ACIT, Circle-18(2), New Delhi V. NTPC Vidyut Vyapar Nigam Ltd., New Delhi

ITA 5744/DEL/2019

AI Insights

The case involves appeals by both the Assessee, NTPC Vidyut Vyapar Nigam Ltd., and the Revenue concerning the assessment years 2013-14 and 2015-16. The primary issues revolved around the treatment of amounts received from encashed bank guarantees and related interest, and the deductibility of expenses related to superannuation benefits and corporate social responsibility (CSR). The Assessing Officer (AO) had added these amounts to the Assessee's income, treating them as income and disallowed certain expenses as prior period expenses or non-business related. The CIT(A) upheld some of these decisions, which were contested in the ITAT. The ITAT, after considering the directives from the Ministry and the nature of the Assessee's business, reversed the CIT(A)'s decision on the bank guarantee amounts and interest, and upheld the CSR expenses as business-related.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 113810 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 11 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-05-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 16-04-2023
• Assessment Year: 2015-2016
• Appeal Filed On: 30-06-2019
• Other Referred Cases: M/s. HLL Life Care limited vs. ACIT, CIT vs. Delhi Safe Deposit Go. Ltd., Saurashtra Cement and Chemical Industries Ltd Versus CIT, Travancore Titanium Products Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business expenditure; Difference of opinion; Valuation report; Change of opinion
• Section: 37; 143(3); 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH ‘E’ : NEW DELHI) BEFORE SH. N.K.BILLAIYA, ACCOUNTANT MEMBER AND SH.ANUBHAV SHARMA, JUDICIAL MEMBER ITA No. 5578/Del/2019, A.Y. 2013-14 M/s. NTPC Vidyut Vyapar Nigam Ltd. Core-7, Scope Complex 7, Institutional Area Lodi Road, New Delhi-110003 PAN : AABCN7433J Vs. ACIT, Circle 18(2), New Delhi Appellant Respondent ITA No. 5743/Del/2019, A.Y. 2013-14 ITA No. 5744/Del/2019, A.Y. 2015-16 ACIT, Circle 18(2), New Delhi Vs. M/s. NTPC Vidyut Vyapar Nigam Ltd. Core-7, Scope Complex 7, Institutional Area Lodi Road, New Delhi-110003 PAN : AABCN7433J Appellant Respondent Appellant by Sh. Ved Jain, Adv. Ms. Supriya, CA Respondent by Ms. Sarita Kumari, CIT-DR Date of hearing: 17.04.2023 Date of Pronouncement: 31.05.2023 ORDER Per Anubhav Sharma, JM : The appeal has been preferred by the Assessee and Revenue for AY 2013-14 and appeal is preferred for AY 2015-16 by Revenue. The same arise 2 ITA no. 5578 & Ors. NTPC Vidyut Vyapar Nigam Ltd. 2 out of the separate orders dated 23.04.2019 for these AYs, passed by CIT(A)-6, New Delhi (hereinafter referred as Ld. First Appellate Authority or in short Ld. ‘FAA’) arising out of appeals before it against the order dated 26.12.2016 & 23/12/2017 respectively passed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) by the ACIT, Circle-18(2), New Delhi (hereinafter referred as the Ld. AO). The grounds of appeal for of AY 2015-16 is covered in appeal for AY 2013-14, so facts of AY 2013-14 are taken up for discussion on merits. 2. The return of the assessee company for AY 2013-14, was filed declaring total income at nil and current losses to be carried forward. During the scrutiny assessment proceedings it was observed by the Ld. AO from the P & L account and note No. 7 pertaining to other current liabilities that the assessee had reduced an amount of Rs. 1,15,82,16,659/- under the head exceptional items and an amount of Rs. 1,37,80,38,503/- was shown as liabilities as on 31/03/2013. It was also observed that an amount of Rs. 13,95,00,000/- was received as liquidated damages which was not credited to the P & L account. The assessee was asked to explain as to why Rs. 115,82,16,659/- of the encashed bank guarantee amount including interest on it up to financial year 2011-12 and interest of Rs. 8,40,70,447/- on the investment of the bank guarantee amount for the financial year 2012-13 should not be treated as income. In response it was submitted that that the assessee had been appointed as nodal agency for Jawaharlal Nehru National Solar Mission (JNNSM) of India by a Presidential directive by the Ministry of Power, Government of India and under the said Mission, it had entered into Power Purchase Agreements with Solar Power Developers (SPDs). It was also submitted that under the directions of Ministry of New and Renewable Energy (MNRE), assessee entered a clause of encashment of bank guarantee if the project is not completed by SPDs within the time allowed. The said clause was entered to effectively meet the deadlines 