ACIT, Uttrakhand V. M/s. Uttaranchal Jal Vidyut Nigam Ltd., Dehradun

ITA 736/DEL/2017

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 5589 (ITAT-DEHRADUN)
• Duration Of Justice: 4 year(s) 10 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-12-2021
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2012-2013
• Appeal Filed On: 08-02-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: RAKESH GUPTA
• Keywords: Capital asset converted into stock in trade; Depreciation; Set aside
• Section: 32; 69; 145; 63; 10; 143(3); 43

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : B : NEW DELHI BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER ITA No.736/Del/2017 Assessment Year: 2012-13 ACIT, Circle-2, 13-A, Subhash Road, Uttarakhand. Vs. Uttaranchal Jal Vidyut Nigam Ltd., Ujjwal, Maharani Bagh, GMS Road, Dehradun. PAN: AAACU6672R (Appellant) (Respondent) Assessee by : Dr. Rakesh Gupta, Advocate & Shri Somil Aggarwal, Advocate Revenue by : Smt. Poonam Sharma, Sr. DR Date of Hearing : 22.12.2021 Date of Pronouncement : 24.12.2021 ORDER PER R.K. PANDA, AM: This appeal filed by the Revenue is directed against the order dated 29 th December, 2016 of the CIT(A), Dehradun, relating to Assessment Year 2012-13. 2. The only effective ground raised by the Revenue reads as under:- “1. The ld.CIT(A) has erred in law and on facts by allowing depreciation on assets for which the actual cost as per section 43(1) of the Income Tax Act, 1961 was NIL. ITA No.736/Del/2017 2 2. The order of the ld.CIT(Appeals) be set aside and that of the Assessing Officer be restored.” 3. Facts of the case, in brief, are that the assessee is a company incorporated on 12 th February, 2001 by Government of Uttarakhand for management of running generating stations, development and construction of new hydropower projects in the State of Uttarakhand. The Central Government vide its order dated 05.11.2011 transferred all hydro power plants located in the State of Uttarakhand to Uttarakhand Jal Vidyut Nigam Ltd. (UJVNL). It filed its return of income on 28 th September, 2012 declaring an income of Rs.17,03,72,200/-. This return was subsequently revised on 22 nd December, 2013 declaring the income at Rs.74,66,66,910/-. During the course of assessment proceedings, the AO analysed the history of the assessee which was discussed in the assessment order u/s 143(3) for the A.Y. 2008-09. The AO pointed out that during the course of assessment in the case of assessee, the then Assessing Officer had observed that at the time of creation of UJVNL, certain assets and liabilities had been transferred from UPJVNL to the assessee vide notification issued by the Govt, of India. It was seen that the assessee had taken over the assets transferred from UPJVNL but on the liability side did not take over the loans transferred in full from UPJVNL. In the Balance Sheet, the assessee has taken a reconstruction reserve amounting to Rs.6,26,96,37,032/- which was stated to be the equal to the difference of assets liabilities including capital reserves. On being asked about the same and after discussion with the A.R. for the assessee, it was found that the ITA No.736/Del/2017 3 liability side of the Balance Sheet of the assessee was still not settled, i.e. the loan amount transferred by UPJVNL to. UPJVNL was still under dispute and there was no clarity as on date with regard to the nature of the liability. Hence, the A.O. had concluded that the assessee had only taken over the assets for which the liability was not ascertained till date. This implied that on date, the assessee had the assets without the corresponding liability i.e. in effect, the assets had been taken over free of cost. This amounted to disallowance of depreciation on the same as per section 32 of the IT. Act, 1961, read with section 43 which defined “Actual Cost”. What was the issue here, was the cost of the assets to the assessee and not the existence of the assets. As the assessee had failed to prove beyond doubt that the assets that were taken over were not free of cost to the assessee, therefore, the assessee was held not entitled to the claim of depreciation on the same. Section 32 of the I.T. Act, 1961, read with section 43 of the IT. Act, 1961, required that depreciation is permissible only on the basis of “Actual Cost” of the assets to the assessee. The A.O. also held that the assessee had failed to explain the nature of the Reconstruction Reserve that it had created. The assessee had claimed the benefit of demerger scenario in its case under clause (ii) of section 2(19AA) of the I.T. Act, 1961, but the Assessing Officer had held that the criteria of demerger was not being fulfilled by the assessee company. The assessee company had taken over the assets but had not taken over the corresponding liabilities. In view of this, the assessee could not claim the benefit of Explanation 7A of Section 43(1) of the I.T. Act, 1961. The Assessing Officer had further held ITA No.736/Del/2017 4 that as per Explanation 4 of section 2(19AA) of the I.T. Act, 1961 it was seen that the assessee had failed to comply with the terms, as the order of the Govt, of India, Ministry of Power dated 05.11.2001 was not a Gazette Notification, but was only a provisional order. Hence, the assessee company had failed to fulfill this final condition as well. In view of the above, the depreciation with respect to the assets for which no corresponding liability is taken was disallowed and added back to the taxable income for that year. 4. He, therefore, asked the assessee to explain as to why depreciation amounting to Rs.4,1368,564/- should not be disallowed and added to the total income of the assessee. The assessee submitted that the depreciation of fixed assets transferred from UPJVNL for AY 2012-13, works out to Rs.4,13,68,564/- and these were transferred after the bifurcation from UPJVNL to UJVNL. It was submitted that the Uttaranchal Jal Vidyut Nigam Ltd. (UJVNL) was incorporated on 12.02.2001 by Government of Uttaranchal for management of running generating stations, development and construction of new hydropower projects in the State of Uttaranchal. It was further submitted that the Central Government vide its order dated 5-11-2001 transferred all hydro power plants located in the State of Uttaranchal to UJVNL and although the company took the