Assistant Commissioner of Income Tax Circle 2(1), Jabalpur V. Madhya Pradesh Power Managment Co.Ltd., Jabalpur

ITA 39/JAB/2017

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 5560 (ITAT-JABALPUR)
• Duration Of Justice: 4 year(s) 9 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-06-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2011-2012
• Appeal Filed On: 07-09-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Onus to prove
• Section: 43B; 143(3); 37(1); 73

Judgement Text

1 | P a g e IN THE INCOME TAX APPELLATE TRIBUNAL JABALPUR BENCH, JABALPUR (through web-based video conferencing platform) BEFORE SHRI SANJAY ARORA, HON‟BLE ACCOUNTANT MEMBER & SHRI MANOMOHAN DAS, HON'BLE JUDICIAL MEMBER I.T.A. No. 36/JAB/2017 (Asst. Year: 2011-12) I.T.A. No. 39/JAB/2017 (Asst. Year: 2011-12) Assessee by : Shri Sukesh Kumar, FCA Revenue by : Shri Shravan Kumar Gotra, CIT-DR Date of hearing : 02/06/2022 Date of pronouncement : 17/06/2022 O R D E R Per Bench These are cross appeals by the Assessee and the Revenue directed against the order by the Commissioner of Income Tax (Appeals)-2, Jabalpur („CIT(A)‟ for short) dated 19/6/2017, partly allowing the assessee‟s appeal contesting it‟s assessment under section 143(3) of the Income Tax Act, 1961 („the Act‟ hereinafter) dated 20/12/2016 for assessment year (AY) 2011-12. MP Power Management Co. Ltd., Block No.14, Shakti Bhawan, Vidyut Nagar, Rampur, Jabalpur [PAN : AAECM 7649 C] vs. Asst. CIT, Circle-2(1), Jabalpur. (Appellant) (Respondent) Asst. CIT, Circle-2(1), Jabalpur. vs. MP Power Management Co. Ltd., Block No.14, Shakti Bhawan, Vidyut Nagar, Rampur, Jabalpur [PAN : AAECM 7649 C] (Appellant) (Respondent) ITA Nos. 36 & 39/JAB/2017 (A.Y. 2011-12) MP Power Management Co. Ltd. 2 | P a g e 2. The Appeals raise two issues, which we shall take up in seriatim. The assessee, a power trading company, sources power from power generating companies, also public sector companies, for supply primarily to power distribution companies (DISCOMs), again public sector companies. It entered into a power sale agreement (PSA) for sale of power on 28/04/2010 with Lanco Power Trading Ltd. (LANCO) (now National Energy Trading and Services Ltd.), agreeing to sell 150 kwh of power each month from May, 2010 to March 2011, save for the month of January, 2011. As per clause-2(f) of the said agreement (PB pgs. 4-11), a failure on the part of the purchasing company (LANCO) to schedule at least 80% of the agreed power purchase would make it liable for compensation to the assessee @ Rs. 2 per kwh (of short supply). On account of shortfall in sourcing power during the period of the agreement, the assessee company raised a compensation for Rs. 86.56 crores on the buyer-company in terms of clause-2(f) of the agreement. The same was disputed by the latter, even as the assessee-company appropriated Rs. 5 cr. by realising a letter of credit (LC) opened by LANCO in it‟s favour for that amount. The assessee admitting the income of Rs. 5 cr. for the relevant year, i.e., AY 2011-12, the issue arose as to the accrual of income, if any, qua the balance, unrealized claim of Rs. 81.56 cr. The AO regarded the same as the assessee‟s income for the current year, at Rs. 72.50 cr. This, as explained by Sh. Kumar, the ld. counsel for the assessee, during hearing, was as the dispute had attained resolution through an award by the Madhya Pradesh Electricity Regulatory Commission (MPERC), which vide its order dated 31/12/2013 arrived at a total compensation of Rs. 14.06 cr., which had accordingly been disclosed as income at Rs. 5 cr. and Rs. 9.06 cr. for AY 2011-12 and AY 2014-15 respectively. In appeal, the ld. CIT(A) allowed relief for Rs. 63.44 cr. by deducting Rs. 9.06 cr. on the ground that the amount in excess of Rs. 14.06 cr. (of which Rs. 5 cr. stood already added suo motu by the assessee) could not be regarded as accrued. Reliance was placed by him on the decision in CIT vs. Chunilal V. Mehta & Sons P. Ltd. [1971] 82 ITR 54 (SC). Aggrieved, both the assessee and the Revenue are ITA Nos. 36 & 39/JAB/2017 (A.Y. 2011-12) MP Power Management Co. Ltd. 3 | P a g e in appeal, i.e., for Rs. 9.06 cr. (confirmed for addition) and Rs. 72.50 cr. (deleted in appeal) respectively, raising the following grounds of appeal: The Assessee: “1. That ld. CIT(A) is not justified to maintain an addition of Rs. 9.06 crores being the amount already realized and shown as income in the FY 2013-14 as per arbitration award. 