MADHYA GUJARAT VIJ COMPANY LTD.,VADODARA vs. THE PR. CIT-1, VADODARA

As transpires from the order of the Ld.PCIT, the revisionary jurisdiction was exercised by him u/s.263 of the Act on the assessment order made in the case of the assessee in the impugned year u/s.143(3) of the Act finding the same to be erroneous causing prejudice to the Revenue on three counts:

For allowing claim of interest accrued but not due on PFC (RAPDRP) which was unpaid, amounting to Rs.17,91,17,390/-, in violation of the provisions of section 43B of the Act and 3. on account of the addition made by the AO to the income of the assessee of Capital Grants & Subsidies and Consumer Contribution written back during the year being short to the tune of Rs.52,47,39,161/-.

All these issues were confronted to the assessee during the revisionary proceedings, who submitted his explanation contending that there was no error on the impugned issues in the assessment order. The Ld.PCIT, however, held that in the reply furnished by the assessee, certain details in respect of the issues had been furnished in the proceedings before him u/s.263 of the Act, which details were not furnished during assessment proceedings before the AO, therefore, he found that the AO had not made necessary verifications/enquiries on the issue which should have been during assessment proceedings. Accordingly, invoking Explanation-2 to section 263 of the Act, as per which any order passed without making any enquiries or verification which should have been made is deemed to be erroneous causing prejudice to the Revenue, the Ld.PCIT held that the assessment order passed in the present case was erroneous causing prejudice to the Revenue and, accordingly, he set aside the assessment order passed by the AO directing him to pass fresh assessment order.

We shall now be adjudicating the appeal dealing with each issue raised by the Ld.PCIT considering all the explanations and evidences referred to by the assessee as well as the contentions of the Ld.DR.

Taking up the first issue of allowance by the AO of bonus remaining unpaid amounting to Rs.2,02,67,957/- in violation of the provisions of section 43B, as per the Ld.PCIT, the assessment records revealed this amount of bonus as remaining unpaid during the year, and despite so the AO had not made any disallowance of the same u/s.43B of the Act, which mandates bonus to be allowed only on payment basis.

The assessee’s contention against this finding of the Ld.PCIT was that this issue had been inquired into during assessment proceedings by the AO and demonstrated to him that the said amount was not unpaid by the assessee but was paid before the due date of filing of the income-tax return. That, accordingly, the AO had rightly allowed the claim of this amount of bonus to the assessee in terms of the provisions of section 43B of the Act. That, this explanation was furnished to the Ld.PCIT also. It was contended that this fact of the bonus of Rs.2.02 crores being not unpaid but was paid by the due date of filing of the return of income was duly reflected, as such, in the Tax Audit Report furnished by the assessee.

In this regard, with respect to the enquiry conducted during the course of assessment proceedings, our attention was drawn to notices issued u/s.142(1) of the Act dated 28/08/2019, placed before us in the Paper Book (PB) at page No.123 and that issued on 12/11/2019, placed before us in the PB at page Nos.25 to 32. From the same, it was pointed out that the assessee was asked to furnish its Tax Audit Report and was asked to furnish evidences with regard to claim of deduction on account of bonus. Thereafter, our attention was drawn to the reply dated 18/10/2019 furnished by the assessee in respect to both the notices which was placed before us in the PB at page No.24 and dated 26/11/2019 placed in the PB at page Nos.33 to 53 respectively. Referring to the same, it was pointed out that, in response, the assessee had filed copy of the Tax Audit Report, which duly reflected the amount of bonus of Rs.2.02 crores as having been paid before the due date of filing of the income-tax return. Copy of the Tax Audit Report reflecting the said fact was placed before us, wherein it was pointed out that the assessee at point No.26(i)(B)(a) had reflected bonus of Rs.2.02 crores as liability incurred during the impugned year paid on or before the due date of filing the return of income u/s.139(1) of the Act.

With regard to the submissions made before the Ld.PCIT on this issue, our attention was drawn to the assessee’s reply in response to the notice issued by the Ld.PCIT u/s.263 of the Act, which was placed before us at page Nos.62 to 74 of the Paper Book submitted by the assessee. More particularly, our attention was drawn to PB at page No.60, wherein the assessee had in very clear terms submitted to the Ld.PCIT that the amount of bonus of Rs.2.02 crores stood paid before the due date of furnishing of return of income u/s.139(1) of the Act , which fact it was stated was verifiable from the Tax Audit Report for the year, copy of which was also furnished to the Ld.PCIT along with reply. The assessee, had, therefore, stated that there was no need in adding back the said amount of bonus which already stood paid by the assessee.

