ACIT 14(2)(1), MUMBAI vs. MAHARASHTRA STATE POWER GENERATIN CO LTD, MUMBAI

O R D E R

PER PAVAN KUMAR GADALE JM:

“1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in allowing the deduction of Rs. 14,78,47,332/- on account of prior period expenditure which was not in accordance with the method of accounting stipulated in Sec. 145 of the Act. 2. The appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of appeal.

3. The appellant prays that the order of CIT(A) on the above ground be set-aside and that of the AO be restore”.

2. The Brief facts of the case are that the assesse is engaged in the business of generation of electricity within State of Maharashtra. Pursuant to demerger of Maharashtra State Electricity Board (in short „MSEB‟) it was formed to carry out the generation of electricity earlier carried out by MSEB and is fully owned by Government of Maharashtra. The assessee has filed the return of income for the A.Y 2011-12 on 30.09.2011 declaring the total loss of Rs.1,01,74,98,300/-. Subsequently, the case was selected for scrutiny and notice u/s 143(2) and 142(1) of the Act was issued. In compliance, the Ld. AR of the assessee appeared from time to time and filed the details. The A.O on perusal of & 3634/M/2017-Maharashtra State Power Generation Co. Ltd., the financial statements found that the assessee company has disclosed sale of power as revenue and subsidy and grants as their income and the surplus has been computed at Rs. 3,09,45,67,352/-.While computing the surplus as per the revenue account of the assessee, the A.O found that the prior period expenses was claimed in the computation and the explanations were called. In compliance the assessee has filed a letter dated 03.01.2014 supporting the claim referred at page 2 para 6 of the A.O order. But the A.O was not satisfied with submissions and made an addition. Further the A.O found that the assessee has made a revised claim of depreciation to avail generation based incentive under a scheme named „Generation Based Incentive‟ and filed submissions referred at par -10 of the assessment order. The AO considering the facts submissions and evidences filed by the assessee considered revised claim but made addition of prior period expenses and assessed the total loss of Rs. 83,93,95,243/-and also calculated book profits u/s 115JB of the Act. Since the book profit calculations under 115JB of the Act is higher.The A.O has computed the total income and passed an order u/s 143(3) of the Act dated 28.03.2014.

3. Aggrieved by the order the assessee has filed an appeal with the CIT(A), the Ld. CIT(A) considering the ITA No. 4440/M/15 & 3634/M/2017-Maharashtra State Power Generation Co. Ltd., grounds of appeal, submissions of the assessee and findings of the A.O has dealt on the facts and the issues and found that the disputed issue of prior period expenditure was considered by the predecessor CIT(A) in the A.Ys 2001-02 & 2003-04 to 2006-07 and referred to the observations at page 8 para 3.3 of the CIT(A) order which is read as under:

„3.3 I have considered the appellants submissions. The AO had disallowed prior period expenses of Rs. 14,78,47,332/- on the ground that prior period expenses are disallowable as they do not pertain to this assessment year. The appellant in its submissions states that they are consistently following this accounting procedure, hence, this is allowable expenditure. This issue had come into consideration of CIT(A) in A.Y 2001- 02, 2003-04, 2004-05, 2005-06 and 2006-07 wherein the CIT(A) in A.Y 2006-07 in para 2 to 4 held as under: 2. The First ground of appeal is against disallowance of prior period expenses amounting To Rs. 1,58,21,51,478/-.

3. On the merits of the issue under consideration, it is relevant to point out that this is a recurring issue in the case of appellant which has been dealt with in details by my processor appellate commissioner in appellants own case for A.Y 2001-02 in order March 18, 2009 wherein para 8.10 the issue has been decided as under: So far as the other items are concerned, the treatment given to them is according to the guidelines framed for preparing the accounts of the electricity companies. The facts showing the entirety of the appellants operations and its huge network explains the time taken to account for various expenses. The accounts of the appellant are audited by internal auditor and statutory auditor under the companies Act and the Income Tax Act. Further, reference to the Boards circular is also in favour of the appellant. The AO has not come out with any finding & 3634/M/2017-Maharashtra State Power Generation Co. Ltd., that any of these expenses are not allowable as deduction. Since the expenses are otherwise allowable, the appellant cannot be denied the deduction which has been claimed following proper accounting standards. Further, the AO has included the prior period revenue in the appellants income. So there is no logic to disallow the prior period expenses. In view of this the AO is directed to allow the prior period expenses as claimed.