2. That ld. CIT(A) is not justified to maintain the addition of Rs. 1,09,42,819/- being the amount outstanding as on the close of the year whereas the amount was already added back in earlier years.” The Revenue: “1. The ld. CIT(A) has erred in law in not appreciating the impact of para 9.3 of Accounting Standard 9 revenue recognition of Rs. 82.55 cr. (*) while deleting the addition of Rs. 63,44,00,000/-. 2. That the appellant reserves the right to amend/alter any of the grounds of appeal/add other grounds of appeal at the time of hearing.” (*) the correct figure works to rs. 81.55 cr. 3. Before us, the assessee would rely on the Accounting Standard (AS) 9 qua the recognition of income. The same clearly provides for an uncertainty as to ultimate realisation, on account of prudence, a fundamental accounting assumption, as an impediment to accrual of income, which is to be dovetailed to the concept of real income, as explained in Godra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746 (SC); UCO Bank v. CIT [1999] 237 ITR 889 (SC); United Commercial Bank v. CIT [1999] 240 ITR 355 (SC), among others. The Revenue‟s stand, on the other hand, is that subsequent events cannot alter the accrual of income, which takes place or arises at an anterior point of time. The right to receive Rs. 86.56 cr. arose to the assessee-company under clause-2(f) of the agreement, binding on the parties, due to the shortfall in scheduling power as per the terms of the agreement. The purchaser company‟s denial of the assessee‟s valid claim would not alter the assessee‟s right to receive the same, being only in terms of the agreement. Further, the subsequent resolution of the dispute through an ITA Nos. 36 & 39/JAB/2017 (A.Y. 2011-12) MP Power Management Co. Ltd. 4 | P a g e arbitral award, and it‟s acceptance by both the parties, was irrelevant, and would only entitle the assessee to claim the difference as loss on account of a bad debt. This sums up the case of either side before us. 4. We have heard the parties, and perused the material on record. 4.1 The Revenue‟s entire case is that once the assessee is regularly raising bills (for sale of power) to LANCO and, further, despite it not sourcing power to the requisite extent, the compensation in terms of the agreement stands accrued; the assessee-company having in fact incurred corresponding expenditure on procurement of power (which cannot be stored). That being so, the AO ought to have added Rs. 81.56 cr., and not Rs. 72.50 cr. There is no finding by him of the assessee having disclosed Rs. 9.06 cr. for AY 2014-15, or even if the addition for the current year was being reduced for that reason. This, rather, would be contrary to his stand that the recognition of income is to be on the basis of accrual, and not on receipt. As we observe, he does so on the understanding, on the basis of the assessee‟s written submissions dated 03/11/2016 & 21/11/2016 before him, that the assessee, following AS-9, has accounted for Rs. 14.06 cr. (sub-para 2, pg. 4 of the assessment order), while the truth of the matter is that only Rs. 5.00 cr. has been accounted by the assessee for the current year on receipt basis. 4.2 In our considered view, the reliance on AS-9 by the assessee is, in the given facts and circumstances, misplaced. True, an uncertainty as to realisation would preclude recognition of income inasmuch as conservatism and prudence are fundamental accounting concepts, so that income, where and to the extent uncertain as to its realization, cannot be said to have accrued. The reason for non- admission of the assessee‟s claim (for Rs. 86.56 cr.) by Rs. 81.56 cr. by the buyer, is not shown to be for want of funds or any disinclination on it‟s part to pay the assessee it‟s just dues. Even the assessee has not preferred a recovery suit, and it is doubtful if MPERC has power of attachment or otherwise to execute it‟s award. The only reason, as we gather, is that it considered the assessee‟s claim as not in ITA Nos. 36 & 39/JAB/2017 (A.Y. 