Considering the above submissions of the Ld.Counsel for the assessee, it is evident that during the course of assessment proceedings itself the assessee had placed the copy of the Tax Audit Report to the AO, wherein the amount of bonus of Rs.2.02 crores was reflected as paid before the due date of filing of the return of income. The said fact was also communicated to the Ld.PCIT. Having noted the above facts, we now turn to the findings of the Ld.PCIT holding the assessment order to be erroneous on this count.

As noted in the earlier part of our order, the Ld.PCIT has generalized his findings with respect to the all three issues at paragraph No.7 of his order, as under:

As per the Ld.PCIT, the assessment order was held to be erroneous for the reason that the assessee has furnished certain details with respect to the issue of bonus before him which were not there before the AO and the AO , therefore, had not made necessary enquiries or verification with respect to the same.

It is clearly evident from the facts noted by us regarding the enquiry conducted by the AO on the issue of bonus, that the finding of the Ld.PCIT that the assessee has now furnished certain fresh details which were not considered by the AO is blatantly incorrect and false. All explanations with evidences demonstrating the fact of bonus having been paid before due date of filing of return of income was furnished to the AO during assessment proceedings itself. Therefore, the finding of the Ld.PCIT that the assessee has now furnished fresh details which needed to be looked into by the AO and verified, is found to be incorrect by us.

Moreover, we agree with the Ld.Counsel for the assessee that even on merits, no disallowance of bonus amounting to Rs.2.02 crores was called for since the assessee had established both to the AO and the Ld.PCIT that the assessee had not claimed the said amount as an expense in violation of provisions of section 43B of the Act, having paid the same before the due date of filing the return of income, which fact was certified by the Tax Auditor in its Tax Audit Report. The bonus was clearly demonstrated to be not unpaid.

The Ld.DR was unable to controvert the factual contention of the Ld.Counsel for the assessee b, both with regard to the examination of the impugned issue by the AO and the fact of the assessee having demonstrated both to the AO and the Ld.PCIT of the bonus not remaining unpaid, but in fact paid before the due date of filing of return of income. The Ld.DR was unable to point any infirmity accordingly in the allowance of claim of Bonus of Rs. 2.02 Crs by the AO in terms of the provisions of section 43B of the Act.

The finding of error therefore on the issue of the assessment order being erroneous for having allowed the assessee’s claim to bonus of Rs.2.02 corres allegedly on violation of provisions of section 43B of the Act is accordingly set aside.

Taking up the next issue of allowance of interest expenses paid on PFC loan (RAPDRP) amounting to Rs.17,91,17,390/- against in alleged violation of provisions of section 43B of the Act on account of the same, having remained unpaid

The contention of the Ld.Counsel for the assessee of the same having been examined during the assessment proceedings was demonstrated by referring to the notice issued by the AO u/s.142(1) dated 12/11/2019, copy placed before us at page No.27 of the PB, from where it was pointed out that the AO had specifically asked the assessee at point No.8 of the notice to “furnish details of interest pertaining to the year under consideration in respect of loan taken from PFC & REC under different projects/scheme separately and whether the outstanding interest as on 31/03/2017 in respect of these loans had been paid by the due date of filing the return of income furnished date of payment)”. The assessee it was pointed out, furnished reply to the same vide his letter dated 26/12/2019, placed before use at page Nos.75 to 79 of the PB. Our attention was drawn to the reply furnished by the assessee to this specific query at page No.76, wherein the assessee furnished details of interest pertaining to interest from loan from REC and PFC along with its actual date of payment vide Annexure B.