3 ITA no. 5578 & Ors. NTPC Vidyut Vyapar Nigam Ltd. 3 of the Solar Power Mission of India. Accordingly, during the year under consideration and during the preceding previous year i.e. AY 2011-12 2012-13, & 2013-14, assessee encashed some of the bank guarantees wherever there was delay in completion of project. For the FY 2010-11 and 2011-12, Rs. 7,65,65,000/- and Rs. 107,15,75,000/- respectively had been encashed and had been offered to tax. However, by letter dated 29/06/2012, the ministry directed the assessee to keep the money realised through encashment of bank guarantees in maximum interest-bearing accounts and clarified that the money is not to be treated as income of the assessee. The assessee represented to the ministry that the income belongs to the assessee as the assessee was a party to the contract but the ministry vide further communication dated 26/12/2012 maintained the standard allowed only specified expenses like solar litigation expenses and payment to SPDs in case of default from discoms, is to be charged from the bank guarantee fund. Hence, the assessee reversed an amount of Rs. 115,82,16,659/- realised through bank guarantees of the SPDs and interest earned thereon received up to 31/03/2012 under the head exceptional item and an interest of Rs. 8,40,70,447/- earned on the bank guarantee fund during the financial year 2012-13 was accrued to the bank guarantee fund during the financial year 2012-13. It was also submitted that since the money belonged to the Ministry of New and Renewable Energy, Government of India and not the assessee and the assessee being nodal agency for implementing the National Solar Mission is only acting as the manager of the bank guarantee fund and not an owner of the amount received after encashment. 2.1 The reply of the assessee was considered but was not found to be acceptable by the Ld. AO and he observed that that the assessee had entered into Power Purchase Agreements with the Solar Power Developers and since the contracts were made by the assessee, who itself forfeited bank guarantee and offered it to income in the previous years. Ld. AO also held that the assessee 4 ITA no. 5578 & Ors. NTPC Vidyut Vyapar Nigam Ltd. 4 was rightly booking the income from forfeiture of bank guarantees in relation to such projects since the income was accruing to the assessee company and not to any other entity. Ld. AO noted that the shift in the policy and cessation of declaring the income arising from the forfeiture of bank guarantees was triggered by the letter of the Ministry containing the directions that such income was not to be considered as income of the assessee company. He further noted that no accounting taxing event happened to necessitate such change and it was a mere change of opinion on the part of the superior of the assessee company be binding on the assessee by reasons of hierarchy. Hence, the amount of Rs. 138,17,87,106/- (reversal amount +current year undisclosed amount+ interest income) was added to the income of the assessee. 2.2 Further, by note sheet entry dated 21/12/2016 the Ld. AO asked the assessee to explain why Rs. 1.34 crores under employee benefit expenses towards superannuation benefits pertaining to earlier years, i.e., 01/01/2007 to 31/03/2012 be not disallowed as being prior period expense. It was submitted that a government audit was conducted and it was observed that the appellant has to follow the DPE guidelines for superannuation fund in respect of employees deputed on secondment. It was guided that the accounting for superannuation fund and other benefits should be reviewed and considering this the appellant reviewed and revised to shift from the existing method to contribution on fixed percentage basis as per DPE guidelines. Further, the said contribution was to be paid by the assessee to NTPC and - NTPC obtains actuarial valuation of report in respect of all its employees. The contention of the assessee was not found to be acceptable. The AO observed that the assessee had calculated the amount of provision on the basis of percentage which was at best an estimate and was neither scientific nor based on any act to a real valuation. It was also observed that no actuarial valuation had been attempted nor any such valuation report had been provided by the assessee. In absence of 5 ITA no. 5578 & Ors. NTPC Vidyut Vyapar Nigam Ltd. 5 any scientific basis for evaluating the quantum , of liability, the provision for impugned reliability was held to be in the nature of an unascertained liability and, therefore, inadmissible. The AO also noted that the assessee is required to maintain its books of account