2011-12) MP Power Management Co. Ltd. 5 | P a g e terms of the contract and, in any case, unreasonable and exaggerated. The assessee had no surplus power (which in terms of the PSA had to be reckoned on the basis of the power available from Kawas and Gandhar power stations) (pg. 13, para 21 (c) of the award) for certain months, so that there was no question of it being compensated for non-scheduling of power for those months. Then, again, the assessee did not exhibit loss thereto (due to non off-take of power) for other months, in absence of which no claim for compensation or damages, liquidated or un-liquidated, could be entertained. In fact, it raised a specific claim (per it‟s written submissions before the MPERC), recorded at pg. 17 of the Commission‟s order, that the actual loss to the assessee-company due to non off-take of power could be readily worked out on the basis of the materials available, a proposition not disputed before it. Now, could a company which itself urges the Commission to work out the assessee’s loss, be regarded as shying away from it’s obligations under the contract? It had in fact requested the assessee-company to modify the provision of compensation to the total contracted period instead of on monthly basis, and the same had been acceded to by it (pg.10, para 19(b) of it‟s order). 4.3 It is these factors which, as a reading of it‟s detailed order (at PB pgs.15-39) shows, prevailed with MPERC, leading it to calculate the loss to the assessee. With reference to the decisions by the Apex Court in Fateh Chand vs. Balkishan Dass, AIR 1963 SC 1405 and Union of India vs. Raman Iron Foundry, AIR 1974 SC 1265, expounding sections 73 & 74 of the Indian Contract Act, it was explained that the jurisdiction of a Court to award compensation for damages is unqualified except as to the maximum amount stipulated. The same though has to be reasonable. Where the quantum of damages for the breach of contract is specified in the contract itself, the same only dispenses with the proof of actual loss or damage. It would not be just to award compensation where no legal injury had at all resulted. Further, in Maula Bux vs. UoI [1970] 1 SCR 928, the Hon'ble Court observed that when loss in terms of money can be determined, the party claiming ITA Nos. 36 & 39/JAB/2017 (A.Y. 2011-12) MP Power Management Co. Ltd. 6 | P a g e compensation must prove the loss suffered by him. The Commission went on to further observe that in the instant case the actual loss suffered by the assessee can be calculated easily (pg. 14, para 21(j)). It then proceeded to award the compensation on the basis of the materials before it; it‟s working thereof forming part of it‟s order (pg. 24, under Issue 3 (e)). The assessee‟s claim over and above Rs. 14.06 cr. was, in it‟s view, wholly unjustified. How, then, can the same be regarded as accrued, i.e., merely because the assessee has raised a claim in its respect? It is this that had led us to state in the earlier part of this order that it is not a case of un-realize-ability of a debt and, thus, income, but of its reasonability and, thus, as explained by the Apex Court, accrual, which signifies the right to receive, itself. Though the date of receipt of Rs. 9.06 cr. is not on record, nor could be stated by Shri Kumar, it was confirmed by him to have been paid soon after the award in December, 2013. 4.4 Income to the extent of Rs. 14.06 cr., thus, arose to the assessee for the relevant year, even though the same was quantified and received later. The materials before the Court, on the basis of which it worked out the compensation, were supplied by the parties themselves and relate to facts which were not in dispute and, further, pertain to the relevant year. As regards the amount in excess of Rs. 14.06 cr., i.e., Rs. 72.50 cr., there is no question of accrual thereof for any year, and the question of claim of bad debt in its respect therefore does not arise. This in fact was precisely the issue before the Apex Court in Chunilal V. Mehta & Sons (supra). The assessee claimed damages for unlawful termination of it‟s managing agency at Rs. 28 lacs, which was later determined at Rs. 2.34 lacs, so that the question of accrual, as well as of its year and, thus, the year of taxability, arose. It was clarified therein that the damages in the sum of Rs. 2.34 lacs became due to the assessee in April, 1951, i.e., at the time of termination of agency itself, and not on its receipt in December, 1955 on the settlement of the dispute. The fact that the assessee claimed an exorbitant sum (Rs. 28 lacs), to which it was not ITA Nos. 36 & 39/JAB/2017 (A.Y. 2011-12) MP Power Management Co. Ltd. 7 | P a g e entitled, would not convert it‟s right (which was limited to Rs. 2.34 lacs) into a contingent right. 