National Hydroelectric Power Corpn. Ltd v. Commissioner Of Income Tax

[2010] 1 S.C.R. 16 A NATIONAL HYDROELECTRIC POWER CORPN. LTD. v. COMMISSIONER OF INCOME TAX (Civil Appeal No. 6 of 2010) JANUARY 5, 2010 B [S.H. KAPADIA AND AFTAB ALAM, JJ.] Income Tax Act, 1961: s.115JB, Explanation-I Clause (b) - Applicability of - Advance against depreciation -(AAD) -C Held: AAD is a timing difference - It is not carried to profit and loss account - It is income received in advance subject to adjustment in future and not a reserve and hence clause (b) of Explanation (I) to s. 115JB is not applicable. D Assessee is supplier of electricity at notified tariff rate. The sale price included Advance against Depreciation (AAD) which is shown by assessee as sales in its profit and loss account. While computing the book profit, assessee deducted the AAD component from total sale price and took only balance amount into the profit and E loss account. According to the Authority for Advance Rulings, reduction of AAD from the sales was reserve which had to be added back on the basis of Clause (b) of F Explanation-I to Section 115JB of the Income Tax Act, 1961. Allowing the appeal, the Court HELD: On reading Explanation-I, to Section 115JB of G Income Tax Act, 1961, it is clear that to make an addition under clause (b}, the two conditions which must be jointly satisfied are that there must be a debit of the amount to the profit and loss account and the amount so NATIONAL HYDROELECTRIC POWER CORPN. LTD. v. COMMNR. OF INCOME TAX 17 debited must be carried to the reserve. Since the amount A 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 for the purposes of determination of net profit at all, hence clause (b) of Explanation-I was not applicable. Further, "reserve" as contemplated by clause B (b) of the Explanation-I to Section 115JB of the Act is required to be carried through the profit and loss account. There are broadly two types of reserves, viz. those that are routed through profit and loss account and those which are not carried via profit and loss account, c for example, a Capital Reserve such as Share Premium Account. AAD is not a reserve. It is not appropriation of profits. It is an amount that is under obligation, right from the inception, to get adjusted in the future, hence, cannot be designated as a reserve. It is nothing but an D adjustment by reducing the normal depreciation includible in the future years in such a manner that at the end of useful life of the Plant (which is normally 30 years) the same would be reduced to nil. At tho end of the life of the Plant, AAD will be reduced to nil. In fact, Schedule E XII-A to the balance sheet for the financial years 2004-05 onwards indicates recouping. AAD is "income received in advance". It is a timing difference and represents adjustment in future which is in-built in the mechanism notified on 26.5.1997. This adjustment may take place F over a long period of time. [Paras 10 and 11] [20-A-H; 21-A] . CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 6 of 2010. From the Judgment & Order dated 17.12.2004 in AAR 550 of 2010 of the Authority for Advance Rulings (Income Tax), New Delhi. Soli Dastur, Nishant Thakker, Sunita Dutt, Rajiv Mehta for the Appellant. A Parag P. Tripathi, ASG, D.K. Singh, Kuna! Bahri, Rahul Kaushik, B.V. Balaram Das for the Respondent. The Judgment of the Court was delivered by S.H. KAPADIA, J. 1. Leave granted. B 2. In this civil appeal filed by the assessee we are concerned with accounting treatment of Advance Against Depreciation ("AAD", for short). 3. We are concerned with assessment year 2001-02. [2010] 1 BAqomlo3INo usa oot faga fara fetes. 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