B.C.Meena, Member (A) -
(1.) THE bunch of these three appeals filed by revenue emanates from the common order of CIT (Appeals), Faridabad dated 05.04.2010 for three Assessment Years and in all these appeals, the common issue involved is with regard to the taxability of advance against depreciation" (AAD). The grounds of appeal are common except difference in figure of addition. The grounds of appeal in ITA No. 3013/Del/2020 for Assessment Year 2000 -01 read as under: - -
"1. Whether, on the facts and in the circumstances of the case, the Ld. CIT(A) was right in law in deleting the addition of Rs. 1,40,58,00,000/ - made by the Assessing Officer on account of 'Advance Against Depreciation', in spite of the Hon'ble Supreme Court's decision dated 05 -01 -2010 wherein, it was held that the advance against depreciation is "income received in advance", thus making the said income subject to "charge" under Chapter -II, as business income under Chapter -IV -D read with sub -clause (i) of sub -section (24) of section 2 of the Income -tax Act -
2. WHETHER , on the facts and in the circumstances of the case, the Ld. CIT(A) was right in law in deleting the addition of Rs. 1,40,58,00,000/ - made by the Assessing Officer under section 143(3) [and not under section 115JB] on account of "Advance Against Depreciation" ignoring the provisions of section 2(24) read with section 28 of the Income -tax Act, 1961 - which provides that "income" includes profits and gains and the profits and gains of any business or profession carried on by the assessee at any time during the previous year is taxable? That the appellant craves for the permission to add, delete or amend the grounds of appeal before or at the time of hearing of appeal."
The brief facts of the case are as under: - -
"Assessee is a public sector enterprise registered under the Companies Act, 1956. Its accounts are prepared in accordance with Parts II and III of Schedule VI to the Companies Act. The entire shareholding of the assessee is with Government of India. Its accounts are audited by Comptroller and Auditor General of India. They are laid before both the Houses of Parliament."
Assessee is required to sell electricity to State Electricity Board's Discoms etc. at tariff rates notified by CERC. The tariff consists of Depreciation, AAD, Interest on loans, Interest on working capital. Operation and Maintenance Expenses, Return on equity.
On 26.5.97, GOI introduced a mechanism to generate additional cash flow by allowing generating companies to collect AAD by way of tariff charge. It was decided that the year in which Normal Depreciation fell short of original scheduled loan repayment, instalment (capped at l/12th of the original loan) such shortfall would be collected as Advance against Future Depreciation. In other words, once the loan stood re -paid, the Advance so collected would get reduced from the Normal Depreciation of the later years, and such reduced depreciation would be included in the tariff, in turn lowering the tariff.
(2.) In the first round of appeal, the ITAT in its order dated 11.01.2008 for the assessment years 2000 -01 and 2001 -02 has restored the issue to the file of the CIT(A) on the issue of advance against depreciation. Similarly, the issue on account of advance against depreciation was restored to the CIT(A) in Assessment Year 2003 -04 vide ITAT order dated 09.02.2009. The CIT(A) has deleted the addition by passing a common order dated 05.04.2010, against which the revenue is in appeal. As per revenue's contention, advance against depreciation is an income to be taxed under the year under consideration.
(3.) Ld. DR submitted that the issue before the Hon'ble Supreme Court was with reference to the addition while computing the profit u/s. 115JB of the Income -tax Act, 1961, hence same cannot be applied while computing the income under the regular provisions of Income -tax Act, 1961. Hon'ble Supreme Court, in assessee's case, has held that advance against depreciation is not a reserve and also it is not an appropriation of profit, hence, the same cannot be added while computing the income under the regular provisions of the Income -tax Act. Ld. AR's contention was also that advance against depreciation was not meant for uncertain purpose and it was for a definite purpose that is under obligation, right from the inception, and it is going to be adjusted in the future. Therefore, it cannot be designated as a reserve. The assessee is a public sector undertaking engaged in the business of generation of power. The tariff for the power is determined by the Central Electricity Regulatory Commission (CERC) and accordingly assessee has to sell electricity to the various State Electricity Boards at the tariff rates notified by the CERC. This tariff is worked out on the basis of the cost of plant which consists of depreciation, interest on loans, operation and maintenance expenses and also a fixed return on equity. The CERC determines the tariff for power generating companies. These power generating companies were not in a position to repay the instalment of the loan for the borrowed loan for the purpose of setting up of power plant for generation of the electricity. To meet such crisis, the Central Government devised a mechanism to help power generating companies including the assessee to raise funds to meet its obligation of repayment of loan in time. By notification dated 26th May, 1997, these companies were permitted to collect an amount in advance in the years in which the normal depreciation (9096 of the original cost of the Plant spread equally over the useful life of Plant) otherwise allowed to be recovered was not sufficient to meet loan repayment schedule and called it "advance against depreciation". On the payment of the loan the advance so collected is to be adjusted from the normal depreciation allowable and included in the tariff of such later years and on this count, this issue arises how this advance received against future obligation is to be adjusted in the account of the assessee. The assessee company approached the Institute of Chartered Accountants of India (ICAI) for its opinion. The ICAI gave an opinion that it is in the nature of advance and should be