Income Tax Appellate Tribunal - Hyderabad
Lanco Kondapalli Power Pvt.Ltd, ... vs Assessee on 26 July, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH 'B', HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER and
SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
I.T.A. No. 1615/Hyd/2010
Assessment year 2007-08
M/s. Lanco Kondapalli Power Vs. Dy. CIT
Pvt. Ltd., Hyderabad Circle-16(1)
PAN: AAACK5423A Hyderabad
Appellant Respondent
I.T.A. No. 1659/Hyd/2010
Assessment year 2007-08
Dy. CIT Vs. M/s. Lanco Kondapalli Power
Circle-16(1) Pvt. Ltd., Hyderabad
Hyderabad PAN: AAACK5423A
Appellant Respondent
Assessee by: Sri S. Rama Rao
Revenue by: Smt. Alka R. Jain
Date of hearing: 26.07.2012
Date of pronouncement: 31.08.2012
ORDER
PER CHANDRA POOJARI, AM:
These are cross appeals directed against the order of the CIT(A)-V, Hyderabad dated 15.10.2010 for A.Y. 2007-08.
2. The assessee raised the following grounds:
1. The order of the learned Commissioner of Income-tax (appeals) is erroneous to the extent the said order is prejudicial to the appellant.
2. The learned CIT (appeals) erred in holding that the amount of Rs. 7,21,16,000 billed against AP Tranco being the Advance tax payable represents the income accruing to the appellant during the Previous year under consideration.
3. The learned CIT (appeals) ought to have seen the fact that though a bill was raised by the appellant against the AP Tranco claiming the said amount towards Advance tax, AP 2 I.T.A. Nos. 1615 & 1659/Hyd/2010 M/s. Lanco Kondapalli Power Pvt. Ltd.
============================= Tranco did not accept the claim and the amount was written off during the year itself.
4. The learned CIT (appeals) ought to have considered the fact that AP Tranco did not appoint the Arbitrator in spite of the request made by the appellant herein and the appellant had to approach the Honourable High Court of Andhra Pradesh and the matter is pending .
5. The learned CIT (appeals), in the circumstances of the case, ought to have held that the said amount did not accrue to the appellant during the previous year and is not assessable as the income of the appellant for the year under consideration.
6. The learned CIT (appeals) erred in holding that the profit of Rs. 3,00,09,300 represents income from other sources and not the income from business of power generation. The learned CIT (Appeals) ought to have held that the said income is a part of business income derived by the appellant from the power generation unit and directed that the consequential deduction be allowed.
3. The Revenue raised the following ground:
1. The CIT(A)-V is not correct in holding that reimbursement of advance tax payments to the assessee form part of business income, since the sum reimbursed is not directly related to the generation and distribution of power but is a result of an agreement. Therefore, CIT(A)-V ought to have considered the sum reimbursed as income from other sources.
4. Ground Nos. 1 to 5 in assessee's appeal and the ground raised by the Revenue are interrelated. Hence we take up these grounds together for adjudication.
5. The facts are that the assessee is a company which is engaged in the generation of power. It has an agreement with M/s. AP Transco, whereby as per Articles 3.8, 3.9 and 3.10 of the Power Purchase Agreement, M/s. AP Transco is to provide reimbursement of taxes paid by the assessee company. During assessment proceedings, the Assessing Officer investigated this issue and found that as per the clauses of the aforementioned 3 I.T.A. Nos. 1615 & 1659/Hyd/2010 M/s. Lanco Kondapalli Power Pvt. Ltd.
============================= agreement, the assessee had raised four bills regarding reimbursement of taxes. Details of these claims are as below:
Bill Nature of Bill Amount
Bill Date
No. Bill (Rs.)
AT/21 24.05.2006 Advance Tax 10,817,000
AT/22 14.08.2006 Advance Tax 21,635,000
AT/23 15.11.2006 Advance Tax 21,635,000
AT/24 15.02.2007 Advance Tax 18,029,000
Total 72,116,000
Observing that the assessee is following the mercantile system of accounting, the Assessing Officer added the aforesaid amount to the income of the assessee.