financial & administrative control of the plants immediately thereafter with effect from 9-11- 2001, the Transfer Scheme for transfer of values of assets & liabilities has still not been finalized. In absence of any transfer scheme, the Nigam derived its ITA No.736/Del/2017 5 provisional opening balances, on the basis of information available with it received from UPJVNL, to complete its accounts. The difference between opening balances of Assets & Liabilities was shown as Reconstruction Reserve under Capital Reserve in the Balance Sheet pending finalization of Transfer Scheme. From the perusal of the Balance Sheet of UPJVNL it was clear that the total Fixed Assets as on 31- 3-2001 was Rs. 998.92 crores, out of which 682.05 crores was received out of demerger of UPJVNL vide notification letter dated 5- 11-2001. Correspondingly, the depreciation up to that date had also been accounted for in UJVNL accounts and the depreciation on the written down value as on 9-11-2001 was considered by UJVNL. It was further submitted that since these assets represented share capital in the balance sheet of UPJVNL, hence it could not be said that these assets had been obtained free of cost from UPVJNL. The difference of Assets and Liabilities had been shown as reconstruction reserve under “Capital Reserve” in the Balance Sheet. It was argued that this would be a demerger for the purpose Income Tax Act, 1961 and in case of demerger only a portion of the assets and liabilities of the company were assigned to the demerged company, which in this case did not involve any payment of cash and shares for the assets and liabilities transferred from UPJVNL to UJVNL. Hence, it may be stated that both the share capital as well as reserves including the reconstruction reserve (which belonged to subscriber of the share capital i.e. in this case the State of Uttaranchal) had been utilized for getting the assets. ITA No.736/Del/2017 6 4.1 It was further submitted that the Commissioner of Income Tax (Appeal) had also given due relief on account of Depreciation on fixed Assets while disposing of Appeals for the earlier assessment years and held that the assessee would be entitled to claim depreciation on assets transferred from UP Jal Vidyut Nigam Limited to UJVNL. It was further submitted that in the year 2005-06, the department had filed an appeal before the ITAT against the order of CIT(A)-1, Dehradun only on one ground i.e. for allowing depreciation on fixed assets acquired from UPJVNL but the aforesaid appeal of the department had been dismissed by the ITAT New Delhi on 13 th Aug 2009, due to non approval of COD and no further appeal had been filed in the matter. Hence, In view of the above the proposed addition on account of depreciation on assets transferred from UPJVNL at the time of bifurcation in the year 2001-02, was arbitrary and unlawful. 5. However, the AO was not satisfied with the arguments advanced by the assessee. He noted that the issue of depreciation is subjudice before the ITAT. He, therefore, rejected the claim of depreciation of Rs.4,13,68,568/- on the assets acquired by the UJVNL and added the same to the total income of the assessee. 6. The AO, during the course of assessment proceedings asked the assessee to explain why capacity charges, deemed generation charges and capacity index incentive amounting to Rs.45,31,58,363/- should not be added to the total income of the assessee as in the preceding assessment year. The assessee ITA No.736/Del/2017 7 submitted that Rs. 45,31,58,363/- on account of capacity charges, deemed generation charges and capacity Index incentive, had been disclosed in the Notes to Accounts, annexed with the Balance Sheet as on 31-3-2012. The said amount had been shown as disclosure in the Balance Sheet, being the amount claimable by the assessee from UPCL, which had not been acknowledged but disputed by the UPCL since inception and the matter had been referred to the Regulatory Authority for settlement. Since, the methodology was still to be determined and there were several technical aspects which were still to be finalized, the determination of amount on account of capacity charges, deemed generation charges and capacity index incentives could not be quantified. It was further submitted that the matters were disputed by the UPCL, who had ultimately to accept and make payment to the Appellant. It was submitted that the UERC is a regulatory authority who fixes the tariff on annual basis in accordance to the Terms & Conditions for determination of Hydro Generation Tariff, Regulation 2004. Since the method of calculation of these charges was not clear, this matter became the subject matter of dispute. The UJVNL had filed a petition before the UERC on 25th March 2014 due to prolonged dispute between UPCL and UJVNL and had also sought necessary directions from the UERC on the applicability and pay ability of capacity charges, deemed generation charges and capacity Index incentive. It was submitted that since the basis, modality and the amount on which the capacity charges, deemed generation charges and capacity Index incentives were to be levied, were yet to be determined/quantified, it was difficult ITA No.736/Del/2017 8 for the assessee to ascertain the correct and actual amount of charges recoverable from UPCL. Hence, in absence of above, the same could not be recognized as revenue by the assessee in its Profit & Loss A/c, However, the same had been disclosed in Notes on Accounts annexed with the Balance Sheet as on 31-3-2012. It was further submitted that under section 145 of the Income Tax Act, 1961, income of the assessee under the head “Business” shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Admittedly, the assessee was following mercantile system of accounting and was free to choose any of the two methods of accounting provided true income can be ascertained out of it and the same method is consistently followed [(CIT vs. British Paints (188 ITR 44, SC), (CIT vs. Realest Builders & Services Ltd. 216 CTR 345 (SC)]. 