ASSISTANT COMMISSIONER OF INCOME, CIRCLE-1(1),, GUNTUR vs. M/S JOCIL, GUNTUR

आदेश /O R D E R

Per Shri D.S.Sunder Singh, Accountant Member : This appeal is filed by the revenue against the order of the Commissioner of Income Tax [CIT(A)]-1, Guntur vide Appeal No.23/2015-16 dated 06.04.2018 and the cross objections are filed by the assessee in support of the order of the Ld.CIT(A) for the Assessment Year (A.Y.)2007-08.

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Sales of Trading and Profit & Loss A/c and reduced the debtors to that extent in the Balance Sheet with a journal entry on 31.03.2007 narrating that the same was not recognized as income. The Assessing Officer (AO) treated the same as income and made the addition of Rs.76,08,678/-, being the difference between the amount not included in the total sales and kept in contingent sales account. The findings of the AO which is made available in page No.5 of the assessment order are extracted for the sake of clarity which reads as under : “During the course of reopened assessment proceedings, on verification of records for the AY 2007-08, it is noticed that the assessee company, during the F.Y. 2006-07, relevant to the A.Y. 2007-08, transferred an amount of Rs.76,08,678/- (pertaining to power division) to the 'Contingent Sales Account' by not including the same in total Sales of Trading and Profit & Loss A/c.' and reducing the debtors to that effect in the Balance Sheet with a single entry on 31.03.2007 narrating that the same was not recognized as income. Since the bills were raised for the sale value of electricity including the contingent sale amount for supply of power, the above said amount is not to be deducted from 'Total Sales' as the assessee has been following mercantile system of accounting. The assessee raised bills at escalated prices @ 5% p.a. towards the power supplied to APTRANSCO, as per the Andhra Pradesh Electricity Regulatory Commission's (APERC) Order. The Commission has also ensured the payments to the suppliers by directing the APTRANSCO to arrange payments for the supply of power purchased from developers of non-conventional energy by opening a letter of credit in favour of the suppliers of power. Hence, it is evident that there is short admission of sales to the tune of Rs76,08,678/- and the same is to be brought for taxation. During the course of scrutiny proceedings, with regard to the sale of power to AP TRANSCO and difference in sale price recorded ; the authorized representative of the assessee vide their letter dated

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12.12.2014 has submitted as follows:

“The assessee company established a 6 MW Bio-mass power plant in March, 2001. Part of the electricity so generated is consumed by the company for its own manufacture process of fatty acids, soap noodles, toilet soap, etc. and the surplus electricity generated is sold to APTRANSCO. The company had entered into Power Purchase Agreement (PPA) with APTRANSCO on 6.7.2002 which supersedes in its entirety the Power Purchase and Wheeling agreement entered on 12.4.2000 and 25,4.2001. As per agreement the purchase price of surplus power generated by the company is at the rate of Rs.2.25/unit with 5% escalation p.a. with 1994-95 as base year and to be revised on 1st April every year upto the year 2003-04. Beyond the year 2003-04, the purchase price by APTRANSCO will be decided by Andhra Pradesh Electricity Regulatory Commission [APERC). Accordingly, the price payable for the energy during the financial year 2003-04 worked out to Rs.3.48/unit. For power purchases from 1.4.2004, as per the terms of the PPA, the price will be decided by Andhra Pradesh Electricity Regulation Commission (APERC). Since APERC is empowered to fix the selling price (As per Article No.2 of agreement), it has decided two part pricing, comprises variable cost and fixed cost which vary from period to period. Based on it, the selling price applicable from 1.4.2004 worked out to Rs. 2.76/unit as against Rs.3.48/unit existed on 31.3.2004. In view of this abnormally low price fixed by APERC, Bio mass Energy Developers Association(BEDA) on behalf of its members approached A.P. High Court and obtained a direction by interim order dt.20.8.2004 for payment of price fixed by APERC plus 50% of the difference between the price fixed by APERC (which vary period to period depending on variable and fixed costs) and price prevailing on 31.3.2004, provisionally subject to the final orders. After setting up of Appellate Tribunal for Electricity (ATE), New Delhi, the High Court directed BEDA to file the appeal before the Tribunal. The Tribunal allowed the appeal filed by BEDA but APERC and APTRANSCO went on appeal to Supreme Court and Supreme Court remanded the case to APERC to reconsider the claims of power generators