Thereafter, with respect to the explanation and reply furnished during revisionary proceedings to the Ld.PCIT, our attention was drawn to Page No.62 of PB submitted by the assessee from where it was pointed out that the assessee had explained in detail to the Ld.PCIT that the provisions of section 43B of the Act were not attracted to interest amounting to Rs.17.91 crores which accrued on the loans from PFC for the reason that this had not become due for payment for the impugned year and the provisions of section 43B of the Act, therefore did not apply to such claims which had not become due for payment. It was pointed out that the assessee had explained to the Ld.PCIT that these loans were issued with the term and condition that they would be converted into capital grants on the fulfilment of certain stipulated condition and the fulfilment of the conditions was to be seen up to January-2017 after which if the conditions were found to be not furnished, the loans were to be repaid with interest in installments over a period of four years. It was also pointed out that the assessee had explained to the Ld.PCIT that this moratorium period upto January-2017 had been extended upto January-2022. Similar explanation had been furnished with respect to the APDRP scheme loan also. Our attention was drawn to the contents to the same, is as under:

The Ld. DR however relied on the order of the Ld.PCIT.

Having considered the contentions of both the parties, we do not find any infirmity in the finding of error by the Ld.PCIT on this issue of interest on PFC loans of Rs.17.91 Crs being allowed by the AO without proper inquiry. The fact that this interest remained unpaid during the year is not disputed by the assessee. The assessee admits to the same in its explanation furnished to the Ld.PCIT and also the AO. It is also not disputed that such interest is allowable only on payment basis as per section 43B of the Act. The only explanation given by the assessee vis a vis the unpaid interest expense not being disallowable u/s 43B of the Act is that it had not become due for payment and therefore could not be disallowed on account of remaining unpaid. We fail to understand how this explanation justifies the case of the assessee of the unpaid interest not being disallowable u/s 43B of the Act. There is no dispute with regard to the position of law u/s 43B of the Act allowing such interest payments only on payment basis . In the light of the clear position of law, we fail to understand how an unpaid interest, even if not accrued for payment, is allowable. No judicial decisions to support the contention of the assessee was filed at any stage, i.e the AO, the Ld.PCIT or even before us. Therefore it is evident that the AO had not examined the issue of allowability of unpaid interest in the light of the provision of law u/s 43B of the Act and neither has the assessee been able to demonstrate allowability of the same u/s 43B of the Act.

The findings of the Ld.PCIT therefore of the assessment order being erroneous so as to cause prejudice to the Revenue for allowing unpaid interest on PFC loans of Rs.17.91 Crs in violation of the provisions of section 43B of the Act, is therefore upheld .

With respect to the last issue of Capital Grants & Subsidies and Consumer Contribution written back by the assessee on account of which addition was made by the AO but was found to be short by the Ld.PCIT to the tune of Rs. 52,47,39,161/-, the case of the Ld.PCIT was that undoubtedly the AO had examined the issue during assessment proceedings and made addition, but while calculating the amount found by him to have been written back short by the assessee, he had made an error.

The Ld.PCIT notes that during assessment proceedings the assessee had explained to the AO that the Capital Grants & Subsidies and Consumer Contribution being utilized towards infrastructure development of the assessee, by way of setting up distribution network for the distribution of electricity which business the assessee was into, the assessee was writing back every year 5.28% of these grants and contribution. The assessee furnished a calculation of the same pointing out as to how it had written back amount of 9568.27 lakhs on this account by way of adding back 5.28% of the Government Grants and Consumer Contribution during the year and those pertaining to the preceding year. The AO, however, was not satisfied with the explanation of the assessee noting that the assessee had not furnished the year-wise bifurcation of the amount transferred to the P&L A/c. and, therefore, he went on to make his own calculation of the amount of such grants and contributions which needed to be transferred to the P&L a/c. during the year. As per the AO, the assessee ought to have written back @ 15% of the grants and consumer contribution, which according to him worked out to Rs.17,464.94 lakhs and noting that the assessee had transferred only an amount of Rs.9568.27 lakhs, the remaining amount as per the AO of Rs.11,317.93 lakhs was added back to the income of the assessee. The Ld.PCIT therefore noted that the AO had made addition of Rs.11,317.93 lakhs to the income of the assessee on account of amounts to be written back to the P&L A/c. from Capital Grants & Subsidies and Consumer Contribution received by the assessee.