6.1 It was submitted that the law does not lay down what is proper method of accounting. However, what is mandated is that such system and method of accounting should comply with the accounting standards notified by the Government. It was further pointed out that the Government had notified 2 accounting standards vide Notification no. SO 69 (E), dated 25-1-1996 dealing with the “Disclosure of Accounting Standards” And “Disclosure of Prior Period and Extraordinary Items and Changes in Accounting Policies" respectively. Thus, it was submitted that the profit or loss in the Profit and Loss account prepared by the assessee as per mercantile method of accounting, based on accepted, ITA No.736/Del/2017 9 accounting principles and by following the accounting standards prescribed by ICAI and ones prescribed by Central Government u/s 145(2), had to be the foundation on the basis of which the Income under the head “Business” should be computed by the Income tax Authority. Thereafter, the assessee made submissions on the concept of accrual and role of accounting standards. It was submitted that it had been judicially held that Income accrues or arises when the assessee acquires a right to receive the same. However, mere claim will not fall in the ambit of the income. It was only on final determination of the right and amount of the compensation, that the right to claim would arise. It was further submitted that sections 210 and 211 of the Companies Act, 1956 made it mandatory for every company to follow the accounting standards issued by the ICAI. Therefore, each company had to make its accounts in accordance with accounting standards issued by the ICAI, failing which the financial statements of the company cannot be said to be giving a true and fair view. It was pointed out that it was held in the case of CIT vs. Woodward Governor India (P) Ltd. (294 ITR 451) (Delhi) that the accounting standards prescribed by the ICAI were also required to be followed by the assesses. Discussing the basic propositions for revenue recognition, it was argued that the same was based on Prudence i.e., not to recognize any income or asset which is not certain while recognizing all possible expenses and losses. It was further submitted that an income accrues as per AS 9 when, ITA No.736/Del/2017 10 i) The significant risk and reward of the ownership has been transferred/ services have been rendered, and ii) There is certainty of realization of consideration. 7. It was argued that under the provisions of Income Tax Act also, an income could not be brought to tax if it is disputed and cannot be ascertained. In such cases, income accrues in the year when such dispute is resolved or there are conditions which reasonably establish that dispute is likely to be resolved and indications were there of possibility of fair and reasonable ascertainment of rights and liabilities. In the case of the appellant is very clear that the amount of capacity charges, capacity index incentive and deemed generation charges could not be ascertained and the matter was in dispute before the regulatory authority i.e. UERC. Accordingly, in view of the above, the same was provided by way of notes on accounts and not accounted for in the Profit & Loss Account. The assessee further referred to the principles governing Accounting Standard - 5 relating to prior period items and Accounting Standard - 4 dealing with “Event after Occurring Balance Sheet Date” to state that a study of above accounting principles clearly brought out that revenue had to be recognized as and when and to the extent it is certain to be realized on the basis of conditions existing on each Balance Sheet date. It was further submitted that it had been judicially held that Accounting Standards issued by Institute of Chartered Accountants of India have to be followed unless they are in conflict with statutory provisions. In the case of ITA No.736/Del/2017 11 CIT vs. Woodward Governor 312 ITR 282 (S.C.) it had been held that it is settled law that no income can be said to accrue or arise unless there is an acknowledgment of the debt by the payer to the payee. Unless there was acknowledgment of debt, no real income could be said to result and income tax could only be levied only on real income. It was further submitted that the theory that only real income is to be taxed is settled law and it has been held by various Courts that notwithstanding that an assessee may be following the mercantile system of accounting, the assessee could only be taxed on real income and not on any hypothetical/illusory income. 8. However, the AO was not satisfied with the arguments advanced by the assessee and made addition of Rs.45,31,58,363/- to the total income of the assessee. 9. In appeal, the ld.CIT(A) deleted both the additions by observing as under:- “9. I have duly considered the facts and circumstances of the case. Both the issues in dispute have been considered and decided by me in the appeal order 16/CIT(A)/DDN/14- 15 dated 30-03-2015. In the said appeal order, on the issue of Depreciation, after quoting from the orders of my learned predecessors, I have held as under 4. “I have duly considered the facts of the case and the view of my Ld. Predecessors. It is quite clear that the situation arising under the circumstance is what has been recognized as a demerger in terms of Explanation 4 to section 2(19AA) of the I.T. Act, 1961. In the circumstances the property and the liabilities of the undertaking or undertakings being transferred by the demerged company are transferred at the values appearing in its books of accounts immediately before the demerger. Thus, fixed assets worth Rs.682,05 crores were received by the assessee on account of demerger of UPJVNL vide the notification dated 5.11.2001. I am in agreement with the logic ITA No.736/Del/2017 12 expressed by my Ld. Predecessor in the order for the A.Y. 2004- 05 when he says that the A.O.’s arguments that the appellant had received the aforesaid assets free of cost, if stretched further will amount to stating * that whatever Uttaranchal received at the time of division of U.P., it had received free of cost and this was a wrong and unpleasant way of seeing the division of U.P. and the division of resources between the two states. I am also in agreement with my Ld. Predecessor when he states that the new state of Uttaranchal, instead, can be and should be seen to have incurred a cost for whatever came to it, for being a part and parcel of the U.P. when the assets were brought by the state of undivided U.P. and the only task that remained after division was attribution of cost of assets that were left with it in the wake of its secession from U.P. which has been done by creating a corresponding reconstruction reserve on the liability side. The A. O. has not rebutted the contention of the assessee that the creation of the Uttaranchal Jal Vidyut Nigam in accordance with sub section (4) of section 63 of the U.P. Reorganization Act, 2000 (did not amount*)(* should read “amounted to”) to a demerger. In the circumstances, it is held that the view of the A.O. that the assets have been acquired free of cost and, therefore, the depreciation is not allowable on them is not sustainable. In the circumstances, the disallowance and addition of Rs.4,83,34,894/- on this account is deleted.” 