Income Tax Appellate Tribunal - Jaipur
Deputy Commissioner Of Income Tax, ... vs Rajasthan Rajya Vidyut Utpadan Nigam ... on 8 May, 2018
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IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR
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BEFORE: SHRI VIJAY PAL RAO, JM & SHRI VIKRAM SINGH YADAV, AM
vk;dj vihy la-@ITA No. 1013/JP/2017
fu/kZkj.k o"kZ@Assessment Years : 2008-09
D.C.I.T., cuke M/s Rajasthan Rajya Vidyut Utpadan
Circle-6, Vs. Nigam Ltd.,
Jaipur. Vidyut Bhawan, Jaipur.
LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AABCR 7436 B
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s Assessee by : Shri P.C. Parwal (CA)
jktLo dh vksj ls@ Revenue by : Smt. Roli Agarwal (CIT)
lquokbZ dh rkjh[k@ Date of Hearing : 02/05/2018
mn?kks"k.kk dh rkjh[k@ Date of Pronouncement : 08/05/2018
vkns'k@ ORDER
PER: VIKRAM SINGH YADAV, A.M.:
This is an appeal filed by the Revenue against the order dated 29/09/2017 passed by the ld CIT(A), Bikaner for A.Y. 2008-09, wherein the Revenue has taken following grounds of appeal:
(i) "Whether on the facts in the circumstances of the case and in law the ld. CIT(A) was justified in deleting the addition of Rs. 4594/- made by the AO for depositing the employee's contribution to PF & ESI beyond the prescribed time limit provided in respective Acts."
(ii) "Whether on the facts in the circumstances of the case and in law the ld. CIT(A) was justified in holding that employee's contribution to PF &
2 ITA 1013/JP/2017_ DCIT Vs. M/s RRVUNL ESI are governed by the provision of section 43B and not by section 36(1)(va) r.w.s. 2(24)(x) of the I.T. Act."
(iii) "Whether on the facts in the circumstances of the case and in law the ld. CIT(A) was justified in deleting the addition of Rs. 1,76,88,00,000/- made on account of advance received against depreciation deferred."
2. Regarding grounds No. 1 and 2 of the Revenue's appeal, following the decision of Hon'ble Rajasthan High Court in the case of CIT Vs. Jaipur Vidyut Vitran Nigam Ltd. 98 DTR 105 (Raj) and Ors, the ld. CIT(A) has given his findings which are as under:
"3.4 From the above decisions, it is clear that payment or contribution made to the provident fund authority any time before filing of the return for the year in which the liability to pay accrued is an allowable expenditure. Likewise, in the present case, the employees' contribution was deposited by the appellant before due date for filing of return of income, therefore, in view off the decision of the Hon'ble Supreme Court in the case of CIT vs. Alom Extrusions Ltd (supra) and decision of the Hon'ble Delhi High Court in the case of CIT vs. Aimil Ltd & Ors (supra), the payments made before due date for filing of return of income are allowable. The AO is directed to verify the dates of payment of employee's contribution towards PF and ESI and delete the addition made on this account if the payments have been made before the due date of filing of return of income by the appellant. Considering the factual and legal position as discussed above, the AO is directed to verify and allow as per law. This ground of appeal is allowed."
3. We have heard the rival contentions and perused the material available on record and we do not think that there is any infirmity in the 3 ITA 1013/JP/2017_ DCIT Vs. M/s RRVUNL order of the ld. CIT(A) who, following the decisions of the Hon'ble Rajasthan High Court referred supra, has directed the AO to verify the dates of payment of employee's contribution and delete the same, if the payments have been made before the due date of filing of the return of income. In the result, the grounds taken by the Revenue are dismissed.