4.5 It is not the case that the assessee had made a reasonable estimate of its loss (actual), and limited its claim of accrual to that extent, in which case the variance, if any, on actual award, would stand to be adjusted there-upon, i.e., December, 2013 (fy 2013-14). The fact of the assessee having, as claimed, disclosed this income (Rs. 9.06 cr.) for AY 2014-15, would be of little moment considering that it follows mercantile system of accounting, so that the basis of recognition of income is accrual, and not receipt, of income. It is trite law that income is to be brought to tax in the hands of the right person and for the right year (refer ss. 4 & 5 r/w ss. 28 & 145 of the Act; ITO v. Ch. Atchaiah [1996] 218 ITR 239 (SC); CIT v. British Paints India Ltd. [1991] 188 ITR 44 (SC)). This plea, it may be noted, was also taken in Chunilal V. Mehta & Sons P. Ltd. (supra), though found by the Hon'ble Court to be not relevant, i.e., the fact that the assessee had included on receipt in its profit & loss account for the year 1955 was a wholly immaterial circumstance. Inasmuch as, however, there can be no double tax, so that the income of Rs. 9.06 cr. ought to have been, where so, assessed protectively by the Revenue for that year, the assessee is at liberty to take steps as permissible under law for the adjustment of it‟s income for that year on the basis of the finding for this year. 4.6 The assessee has relied, besides Godra Electricity Co. Ltd. (supra), on the decision in FGP Ltd. vs. CIT [2010] 326 ITR 444 (Bom). We, therefore, meet this reliance, also recapitulating our findings. In FGP Ltd. (supra), following Godra Electricity Co. Ltd. (supra), the Hon'ble Court has held that the amount receivable by the assessee under an agreement, where disputed, cannot be said to have accrued. We have reiterated that to be the guiding principle; in fact even without AS-9, which articulates the fundamental accounting assumption of conservatism and prudence. The decision in each case though would depend on the facts of the ITA Nos. 36 & 39/JAB/2017 (A.Y. 2011-12) MP Power Management Co. Ltd. 8 | P a g e case. On facts, it has been found that the amount disputed was not that due under the PSA, which is to be read in light of the law on compensation as settled by the Hon'ble Apex Court, but only that in excess thereof. The entitlement to compensation is subject to the loss being proved, and the stipulation of Rs. 2 per kwh represents the maximum amount up to which the compensation could be claimed. The Commission had worked out the compensation on the basis of the actual loss suffered by the assessee on the facts (materials) supplied thereto, at Rs. 14.06 cr., and qua which, having been readily paid, there is no dispute. It is only the amount in excess thereof that could therefore be regarded as disputed. We have already noted that it is not the case that the assessee had made a fair, honest estimate of it‟s loss, so that it is only the difference, plus or minus, that would require to be claimed set-off of or offered as income on award of compensation. That is, the assessee invokes AS-9 without following the accounting precepts, making a reasonable accounting estimate in the light of the facts of the case and the law in the matter. The matter thus reduces to one of reasonableness subject to the terms of the agreement, being the guiding criteria. It is only where so that it can be said that, applying AS-9, any amount beyond this sum cannot, despite its claim, be regarded as arisen to the assessee, being uncertain as to its realisation, de hors which it becomes a bald claim. We have on facts found that to be the grievance or cause of objection of the buyer-company. Though