on mercantile basis and the stated claim of leave, superannuation and other benefits pertaining to prior period have arisen because of change in accounting policy effected during the year. It was held that prior period expenses are not admissible because the assessee is following mercantile system of accounting and the contention of the assessee that the employees were with the company on secondment basis and hence the liability crystallized for the assessee company during the year upon being intimated about such liability by the parent ’company was also found to be not acceptable. Since the liability was of prior period and the event of intimation does not alter the assessment year to which such liability pertained and hence the amount of Rs. 1,34,00,970/- was disallowed and added back to the income. 2.3 Further, the assessee was also asked to explain why the amount of Rs. 11,75,593/- spent as community development expenses be not disallowed in response it was submitted that as per the guidelines issued by the Department of Public Enterprises, Government of India every Central public sector enterprises is obligated to spend a share of its net profit for the project serving the interests of society under the concept of corporate social responsibility. Being a government enterprise, the assessee spend the amount on various projects for the interest of the society. The reply of the assessee was considered but was not found to be acceptable. It was noted that the assessee company is engaged the business of production of thermal power and as per section 37(1), for being allowable as deduction, the expenditure should have been laid out wholly and exclusively for the purpose of business. It was also noted that the nexus between the expenditure in the business in connection with which the expenditure has been incurred has to be established before the assessee becomes entitled to 6 ITA no. 5578 & Ors. NTPC Vidyut Vyapar Nigam Ltd. 6 deduction under section 37(1). Since the assessee failed to discharge the said onus, the expenditure of Rs. 11,75,593/- claimed in the P&L account was disallowed and added back to the income. 3. The Ld. CIT(A) has taken in to consideration the extracts from "Guidelines for Selection of New Grid Connected Solar Power Projects" and observed that the appellant is the nodal agency for the Solar Mission. It is also apparent that the assessee was working as per the directions of the Ministry of New and Renewable Energy in terms of the guidelines issued. Ld CIT(A) observes that the contracts were executed on the behalf of the Ministry of New and Renewable Energy. It is also noted that the guidelines also lay down the conditions under which the bank guarantees will be encashed and the damages to be paid to the appellant in view of the non-adherence to the terms of the contract. Further, it is also noted that it is the Ministry of New and Renewable Energy which has to power to issue clarifications in case of any inconsistencies. Hence, Ld. CIT(A) concluded that the assessee was only a nodal agency for the purpose of implementing the guidelines relating to Jawahar Lal Nehru solar Mission. It is further noted that vide letter dated 22/12/2009 the appellant was appointed as the nodal agency for the 1 st phase of National solar Mission by a Presidential directive. Taking into consideration the letters dated 29/06/2012 and 26/12/2012 from the Ministry, Ld. CIT(A) concluded that the assessee was directed to keep the money obtained after encashment of bank guarantees in summer interest-bearing accounts pending the decision regarding the money. Subsequently it was clarified that the fund from encashment of the bank guarantees is to be used as working capital for coverage of litigation charges and releasing payments to solar power developers towards settlement of their claims. It has also been clarified that this was subject to the condition that the assessee would recoup the funds by its receipts from DISCOMS and the total amount realised from the encashment of e bank guarantees would remain the 7 ITA no. 5578 & Ors. NTPC Vidyut Vyapar Nigam Ltd. 7 same. Thus Ld. CIT(A) concluded that that the appellant is merely a custodian of the money received from encashment of bank guarantees and can, subject to certain conditions, utilise the amounts received on encashment of bank guarantee for certain specified purposes. Hence, the assessee rightly treated the amount received on encashment of bank guarantees during the financial year as a liability along with the interest as a liability. Ld. CIT(A) found support from certain decisions of the Hon'ble Karnataka High Court and the Hon'ble Delhi High Court. Accordingly the AO was directed to delete the addition made on account of amounts received on encashment of bank guarantees during the FY 2012-13 along with interest accrued on the encashed bank guarantees for the FY 2012-13. However, the addition made on account of reversal amount realized through bank guarantees of SPDs and the interest earned thereon received till 31/03/2012 was upheld. 