Decided on September 17,2014



P.M.Jagtap, Member (A) - (1.) THIS appeal is preferred by the Revenue against the order of the learned Commissioner of Income -tax (Appeals) II, Hyderabad dated 1.1.2014, whereby he deleted the addition of Rs. 233.75 crores made by the Assessing Officer to the total income of the assessee on account of interest income allegedly accrued to the assessee at the rate of 15% on delayed payments made by the DISCOMs.
(2.) THE assessee in the present case is a State Government Undertaking of Andhra Pradesh which is engaged in the business of power generation. It supplies power inter alia to DISCOMs, which again are undertakings of the State Government. During the year under consideration, huge amount due to the assessee by the DISCOMs running into thousand of cores was outstanding. According to the Assessing Officer, the assessee had right to claim interest on such dues and accordingly interest receivable worked out at Rs. 233.75 crores was added by him to the total income of the assessee for the following reasons given in the assessment completed under S. 143(3) vide order dated 5.12.2011, as summarised by the learned CIT(A) in her impugned order - "(a) That the assessee being a company was following mercantile system of accounting. However, with reference to this particular item of "charging interest from DISCOM" no interest was offered to tax on the ground that such interest was not received. (b) That from the notes forming part of accounts, Schedule 22 part I point 11 it is stated that sale of power is accounted for based on guidelines given by the A.P. Electricity Regulatory Commission (APERC). (c) That the assessee actually made claim before the APERC (A.P. Electricity Regulatory Commission, is responsible for determining the prices of electricity between APGENCO & APDISCOMs) for its claim of interest on delayed payments made by APDISCOM. (d) In the correspondence made by the assessee with APERC the assessee clearly claimed 15% interest on delayed payments made by DOSCOM. (e) In order no. 105/2003 dated 24.03.2003 passed by APERC, the APERC held that, a provision may be incorporated in Power Projects Agreement for opening a revolving letter of credit in favour of APGEEMCOI to cover one month receivables. As per this direction APDISCOM has to open an L/C and has to pay interest if the payments were made beyond one month. (f) That the contention of the assessee that no bills were raised against interest receivable during the previous year as no interest was payable by DISCOM, is totally in contradiction to the notes on accounts where it was stated that the interest was accounted for on receipt basis. (g) As per the Accounting Standard -9 revenue should be recognized unless there is a significant uncertainty as to measurability and collectability. And in the present case there is no uncertainty as to the receipt of interest. (h) From the year 2003 onwards regular bills were raised by the assessee for penal interest. (i) There is no Board resolution to the effect that penal interest should not be recognised, nor it was waived off by the board's resolution. (j) As per the Power Projects Agreement between AP GENCO and APDISCOM clause 3.1.15 in case the bills are delayed beyond two months, late payment fee @ 1.25% per month shall be allowed to be levied by APGENCO." Against the order passed by the Assessing Officer under S. 143(3), appeal was preferred by the assessee before the learned CIT(A) challenging inter -alia the addition made by the Assessing Officer on account of interest allegedly receivable from DISCOMs. Before the learned CIT(A), the following submissions were made on behalf of the assessee in support of its claim that the addition made by the Assessing Officer on account of such interest was not sustainable - "......... (a) That the appellant company is not charging any interest for such delays. However, in the annual accounts, it has stated that interest on delayed payments will be accounted for on receipt basis. Basing on such statement the Assessing Officer computed notional interest. (b) As per Accounting Standard -9 (AS -9) revenue should be recognized only when there is no significant uncertainty as to measurability and collectability of the income. When there is uncertainty about its measurability and collectability, revenue recognition should be postponed. (c) The income is said to have accrued to assessee only if - (i) There exists a legal right for the assessee to claim interest for the delayed payment in accordance with any agreement. (ii) If such interest is to be levied only with the approval of the regulatory authority, such approval has already been sanctioned. (iii) If these two basic conditions are satisfied then only interest on belated payments can be said to have accrued to the assessee. (d) The agreement between APGE#NCOI and APDISCOMs do not provide for charging of interest on late payments. Therefore, the AO cannot tax unreal/hypothetical/notional income to tax which is legally impermissible. (e) In power Purchase Agreement (PPA) dated 22.12.2009, there is a specific clause to charge 'delayed payment interest' at the rate of 1.25% per month. However, this agreement is effective from 22.12.2009 and is not relevant for A.Y. 2009 -10. In any case this clause of PPA was not approved by the A.P. Electricity Regulatory Commission (APERC). (f) The assessee has not raised any bills on the DISCOM claiming interest on delayed payments. Further, there is no provision for charging interest in PPA. Therefore, the AO cannot charge hypothetical income. ....." The learned CIT(A) found merit in the submissions made on behalf of the assessee on this issue and deleted the addition made by the Assessing Officer on account of interest receivable by the assessee from the DISCOMs for the following reasons, given in paragraph No. 8 of her impugned order - "8. The information on record is carefully examined. The crux of the issue is, the Assessing Officer had brought notional interest to tax on the ground that APGENCO has right to claim such interest against APDISCOM. However, in view of the foregoing discussion, the appellant APGENCO as a matter of abundant precaution as always making a claim of interest on DISCOM but at the same time it had no right to make such claim. The power purchase agreement between APGENCO and APDISCOM do not provide for charging such interest. More particularly, the APERC in its order dated 08.07.2013 had categorically stated that APGENCO's request for levying such interest on belated payments was flatly rejected. Even otherwise also thousands of crores of amounts are due from APDISCOMs to APGENCO. Even making the payment for the principal amounts raised by APGENCO has become difficult task. Since APERC has not agreed to charging interest, the question of recovering interest by the appellant does not arise. Therefore, the notional interest brought to tax by the Assessing Officer is deleted."
(3.) AGGRIEVED by the order of the learned CIT(A), Revenue has preferred this appeal before us.;

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