10. After considering that the issue involved is identical, following the orders of my learned predecessors in previous assessment years and my own order in AY 2011-12 and after noting that the issue has also been decided in favour of the assessee following the refusal of permission to the Department 6y the COD in AY 2005-06 to agitate the issue before the ITAT, I hereby hold that the addition of Rs.4,13,68,568/- on account of disallowed depreciation is not sustainable. It is accordingly deleted. The ground of appeal is accordingly allowed. 11. On the Issue of Capacity charges, Deemed Generation Charges and Capacity Index Incentive in the appeal for the AY2011-12, I had held that under:- “It was also observed from the submissions filed by the UPCL that the UPCL has not contested its liability to pay the said charges. It has only questioned the quantum of the charges that have been levied by the assessee on the grounds that the data for misdeclaration for the period 2004-05 to 2012-13 had not been provided to it to enable it to check the bills properly. I had also asked the assessee to furnish a note on the impact of misdeclaration on capacity charges. It is seen from the said note that while misdeclaration may vary the total amount of capacity ITA No.736/Del/2017 13 charges, it would not refute the liability to pay the same. In the circumstances, when the amount is payable to the assessee as per the statutory regulation and when the debtor has not disputed the liability to make the payment, it cannot be said that the income had not accrued to the assessee. The only issue for resolution is the issue of determination of quantum. As my Ld. Predecessor has pointed out recognition of a receivable as revenue or of a liability as expenditure need not be postponed simply because its exact quantification is not possible but according to the mercantile system of accounting, the amount needs to be estimated to be best judgment of the assessee and given effect to in the accounts. If the amount, when it is quantified finally, varies with the estimate made earlier, appropriate adjustments in the accounts are to be made to factor in such variation. Hence, that cannot be a justification for not recognizing the revenue in question, especially in view of the fact that if the assessee failed to recovered the said amount in future it would be free to write the same off as bad debts and income tax law would allow deductionfor the same as and when such eventuality arose. It is seen that this exercise of ascertainment of CC and CII to the mutual satisfaction of both parties has been conducted. This could have formed the basis of best judgement estimation of income from such sources and at least those two charges could have been offered as income on the basis of such joint verification. Subsequently if the finally determined figures varied on account of misdeclaration, the excess claim could have been written as bad debt. In the circumstances, it is held that the plea of the assessee that it had followed the principles of AS9 and declared the amount in the balance sheet to the notes on account but not in the P&L A/c because the receipt was uncertain is unacceptable and it is therefore, rejected. The addition made in this regard is, therefore, sustained.” 12, However, on perusal of the reply filed by the appellant during appeal proceedings, it is noticed that the UERC has decided the matter and the final figure of what is payable to the appellant by UPCL has been computed and accepted by both parties. Thus, the earlier decision according to which it should recognize the income of the amount to its best judgment and claim the unpaid/disputed/written off portion as bad debt later, may no longer be relevant. According to the settlement arrived at by the UERC and accepted by both parties, the total amount now payable to the appellant on account of Capacity charges, Deemed Generation Charges and Capacity Index Incentive for this financial year is only Rs 7,44,41,302/- and therefore, since this amount now stands crystallized, it is only this amount which is liable to be added back to the income of the appellant. Thus, the appellant is entitled to relief of Rs 37,87,17,061/- on this count alone. However, it is also noticed that the appellant has offered the entire amount ITA No.736/Del/2017 14 of Rs 102,19,53,483/- (held to be receivable by it for the Financial years 2004-05 to 2012-13) to tax in the assessment year 2016-17 as the award had been received on 27.04.2015 and deposited Rs 56.78 crores by way of self assessment tax for that year. Further, as submitted by the appellant, when the reassessment for the cases pertaining to AY 2007- 08, 2008-09, 2009-10 and regular assessment for AY 2013-14 was being done, the matter was discussed with the Principal CIT Dehradun, and it was agreed that no additions would be done in those years, in consideration of the appellant having owned up and paid tax on the entire amount in AY 2016-17. I have also perused the orders subsequently passed by the Assessing Officer in the aforementioned assessment years and it is seen that the AO has not made any additions on account of Capacity Charges, Deemed Generation Charges and Capacity Index Incentive for the relevant financial years in those assessments stating that, in view of the appellant having accepting the liability to pay taxes on the entire amount received by it in FY 2015-16, the Department*' has decided not to make any additions in the assessment years relevant to the respective financial years. Therefore, since the appellant has already paid tax on receipt basis in the FY 2015-16 on the amount finally held to be receivable by it in this financial year ie Rs 7,44,41,302/-, it is held that the same amount cannot be taxed in both years and because both the AO and the Appellant are in agreement that the amount may be taxed in the year of receipt, no useful purpose will be achieved by sustaining the addition of even Rs 7,44,41,302/- on this account in this year. Therefore, the entire addition of Rs 45,31,58,363/- made on this account is deleted. This ground of appeal is therefore allowed. 13. The appellant has also challenged the levy of interest and the initiation of penalty proceedings. In this context, it is observed that the liability for interest will automatically stand revised as a result of the reliefs allowed in this appeal. However, the challenge to the initiation of penalty proceedings not being an appealable order in itself, is not sustainable. This ground of appeal is therefore dismissed as premature. 14. In the result, the appeal is partly allowed.” 10. Aggrieved with such order of the CIT(A), the Revenue is in appeal before the Tribunal. 11. We have heard the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We find, the AO, in the instant case, made addition of Rs.4,13,68,564/- ITA No.736/Del/2017 15 being depreciation on assets acquired from UJVNL and Rs.45,31,58,363/- on account of capacity charges, deemed generation charges and capacity index incentive. We find, the ld.CIT(A) deleted both the additions, the reasons of which have already been reproduced in the preceding paragraphs. We find, both the issues stand decided by the Tribunal in assessee’s own case. 12. So far as depreciation is concerned, we find the Tribunal in assessee’s own case vide ITA No.743/Del/2018 for AY 2014-15 has dismissed the appeal filed by the Revenue by observing as under:- “Depreciation: 5. This issue stands adjudicated by the order of ITAT in ITA No.5724/Del/2015 dated31-05-2021. The operative portion of the said order is reproduced for ready reference:- "These are second round of appellate proceedings before us. Briefly stated, the facts of the case are that for the year under consideration a return declaring total income of Rs.8,94,85,800/- was filed by the assessee on 29th October 2004. Assessment was framed u/s 143(3) of the Income Tax Act, 1961 (hereinafter called 'the Act') on 22nd December 2006 assessing total income of the assessee at Rs 40,67,51,498/-. Being aggrieved, the assessee filed an appeal before Ld. CIT (A). The Ld. first appellate authority, vide order dated 30th December 2008, allowed part relief. Assessee filed a further appeal before this Tribunal (ITAT). A coordinate Bench, vide order dated 25th February 2011 in ITA No. 1174/DEL/2009, set aside the matter with the following directions: ”5. We have duly considered the rival contentions and gone through the record carefully. No doubt, audited accounts for this assessment year as well as earlier assessment years are relevant material for determining the true income of the assessee. In the absence of such accounts, it is difficult to determine the taxable income of the assessee. Assessing Officer has made a major disallowance in respect of depreciation claim because of this anomaly. It is also true that auditor of the assessee has to be appointed by learned CAG but to our mind, assessee should have persuaded the learned CAG to get the auditor appointed in time. ITA No.736/Del/2017 16 If we look into the negligence at the end of assessee vis a vis the punishment in the shape of tax liability then the punishment is disproportionate to the negligence. Therefore, in the interest of justice, we are of the opinion that assessee deserves one more opportunity to plead all the issues on the basis of the audited accounts before the Assessing Officer. We allowed the appeal of assessee set aside the order of revenue authorities below and remit all the issues taken up in the assessment order before the assessing officer for readjudication. We direct the assessee to cooperate with the Assessing Officer and submit the requisite details. We further direct the assessee that it should remain vigilant for getting its accounts audited in the subsequent assessment years." 2.1 Post the set aside by this Tribunal, fresh assessment proceedings were initiated by the AO. The AO again made a disallowance of depreciation of Rs 29,95,08,702/- and assessed the total income of the assessee at Rs 38,89,94,500/-. In this regard, vide order dated 28th March 2013, it has been held by the AO as under: ”During the year under consideration it is noticed that the opening WDV for the assets for A.Y. 2004-05 do not tally with the closing WDV for A.Y.2003-04. Hence for the purpose of coming to the amount to be disallowed for depreciation on assets taken over at the time of inception free of cost, the following method is being adopted. For the additions made during the year, the depreciation permissible under the I.T. Act, 1961 is to be allowed, as in the previous years there is no addition to the fixed assets as per the Schedule submitted. The balance depreciation claimed in the profit and loss account is to be disallowed and is to be added back to the taxable income for the year. The depreciation on additions made during the year comes to Rs.2,44,07,898/-. After application of the rates as per I.T. Act 1961, and the assessee has debited an amount of Rs.32,39,16,600/-. The depreciation amounting to Rs.29,95,08,702/- which is the balance is therefore, disallowed and added back to the taxable income of the assessee." 2.2Aggrieved again, the assessee filed an appeal before the Ld. first appellate authority. The Ld CIT (A) has extensively recorded the facts of the case and has found merit in claim made by the assessee. The appeal has been allowed by adjudicating as under: "The ld. AR has challenged this action on the ground that claim of depreciation on old assets has been consistently allowed in the past at Appellate stages and thus should be allowed this year also. Some of the submissions may be extracted : That Uttaranchal Jal Vidyut Nigam Ltd. (UJVNL) was incorporated on 12-2-2001 by Government of Uttaranchal for management of ITA No.736/Del/2017 17 running generating stations, development and construction of new hydropower projects in the State of Uttaranchal. The Central Government vide its order dated 5-11- 2001 transferred all hydro power plants located in the State of Uttaranchal to UJVNL. Although the company took the financial & administrative control of the plants immediately thereafter with effect from 9- 11-2001, the Transfer Scheme for transfer of values of assets & liabilities has not been finalized. In absence of any transfer scheme, Nigam has derived its provisional opening balances, on the basis of information available with it received from UPJVNL, to complete its accounts. The difference between opening balances of Assets & liabilities has been shown as Reconstruction Reserve under Capital Reserve in the Balance Sheet pending finalization of Transfer Scheme. From the perusal of the Balance Sheet of UPJVNL it will be clear that there was total Fixed Assets as on 31-3-2001 is Rs.998.92 crores, out of which 682.05 crores was received out of demerger of UPJVNL vide notification letter dated 5-11- 2001 correspondingly the depreciation upto that date has also been accounted for in our accounts, as such the depreciation on the written down value as on 9-11-2001 was considered by UJVNL. Since these Assets represented share capital in the Balance sheet of UPJVNL hence it cannot be said that these assets have been obtained free of cost from UPJVNL. The difference of Assets and Liabilities have been shown as reconstruction reserve under the Capital Reserve in the Balance Sheet. As such this would be a demerger for the purpose Income Tax Act 1961. In case of demerger only a portion of the assets and liabilities of the company are assigned to the demerged company which in this case did not involve any payment of cash and shares for the assets and liabilities transferred from UPJVNL to UJVNL. Hence it may be stated that both the share capital as well as reserves including the reconstruction reserve which belongs to subscriber of the share capital i.e., in this case the State of Uttaranchal had been utilized for getting the assets. The Ld. Commissioner of Income Tax Appeal-I, Dehradun, has also given due relief on account of depreciation on fixed assets while disposing of appeals for the following Assessment Years. A.Y. Appeal No. Date of Order 2002-03 283/DDN/2007-08 30-12-2008 2003-04 057/DDN/06-07 14-8-2007 2004-05 340/DDN/06-07 30-12-2008 2005-06 284/DDN/07-08 30-12-2008 2007-08 139/DDN/2009-10 27-12-2011 ITA No.736/Del/2017 18 2008-09 68/DDN/2010-11 31-01-2012 2009-10 328/CIT(A)-l/2011-12 30-03-2012 2011-12 16/ CIT(A)/DDN/14-15 30-03-2015 The Ld. CIT (A) has also held that the assessee would be entitled to claim of depreciation on assets transferred from UP Jal Vidyut Nigam Limited to UJVNL. Copy of the orders are enclosed herewith as Annexure 1 to 8. It may be brought to your kind notice that for the AY 2005-06 most of the relief was allowed by the Ld. Commissioner of I. Tax Appeals, as such no appeal was filed by the assessee for the aforesaid Assessment Year. However, the department had filed an appeal before the Hon'ble ITAT against the order of CIT(A)- 1. Dehradun for the aforesaid A.Y. 2005-06 only on one ground I.e., for allowing depreciation on fixed assets acquired from UPJVNL, the aforesaid appeal of the department has been dismissed by the Ld. ITAT New Delhi on 13thAugust, 2009, due to non approval of COD (Committee of Dispute). As per our knowledge no appeal has been filed so far, against the aforesaid order of the Hon'ble ITAT, moreover the above proceedings are also time barred by limitation, hence the order of the Ld. CIT (A) is final. Copy of the order of Hon'ble ITAT is enclosed herewith as Annexure 9. 4.2 The findings of Ld. AO and the averments of the Ld. AR have been considered. A perusal of the facts reveal that on demerger the assets were divided in a fixed ratio and needless to say, the cost of the same (WDV as on that date) was duly accounted for by both the entities. Thus, it is difficult to understand how it can be said that the assets were acquired free of cost. In any case there have been a succession of Appellate orders (as mentioned in the extract of submissions above) which have allowed the claim of depreciation. Following those orders the claim is allowed for this year also with the direction that the closing value of WDV for AY 2003-04 shall be adopted from the audited accounts of that year and taken as opening value for the present year as per audited accounts for AY 2004-05. This ground is accordingly allowed with the deletion of addition of Rs.29,95,08,702. 3.0 Being aggrieved, revenue in appeal before us now. During the course of Appellate proceedings, the Ld DR vehemently supported the disallowance made by the AO. However, when specifically questioned, the Ld DR was unable to rebut the conclusions recorded by the Ld CIT (A) that when the Central Government, vide its order dated 5th November 2001, had ITA No.736/Del/2017 19 transferred all hydro power plants located in the State of Uttaranchal to the assessee, it had recognized the assets in its balance sheet and for the value of assets taken over consideration was paid by the assessee through issuance of share capital. Hence, it cannot be said that these assets have been obtained free of cost by the assessee. 4.0 On the other hand, the Ld AR supported the reasoning given by the Ld CIT (A). 5.0 We have carefully considered the facts of the case and the material available on record. In our considered opinion the conclusions recorded by the Ld. CIT (A) merit to be upheld. The situation arising in the present case is what has been recognized as a demerger in terms of explanation 4 to section 2(19AA) of the Income Tax Act. The AO has disallowed depreciation on the ground that the assessee had received assets free of cost from the Government of Uttaranchal. The action of the AO in disallowing depreciation is not as per law. As per settled accounting principles, every rupee invested in the business has a cost. The cost of borrowing from the bank is known to the business depending on the rate of interest but that does not mean that the capital introduced in the form of shareholders fund has no cost. In the present case, assets generating hydro power have been received by the assessee from the demerger of UP Jal Vidyut Nigam along with corresponding liabilities which it owns to the Uttaranchal Government and others. This liability represents nothing but the cost of the assets