Power Corp. Ltd. v. Commissioner Of Income-Tax2010(320) ITR 374. The facts in this appeal are identical to the facts in thecase before the Supreme Court. The assessee sells electricity to the State Electricity Board,Discoms etc. The tariff is determined and identified by the CentralElectricity Regulatory Commission. The tariff considers inter alia theAdvance Against Depreciation (AAD). The question is whether the AAD incorporated in the tariff constitutes income of the year in which it isreceived or not? In other words, the question is whether the amountsreceived as an advance which are not due in the relevant accounting yearconstitutes income of that accounting year. The Supreme Court held that :- The assessee sells electricity to the State Electricity Board,Discoms etc. The tariff is determined and identified by the CentralElectricity Regulatory Commission. The tariff considers inter alia theAdvance Against Depreciation (AAD). The question is whether the AAD incorporated in the tariff constitutes income of the year in which it isreceived or not? In other words, the question is whether the amountsreceived as an advance which are not due in the relevant accounting yearconstitutes income of that accounting year. The Supreme Court held that :- “Since the amount of AAD is reduced from sales,there is no debit in the profit and loss account.The amount did not enter the stream of income forthe purposes of determination of net profit at all,hence clause (b) of Explanation-I was notapplicable. Further, “reserve” as contemplated byclause (b) of the Explanation-I to Section 115JB ofthe 1961 Act is required to be carried through theprofit and loss account. At this stage it may bestated that there are broadly two types of reserves,viz, those that are routed through profit and lossaccount and those which are not carried via profitand loss account, for example, a capital reservesuch as share premium account. AAD is not areserve. It is not appropriation of profits. AAD isnot meant for an uncertain purpose. AAD is anamount that is under obligation, right from theinception, to get adjusted in the future, hence,cannot be designated as a reserve. AAD is nothingbut an adjustment by reducing the normaldepreciation includible in the future years in sucha manner that at the end of useful life of the plant(which is normally 30 years) the same would bereduced to nil. Therefore, the assessee cannot useAAD for any other purpose (which is possible inthe case of a reserve) except to adjust the sameagainst future depreciation so as to reduce thetariff in the future years. As stated above, at theend of the life of the plant AAD will be reduced tonil. In fact, Schedule XII-A to the balance sheet forFinancial Year 2004-2005 onwards indicatesrecouping. In our view, AAD is “income receivedin advance”. It is a timing difference. It representsadjustment in future which is inbuilt in themechanism notified on 26-5-1997. This adjustmentmay take place over a long period of time. Hence,we are of the view that AAD is not a reserve.” 4.Although the Supreme Court had in that case considered theeffect of Explanation-I to Section 115 JB, the observations apply equallyto the question before us, namely, whether AAD constitutes income. ITA No.151 of 2015 (O&M) -4- Although in the context of Explanation-I to Section 115JB, the SupremeCourt categorically held that AAD “did not enter the stream of income forthe purposes of determination of net profit at all”. It is clear, therefore, thatAAD was held not to constitutes income of the year in question. Further theSupreme Court also held that AAD is income received in advance. In otherwords, it is not income received for the relevant accounting year. It is inthat context that the Supreme Court observed that there is a timingdifference and that it represents the adjustment in future and that it istherefore not even carried through the profit and loss account. 5.In these circumstances, the questions are answered against theappellant and in the favour of the respondent-assessee. The appeal is, therefore, dismissed. (S.J. VAZIFDAR) CHIEF JUSTICE 14.02.2018anju (AVNEESH JHINGAN) JUDGE Whether speaking/reasonedWhether reportable Yes Yes