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while fixing the price. A three member bench of APERC has given three different orders without a majority order. Hence again appeal was filed before the Tribunal for determination of price.

While the dispute is pending for final determination of selling price of power purchased by APTRANSCO, the company was raising bills with 5% escalation in price from 1.4.2004 to keep the issue alive and to have claim against APTRANSCO and to get enforceable right for the recovery of the amount as and when it succeeds in the litigation. Accordingly, the company raised the invoices during the financial year 2006-07 at Rs.3.48/unit for the period from 1.4.2006 to 20.6.2006 and at Rs.4.03/unit from 21.6.2006 to 31.3.2007. However, the company recognized the income towards sale of power as per the price applicable for payment by AP TRANSCO, i.e., APERC price plus 50% of the difference between Rs.3.48/unit and applicable price which worked out to Rs.3.14/unit. Accordingly, the company has not recognized as income the billed amount over and above the amount payable as per interim orders of High Court which amounts to Rs.76,08,678/- the detailed workings of which are enclosed for your perusal. The fact of following of said method and recognition of income was disclosed by the company by way of note in the notes forming part of annual accounts.” From the above, it is clear that the prices escalation made by the assessee ® 5% p.a. with 1994-95 as base year, is according to the Andhra Pradesh State Government Orders and as per the order of the APERC. Vide above order, the Commission has also ensured the payments to suppliers by directing the APTRANSCO to arrange payment for the supply of power purchased from developers of non-conventional energy by opening a Letter of Credit in favour of the suppliers of power.

The Power Tariff issue is disputed by the Biomass Energy Developers Association (BEDA) as well as the APTRANSCO before the Hon'ble Courts at various levels. Appeal, filed by BEDA before the ATE for determination of price, is still pending for decision. The assessee company has been raising bills regularly with 5% escalation in price from 1-4-2004 to justify its claim for payment if APERC/Tribunal/High Court/Supreme Court gives a favourable

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order. Therefore the chances of getting the escalated price are not completely closed and not ceased to exist. From the above, it is crystal clear that the assessee company has an established right to raise the bill on APTRANSCO by virtue of Government Orders and the pending tariff dispute before the ATE. This clearly establishes that the assessee has an absolute right to receive the amount paid. The bills were raised with 5% escalation in price, towards the power supplied to APTRANSCO, as per the APERC Order. The APTRANSCO, however, is disputing the assessee's claim of billing with escalated prices. In such a situation, the assessee company has reduced the difference amounts from the total sales and transferred to Contingent Sales account and reduced the sundry debtors to that effect with a single entry on 31st March, 2007 with a reason that the income was not recognized as income. Mere withholding a part of the invoice by APTRANSCO will not in any way remove the right of entitlement of the assessee, which was declared by the APERC. The argument of the assessee cannot be accepted as reducing the turnover in the Profit & Loss A/c. will have the same impact as claim of expenses. Thus the assessee has adopted contradictory stands on the same issue. In this regard, Accounting Standard '9' (AS-'91 issued by the Ministry of Corporate Affairs (MCA) regarding revenue recognition defines revenue as .gross inflow of cash, receivables. More so, the assessee is following mercantile system and any due of entitlement has to be recognized is revenue, Revenue has to be recognized if the services are measurable at the time of rendering the services. There can be no uncertainty regarding the item of the revenue recognition for any measurable service rendered and invoice raised. When uncertainty relating to collection arises subsequent to the time of sale or rendering of services it will be appropriate to make a separate contribution to reflect the uncertainty rather than to adjust the amount of revenue originally recorded. By resorting the reversal of revenue, the assessee also violated the AS- 9 dealing with revenue recognition. (b) On perusal of the Tax Audit Report, it is dear that the assessee has adopted mercantile system of accounts. When an invoice is raised, money is due to the assessee as per the principles of mercantile system. In this regard reliance can be placed on the ruling of Hon'ble Madras High Court in the case of CIT Vs. Planten Co.(P) Ltd. (124 ITR 648), wherein it was held that "In mercantile system of accounts the accrual of income is independent of its receipts. So long as the amount is due to the assessee, the system of accounts would envisage the grant by treating the same as revenue to the assessee."