received on demerger. The assessee is entitled to depreciation on the written down value of these assets which been prescribed in Explanation 2B of section 43(6) of the Income Tax Act, 1961. The assessee is, therefore, entitled to depreciation. Somewhat similar situation arose in ease of M/s Bharat Sanchar Nigam Limited (BSNL) when it got incorporated in 2000. Prior to BSNL's incorporation, the telecommunication services were being provided by Government of India, Ministry of Communication through its two departments, namely Department of Telecommunication Services and Department of Telecommunication Operation. The AO in case of BSNL referred to the capital structure of the BSNL to draw an inference that the cost of assets was being met by the general reserve as reflected in the capital structure of the company. As per AO, a sum equal to the general reserve would be required to be reduced from the cost of the assets in terms of Explanation 10 of Section 43(1) of the Act. This has been negated by the Hon'ble Delhi High Court vide order dated 09th May 2013 reported in 355 ITR 188(Del) by observing as under: "26. The scheme of hiving off the business of telecom services by Government of India to a corporate entity entailed incorporation of a wholly owned government company (i.e, the petitioner company) and the transfer of the business as a going concern along with all its assets and liabilities to the company. The net assets were transferred at book value, which was agreed ITA No.736/Del/2017 20 to be at least Rs 63,000/- Crores and in consideration of this the petitioner company accepted a liability of Rs 7500 Crores and issued both equity and preference share capital of the face value of Rs 5000 Crores and Rs 7,500 Crores, respectively. The balancing figure was reflected as reserves which is an integral part of the shareholders funds. The Government of India has transferred the assets to the petitioner company at their book value i.e., the value at which the said assets are reflected in the books of DTS and DTO and the book value of the Government of India's holding in the petitioner company as shareholder and a creditor aggregates the book value of the assets transferred. The configuration of the capital structure of the petitioner has no impact on the value of the Government's holding in the petitioner company as reserves of a company are subsumed in the book value of its capital. We find no basis, at all, for the Assessing Officer to surmise that reserves represent a subsidy, grant or reimbursement from which the cost of assets of the petitioner company are met and the whole consideration received by the Government of India for transfer of business is limited to the value of loans and the face value of the shares issued to the Government of India. A reserve represents the shareholders’ fund and may be utilized in various ways including to declare dividends or for issuing bonus shares. There is no plausible reason to assume that the value of shareholders' holding in a company is limited to the face value of the issued and paid up share- capital and the reserves represent a subsidy or a grant or a reimbursement by the shareholders from which directly or indirectly the cost of the assets in the hands of a company are met. We are thus of the view that the reasons as furnished by the Assessing Officer for reopening the assessments could not possibly give rise to any belief that income of the petitioner had escaped assessment and proceedings initiated on the basis of such reasons are liable to be quashed." 6. We have gone through the entire contents and the history of the assessee. In this case, the assets have been transferred from Uttar Pradesh Government (UPJVNL) to Uttaranchal Government (UJVNL). There is no claim of the depreciation twice by both the Governments. The demerger led to division of assets in a fixed ratio and the same was duly accounted for both the entities as per the written down value (WDV) as on that date. The depreciation on de-merger cannot be a forgone benefit owing to de-merger, which is the result of state reorganization. Hence, we decline to interfere with the reasoned order of the Ld. CIT (A).” ITA No.736/Del/2017 21 13. So far as the issue relating to capacity charges, deemed generation charges and capacity index incentive is concerned, we find, the Tribunal in assessee’s own case vide ITA Nos.3804/Del/2015 and 3181/Del/2015, order dated 31.05.2021 has observed as under:- “5.0 We have carefullyconsidered the facts of the case and the material available on record. In the financial statements capacity charges, deemed generation charges and capacity Index incentive have been shown as a disclosure in the balance Sheet as an amount claimable by the assessee from UPCL which has not been acknowledged but disputed by the UPCL since inception and the matter has been referred to the Regulatory Authority for settlement from time to time. Facts on record demonstrate that since the methodology was to be determined and there were several technical aspects which were to be finalized, due to lack of clarity in the regulations, the determination of amount on account of capacity charges, deemed generation charges and capacity index incentives could not be quantified. The issue was disputed by UPCL. UERC is a regulatory authority which fixes the tariff on annual basis in accordance with the Terms & Conditions for determination of Hydro Generation Tariff, Regulation 2004. The method of calculation of these charges was not clear and as such this matter became the subject matter of dispute. The assessee filed a petition before the UERC on 25 th March 2014 due to prolonged dispute between UPCL and UJVNL and had also sought necessary directions from the UERC on the applicability and payability of capacity charges, deemed generation charges and capacity Index incentive. We find merit in submissions made by the Ld AR that since the basis, modality and the amount on which the capacity charges, deemed generation charges and capacity Index Incentives were to be determined/ quantified, it was difficult for the assessee to ascertain the correct and actual amount of charges recoverable from UPCL. We are, therefore, unable to sustain the addition made by the AO. Support may also be drawn from the Hon’ble Apex Court’s judgment in case of Godhra