3.1 In regard to the expenses pertaining to superannuation benefits Ld. CIT(A) observes that it is the contention of the appellant that liability to pay the expense crystallised during the year and is not in the nature of a prior period expense. It is also the contention of the appellant that during the FY 2012-13 government audit was conducted and based on an observation as a result of the audit it has been inferred that the appellant has to follow the DPE guidelines for superannuation fund in respect of employees deputed on secondment. However, from the submissions made it is seen that the only basis on which the expense has been booked and the methodology revised is based on a communication from NTPC Ltd., whose employees are deputed on secondment with the appellant. Ld. CIT(A) concluded that the appellant has failed to demonstrate the changes made in the methodology for computation of the benefits in view of the DPE guidelines. No details regarding the period for which the methodology needed to be revised and comparatives showing expenditure booked before and after the change in the methodology have been furnished. Even otherwise also it 8 ITA no. 5578 & Ors. NTPC Vidyut Vyapar Nigam Ltd. 8 is noted that the impact of the change has also not been demonstrated along with the merit of the expense. In absence of any justification regarding the incurring of the expenditure, the issue of allowability of the same does not arise. Hence, the addition made was upheld. 4. As with regard to disallowance of Rs. of Rs. 11,75,593/- on account of expenses incurred on corporate social responsibility, the Ld. CIT(A) observes that; “4.4.2 I have considered the assessment order and the submissions of the appellant. Deduction for expenditure incurred is allowed under section 37 if the expenditure is incurred wholly and exclusively for the purpose of business of the assessee. It has been held in the case of CIT vs. Delhi Safe Deposit Go. Ltd. ((1982) 133 FIR 756 (SC)] that the true test of an expenditure laid out wholly and exclusively for the purpose of business is that it is incurred by the assessee as incidental to its trade for the purpose of keeping the trade going and of making it pay and not in any other capacity than that of a trader. In the case under consideration the appellant is engaged in the business of trading in electric power and trading of ash/fly ash related products. There seems to be no nexus in the business of the assessee with distribution of sewing machines, installation of borewells and pumps at Khalgaon, submersible pumps at VKaurali, Faridabad etc.” 4.4.3 Since there appears to be no nexus between the business of the assessee and the expenditure incurred does not appear to be in any way incidental to the business of the assessee, the same cannot be allowed as deduction. Therefore, the disallowance made is upheld. Ground of appeal No. 5 is dismissed.” 5. The department has filed two appeals raising similar grounds as reproduced below : 5743.Del.2019, A.Y. 2013-14 “1. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs. 9 ITA no. 5578 & Ors. NTPC Vidyut Vyapar Nigam Ltd. 9 137,17,87,106/- on account of retention of bank guarantee encashment ? 2. That the appellant craves leave to add, amend, alter or forgo any ground/(s) of appeal either before or at the time of hearing.” 5744.Del.2019, A.Y. 2015-16 “1. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs. 37,30,24,001/- on account of retention of bank guarantee encashment? 2. That the appellant craves leave to add, amend, alter or forgo any ground/(s) of appeal either before or at the time of hearing.” 6. The Assessee is in appeal before the Tribunal raising following grounds :- 1. “On the facts and circumstances of the case the order passed by the learned CIT(A) is bad both in the eyes of law and on facts. 2. (i) On the facts and circumstances of the case learned CIT(A) has erred both on facts and in law in confirming the addition of Rs. 115,82,16,659/-made by the AO on account of forfeiture of bank guarantee. (ii) That the above said addition has been confirmed despite the fact that the amount realized out of encase bank guarantee and the interest accrued on deposits made on this account belongs to the Ministry of New & Renewable Energy, Government of India and not to the assessee. 