4. Regarding ground No. (iii) of the Revenue's appeal, briefly stated facts of the case are that during the course of assessment proceedings, the Assessing Officer observed that in Schedule 16: Revenue from sale of power of the assessee's company audited financial statements, the assessee company has reduced a sum of Rs. 176.88 crores from the revenue from sale of power. The assessee was issued a show cause notice as to why the said amount of Rs. 176.88 crores shown as advance against depreciation deferred be not added to the total income. In response, the assessee company submitted that it is engaged in generation of power and supplying it to various distribution companies at the tariff notified by the Rajasthan State Electricity Regulatory Commission (RERC). The tariff rate is fixed on the basis of the expenses incurred by the assessee company which includes the interest cost and element of depreciation and advance against depreciation (AAD), besides other costs. It was submitted that the advance against depreciation is considered while determining tariff to generate the cash flows in the hands of the assessee company for repayment of loan raised for installation of power plant. This advance collection of tariff through the mechanism of AAD is required to be utilized for repayment of loan and it is reduced from the revenue i.e. from sale of power reflected in the balance sheet in Schedule 2A as deferred revenue on account of AAD. This amount is to be subsequently transferred to the sale when the depreciation charged in the books is more than the 4 ITA 1013/JP/2017_ DCIT Vs. M/s RRVUNL depreciation rate fixed for tariff purpose. Further the assessee relied on the decision of Hon'ble Supreme Court in the case of National Hydro Electric Power Corporation Ltd. Vs CIT 320 ITR 374 and submitted that in the said decision, the Hon'ble Supreme Court with reference to adjustment of book profit U/s 115JB has held that the amount of AAD received through tariff is an obligation to be adjusted in future so as to reduce the tariff in the future years. It is a timing difference. It is only the income received in advance. It was accordingly submitted that the Hon'ble Supreme Court has held that the amount of AAD is income received in advance, the same cannot be included in the year in which the amount is received. It can be considered in the income of future years when such AAD is transferred to income. Further, reliance was placed on the decision of Hon'ble Madras High Court in the case of CIT Vs. Coral Electronics Pvt. Ltd. 274 ITR 336 (Mad).
5. The reply so filed by the assessee was however not found acceptable to the Assessing Officer. The Assessing officer observed as under:
"The reply furnished by the A/R of the assessee has been considered. To understand the issue in debate mechanism and structure of Power Companies needs to be understood. Under the Power Sector Transfer Reforms Scheme 2000, Rajasthan State Electricity Board was demerged into five companies namely RRVPN, RRVUN, JWNL, AWNL & JDWNL. The assessee company was one of the resultant companies engaged in the generation of power. The present power scenario is result of understanding between Assessee Company, other resultant companies, State Government and World Bank. Accordingly, selling price of power generated by the assessee company is determined by considering the entire cost including interest and depreciation. The assessee company has borrowed funds for installation of power plants which is repayable 5 ITA 1013/JP/2017_ DCIT Vs. M/s RRVUNL normally within ten years whereas depreciation is charged over the useful life of the plant. Selling price of power is determined by Rajasthan Electric Regulatory Corporation (RERC) by way of tariff. Terms and conditions of fixation of tariff by RERC provide allowance of advance against depreciation over and above normal depreciation. Advance against deprecation is nothing but difference between the rate of depreciation and amount of repayment of loan. The assessee has reduced the said amount of Advance Against Depreciation(AAD) from the revenue of the current year by stating that the same will be reversed in subsequent year and credited to income (according to the assessee company this arrangement has been made as per the terms and conditions of agreement with RERC). On going the terms and condition of tariff it is noticed that it no where provides that the advance against depreciation so allowed to corporation will be adjusted against the subsequent year tariff.
As per the scheme it appears that advance against depreciation allowed by way of tariff by RERC is only to improve the cash flow of the company and it is not adjustable in subsequent year's tariff as per the terms and conditions of determination of tariff. Thus the amount so received is current year revenue and not the revenue for subsequent year.
The selling price of power is determined by RERC and it is neither refundable nor adjustable against the future revenue. The amount was received in terms of invoice raised by assessee and the payer i.e. discoms (JVVNL, JDVVNL, AVVNL) have claimed the said amount as power purchase expenses of current year the said amount is initially booked as revenue by the assessee company and later on for the purpose of determining profit for the year same is reduced and shown as liability. The assessee company has reduced the amount by stating that the excess depreciation charged in tariff is to be reversed in subsequent year.
In view of the above discussion the contention of the assessee is not acceptable on account of the following reasons: -
6 ITA 1013/JP/2017_ DCIT Vs. M/s RRVUNL
(i) The assessee has relied on the decision of the Hon'ble Supreme Court in the case of National Hydro Electric Power Corporation Ltd. 320 ITR 374 which is not relevant in the present case. The Hon'ble Apex Court has dealt the issue relating to adjustment for the purpose of computation of book profit u/s 115JB. In this case income is computed under the normal provisions of computation as per Income Tax Act, 1961 not the book profit u/s 115JB as per the Company's Act. In this case Hon'ble Apex Court has dealt with the issue relating to reserves and not with the issue of revenue of the current year or subsequent year. Hence, the facts of the case dealt by the Apex Court are entirely different from the facts of the assessee company.
(ii) Opinion of ICAI has also been considered. ICAI has opined that where revenue or part thereof received / receivable, during the particular period, is to be adjusted in future, to that extent the revenue received/receivable is not considered as earned, but is treated as revenue received in advance.
The assessee has not provided any material which suggests how the Advance Against Depreciation (AAD) would be reversed in subsequent years. Thus, the opinion of ICAI is not acceptable. The similar view has also been expressed by Authority for Advance Ruling (AAR) in AAR No.550 of 2001 reported at 193 CTR 594 by holding that reduction of AAD from the sales was nothing but a result which has to be added back.
(iii) Terms and condition for determination of tariff issued by RERC has also been considered which provides for the provision relating to improvement of cash flow of the company however it does not provide the mechanism how the AAD allowed in a year will be reversed in subsequent years. In these guidelines there is no provision which deals with adjustment of AAD in subsequent years tariff. Thus, there is no specific provision which deals 7 ITA 1013/JP/2017_ DCIT Vs. M/s RRVUNL adjustment of AAD in subsequent year tariff hence AAD is nothing but revenue of the year under consideration.
(iv) The whole issue also needs to be seen in a totality where all these individual entities (Power Companies) have signed one umbrella agreement, under these circumstances it is difficult to fathom how one entity (JVVNL, JDVVNL, AVVNL) claims amount as an expense while an interlinked entity, the assessee company, in the same chain of operation does not claim it as its revenue. Further, on perusal of the umbrella agreement it is seen that the agreement allows for a financial stability to be provided to these power companies using different tools. However, the convenience of these financial tools cannot be used as an argument to bypass taxation which would be applicable on these individual entities. At each stage of discussion both written and oral the assessee company has made an effort to impress upon as to why a particular set off financial transactions were used by them. This office is not making any opinion on the modality under taken by different entities in this umbrella group for arriving at a financial structure with respect to the project. This order only interprets the applicable taxation taking into account the liability arising out of the action under taken by the entity in question i.e. the assessee company. The assessee company has reduced the AAD amount from its revenue and shown reduced income. The discoms (JVVNL, JDVVNL, AVVNL) who are paying the power purchase charges are claiming the entire amount including AAD as expenditure. Thus, assessee company in its hand is treating the AAD amount as advance revenue whereas the power purchasing company is claiming the AAD as current year's expenses. Thus the treatment of same item has been done in two different ways which cannot be allowed as per the accounting principles.
Based on the above reasons the contention of the assessee is not acceptable and the treatment of revenue from sale of power to discoms 8 ITA 1013/JP/2017_ DCIT Vs. M/s RRVUNL amounting to Rs. 176,88,00,000/- as advance against depreciation deferred by the assessee is disallowed. Thus, addition of Rs.176,88,00,000/- is made to the total income of the assessee."
6. Being aggrieved, the assessee carried the matter before the ld. CIT(A), who has allowed the necessary relief to the assessee company following the decision of Hon'ble Supreme Court in the case of National Hydro Electric Power Corporation Ltd. Vs. CIT (supra) as well as the decision of the Coordinate Bench in the case of ACIT Vs NHPC Limited 67 SOT 130, which was rendered in the context of computation of taxable income under the normal provisions of the Act. The relevant finding of the ld. CIT(A) is contained at Para 2.7 of his order, which is reproduced as under:
"2.7 I have considered the facts of the case and the submission made. It is seen that the assessee has reduced the current year revenue with the advance against depreciation. This stands reversed in the subsequent year. The Expert Advisory Committee of ICAI has given its opinion on the accounting treatment of AAD recovered through the tariff. It is opined that where revenue or a part thereof received/ receivable during a particular period is to be adjusted in future, to that extent the revenue received/ receivable is not considered as earned, but is treated as revenue received in advance. Thus, that part of tariff which arises because of inclusion of advance against depreciation should be treated as revenue received in advance since the said advance will be adjusted in later years against the depreciation. Further the Hon'ble Supreme in case of National Hydro Electric Power Corporation Ltd. Vs.CIT 320 ITR 374 have held that Advance against depreciation is an amount that that is under obligation, right from its inception to be adjusted against the future depreciation so as to reduce the tariff in future years. It is a timing difference. It is only the income received in advance. Similarly 9 ITA 1013/JP/2017_ DCIT Vs. M/s RRVUNL ITAT Delhi bench in case of ACIT vs. NHPC Limited 67 SOT 130 by following the decision of the Supreme Court referred supra, held that the assessee cannot use the advance against depreciation for any other purpose, which is possible in case of reserve, except to adjust same against future depreciation so as to reduce the tariff in future years and advance against depreciation cannot be added under computation of normal income. Considering all these facts and respectfully following the decision of the Hon'ble Supreme Court and ITAT Delhi bench the addition of Rs. 1,76,88,00,000/- made by the Assessing Officer is deleted."
7. Now the Revenue is in appeal before us. During the course of hearing, the ld DR has reiterated the findings of the Assessing Officer and supported the order of the Assessing Officer. It was submitted by the ld DR that the decision of the Hon'ble Supreme Court was rendered in the context of section 115JB of the Act whereas the issue in the present appeal is taxability of AAD under the normal provisions of the Act.
8. Per contra, the ld. AR of the assessee has submitted that the matter is squarely covered by the decision of the Hon'ble Supreme Court in the case of National Hydro Electric Power Corporation Ltd. Vs. CIT (supra) as well as the subsequent decision of the Coordinate Bench in case of NHPC (supra), which has rightly been followed by the ld. CIT(A). Accordingly, he supported the findings of the ld CIT(A). Further, the ld AR has reiterated the contentions raised before the ld CIT(A) which are as under:
1. The assessee company is engaged in the business of generation and distribution of power. The sale rate of power is regulated and determined by Rajasthan State Electricity Regulatory Commission (RERC). RERC fix the tariff rate on the basis of cost incurred by the assessee. Power plants are installed by the assessee co. by raising the loan fund. The life of power 10 ITA 1013/JP/2017_ DCIT Vs. M/s RRVUNL plant is estimated around 20 years whereas repayment of loan is required to be made in 10 years. Thus, to generate the cash flow for repayment of loan within the time, RERC while fixing the tariff rate, apart from the normal depreciation also allow the advance against depreciation towards cost. The amount so collected through the increased tariff rates because of allowance of AAD is utilized for repayment of loan. When the amount of loan becomes lower than the amount of normal depreciation, the difference is included in the income of that year. Therefore, the AAD collected during the year is reduced from the revenue of the current year and is included in the revenue of the subsequent years to which it pertains.
Relevant extract of the terms & conditions for determination of tariff by RERC so far as AAD is concerned (PB 9-10) reads as under:-
(2) Advance against depreciation (AAD) shall be permitted in addition to allowable depreciation, in the manner given hereunder:
AAD= Loan repayment amount as per regulation 18 subject to a ceiling of 1/10th of loan amount as per Regulation 14 minus depreciation as per schedule Provided that advance against depreciation shall be permitted only if the cumulative repayment up to a particular year exceeds the cumulative depreciation up to that year, considering cumulative repayment as reduced by the accumulated depreciation transferred to licensee under transfer scheme.
Provided further that AAD in a year shall be restricted to the extent of difference between cumulative repayment and cumulative depreciation up to that year.
Provided also that in case a transitional loan in secured to meet wholly or partly the difference between the loan repayment and 11 ITA 1013/JP/2017_ DCIT Vs. M/s RRVUNL depreciation charges, then the interest liability of such transitional loans will be considered and the remaining difference, if any, between loan repayment liability (including that of transitional loan) and the depreciation shall only be considered towards AAD. "
Thus, by allowing AAD, the tariff rate is increased. This increased amount received on account of tariff fixation is not the income for the year and therefore it is accounted for in the books as deferred revenue. The amount of deferred revenue is considered in revenue in the year when the amount of outstanding loan becomes lower than the accumulated depreciation. Thus, the AAD forming part of tariff is only to facilitate repayment of loan and nothing else and same will be forming part of revenue in subsequent years to which this revenue pertains. Only because in the terms and conditions for determination of tariff nothing is specified about adjustment of AAD in subsequent year tariff, no adverse inference can be drawn.
2. The assessee has shown Deferred revenue on account of advance against depreciation as on 31.03.2008 at Rs.3,34,68,00,000/- (PB 21). It includes AAD of Rs. 1,76,88,00,000/- for the year which is reduced from the revenue of the current year (PB 24). The amount of revenue so deferred has been included in the revenue of the subsequent year. The same is evident from the P&L A/c of FY 2011-12 wherein the amount of Rs.50,93,159/- by way of advance against depreciation deferred has been added to the revenue from sale of power (PB 30) and reduced from deferred revenue on account of AAD (PB 29). Similar addition to the revenue account is been made in FY 2012-13 which are under finalization. Thus, the observation of the AO that assessee has not provided any material which suggests that how the AAD would be reversed in the subsequent year and therefore the opinion of the ICAI is 12 ITA 1013/JP/2017_ DCIT Vs. M/s RRVUNL not acceptable is without appreciating the nature of receipt peculiar to the electricity companies.
3. The Expert Advisory Committee of ICAI has also given its opinion on the accounting treatment of AAD recovered through the tariff (PB 15-20). It is opined that where revenue or a part thereof received/ receivable during a particular period is to be adjusted in future, to that extent the revenue received/ receivable is not considered as earned, but is treated as revenue received in advance. Thus, that part of tariff which arises because of inclusion of advance against depreciation should be treated as revenue received in advance since the said advance will be adjusted in later years against the depreciation. It may be noted that in the absence of any specific provision for treatment of receipt of AAD in the Income Tax Act the treatment as per the commercial accounting has to be adopted for determination of the income as held by Supreme Court in case of Badri Das Daga Vs. CIT 34 ITR 10. Further, in subsequent year when such deferred revenue has been included in the income) by the assessee, the same has been taxed by the department resulting into double addition. Therefore, the addition made by the AO is unjustified.
4. The Supreme Court in case of National Hydro Electric Power Corporation Ltd. Vs. CIT 320 ITR 374 (PB 11-14) held that AAD is an amount that is under obligation, right from its inception to be adjusted against the future depreciation so as to reduce the tariff in future years. It is a timing difference. It is only the income received in advance. Thus, when the Supreme Court has held that the amount of AAD is income received in advance, the same cannot be included in the year in which the amount is received. It is only the income of the future years. Therefore, only for the reason that this decision is given with reference to calculation of book profit u/s 115JB, the principle laid down in this decision cannot be ignored.
13 ITA 1013/JP/2017_ DCIT Vs. M/s RRVUNL
5. The AO has referred to the decision of the AAR reported in 193 CTR 594. This decision has been overruled by the Supreme Court in the decision referred above. Therefore, when the decision relied by the AO has been overruled by the Supreme Court, the AAD cannot be included in the income of the year.
6. One of the observation raised by AO is that the companies purchasing the electricity have /claimed the same as expenses in the year of purchase (including the AAD) and therefore the AAD received by the assessee is also to be assessed in the income of the year. It may be pointed out that treatment of expenditure in the books of other parties would not be determinative of the treatment of the income in the hands of the assessee. For instance, in case of dealer of car the car sold by him is a revenue receipt but when it is purchased by the other as a fixed asset it would not be an expenditure in the hands of the purchaser. Therefore, only because the other party has claimed the expenditure, it necessarily would not become the income of the assessee of that year.
9. In order to appreciate the rival contentions, firstly, we refer the decision of Hon'ble Supreme Court in the case of NHPC Vs. CIT (Supra). In the facts before the Hon'ble Supreme Court, the assessee company was a public sector enterprise engaged in generation of electricity and selling the same to State Electricity Board(s), Discoms etc. at tariff rates notified by CERC. The tariff consists of depreciation, AAD, interest on loans, interest on working capital, operation and maintenance expenses, return on equity. As per the Government of India policy, notified on 26th May, 1997, the Govt. of India introduced a mechanism to generate additional cash flow by allowing generating companies to collect AAD by way of tariff charge. It was decided that the year in which normal 14 ITA 1013/JP/2017_ DCIT Vs. M/s RRVUNL depreciation fell short of original scheduled loan repayment installment (capped at 1/12th of the original loan) such shortfall would be collected as advance against future depreciation. In other words, once the loan stood repaid, the advance so collected would get reduce from the normal depreciation of the later years, as such reduced depreciation would be included in the tariff, in turn lowering the tariff. In that factual background, the question for consideration before the Hon'ble Supreme Court was how to account for such an advance in the hands of assessee and further whether the reduction of AAD from sales was nothing but a reserve which has to be added back on the basis of clause (b) of explanation 1 to Section 115JB of the Act and the relevant findings of the Hon'ble Supreme Court are contained at para 11 and 12 of its order, which is reproduced as under:
"11. Since the amount of AAD is reduced from sales, there is no debit in the profit and loss account, the amount did not enter the stream of income for the purposes of determination of net profit at all, hence clause (b) of Explanation 1 was not applicable. Further, "reserve" as contemplated by clause (b) of Explanation 1 to section 115JB of the 1961 Act is required to be carried through the profit and loss account. At this stage, it may be stated that there are broadly two types of reserves, viz., those that are routed through the profit and loss account and those which are not carried via the profit and loss account, for example, a capital reserve such as share premium account. AAD is not a reserve. It is not an appropriation of profits. AAD is not meant for an uncertain purpose. AAD is an amount that is under obligation, right from the inception, to get adjusted in the future, hence, cannot be designated as a reserve. AAD is nothing but an adjustment by reducing the normal depreciation includible in the future years in such a manner that at the end of the useful life of the plant (which is normally 30 years) the same would be reduced to nil.
15 ITA 1013/JP/2017_ DCIT Vs. M/s RRVUNL Therefore, the assessee cannot use the AAD for any other purpose (which is possible in the case of a reserve) except to adjust the same against future depreciation so as to reduce the tariff in the future years. As stated above, at the end of the life of the plant AAD will be reduced to nil. In fact, schedule XII-A to the balance-sheet for the financial years 2004-05 onwards indicates recouping. In our view, AAD is "income received in advance". It is a timing difference. It represents adjustment in future which is in-built in the mechanism notified on May 26, 1997. This adjustment may take place over a long period of time. Hence, we are of the view that AAD is not a reserve.
12. For the aforestated reasons, we hold that AAD is a timing difference, it is not a reserve, it is not carried through the profit and loss account and that it is " income received in advance" subject to adjustment in future and, therefore, clause (b) of Explanation 1 to section 115JB is not applicable. Accordingly, the impugned ruling is set aside and the civil appeal filed by the assessee stands allowed with no order as to costs."
10. Further, we refer to the decision of the Coordinate Bench in the case of ACIT Vs. NHPC (in ITA No. 3013 to 3015/Del/2010 order dated September, 20, 2014), the issue for consideration before the Coordinate Bench was whether the ld. CIT(A) was right in law in deleting the addition of Rs. 1,40,58,00,000/- made by the Assessing Officer U/s 143(3) on account of advance against deprecation ignoring the provisions of Section 2(24) read with Section 28 of the Act. The Coordinate Bench relying on the decision of the Hon'ble Supreme Court in the case of NHPC Vs. CIT (supra) has held that advance against depreciation cannot be added under the computation of the normal income. The relevant findings of the Coordinate Bench are contained at Para 5 of its order, which is reproduced as under:
16 ITA 1013/JP/2017_ DCIT Vs. M/s RRVUNL "5. After hearing both the sides on the issue and considering the decisions of Hon'ble Supreme Court, we decide the issue as under.
The Hon'ble Supreme Court has given finding after considering the observation of the Authority for Advance Ruling in para 11 which is reproduced as under :--
"11. Since the amount of "advance against depreciation" (AAD) is reduced from sales, there is no debit in the profit and loss account. The amount did not enter the stream of income for the purposes of determination of net profit at all, hence clause (b) of Explanation-I was not applicable. Further, "reserve" as contemplated by clause (b) of the Explanation-I to Section 115JB of the 1961 Act is required to be carried through the profit and loss account. At this stage it may be stated that there are broadly two types of reserves, viz, those that are routed through profit and loss account and those which are not carried via profit and loss account, for example, a Capital Reserve such as Share reserve. It is not appropriation of profits. AAD is not meant for an uncertain purpose. AAD is an amount that is under obligation, right from the inception, to get adjusted in the future, hence, cannot be designated as a reserve. AAD is nothing but an adjustment by reducing the normal depreciation includible in the future years in such a manner that at the end of useful life of the Plant (which is normally 30 years) the same would be reduced to nil. Therefore, the assessee cannot use the AAD for any other purpose (which is possible in the case of a reserve) except to adjust the same against future depreciation so as to reduce the tariff in the future years. As stated above, at the end of the life of the Plant, AAD will be reduced to nil. In fact, Schedule XII-A to the balance sheet for the years 2004-05 onwards indicates recouping. In our view, AAD is "income received in advance". It is a timing difference. It represents adjustment in future which is in-built in the 17 ITA 1013/JP/2017_ DCIT Vs. M/s RRVUNL mechanism notified on 26.5.1997. This adjustment may take place over a long period of time. Hence, we are of the view that AAD is not a reserve."
In this para, Hon'ble Supreme Court has held that advance against depreciation is not meant for uncertain purposes. Advance against depreciation is an amount that is under obligation right from the inception as the same shall be adjusted in future, hence, cannot be designated as reserve. Hon'ble Supreme Court has also held that advance against depreciation is nothing but an adjustment by reducing the normal depreciation including in the future years in such a manner that at the end of the useful life of the plant the same shall be reduced to nil. The Hon'ble Supreme Court has also held that assessee cannot use the advance against depreciation for any other purposes except to adjust the same against future depreciation so as to reduce the tariff in future years. For this, the relevant observation of the Hon'ble Supreme Court is that there are broadly two types of reserves, viz., those that are routed through profit and loss account and those which are not carried vide profit and loss account, for example, a Capital Reserve such as Share Premium Account, advance against depreciation is not a reserve and it is not appropriation of profits. The above findings by the Supreme Court are clear and decide the issue. It has been held that AAD is not appropriation of profit meaning thereby AAD is not taken out of profit. That it is not a deduction out of profit. The Supreme Court has further held that AAD is an amount that is under obligation, right from the inception. Thus it is a liability and hence not income. When an amount is received by a person from another person, it can have two nature. It can be income. If so it has to be taken to the profit and loss account and from profit and loss account it goes to the balance sheet as reserve. Alternatively it is a liability and straight away goes to the balance sheet under the head 'liability' not under the head 'reserve'. The Supreme 18 ITA 1013/JP/2017_ DCIT Vs. M/s RRVUNL Court has categorically held that it is an amount that is under obligation right from the inception. The Supreme Court has further gone to analyse the nature of "reserve". It has held that there are two types of reserves. One which is created out of profit and another which are capital reserve such as Share Premium Account. It has held that AAD is not a reserve created out of profit since AAD is not income but a liability. If the contention of the Revenue as is being argued is taken to the logical conclusion, then AAD will be income and hence part of Profit and Loss Account. The liability created will be a "reserve" by debit to the profit and loss account. The Supreme Court has categorically held that AAD is not a "reserve". Once AAD is considered as income as is being alleged by Revenue the obvious implication will be that such income in the Balance Sheet is a reserve. It can't be that AAD is an income and then it vanishes. Income has to be carried to the Balance Sheet and such income carried to Balance Sheet will form part of the 'Reserve'. Since 'AAD' has been held by Supreme Court is not a reserve, this contention of the Revenue can't be accepted. It is to be further noted that Supreme Court has not stopped by just saying that AAD is not a reserve. It has gone further to define the nature of AAD and held that it is a liability and is to be discharged in future as can be seen from the following observations:
"AAD is not meant for an uncertain purpose. AAD is an amount that is under obligation, right from the inception, to get adjusted in the future, hence, cannot be designated as a reserve. AAD is nothing but an adjustment by reducing the normal depreciation includible in the future years in such a manner that at the end of useful life of the Plant (which is normally 30 years) the same would be reduced to nil. Therefore, the assessee cannot use the AAD for any other purpose (which is possible in the case of a reserve) except to adjust the same against future depreciation so as to reduce the tariff in the future years."
19 ITA 1013/JP/2017_ DCIT Vs. M/s RRVUNL In view of the categorical finding of the Supreme Court we hold that the CIT(A) was correct in holding that advance against depreciation cannot be added under the computation of the normal income. The order of CIT(A) is upheld and the appeals of the Revenue are dismissed."
11. We have heard the rival contentions of both the parties and perused the material available on the record. We find that the facts of the present case are pari-materia to the facts before the Hon'ble Supreme Court as well as before the Coordinate Bench referred supra and the latter decision has been rendered in the context of taxability of Advance against depreciation under the normal provisions of the Act. The ld CIT(A) has rightly followed the ratio laid down in the said decisions. We donot find any infirmity in the order of the ld CIT(A) and the same is hereby confirmed. The ground taken by the Revenue is thus dismissed.
12. In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open court on 08/05/2018.
Sd/- Sd/-
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(Vijay Pal Rao) (Vikram Singh Yadav)
U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member
Tk;iqj@Jaipur
fnukad@Dated:- 08th May, 2018
*Ranjan
vkns'k dh izfrfyfi vxzfs 'kr@Copy of the order forwarded to:
1. vihykFkhZ@The Appellant- The D.C.I.T., Circle-6, Jaipur.
2. izR;FkhZ@The Respondent- M/s Rajasthan Rajya Vidyut Utpadan Nigam Ltd., Jaipur
3. vk;dj vk;qDr@ CIT 20 ITA 1013/JP/2017_ DCIT Vs. M/s RRVUNL
4. vk;dj vk;qDr@ CIT(A)
5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur
6. xkMZ QkbZy@ Guard File (ITA No. 1013/JP/2017) vkns'kkuqlkj@ By order, lgk;d iathdkj@Asst. Registrar