it may appear that the decision by the first appellate authority, which stands confirmed by us, has been due to the availability of the award, it is not so. The award only provides a ready figure of a reasonable compensation and, thus, adopted as a surrogate measure therefor, which would otherwise need to be worked out, and toward which we may suggest a formula based on PSA itself. The loss awarded by the Commission is on 109.74 MU (million units), which were agreed to be sold at Rs. 5/5.50 per unit. The profit (loss) as per the P&L A/c, assuming the sale of excess power at that rate, as against that obtaining, would easily yield the extent of the loss suffered by the assessee, which, where in excess of Rs. 2 per kwh (Rs. 21.89 cr.), is to be capped at that ITA Nos. 36 & 39/JAB/2017 (A.Y. 2011-12) MP Power Management Co. Ltd. 9 | P a g e sum. The assessee made an exorbitant claim, which led to its non-acceptance. It is for this reason that we have found the facts of the case and, therefore, the issue at hand, as squarely covered by Chunilal V. Mehta & Sons P. Ltd. (supra), with reference to which, as indeed the order of MPERC read with PSA, the parties were required to address their arguments during hearing, though chose to do so de hors the same. There is no mention of the nature and extent of the dispute in FGP Ltd. (supra), in which case the Hon'ble Court did not have the benefit of the arbitral award, available in the instant case even before the AO. The matter of accrual, pertain as it does to the accrual of a right to income, is necessarily to be defined in terms of money value, de hors which it carries no meaning. It is, for instance, nobody‟s case that there is no accrual of a right to the assessee to any sum on the non-scheduling of agreed power by LANCO. Also, the same, to the extent it does, is only for the current year, and not denied by the said buyer. 4.7 We, accordingly, find no reason for any interference with the order of the ld. CIT(A), who has, following Chunilal V. Mehta & Sons P. Ltd. (supra), unfortunately not relied upon by either party before us, held the accrual of income only at Rs. 14.06 cr. and, further, for AY 2011-12. We decide accordingly. 5. The second issue which arises in the assessee‟s appeal, is in respect of Rs. 1,30,89,458, being the provision for terminal benefits to it‟s employees, made by the assessee for the relevant year, disallowed for want of production of payment vouchers, claimed to be at Rs. 130 crores on 31/03/2011. The ld. CIT(A), in appeal, allowed the assessee‟s claim inasmuch as the provision account reflected a closing (as on 31/03/2011) balance at Rs.1,09,42,819, so that the difference of Rs. 21,46,639 (Rs. 1,30,89,458 – Rs. 1,09,42,819) only was liable for deduction. 6. We have heard the parties, and perused the material on record. 6.1 The provision for terminal benefit account reads as under: (PB pg. 45) ITA Nos. 36 & 39/JAB/2017 (A.Y. 2011-12) MP Power Management Co. Ltd. 10 | P a g e Date Particulars (Amount in Rs.) Debit Credit 01/04/2010 By opening balance 2,18,82,715 (1) 31/03/2011 To bank 1,30,00,000 31/03/2011 By contribution for terminal benefits @20% 1,30,89,459 31/03/2011 To terminal benefits for fy 2010-11 1,10,29,355 (2) 31/03/2011 To balance carry forward 1,09,42,819 Total 3,49,72,174 3,49,72,174 (1) this consists of two entries, i.e., for Rs. 1,14,20,078/- and Rs. 1,04,62,637/- being as stated, for GO (officers) and NGO (others) respectively. (2) on enquiry, it was explained by Shri Kumar, that it is only the transfer (debit entry) which stands recorded on 31/03/2011, while the payment to that extent had in fact been made on different dates during the relevant year itself, producing the ledger accounts of the relevant payments, being qua leave encashment; commuted pension; death-cum-retirement gratuity (DCRB); pension; and settlement allowance (copy on record). 