3. (i) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the addition of an amount of Rs.l,34,00,970/-made by AO on account of prior period expenses towards superannuation benefits. (ii) That the disallowance has been confirmed rejecting the detailed submissions and explanations given by the assessee in this regard. 4. (i) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law In confirming the disallowance of an amount of Rs.11,75,593/- made by AO on 10 ITA no. 5578 & Ors. NTPC Vidyut Vyapar Nigam Ltd. 10 account of expenses incurred on Corporate Social Responsibility. (ii) That the disallowance has been confirmed despite the expenses having been incurred wholly and exclusively for the purposes of business only. 5. That the appellant craves leave to add, amend or alter any of the grounds of appeal.” 7. Heard and perused the record. 7.1 Grounds raised in the Revenue’s appeal and ground no. 1 and 2 of the appeal of Assessee. There is no dispute to the fact that the assessee is carrying on Government of India mission working on behalf of the Government of India. The contracts have been executed under the policy in directions of Government of India. The bank guarantee was taken and encashed under the guidelines of the concerned ministry. The encashed amounts are deposited in a separate bank account as per the direction of Government of India. The directions of the Government of India through Ministry of New and Renewable Energy to not treat the amount encashed from bank guarantee as income leave no doubt that the assessee was so far making irregular treatment of the amounts of bank encashment and interest thereupon by showing the same as income of the assessee. Thus, the assessee being custodian of the Government money such money into the hands of assessee cannot be termed as income at any stage. 7.2 The Bench is of considered opinion that Ld. CIT(A) was not in error in giving the finding that appellant is merely custodian of the money received from encashment of bank guarantee and that the assessee has rightly treated the amount receive on encashment of bank guarantee during financial year as a liability along with the interest is liability. However, he failed to appreciate that the directions of the ministry being clarificatory in nature and also carrying a mandate of compliance by the assessee cannot be prospective only. The administrative directions in financial matter of Government entities have 11 ITA no. 5578 & Ors. NTPC Vidyut Vyapar Nigam Ltd. 11 to be taken to be retrospective to time to which controversy relates unless specifically directed to be prospective. Accordingly, Ld. CIT(A) erred in disallowing the reversal of amount received as bank guarantees and interest for earlier years to the extent of Rs. 1,15,82,16,659/-. Accordingly, the issue in the Revenue’s appeals are decided against the Revenue and the issue no. 1 in the appeal of assessee is decided in favour of the assessee. 7.3 Ground no. 2 in the appeal of assessee : The Bench is of the considered view that the settled provisions of law is that if any liability, though relating to the earlier year, depends upon making a demand and its acceptance by the assessee and such liability have been actually claimed and paid in the latter previous years it cannot be disallowed as deduction nearly on the basis that the accounts are maintained on mercantile basis and that it can relate to transactions of the previous years. Reliance can be placed on the judgement of Hon’ble Gujrat High Court in Saurashtra Cement and Chemical Industries Ltd Versus CIT 1994(10) TMI 30 for same. It can be observed that Ld. AO has not doubted the expenses on account of superannuation benefits and that same were revenue in nature. The orders of Ld. CIT(A) show that he found there was no justification regarding the incurring expenditure but the Ld. Tax Authorities have failed to appreciate is that based upon the Government audit objections and as per the guidelines from the Department of Public Enterprises the assessee had reviewed and revised the method of contribution on fixed percentage basis. The deposit amount was debited to the P & L account of the current year. The calculation have been placed on record at page no. 91 to 93 of the paper book as were before the Ld. Tax Authorities below. Since the change and accounting and computation is outcome of binding nature of department of Public Enterprises Guidelines, the assessee had no option but to comply and accordingly the liability is to be considered to be crystallized during the year under consideration. The binding nature of instructions on 12 ITA no. 5578 & Ors. NTPC Vidyut Vyapar Nigam Ltd. 12 assessee to make provision as per the instructions in itself is justification for making debit in the accounts, which Ld. CIT(A) failed to appreciate. Even otherwise the business of assessee is ongoing and rates of taxes have not change, thus, making disallowance revenue neutral. Accordingly, ground no. 2 in ITA No. 5578/Del/2019 is decided in favour of assessee. 