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by the Hon'ble ITAT in the assessee's case vide ITA No. 696/Vizag/2013 dated 27-05-2016 for the AY 2009-10 wherein, the Hon'ble ITAT held that disputed sale price cannot be treated as income at Para 16 of pages 23 & 24 of the order which is reproduced as under:

"16. Considering the facts and circumstances of this case and also respectfully following the decision of Hon tie Supreme Court of India, in the case of Godhara Electricity Supply company Vs. CIT (supra), we are of the view that the impugned contingent sale on account of differential sale price claimed by the assessee which was pending before the ATE for adjudication is not accrued to the assessee as revenue for the relevant financial year. The assessee has rightly recognized the revenue as per the sale price fixed by the state government which is the real income accrued to the assessee as per the prevailing situation. The additional claim made by the assessee is a mere claim which was not settled by the authorities. Unless the issue is settled, the assessee cannot recognize its revenue merely based on its claim, The assessee has rightly treated the difference between sale price claimed and the price paid by the APTRANSCO as contingent sales. The CIT(A) after considering the facts and circumstances of the case has rightly deleted the additions made by the A.O. We do not see any error or infirmity in the order passed by the CIT(A). Hence, we inclined to uphold the CIT(A) order and dismiss the appeal filed by the revenue."

Following the decision for the AY 2009-10, the Hon'ble ITAT, Visakhapatnam in ITA Nos. 68 to 71/Vizag/2016 dated 28.04.2017 for AYs. 2005-06, 2006-07, 2010-11, 2011-12, has decided the identical issue in favour of the assessee.”

Since, there is no change in the facts and the Ld.CIT(A) allowed the appeal of the assessee following the order of this Tribunal, we do not find any reason to interfere with the order of the Ld.CIT(A) and uphold the same.

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Order pronounced in the open court on 21st August, 2019.

Sd/- Sd/- (िी.दुगाा राि) (धड.एस. सुन्दर धसंह) (V. DURGA RAO) (D.S. SUNDER SINGH) न्याधयक सदस्य/JUDICIAL MEMBER लेखा सदस्य/ACCOUNTANT MEMBER नवशधखधपटणम /Visakhapatnam नििधंक /Dated : 21.08.2019 L.Rama, SPS आदेश की प्रतितिति अग्रेतिि/Copy of the order forwarded to:- 1. निर्धाऩरती/ The Assessee- M/s JOCIL Limited, Dokiparru, Medikonduru Mandal, Guntur 2. रधजस्व/The Revenue – (i) Asst.Commissioner of Income Tax, Circle-1(1), Guntur (ii) Dy.Commissioner of Income Tax, Circle-1(1), Guntur 3. The Pr.Commissioner of Income Tax, Guntur 4. The Commissioner of Income Tax (Appeals)-1, Guntur 5. तिभागीय प्रतितिति, आयकर अिीिीय अतिकरण, तिशाखािटणम/DR, ITAT, Visakhapatnam 6.गार्डफ़ाईि / Guard file आदेशािुसार / BY ORDER // True Copy //

Sr. Private Secretary ITAT, Visakhapatnam