6.2 It is, therefore, incorrect to say that the amount of Rs. 130 cr. is in respect of provision made during the year, which (i.e., provision for the year) only could be added u/s. 43B. The said payment is in respect of the opening provision (Rs. 218.83 lacs), of which Rs. 165.75 lacs, being in respect of AY 2009-10 (Rs. 63,37,359) and Rs. 1,02,37,178 (AY 2010-11), has been disallowed suo motu by the assessee for those years (PB pgs. 48-53), even as noted in the assessment order itself (para3). Thus, against a total provision of Rs. 349.72 lacs, Rs. 296.64 lacs (i.e., Rs. 165.75 lacs + Rs. 130.89 lacs) stands disallowed, even as the assessee has paid Rs. 240.29 lacs. Now if this is not travesty of justice, what is? Rather, for all we know, some part of the balance provision for the current year, i.e., Rs. 20.60 lacs (Rs.130.89 lacs – Rs. 110.29 lacs), may have been paid by the due date of filing of the return for current year u/s. 139(1), in which case the same also qualifies for deduction u/s. 37(1) r/w s. 43B. The order of the ld. CIT(A), who has allowed the assessee a relief of Rs. 21.47 lacs is, thus, on the face of it, incorrect. ITA Nos. 36 & 39/JAB/2017 (A.Y. 2011-12) MP Power Management Co. Ltd. 11 | P a g e He, in doing so, allows the assessee credit for Rs. 130 cr. paid on 31/03/2011, even as he specifically notes (at para 6.2.3 (iii)/pg. 26) that the assessee did not file any confirmation for payment of Rs.130 cr. from the M.P. Terminal Benefit Trust during appellate proceedings. Rather, his order is wholly inconsistent with and without regard to that by the AO, the basis of disallowance by whom is the non- production of payment vouchers by the assessee before him, which finding or infirmity therefore survives the impugned order. 6.3 Our next observation is that in view of the suo motu disallowance by the assessee, as explained, on account of s.43B, there has been no examination of the deductibility of the same as there was no occasion to do so. The deduction u/s. 43B is only in respect of sums otherwise allowable. As such, the payment during the year (for Rs. 130 cr.), removing the bar of s. 43B, also becomes the occasion to examine the same to the extent disallowed earlier. Subject, therefore, to the satisfaction of the condition for deduction, viz. sec. 40A(7) for gratuity; actuarial valuation (or otherwise, scientific, empirical validation) for gratuity, leave salary; payment to an approved fund (or the concerned employee), etc., deduction shall be allowed to the assessee for the current year u/s. 37(1) r/w s. 43B. This deduction follows the disallowance u/s. 43B for Rs. 130.89 cr., which cannot be faulted with. The assessee shall accordingly provide the complete break-up of the opening provision of Rs. 165.75 lacs (i.e., to the extent disallowed for earlier years), as well as of Rs. 130.89 cr. (for the current year), i.e., Rs. 296.64 cr., in terms of the following: a) year b) nature (viz. pension, commuted pension, gratuity, SD, leave pay, etc.) c) status (i.e. whether allowed in the year of provision or not) i.e. disallowed and the extent thereof. It shall also specify and exhibit the payment/s made against each provision, as also if the same is to an approved fund. It is only when armed with this information, which he is at liberty to verify, that the AO could allow the assessee‟s claim in ITA Nos. 36 & 39/JAB/2017 (A.Y. 2011-12) MP Power Management Co. Ltd. 12 | P a g e respect of payment of Rs. 240.29 lacs (Rs. 130 cr. + Rs. 110.29 cr.) made during the current year, as indeed that qua the current year provision made in the following year, i.e., up to the due date of filing the return of income u/s. 139(1). And which we, vacating the finding/s by the ld. CIT(A), subject to his satisfaction, direct the AO to and, further, to record his dissatisfaction, if any, per a speaking order, to the extent the said deduction is not allowed by him. The burden to prove it‟s claims shall be on the assessee, for which the AO shall allow it no more than a reasonable time. 6.4 We decide accordingly. 7. In the result, the assessee‟s appeal is partly allowed and the Revenue‟s appeal is dismissed. Order pronounced in open Court on June 17, 2022 Sd/- Sd/- (Manomohan Das) (Sanjay Arora) Judicial Member Accountant Member Dated: 17/06/2022 vr/- Copy to: 1. The Assessee: MP Power Management Co. Ltd., Block No.14, Shakti Bhawan, Vidyut Nagar, Rampur, Jabalpur (MP) 2. The Revenue: Ass t. CI T, Circle-2(1) , Jabalpur. 3. The Principal CI T-2, Jabalpur (MP) 4. The CI T( Appeals)-2, Jabalpur. 5. The CI T-D.R., I TAT, Jabalpur 6. Guard File