8. Ground no. 3 in the appeal of assessee. It can be appreciated that the assessee is supposed to follow the guidelines of department of Public Enterprises. The CSR expenses have been incurred by the assessee voluntarily taking as responsibility under the mandate of CSR guidelines of the DPE. Ld. CIT(A) has fallen in error to apply strict principles of Act that expenditure should be wholly and exclusively for the purpose of business to the assesee which is a public enterprises. The nexus theory with the objectives of CSR expenditure qua the objectives have to be considered in case of public enterprises on different footing as they also have wider horizon of benefit of society than their objectives alone and Ld. CIT(A) has failed to appreciate same. 9. In this context, the Tribunal Cochin in the case of M/s. HLL Life Care limited vs. ACIT [ ITA No. 123/Coch/2017] is relevant wherein in para 9 and 9.5 and 9.8 it is held as follows :- “9. We have heard the rival submissions and perused the material on record. The assessee is a Government of India Undertaking, working under the Ministry of Health and Family Welfare. The Government of India had issued certain Guidelines dated 09.04.2010 to all Central Public Sector Enterprises on CSR. The Guidelines issued by the Central Government dated 09.04.2010, is placed at pages 9 to 27 of the paper book filed by the assessee. As per the Guidelines as indicated under "5. Funding", all PSUs should mandatorily spend a percentage of net profit for CSR activities. The CSR expenses that has been incurred by the assessee is based on the specific directions of the Government of India and the A.O. in the assessment order passed u/s 143(3) dated 19.03.2015 had allowed the CSR expenditure. 9.5 The CSR expenses has been incurred as per the directions of Government of India. The Hon'ble Kerala High Court in the case of Travancore Titanium Products Ltd. (supra) had held that a Government Undertaking is duty bound 13 ITA no. 5578 & Ors. NTPC Vidyut Vyapar Nigam Ltd. 13 to comply with Governmental orders. The relevant findings of the Hon'ble jurisdictional High Court reads as follows :- "Being a company under the control of the Government, it is bound to comply with all the Government orders and the Board of Directors itself is constituted with the Government secretaries and other nominees as members. Therefore, the claim of deduction has to be considered with reference to the peculiar circumstances of the company which has no discretion in regard to the payment of the service charges to the government as it is bound to comply with the government orders. So much so, we are of the view that the parameters applicable in the case of a private company that too with respect to the claim for business expenditure, are exactly not applicable in the case of Public Sector Company whether it is under the control of the State Government or Central Government. In fact, many public sector companies are not formed just to make profit alone but are supposed to achieve larger objectives for the society and the State. By making payment of service charge, the respondent company has discharged only the obligation under Government orders. It cannot carryon business by violating Government orders and remain as a defaulter to the Government. 9.8 Since, the assessee had incurred CSR expenses to comply with the directions of Govt. of India, following the above observations made by High Court of Kerala and ITAT, Mumbai Bench, the expenditure incurred is incidental to the assessee's business and ought to be allowed as deduction u/s 37 of the I.T.Act”. 10. In the light of aforesaid the ground no. 3 in decided in favour of assessee. As a consequence to aforesaid determination of the grounds in respective appeals the Revenue’s appeals are dismissed and of Assessee is allowed. Order pronounced in the open court on 31 st May, 2023. Sd/- Sd/- (N.K.BILLAIYA) (ANUBHAV SHARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER Date:-31.05.2023 *Binita, SR.P.S* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 14 ITA no. 5578 & Ors. NTPC Vidyut Vyapar Nigam Ltd. 14 5. DR: ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI