MAHARASHTRA ELECTRICITY REGULATORY COMMISSION,MUMBAI vs. DY CIT (EXEMPTION)-CIRCLE 2, MUMBAI

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ITA 7829/MUM/2025Status: DisposedITAT Mumbai05 May 2026AY 2018-1916 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that prior period income adjusted against prior period expenses should be eligible for exemption under Section 10(46). It also held that 'other income', including interest on HBA and minor incidental receipts, were eligible for exemption under Section 10(46) as they were intrinsically connected to the assessee's regulatory functions.

What were the facts?

The assessee, Maharashtra Electricity Regulatory Commission, claimed exemption under Section 10(46) for its income. The Assessing Officer denied exemption on certain 'other income' and prior period income, and also made disallowances under Section 40(a)(ia). The CIT(A) upheld most of the additions but restored the Section 40(a)(ia) issue for verification.

What were the issues?

Whether 'other income' and prior period income earned by a statutory regulatory body are eligible for exemption under Section 10(46), and whether disallowances under Section 40(a)(ia) are warranted.

Which sections of the Income-tax Act were involved?

Section 10(46),Section 40(a)(ia),Section 250

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “D” BENCH MUMBAI

For Appellant: Shri Rajiv Kahndelwal (Virtually
For Respondent: Shri Annavaram Kosuri, SR AR
Hearing: 16.04.2026Pronounced: 05.05.2026

आदेश / ORDER PER MAKARAND VASANT MAHADEOKAR, AM: This appeal is filed by the assessee against the order dated 06.10.2025 passed by the Commissioner of Income-tax (Appeals), National Faceless Appeal Centre, Delhi[hereinafter referred to as "CIT(A)"], under section 250 of the Income-tax Act,

2 ITA No. 7829/Mum/2025 Maharashtra Electricity Regulatory Commission 1961[hereinafter referred to as "the Act"], arising from the assessment order dated 29.01.2021 passed by the Assessing Officer, National e-Assessment Centre, under section 143(3) read with sections 143(3A) and 143(3B) of the Act for the assessment year 2018–19.

Facts in Brief 2. Brief facts of the case are such that the assessee is an AOP constituted on 05.08.1999 under the Electricity Regulatory Commission Act, 1998, subsequently governed by the Electricity Act, 2003, and is entrusted with regulatory functions in the power sector, including tariff determination and protection of consumer interests. The assessee had been notified by the Central Government vide notification dated 01.12.2016 for exemption under section 10(46) in respect of specified income.

3.

The assessee filed its return of income on 19.10.2018 declaring total income at Rs. 7,58,87,698/- and, after claiming exemption under section 10(46) of the Act to the same extent, returned nil income. The case was selected for scrutiny under CASS for examining the issue of “Business Income of Trust” and statutory notices under sections 143(2) and 142(1) were issued during the course of assessment proceedings.

4.

During the course of assessment proceedings, the Assessing Officer noticed that apart from the specified income covered under notification under section 10(46), the assessee had earned

3 ITA No. 7829/Mum/2025 Maharashtra Electricity Regulatory Commission other income aggregating to Rs. 16,70,763/- comprising “Personal use of office vehicle Rs. 3,204/-, Misc. income Rs. 7,206/-, Interest on HBA Rs. 16,55,645/- and Interest on loans to others Rs. 4,708/-”. The assessee submitted that such income, particularly interest on HBA, was subsequently included in the notification for exemption in later years. However, the Assessing Officer held that the assessee “is not eligible for claiming exemption on the income to the tune of Rs.16,70,763/-, in view of S.O. 3605(E) dated 01-12-2016 though it may became eligible for assessment year 2021-22” and accordingly restricted the exemption.

5.

The Assessing Officer further observed from the audit report that the assessee had credited prior period income and debited prior period expenses. The assessee submitted details of such prior period adjustments. The Assessing Officer, however, held that since the assessee was following mercantile system of accounting, expenses not pertaining to the year under consideration could not be allowed and, after noting that the assessee had already disallowed Rs. 7,09,16,312/- in its computation, made a further disallowance of Rs. 1,10,26,018/- observing that “income liable to assess in a particular year cannot be postponed”.

6.

Further, with regard to payments for professional and technical services, the Assessing Officer observed that against payments of Rs. 4,03,42,593/-, tax was required to be deducted

4 ITA No. 7829/Mum/2025 Maharashtra Electricity Regulatory Commission on Rs. 3,44,04,937/-, whereas tax had been deducted only on Rs. 2,12,67,256/-, resulting in non-deduction on Rs. 1,31,37,681/-. The assessee submitted details in response; however, the Assessing Officer invoked section 40(a)(ia) and disallowed 30% thereof amounting to Rs. 39,41,304/-.

7.

Accordingly, the Assessing Officer computed total income at Rs. 9,08,55,020/- and, after allowing exemption under section 10(46) to the extent of Rs. 7,42,16,935/- (after reduction of Rs. 16,70,763/-), assessed total income at Rs. 1,66,38,085/-.

8.

Aggrieved by the assessment order, the assessee preferred appeal before the CIT(A). The assessee reiterated that it is a quasi-judicial regulatory authority, not engaged in any commercial activity, and is eligible for exemption under section 10(46) in respect of all its income. It was further submitted that prior period income had been adjusted against prior period expenses and a net disallowance had already been offered in the return. It was also contended that disallowance under section 40(a)(ia) was not warranted as tax was deducted at lower rate based on certificates obtained from vendors.

9.

The CIT(A), after considering the submissions, recorded that the assessee had not furnished complete details regarding nature and allowability of prior period expenses and held that under mercantile system, such expenses are allowable in the year in which they are debited and not on the basis of crystallization.

5 ITA No. 7829/Mum/2025 Maharashtra Electricity Regulatory Commission Accordingly, the disallowance of Rs. 1,10,26,018/- was confirmed.

10.

In respect of disallowance under section 40(a)(ia), the CIT(A) noted the contention regarding lower deduction certificates and restored the issue to the file of the Assessing Officer for verification, observing that “the AO is directed to verify the appellant’s claim and the same may be decided based on the lower TDS deduction certificate”.

11.

With regard to denial of exemption under section 10(46), the CIT(A) held that exemption is available only in respect of specified income notified by the Central Government and that “the other income of Rs. 16,70,763/- does not fall under the category of specified income”, and therefore confirmed the addition.

12.

On the issue of tax rate, the CIT(A) directed the Assessing Officer to apply tax rate as per AOP status and partly allowed the appeal. 13. Aggrieved by the order of CIT(A), the assessee is in appeal before us raising following grounds of appeal: The following grounds of appeal are independent of, and without prejudice to, one another – 1. The Commissioner of Income-tax (Appeals) at the National Faceless Appeal Centre, Delhi (hereinafter referred to as the CIT(A)) erred in upholding the action of the Officer at the National e-Assessment Centre, (hereinafter referred to as the Assessing Officer) in making an addition of Rs 1,10,26,018, being prior period income, on the ground that the same is not included in the total income for the year under reference.

6 ITA No. 7829/Mum/2025 Maharashtra Electricity Regulatory Commission The appellants contend that on the facts and in the circumstances of the case and in law, the CIT(A) ought not to have upheld the action of the Assessing Officer in making the impugned addition inasmuch as he has not correctly appreciated the facts of the case in its entirety, and hence, the impugned addition of Rs 1,10,26,018 is bad in law and needs to be deleted. The appellants further, contend that on the facts and in the circumstances of the case and in law, the CIT(A) ought not to have upheld the action of Assessing Officer inasmuch as he failed to appreciate that the aforesaid prior period income Rs 1,10,26,018 has been adjusted against the prior period expenses Rs 8,19,42,330, and a net disallowance of Rs 7,09,16,312 has already been made by the appellants in their return of income and hence, the impugned addition of Rs 1,10,26,018 is bad in law and needs to be deleted. Without prejudice to the above, the appellants contend that on the facts and in the circumstances of the case and in law, the Assessing Officer ought to have allowed exemption under section 10(46) in respect of the aforesaid income of Rs 1,10,26,018. 2. The CIT(A) erred in upholding the action of the Assessing Officer in not allowing exemption under section 10(46) on incomes aggregating Rs 16,70,763 on the ground that the same is not in the nature of “specified income.” The appellants contend that on the facts and in the circumstances of the case and in law, the CIT(A) ought not to have upheld the action of the Assessing Officer in making the impugned disallowance inasmuch as he has not correctly appreciated the facts of the case in its entirety, and hence, the action of the Assessing Officer is bad in law and needs to be reversed. The appellants further, contend that on the facts and in the circumstances of the case and in law, the CIT(A) ought not to have upheld the action of the Assessing Officer in making the impugned disallowance inasmuch as aforesaid incomes earned by the appellants are for its objects, and not for commercial, or for any purpose other than the objects, and hence, the action of the Assessing Officer is bad in law and needs to be reversed. The appellants crave leave to add to, alter and/ or amend the afore stated grounds of appeal.

7 ITA No. 7829/Mum/2025 Maharashtra Electricity Regulatory Commission 14. During the course of hearing, the Ld. Authorised Representative (AR)submitted that the amount of Rs. 1,10,26,018/- represents prior period income which has been duly accounted for in the books and corresponds to earlier transactions, the details of which were tabulated as under: i. Advance from others – Rs. 5,00,000/- ii. Advance against expenses for public hearing case – Rs. 1,88,566/- iii. Advance licence fees (BEST) – Rs. 1,02,24,000/- iv. Fees for annual licence – Rs. 1,13,452/- 15. It was explained that each of the above items does not represent fresh income of the year but pertains to earlier periods and has been recognized in the current year only on account of accounting adjustments and reconciliation. The Ld. AR invited our attention to the ledger account extracts placed in the paper book and explained each item. The explanation furnished by the Ld. AR is tabulated for clarity as under: Sr. Particulars Amount (Rs.) Nature of Explanation No. Transaction furnished by assessee 1 Advance 5,00,000/- Initially treated Amount received on from Others as 22.11.2016 miscellaneous remained receipt unreconciled and was recorded as miscellaneous receipt; upon review, it was identified as advance for O & M and accordingly treated as prior period adjustment income 2 Advance 1,88,566/- Advance Payment made in against subsequently earlier year on expenses for adjusted 07.04.2016 and public recorded as advance;

8 ITA No. 7829/Mum/2025 Maharashtra Electricity Regulatory Commission hearing case expense crystallized and adjusted later; inadvertent entry in FY 2017-18 treated it as prior period item, which was later rectified with no impact on income 3 Advance 1,02,24,000/- Excess licence Licence fees from Licence Fees fees pertaining BEST was computed – BEST to earlier years on estimated basis for FY 2015–16 and FY 2016–17 and adjusted later based on audited figures; due to regulatory changes, excess remained unadjusted and was recognised as prior period income 4 Fees for 1,13,452/- Income Amount received on Annual pertaining to 20.06.2017 as Licence earlier year Annual license Fees but received relates to FY 2016– later 17; since received in FY 2017–18, it was accounted as prior period income Total 1,10,26,018/-

16.

The Ld. AR further submitted that all the aforesaid items aggregating to Rs. 1,10,26,018/- represent either income or expenditure pertaining to earlier periods arising in the course of carrying out the statutory functions of the assessee Commission. It was contended that the character of these receipts remains intrinsically linked to the regulatory activities of the assessee and, therefore, they partake the same nature as the income already notified for exemption. It was thus argued that merely

9 ITA No. 7829/Mum/2025 Maharashtra Electricity Regulatory Commission because such amounts have been accounted for as prior period adjustments in the books, the same do not lose their essential character as income derived in the course of discharge of statutory functions of the Commission. The Ld. AR submitted that these items are in the nature of licence fees, advances, or adjustments relating to regulatory receipts and expenditure, which are directly connected with the objects of the assessee. Accordingly, it was contended that the said amounts, being integral to the functioning of the Commission and not arising from any commercial or independent activity, qualify for exemption under section 10(46) of the Act. The Ld. AR therefore submitted that the denial of exemption and the addition made by the Assessing Officer, as confirmed by the CIT(A), is not justified both on facts and in law. 17. Regarding the addition on account of other income amounting to Rs. 16,70,763/-, the Ld. AR submitted that the impugned income comprises the following items: Personal use of office vehicle – Rs. 3,204/- i. Miscellaneous income – Rs. 7,206/- ii. Interest on HBA – Rs. 16,55,645/- iii. Interest on loans to others – Rs. 4,708/- iv. 18. It was submitted that a substantial portion of the impugned amount represents interest on House Building Advance (HBA) granted to employees, which arises out of staff welfare measures in accordance with Government regulations. It was explained that at the time of the original application for exemption, such income was not included as housing loans were not being granted;

10 ITA No. 7829/Mum/2025 Maharashtra Electricity Regulatory Commission however, in subsequent years, the assessee included such income in its application and the same has been approved by the CBDT in later notifications. The Ld. AR invited our attention to notification No. S.O. 2015(E) dated 23.06.2020 placed at paper book page No.33 where Interest on loans and advances given to employees was included as specified income. The Ld. AR emphasized that the objects and nature of activities of the assessee remained unchanged and, therefore, the character of such income continues to be non-commercial and incidental to its statutory functions. It was argued that the subsequent recognition of such income in later notifications substantiates the claim that these receipts are of the same nature as the specified income. 19. Per contra, the Ld. Departmental Representative supported the orders of the lower authorities and submitted that the Assessing Officer has correctly examined the facts on record and made the additions in accordance with the provisions of the Act. We have carefully considered the rival submissions, perused the orders of the lower authorities and the material placed on record. The controversy in the present appeal primarily revolves around the scope and applicability of exemption under section 10(46) of the Act in respect of (i) prior period income of Rs. 1,10,26,018/- and (ii) other income of Rs. 16,70,763/-.

20.

At the outset, it would be apposite to refer to the statutory framework of section 10(46), which provides that any specified income arising to a body or authority or Commission shall be

11 ITA No. 7829/Mum/2025 Maharashtra Electricity Regulatory Commission exempt, provided that such entity (a) is established by or under a statute for the benefit of the general public, (b) is not engaged in any commercial activity, and (c) is notified by the Central Government in the Official Gazette. The Explanation clarifies that the exemption is restricted to “specified income”, being the income of such nature and to such extent as may be notified.

21.

There is no dispute on facts that the assessee is a statutory regulatory authority constituted under the Electricity Act and is not engaged in any commercial activity. It is also an admitted position that the assessee stands notified under section 10(46) by the Central Government. Therefore, the conditions contained in clauses (a), (b) and (c) of section 10(46) stand satisfied. The controversy is thus confined to the interpretation of the expression “specified income” as contained in the notification. Addition of Rs. 1,10,26,018/- on account of prior period income

22.

On a careful consideration of the facts, we find that the impugned amount comprises items such as licence fees, advances and other regulatory receipts, which are intrinsically connected with the statutory functions of the assessee. The nature of these receipts has not been disputed by the Revenue. The only basis for addition is the timing difference in recognition. In our considered view, once the nature and source of income falls within the regulatory framework of the assessee and is otherwise eligible for exemption, mere accounting classification as

12 ITA No. 7829/Mum/2025 Maharashtra Electricity Regulatory Commission “prior period income” cannot alter its character. Further, it is an undisputed fact that the assessee has already disallowed prior period expenses to a substantial extent in its computation (Rs. 7,09,16,312/-). Therefore, bringing the corresponding income to tax without granting the benefit of exemption would lead to distortion of real income.

23.

More importantly, the exemption under section 10(46) is attached to the nature of income and not to the year of recognition. If the underlying income is in the nature of licence fees or other regulatory receipts forming part of the specified income, the same would continue to retain its exempt character notwithstanding the year in which it is accounted. Accordingly, we are of the considered view that the addition of Rs. 1,10,26,018/- is not sustainable in law. The Assessing Officer is directed to grant exemption under section 10(46) in respect of the said income. Addition of Rs. 16,70,763/- on account of other income

24.

The second issue pertains to denial of exemption in respect of other income comprising personal use of vehicle, miscellaneous income, interest on HBA and interest on loans to others, on the ground that such income is not specifically covered by the notification issued under section 10(46).

25.

The Assessing Officer denied exemption on the ground that interest on House Building Advance (HBA) was not included in

13 ITA No. 7829/Mum/2025 Maharashtra Electricity Regulatory Commission the notification issued under section 10(46) for the relevant period. The CIT(A) upheld the action of the Assessing Officer on the same reasoning. The Ld. AR has brought to our notice that interest on HBA has subsequently been included in the notification(No. S.O. 2015(E) dated 23.06.2020) issued by the Central Government for later years. It is further contended that such income arises from staff welfare activity carried out in accordance with Government regulations and is intrinsically connected with the functioning of the Commission.

26.

On a careful consideration of the issue, we find merit in the contention of the assessee. The subsequent notification including interest on HBA in the category of “specified income” is a relevant and significant factor indicating the true nature and character of such income. It clarifies that such receipts were always considered by the Central Government to be part of the permissible income of the Commission, though not expressly enumerated in the earlier notification.

27.

In our considered view, where the nature of income remains identical and there is no change in the underlying activity, the subsequent inclusion in the notification has persuasive value in interpreting the scope of “specified income”. Such inclusion is clarificatory in nature and cannot be viewed in isolation so as to deny exemption for earlier years, particularly when the assessee continues to satisfy all other statutory conditions and the income

14 ITA No. 7829/Mum/2025 Maharashtra Electricity Regulatory Commission arises from non-commercial, incidental activities of the Commission.

28.

Further, it is not the case of the Revenue that the interest on HBA is derived from any independent commercial activity. On the contrary, the same arises from loans extended to employees as part of staff welfare measures, which are incidental to the functioning of the statutory body. The remaining items are: Personal use of office vehicle – Rs. 3,204/-  Miscellaneous income – Rs. 7,206/-  Interest on loans to others – Rs. 4,708/-  29. The Assessing Officer denied exemption on the ground that these items are not expressly mentioned in the notification. However, such an approach, in our considered view, is overly restrictive and not in consonance with the scheme of section 10(46). 30. Firstly, these items are not independent sources of income but are merely incidental, ancillary or consequential receipts arising in the course of carrying out the regulatory functions of the Commission. They do not have any commercial character nor do they represent any activity alien to the objects of the assessee.

31.

Secondly, the phrase “income of the nature” used in the Explanation to section 10(46) is of wider import and cannot be construed in a narrow or literal manner so as to exclude minor and incidental receipts which are integrally connected with the

15 ITA No. 7829/Mum/2025 Maharashtra Electricity Regulatory Commission specified activities. Once the principal streams of income arising from regulatory functions are held to be exempt, ancillary receipts arising from the same activity must also partake the same character.

32.

Thirdly, the subsequent notification including additional heads of income demonstrates that the Central Government has, over time, expanded and clarified the scope of eligible income. This supports a purposive and harmonious interpretation of the provision rather than a restrictive one.

33.

Fourthly, it is not the case of the Revenue that any of these receipts arise from a commercial or profit-oriented activity. In the absence of such finding, denying exemption merely on the ground of non-mention in the notification would defeat the object of the provision, which is to exempt income of statutory regulatory bodies engaged in public functions.

34.

Fifthly, these amounts are insignificant and incidental in nature, and are either reimbursements, adjustments or minor receipts arising during the course of administration. Such receipts cannot be segregated from the main activity and taxed independently when the core activity itself is exempt.

35.

In view of the above discussion, we hold as under: Interest on HBA of Rs. 16,55,645/- is eligible for exemption under i. section 10(46). The balance items, namely personal use of office vehicle (Rs. 3,204/-), ii. miscellaneous income (Rs. 7,206/-) and interest on loans to others

16 ITA No. 7829/Mum/2025 Maharashtra Electricity Regulatory Commission (Rs. 4,708/-), being incidental and intrinsically connected with the regulatory functions of the assessee, are also eligible for exemption under section 10(46). 36. Accordingly, the entire addition of Rs. 16,70,763/- is directed to be deleted. The ground raised by the assessee is allowed. 37. In the result, the appeal of the assessee is allowed.

Order pronounced in the open court on 05.05.2026.

Sd/- Sd/- (PAWAN SINGH) (MAKARAND VASANT MAHADEOKAR) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Dated 05/05/2026 Z.U., PS आदेश की प्रतितिति अग्रेतिि/Copy of the Order forwarded to : 1. अपीलाथी / The Appellant 2. प्रत्यथी / The Respondent. 3. संबंधधत आयकर आयुक्त / The CIT(A) 4. आयकर आयुक्त(अपील) / Concerned CIT धिभागीय प्रधतधनधध, आयकर अपीलीय अधधकरण, मुम्बई / DR, ITAT, Mumbai 5. 6. गार्ड फाईल / Guard file. आदेशानुसार/ BY ORDER, सत्याधपत प्रधत //True Copy// 1. उि/सहायक िंजीकार ( Asst. Registrar) आयकर अिीिीय अतिकरण, मुम्बई / ITAT, Mumbai

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