Electricity Co. Ltd. v. CIT reported in 225 ITR 746 (SC) wherein the Hon’ble Apex Court examined the cash system and the mercantile system of accounting in the context of hypothetical income. It was held that the computation of income is made in accordance with the method of accounting regularly employed by the assessee. It may be either the cash system where entries are made on the basis of actual receipts and actual outgoings or disbursements; or it may be the mercantile system where entries are made on accrual basis, that is to say, accrual of the right to receive payment and the accrual of the liability to disburse or pay. However, in both cases unless there is real income, there cannot be any income-tax. Considering the facts before it, the Hon’ble Apex Court held that although the assessee-company was following the mercantile system of ITA No.736/Del/2017 22 accounting and had made entries in the books regarding enhanced charges for the supply of electricity made to its consumers, no real income had accrued to the assessee-company in respect of those enhanced charges in view of the fact that soon after the assessee-company decided to enhance the rate, representative suits were filed by the consumers which were decreed by the Court and ultimately, after various proceedings which took place, the assessee-company was not able to realise the enhanced charges. The Court held that no real income had accrued to the assessee- company and, hence, the entries in respect of enhanced charges did not reflect the real income of the assessee and could not be brought to tax by the revenue. 5.1 TheLd AR has also placed on record the fact that on 27 th April, 2015, UERC has finally settled the petition dated 25 th March, 2014 regarding the dispute between UPCL and the assessee on the applicability and pay ability of capacity charges, deemed generation charges and capacity Index incentive and UERC has given direction to UPCL to consider and pay the revised verified capacity charges, deemed generation charges and capacity Index incentive by SLDC, UPCL and UJVNL in 18 equal monthly installments. On the basis of verified data, year wise bills for CC, CII has been raised in suppression of bills raised earlier and detail of bills raised before and after verification for the period from FY 2004-05 to FY 2012-13 is as under: Financial year Total Capacity charges & Capacity Index Incentive Old Bill Revised Bill 2004-05 227,232,641 15,42,96,401 2005-06 66,705,707 4,57,18,570 2006-07 115,138,682 9,02,41,357 2007-08 99,150,697 8,24,69,988 2008-09 359,035,896 6,70,28,088 2009-10 633,606,018 28,83,27,802 2010-11 406,656,344 9,27,10,039 2011-12 441,513,425 7,44,41,381 ITA No.736/Del/2017 23 2012-13 496,965,529 12,68,59,505 Total 2,846,004,939 102,20,93,131 5.2 The Ld AR has also brought on record the fact that the assessee has started receiving the disputed amounts from UPCL in monthly installments w.e.f, August, 2015 and that the assessee has voluntarily agreed do disclose the entire amount of capacity charges, Deemed Generation Charges and capacity index incentive charges during the FY 2015-16 relevant to AY 2016-17. This fact is also verifiable from the orders of assessment dated 17 th March 2016 passed by the AO in case of the assessee for AY 2007- OS u/s 254/143(3) of the Income Tax Act, 1961 wherein he has taken note of subsequent developments and has accepted the claim made by the assessee by observing as under: “7.5 The reply of the assessee has been considered carefully and the matter of matter of capacity charges, deemed generation charges and capacity index incentives has now been finally decided by the UERC and the dispute between UPCL and UJVNL stands settled. The amount of capacity charges, deemed generation charges and capacity index incentives have been determined after the direction of the Hon’ble UERC vide its order dated 27.04.2015 by observing that:- The respondent (UPCL) shall pay to petition (I.e., UJVNL) the arrear in 18 equal monthly instalments from August, 2015 onward on account of: (a) Tariff revision (b) Capacity charges and capacity index incentive (c) Income Tax 7.6 The assessee has produced the copy of the Hon’ble UERC order dated 27.04.2015 alongwith its revised year wise income of capacity charge, deemed generation charge and capacity index incentive duly agreed by UPCL and UJVNL. A copy of the agreed reconciliation statement between UPCL and UJVNL is also furnished alongwith the copy of bank statement in which the above amount of installment have been received by the UJVNL, in support of its claim, a written explanations have been submitted by the assessee on the issue of capacity charges, capacity index incentive and deemed generation charges is given as mentioned in the body of the order. The assessee has agreed to offer the income earned for the period from F.Y.2004-05 to F.Y.2012-13 under the head capacity charges, deemed generation charge and capacity index incentive to be taxed in F.Y.2015-16 i.e., on receipt basis and has also paid two installment§ of advance tax after including the capacity charges in the income of the company for F.Y.2015- ITA No.736/Del/2017 24 16. Hence no addition has been made on this account during the year under consideration. ” 5.3 Similarfindings have been given by the AO in orders for assessment dated 21 st March 2016 and 17 th March 2016 passed u/s 254/143(3) for AYs 2008-09 and 2009-10.Once the correct amount of income has already been offered to tax in AY 2016-17, we find no merit in the addition made by the AO in the present order of assessment. We, therefore, allow ground no. 2 of the appeal and direct the AO to delete the addition made of Rs 40,66,56,344/-.” 14. Since both the issues stand decided by the decision of the Tribunal in assessee’s own case, therefore, in absence of any contrary material brought to our notice, we do not find any infirmity in the order of the CIT(A) in deleting both the additions. Accordingly, the grounds raised by the Revenue are dismissed. 15. In the result, the appeal filed by the Revenue is dismissed. Order pronounced in the open court on 24.12.2021. Sd/- Sd/- (CHALLA NAGENDRA PRASAD) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 24 th December, 2021 dk Copy forwarded to : 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asstt. Registrar, ITAT, New Delhi