shown as a liability in the balance sheet. The assessee company followed this accounting practice. However, the AO did not accept this contention and treated advance against depreciation as income while computing regular income as well as book profit. The assessee applied to the Authority for Advance Ruling. The Authority for Advance Ruling decided vide its order dated 17th December, 2004 that the advance against depreciation is to be added to the book profit while determining Minimum Alternate Tax liability under section 115JB of the Act. Against this order of the Authority for Advance Ruling, the assessee filed a Special Leave Petition before the Hon'ble Supreme Court. The assessee also filed appeals against the order of the Assessing Officer before the CIT(A). the CIT(A) confirmed the order of the Assessing Officer in its order dated 31.03.2005 in so far as the addition to the book profit made for the purpose of Minimum Alternate Tax. The CIT(A), however, did not decide the issue regarding addition made while computing the income under the regular provisions of the Act. Against this, the assessee came in appeal before the ITAT and contended that the CIT(A) has not decided the issue of taxing advance against depreciation while computing regular income as under the regular provisions of Income -tax Act, 1961. The ITAT set aside the issue to the file of CIT(A) vide its order dated 11th January, 2009 for assessment years 2000 -01 and 2001 -02. Meanwhile, the SLP filed by the assessee was decided by Hon'ble Supreme Court vide its order dated 05.01.2010. The CIT(A) after taking into consideration the decision of Hon'ble Supreme Court held that advance against depreciation cannot be considered as income for the year under consideration. The relevant portion of the order of the CIT(A) read as under: - -
"4. I have carefully considered the above contentions of the Ld. A.R. and perused the impugned assessment orders passed u/s. 143(3) in the instant case for all the above -mentioned assessment years, and the subsequent orders passed by the CIT(A) and the Ld. ITAT on the issue of AAD for the purposes of section 115JB of the Income -tax Act, 1961 in respect of which the Worthy AAR Authorities vide their order dated 17 -12 -2004 had given the ruling in favour of the Revenue by holding that the AAD had to be included in the computation of book profit for MAT u/s. 115JB of the Income -tax Act, 1961 in the year of its receipt. I have also gone through the Notification of the Central Government issued in 1997 for Fixation Tariff for the supply of electricity u/s. 43A of the Electricity (Supply) Act, 1948 dated 23 -05 -1997 as well as the opinion of the "Expert Advisory Committee of Institute of Chartered Accountants of India" along with the accounting treatment of AAD as advised by the I.C.A.I. I have also perused the Tariff Notification of Central Electricity Regulatory Commission ("CERC") dated 26 -03 -2001 effective for the period 01 -04 -2001 to 31 -03 -2004. I have also studied the Hon'ble Apex Court's order dated January 5, 2010 for the assessment year 2001 -02 in the appellant's own case in Civil Appeal No. 6 of 2010 adjudicating on the accounting treatment of AAD. After examining the status of the company being a public sector enterprise, whose accounts were prepared in accordance with Para II and III of Schedule VI to the Companies Act, 1956 and audited by Comptroller and Auditor General of India and laid before both the Houses of Parliament, the Hon'ble Supreme Court has also appreciated the business of the appellant public undertaking to sell electricity to State Electricity Board(s), Discoms, etc. at tariff rates noted by CERC which consisted of depreciation, advance against depreciation, interest on loans, interest on working capital, etc. The Apex Court analysed GOI's notification dated 26.05.1997 and after going into the merits of the issue as per the ruling of the AAR read with clause (b) of Explanation I to section 115JB of the Income -tax Act, 1961, finally concluded vide its para 11 that since the amount of AAD is reduced from sales and did not enter the stream of income for the purposes of determination of net profit at all, hence the clause (b) of Explanation I to section 115JB of the 1961 Act was not applicable. Further, the Apex Court held that the AAD is not a reserve, not appropriation of profits and not meant for an uncertain purpose and it is an amount that is under obligation, right from the inception to get adjusted in the future and hence it cannot be designated as a "reserve". At the most, the AAD is "income received in advance" and it is a timing difference that represents adjustment in future which is inbuilt in the mechanism notified on 26 -05 -1997. Hence the clause (b) of Explanation I to section 115JB is inapplicable and hence the AAD could not be added as adjustment under the provisions of section 115JB for the purposes of computation of book profit.
5. I have given a deep thought to the above ruling of the Hon'ble Supreme Court on the issue of AAD for the purposes of section 115JB. Although the decision of the Ld. Apex Court has been given in respect of the adjustments to be made for the MAT purposes under clause (b) of Explanation I to section 115JB, it is observed that the issue has been finally clinched by the Hon'ble Court, as to its nature and taxability, which would also be relevant for the computation of regular income as per the provisions of section 143(3) of the Income -tax Act, 1961. Since the AAD is a timing difference, it is not a reserve, it is not carried through P & L account and it is income received in advance subject to adjustment in future, it cannot be added/disallowed also under the computation of normal income u/s. 143(3) of the Income -tax Act, 1961. The above ratio of the Hon'ble Supreme Court, being equally invokabale and applicable in the regular assessments, the addition made by the A.O. in the orders u/s. 143(3) for these three years on account of AAD stand cancelled too.
6. In the result, all the three appeals are allowed, giving a relief of Rs. 133,81,00,000/ -, Rs. 140,58,00,000/ - and Rs. 152,63,00,000/ - respectively for the assessment years 2000 -01, 2001 -02 and 2003 -04."