6. On appeal, the CIT(A) confirmed order of the Assessing Officer. Against this the assessee is in appeal before us. However, he held that reimbursement of advance tax is income from business instead of income from other sources. Against this, the Revenue is in appeal before us.
7. We have heard both the parties and perused the material on record. It is fairly conceded by both the parties that this issue is covered by the order of the Tribunal dated 18th May, 2012 in assessee's own case in ITA Nos. 798/Hyd/2009, 1500/ Hyd/2011, ITA No. 767/Hyd/09 and 1435 to 1438/Hyd/2011 for A.Ys. 2001-02, 2003-04 to 2006-07 more specifically for A.Y. 2001-02 in ITA No. 767/Hyd/09 (assessee's appeal) and in ITA No. 798/Hyd/2009 (Revenue appeal) in para 11 of the order which reads as under;
11. We heard both sides and perused the material on record. Undisputed facts emerging from the orders of the CIT(A) as well as the Assessing Officer are that though the Assessing Officer has raised the bill on APTRANSCO for energy supplied by it amounting to Rs. 329,39,89,958 after commencement of combined cycle commercial operation and an amount of Rs.
4 I.T.A. Nos. 1615 & 1659/Hyd/2010M/s. Lanco Kondapalli Power Pvt. Ltd.
============================= 50,62,32,391 before commencement of combined cycle commercial operation, total amounting to Rs. 382,54,87,771, the APTRANSCO has admitted only an amount of Rs. 296,67,25,943. As is evident from the orders of the Revenue authorities, for the differential amount, dispute is going on between parties at different levels. Assessee company having claimed to get the disputed amount from APTRANSCO and has even invoked the arbitration clause and has moved an Arbitration application before the Hon'ble Andhra Pradesh High Court seeking appointment of an arbitrator, the whole issue is in a stage of suspended animation. Admittedly, the assessee company has not received the whole amount as raised in the bills on APTRANSCO. Whatever amount has been received from APTRANSCO has been shown in the books of account. When there is uncertainty over receipt of the disputed amount by the assessee company, until finalisation of litigation, it cannot be said that income has accrued or crystallized in the hands of the assessee just because bills have been raised by the assessee. Accounting Standard No. 9 issued by the ICAI, dealing with the effect of uncertainties on revenue recognition, stated as follows:
"9. Effect of Uncertainties on Revenue Recognition 9.1 Recognition of revenue requires that revenue is measurable and that at the time of sale or the rendering of the service it would not be unreasonable to expect ultimate collection.
9.2 Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e.g., for escalation of price, export incentives, interest etc., revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognise revenue only when it is reasonably certain that the ultimate collection will be made. Where there is no uncertainty as to ultimate collection, revenue is recognised at the time of sale or rendering of service even though payments are made by instalments.
9.3 to 9.4 ......
9.5 When recognition of revenue is postponed due to the effect of uncertainties, it is considered as revenue of the period in which it is properly recognised."
ICAI, being a statutory body, the Accounting Standard prescribed by it cannot be brushed aside lightly. The assessee company in its books of account has recognized whatever amount has been received from APTRANSCO and has not 5 I.T.A. Nos. 1615 & 1659/Hyd/2010 M/s. Lanco Kondapalli Power Pvt. Ltd.
============================= recognised the disputed amount, since the same is subject matter of litigation. The procedure adopted by the assessee for recognition of revenue is in conformity with the Accounting Standard 9, relevant portion of which has been extracted above. What the income-tax authorities are required to tax is the real income of the assessee, and not any hypothetical income or any income under litigation, there being no certainty of the assessee receiving such income until the litigation reaches finality. The Hon'ble Supreme Court in the case of Godhra Electricity Company Ltd V/s. CIT (225 ITR 746), vide head note on page 746, has held as follows-
"Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz. the accrual of the income or its receipt. But the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book- keeping, an entry is made about a hypothetical income, which does not materialise."
The Hon'ble Supreme Court, after analyzing its earlier decision, very succinctly observed in the penultimate para of its decision, vide page 760 of the Reports (225 ITR), in the following manner "The question whether there was real accrual of income to the assessee company in respect of the enhanced charges for supply of electricity has to be considered by taking the probability or improbability of realisation in a realistic manner. If the matter is considered in this light, it is not possible to hold that there was real accrual of income to the assessee company in respect of the enhanced charges for supply of electricity which were added by the Income-tax Officer while passing the assessment orders in respect of the assessment years under consideration. The Appellate Assistant Commissioner was right in deleting the said addition made by the Income-tax Officer and the Tribunal had rightly held that the claim at the increased rates as made by the assessee company on the basis of which necessary entries were made represented only hypothetical income and the impugned amounts as brought to tax by the Income-tax Officer did not represent the income which had really accrued to the assessee company during the relevant previous years. The High Court, in our opinion, was in error in upsetting the said view of the Tribunal.
The Income-tax Appellate Tribunal, Hyderabad Bench, vide its order dated 31.1.2011 in the case of DCIT V/s. Sri Balaji Bio- Mass Power P. Ltd. in ITA No. 1748/Hyd/2008, has considered a similar issue and held in the following manner-
6 I.T.A. Nos. 1615 & 1659/Hyd/2010M/s. Lanco Kondapalli Power Pvt. Ltd.
============================= "8. We have considered the rival submissions. There is no dispute with regard to the material facts of the case. The only question that arises for consideration is whether the differential amount of sales , viz. worked out at Rs. 3.48/- per unit as per the Power Purchase Agreement applying which invoices for supply of power to APTRANSCO were raised and Rs. 3.18/- applying which in terms of the interim orders of the Hon'ble A.P. High Court, invoices of the assessee were settled by the APTRANSCO and accounted for by the assessee in the books of account, can be treated as the income of the assessee for the assessment year 2005-06. We find that the CIT(A) has given elaborate reasoning before concluding that the income worked at the rate of Rs. 3.48/- per unit of power supplied had neither accrued to the assessee nor was receivable during the previous year and therefore, no corresponding debt in respect of the differential amount stood created in the books of the purchaser, i.e. APTRANSCO. Merely based on the invoices raised, income cannot be deemed to accrue to the assessee, when the differential income was subject matter of litigation, and there is no certainty of the assessee being entitled to such income, unless it succeeds in such litigation. Even if an assessee succeeds ultimately in the litigation, a debt enforceable against the other party does not get created, unless a claim in that behalf was raised before the same being barred by limitation. It is for this reason that an assessee, to keep the issue alive, has to raise the claim against the other party within the period of limitation, which in its view is due to it according to the terms of the contract, so as to get an enforceable right for the recovery of the amount as and when it succeeds in the litigation. In this view of the matter, though invoices raised constitute fundamental record for maintenance of accounts in the normal course, as observed by the Assessing Officer, that logic does not hold good when the subject matter was under
dispute and was under litigation before the judicial fora, including the jurisdictional High Court and Hon'ble Supreme Court during the relevant points of time. Assessee's method of accounting only the amount which was not subject matter of litigation and which in fact was received by it from the APTRANSCO in terms of the interim order of the A.P. High Court, was in conformity with the Accounting Standard 9 and the ratio laid down by the Apex Court, among others, in the case law discussed by the CIT (A) in the impugned order, and also in the case-law relied upon by the assessee before us. In this view of the matter, we find no infirmity in the order of the CIT (A), which is accordingly confirmed and the grounds of appeal of the Revenue are rejected.".7 I.T.A. Nos. 1615 & 1659/Hyd/2010
M/s. Lanco Kondapalli Power Pvt. Ltd.
============================= Considered in the light of the aforesaid principle of law, it cannot be said that the amount disputed by APTRANSCO has really accrued to the assessee company in the assessment year under dispute. Only because, the assessee company has raised the bill for the said amount as per the Power Purchase Agreement. We therefore, hold that addition of Rs. 84,06,80,727 cannot be sustained. We accordingly delete the same. However, we make it clear that the said amount will be taxable in the hands of the assessee in the year in which it is actually received. Assessee's grounds on this issue are allowed, and the same of the Revenue are dismissed.
8. Further the same view is considered for A.Y. 2003-04 in ITA No. 1435/Hyd/11 in para 24 which reads as follows: "24. We heard both sides and perused the material on record.
Undisputed facts are that though the assessee has raised the bills for reimbursement of advance tax paid, APTRANSCO has refused to pay the same, and the assessee in order to resolve the dispute has approached the Hon'ble High Court for appointment of an arbitrator. In these facts of the case, the issue in dispute involved in this ground of the assessee is akin to the one considered by us while considering the cross-appeals of the assessee for the assessment year 2001-02. Hence for the detailed reasons discussed in para 11 hereinabove, while dealing with the corresponding issue for the assessment year 2001-02, we find that the addition of Rs .5,87,99,000 made by the Assessing Officer and confirmed by the CIT(A) cannot be sustained. We accordingly delete the same."
9. Respectfully following the above ratio laid down by the co-ordinate Bench, we decide the issue in favour of the assessee. The grounds raised by the assessee are allowed and the ground raised by the Revenue is dismissed.
10. Now, we will consider the second issue i.e., ground No. 6 in assessee's appeal is with regard to the CIT(A)'s observations that the profit of Rs. 3,00,09,300 represents income from other sources and not from business of power generation. Brief facts of the issue are that the company availed foreign currency loans for setting up of a power plant at Libor Plus Fix Rate. In order to hedge the risk on account of exchange rate fluctuations, the 8 I.T.A. Nos. 1615 & 1659/Hyd/2010 M/s. Lanco Kondapalli Power Pvt. Ltd.
============================= company entered into an interest rate swap contract with State Bank of India, Koti, Hyderabad fixing the LIBOR rate. As the interest rates grew during the year, the assessee sold the above contract and made a profit of Rs 3,00,09,300. This profit was disclosed as income from business. The Assessing Officer held that the aforementioned income was to be assessed as income from other sources. On appeal, the CIT(A) held that the income from exchange fluctuations has to be considered as income from other sources and not as income from business. Against this, the assessee is in appeal before us.
11. The assessee relied on the following judgements:
a) CIT vs. Rane (Madras) Ltd., 238 ITR 377 (Mad.)
b) Raghunath Exports (P) Ltd. vs. CIT, 330 ITR 57 (Cal.)
c) CIT vs. Gem Plus Jewellery India Ltd., 330 ITR 175 (Bom)
d) Shah Originals vs. ACIT (2007) 112 TTJ 754 (Mum.)
e) Changepond Technologies (P) Ltd. vs. ACIT 119 TTJ (Chennai)
f) DCIT & Ors. vs. EDS Electronic Data Systems (I) (P) LTD.23 DTR 10
12. The DR relied on the order Shree Krishna Polyester Ltd. vs. DCIT, 274 ITR 21 and the order of CIT(A).
13. We have heard both the parties and perused the material on record. The assessee earned this income by hedging the risk on account of exchange rate fluctuation relating to interest rate payment on foreign loans. This interest income cannot be considered as derived from business activity of the assessee. Even the assessee not carried on the business of production of electricity, it would have earned this income. Carrying out of business activity has nothing to do with earning of this income. The claim of the assessee is that when the payment of interest is business expenditure, correspondingly saving of interest is also a business income. In our opinion, earning from business activity 9 I.T.A. Nos. 1615 & 1659/Hyd/2010 M/s. Lanco Kondapalli Power Pvt. Ltd.
============================= is independent from earning from saving on account of this kind of hedging. Being so, we do not find any merit in the argument of the learned counsel for the assessee. Accordingly, this ground of the assessee is dismissed. The order of the CIT(A) is confirmed on this count.
14. In the result, assessee's appeal is partly allowed whereas the appeal of the Revenue is dismissed.
Order pronounced in the open court on 31st August, 2012.
Sd/- Sd/-
(ASHA VIJAYARAGHAVAN) (CHANDRA POOJARI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, dated 31st August, 2012
tprao
Copy forwarded to:
1. M/s. Lanco Kondapalli Power Pvt. Ltd., c/o. Sri S. Rama Rao, Advocate, Flat No. 102, Sriya's Enclave, 3-6-643, St. No. 9, Himayathnagar, Hyderabad-500 029.
2. The Deputy Commissioner of Income-tax, Circle-16(1), Hyderabad.
3. The CIT(A)-V, Hyderabad.
4. The CIT-IV, Hyderabad.
5. The DR - B Bench, ITAT, Hyderabad