The Ld.PCIT noted a mistake in this calculation of Rs.11317.93 lakhs added back by the AO to the income of the assessee. He noted that while the assessee had transferred an amount was only Rs.9,00,61,839/-(900 lacs) in the P&L A/c. for the year under consideration on this aspect, the AO had allowed the assessee benefit of Rs.6148.01 lakhs while calculating the amount short transferred to the P&L A/c. According to the Ld.PCIT, therefore, the AO had allowed excess deduction / relief of Rs.52,47,39,161 [Rs.66148.01 lakhs (-) 900.61 lakhs ] (5247 lacs)without making verification or enquiry in respect of the above excess claim of deduction. These facts are noted at page 5 of the Ld.PCIT’s order are reproduced hereunder:-

The Ld.counsel for the assessee pointed out that in the revisionary proceedings, the assessee had clarified to the Ld.PCIT that his entire basis for holding that the addition made by the AO on this amount was erroneous was based on incorrect appreciation of facts. He pointed out that it had been clarified to the Ld.PCIT that the assessee has not transferred an amount of Rs.900.61 lakhs but, in fact, transferred an amount of Rs.9568.27 lakhs. That, accordingly, the AO had not allowed any excess deduction or relief as compared to the amount noted to be allowable by the AO of Rs.6148.01 lakhs. In fact, the assessee had added back a greater amount of Rs.9568.27 lakhs as compared to Rs.6148.01 lakhs found to be allowable by the AO. In this regard, he drew our attention towards the reply filed to the Ld.PCIT at page No.65 of the PB submitted by the assessee, is as under: “THUS, TOTAL AMOUNT OF ₹95,68,27,264.55/- HAS BEEN TRANSFRRED TO PEL ACCOUNT WHICH IS 5.28% (ON SLM BASIS) OF THE GRANTS RECEIVED STARTING FROM THE FINANCIAL YEAR 2005-06 TO FINANCIAL YEAR 2016-17. SO HOW IT CAN BE SAID THAT ONLY 29,00,61,893.19/- HAS BEEN TRANSFERRED TO THE PEL ACCOUNT THOUGH THE AMOUNT TRANSFERRED OF ₹95,68,27,264.55/- IS CLEARLY BEING SHOWN IN THE PROFIT AND LOSS ACCOUNT OF THE YEAR UNDER CONSIDERATION, THUS, THE SAID ISSUE DOES NOT REQUIRE ANY REVISION.”

Even during the course of hearing before us, the Ld.Counsel for the assessee pointed out that from the order of the Ld.PCIT that he had even noted the fact of the assessee having transferred Rs.9568.27 lakhs to the P&L A/c at page 5 of his order reproduced above by us, but while finding error in the order of the AO, he had noted the assessee to have transferred only Rs.900.61 lakhs which was incorrect.

The Ld.DR before us, though was unable to controvert this factual contention of the assessee, however, he relied heavily relied on the order of the Ld.PCIT on this issue that the assessee had furnished before him explanation which were not furnished during the course of assessment proceedings and, therefore, was not examined by the AO.

Having heard both the parties, we do not find any merit in the finding of error by the Ld.PCIT on the issue of write back of capital grants and consumer contribution being short. The assessee, we have noted, has not furnished any fresh detail to the Ld.PCIT but, in fact, he has pointed out to him the incorrect facts noted by him while arriving at this finding of the error on this issue. He had categorically pointed out from the facts on record the incorrect fact noted by him of the amount written back by the assessee in its Profit and loss account and had demonstrated the correct figures from the records itself . The assessee had also demonstrated that factually there was no shortfall in the amount of grants and contribution written back. The Ld.DR was also unable to controvert the factual contention of the Ld.Counsel for the assessee.

The Ld.PCIT has recorded his finding of error completely ignoring the factual averments of the assessee before him demonstrating otherwise.

In effect, therefore, we uphold the order of the Ld.PCIT finding error in the order of the AO causing prejudice to the Revenue only on the issue of unpaid interest on PFC amounting to Rs.17.91 Crs being allowed without not being examined by the AO in the light of the provisions of section 43B of the Act. On the remaining issues of allegedly unpaid bonus of Rs.2.02 Crs being allowed to the assessee in contravention of section 43B of the Act and write back of grants and contribution being short by Rs.52.47 Crs, we do not find any merit in the findings of error by the Ld.PCIT.

The order of the Ld.PCIT accordingly is partly confirmed and so also the appeal of the assessee is partly allowed.

In the result, the appeal of the assessee is partly allowed. Order pronounced in the Open Court on 10th January, 2025 at Ahmedabad.