THE COMMISSIONER OF INCOME TAX V. M/S. KARNATAKA POWER CORPORATION LTD.,

ITA/404/2014

AI Insights

The case involves the Revenue's appeal against the decisions of the Income Tax Appellate Tribunal concerning the treatment of funds received by Karnataka Power Corporation Ltd (KPCL) from the Exchange Risk Administration Fund (ERAF) and a guarantee commission. The Tribunal had previously ruled that the funds from ERAF, which were treated as liabilities or advances and later converted into government equity, should not be considered income for tax purposes. Furthermore, the Tribunal upheld the accrual basis of accounting for the guarantee commission, allowing the expense even though it was not paid. The High Court's decision affirmed the Tribunal's findings, dismissing the Revenue's appeals.

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 728853 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 13-07-2015
• Assessment Year: misc
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: R B KRISHNA
• Assessee Lawyers: K V ARAVIND
• Keywords: Accrual basis accounting; Assessment Year; Assets transfer; Equity Conversion; Income Tax; Power generation; Public sector undertaking; Corporatisation; Income Treatment
• Section: 260-A

Judgement Text

" IN THE HIGH COURT OF KARNATAKA AT BENGALURU Dated this the 13th day of July, 2015 Present THE HON’BLE MR JUSTICE VINEET SARAN & THE HON’BLE MR JUSTICE ARAVIND KUMAR Income Tax Appeals 404 & 405 / 2014 Between 1 Commissioner of Income Tax C R Building, Queens Road Bangalore 2 Deputy Commissioner of Income Tax Circle 11 (5), Rashtrothana Bhavan Nrupathunga Road, Bangalore Appellants (By Sri K V Aravind, Adv.) And M/s Karnataka Power Corporation Ltd (Formerly Visvesvaraya Vidyuth Nigama Ltd) Shakthi Bhavan, # 82, Race Course Road Bangalore Respondent (By Dr R B Krishna, Adv.) Appeals are filed under S.260 A of the Income Tax Act, 1961 praying to set aside the orders passed by the ITAT in ITA 1514 & 1513/Bang/2012 on 11.4.2014 confirming the order of the Appellate Commissioner and confirm the order passed by Deputy Commissioner of Income Tax, Circle 11 (5), Bangalore. ® 2 Appeals coming on for Admission this day, Vineet Saran J, delivered the following: JUDGMENT The Revenue has filed these two appeals challenging the order of the Income Tax Appellate Tribunal dated 11.4.2014 passed in ITAs 1514 & 1513 /Bang/ 2012. ITA 404/2014 relates to assessment year 2004-05 and ITA 405/2014 relates to assessment year 2003-04. The brief facts of this case are that the respondent assessee Karnataka Power Corporation Ltd (KPCL) is a public sector undertaking owned by the Government of Karnataka and is engaged in the business of power generation which was formed after the corporatisation of the erstwhile Karnataka Electricity Board (KEB) vide Government Order dated 30.3.2000. When the KEB was corporatised, it ceased to exist and its assets and liabilities were vested with the State Government. It is also an admitted fact that by a subsequent order dated 31.3.2001, certain assets of KEB got vested with the assessee (KPCL) as were notified in the said Government Order. It is noteworthy that while a large number of assets were transferred to the assessee KPCL but the said Government Order did not mention about the transfer of Exchange Risk Administration Fund (ERAF) to the assessee KPCL and as such, ERAF 3 did not get vested with the assessee and continued to be with the Government. It is this ERAF which is matter of dispute in the present appeals. For the assessment year 2003-04, the assessee had received a sum of Rs.23 crores from the ERAF, which fund, undisputedly remained with the State Government after the assets of KEB were transferred to the State Government. The Assessing Officer, while passing the assessment order dated 28.3.2006, treated the said amount of Rs.23 crores as income of the assessee on the ground that at the time when the investment was made by KEB in the said ERAF, it was treated as an expenditure of the KEB. The Appellate Commissioner vide his order dated 30.8.2012, had set aside the addition of Rs.23 crores made by the Assessing Officer on the ground that the said amount was not transferred to the said assessee and hence the same could not be treated as income of the assessee. Challenging the order of the Commissioner of Income Tax, Revenue filed an appeal before the Tribunal which has been dismissed by a detailed, reasoned order on 11.4.2014 holding that, treating the amount received from ERAF to be income of the assessee would be inconsistent with the actual facts and circumstances of the case primarily on the ground that the amount was treated as an advance or a 4 liability of the assessee and then subsequently, by Government Order dated 15.3.2011, the same was converted into Government equity. The Tribunal further held that the liability continued to exist in the assessment year under consideration and as such, the amount could not be treated as income of the assessee. For the assessment year 2004-05, the assessee received a sum of Rs.32.9 crores from the ERAF which was treated by the Assessing Officer as income. The appellate Commissioner reversed the finding of the Assessing Officer and the appeal filed by the Revenue was dismissed by the Tribunal by a common order for both the years. Besides this question, for the said assessment year 2004-05, a further sum of Rs.41,35,275/- was added to the income of the respondent assessee which was an amount accrued to be paid to the government as guarantee commission under a contract but the same was not actually paid. Challenging the common order of the Tribunal for the two assessment years, these appeals have been filed. We have heard Sri K V Aravind, learned counsel for the appellants as well as Dr R B Krishna, learned counsel for the respondent assessee in both the appeals and perused the records. 5 After the transfer of assets of KEB vide Government Order dated 30.3.2000, all the assets including the ERAF stood transferred to the State Government. By a subsequent Government Order dated 31.3.2001, certain assets of KEB were transferred by the State Government to the assessee KPCL Such being the factual position, the payment made by the State Government out of the ERAF could not but be treated as a liability and was also shown in the accounts of the assessee as liability or advance from the State Government, till it was converted into equity of the State Government vide Government Order dated 15.3.2011. In such factual situation, the order of the Assessing Officer treating the amounts paid to the assessee for the two assessment years as income of the assessee could not be justified in law and the Appellate Commissioner as well as the Tribunal have rightly disallowed the same as income of the assessee KPCL. As regards the guarantee commission of Rs.41,31,275/- having been allowed as expenditure though not paid by the assessee to the State Government, it may only be mentioned that as the assessee had maintained its account on accrual basis, the expenses can be claimed irrespective of whether it was paid or not. The amount accrued to be paid by the assessee under the terms of the contract is not in question. 6 As such, since the assessee was maintaining the accounts on accrual basis such expenditure has rightly been allowed. In view of the aforesaid discussion, we are of the opinion that no substantial question of law arises in these appeals for determination by this Court. Appeals are accordingly, dismissed. Sd/- Judge Sd/- Judge An "