4. I have pursued the facts of the case and I find the situation in this year is identical to the situation relevant for A.Y 2001-02. I do not see any reason to deviate from the findings of my predecessor appellate commissioner since the facts are identical and there is no change in the situation. Following the decision of my predecessor it is held that prior period expenses have to be allowed to appellant as claimed. The ground of appeal is accordingly allowed.

4. Considering the earlier years decisions in assessee own case and the facts being identical, the Ld.CIT(A) has allowed the grounds of appeal on this disputed issue of prior period expenses and partly allowed the appeal of the assessee. Aggrieved by the Ld.CIT(A) the revenue has filed an appeal with the Honble Tribunal.

5. At the time of hearing, the Ld. DR submitted that the CIT(A) has erred in relying on earlier years decisions and the facts in the present case are different and relied on the Assessing officer order.

6.Contra, The Ld.AR supported the order of the Ld.CIT(A) and submitted that on similar circumstances the Hon‟ble Tribunal for the earlier assessment years dealt on the & 3634/M/2017-Maharashtra State Power Generation Co. Ltd., disputed issue of prior period expenses in the Revenue appeal and confirmed the Ld.CIT(A) order granting the relief to the assesssee and prayed for dismissal of the revenue appeal.

“3. Hence, the identical issue to be decided in this appeal is as to whether the ld. CIT(A) was justified in directing the ld. AO to grant deduction towards prior period expenditure in the facts and circumstances of the instant case. 3.1. The appeal for the A.Y.2001-02 is taken as the lead case herein with the consent of both the parties and the decision rendered thereon would apply with equal force for A.Yrs. 2002-03 and 2003-04 also except with variance in figures.

ITA No. 4440/M/15 & 3634/M/2017-Maharashtra State Power Generation Co. Ltd., Lines Constructions. Sub-station Constructions, Power Station, Major Stores and for each of these activities like construction, Generation, transmission, distribution and maintenance, etc. MSEB has got a number of zonal offices, section offices, etc. spread throughout the Maharashtra State. This being so, there is always a communication gap and some of the payments / income due or accrued, cf the year may not be accounted for during the year. This is inspite of the fact that MSEB has got a system of proper Internal, Control and pre-audit. Further, it has got separate department headed by Director of Internal Audit for regular Internal Audit and Inspection under the D.O.I.A. for Inspection work and there are number of Inspection teams attached to circle offices for carrying out regular Inspection work. Ld.AR of the appellant mentioned that appellant's audit is conducted by CAG. In spite of above at the instant of the Government Audit, certain items of expenses and Income pertaining to earlier period are required to be accounted for. These items are nothing but spill over of the earlier period and which were not considered while submitting returns for the earlier period. MSEB Accounts thus prepared in keeping with the rules of Electricity (Supply) (Annual Accounts) Rules 1985 prescribed under section 69 of the Electricity Supply Act, 1948 and C.A.G. also accepts this accounting system. 8.4 The appellant further submitted that the total income of the appellant required to be computed was in accordance with the method of accounting regularly followed by it as laid down by the provisions of sec. 145 of the Income-tax Act, 1961. In this connection attention was drawn to the accounting standard No. II issued by the CBDT notified vide notification no. SO69(E) dtd. January 25,1996 in terms of which it has been stated in Para 7 that :- 'Prior period items shall be separately disclosed in P&L account in the previous year together with their nature and amount in a manner so that their impact on profit and loss in the previous year can be perceived'. 8.5 Hence it was submitted that the objective of the above mentioned Accounting Standard is that every assessee is & 3634/M/2017-Maharashtra State Power Generation Co. Ltd., required to disclose the prior period item separately. Had it been laid down that prior period expenditure is not allowable as per the LT.Act,1961, as alleged by the Assessing Officer there was no requirement for CBDT to issue an Accounting Standard in respect thereof. 8.6 Ld.AR further submitted that the quantum of prior period expenses is very negligible in comparison to the total expenses claimed. Reference was made to the following judicial pronouncements wherein it has been held that in the case, the prior period expenses are a meager percentage of the turnover, then the prior-period expenses should be allowed: Escorts Ltd. v/s. IAC reported in (2004) 89 TTJ 221 (Del) Unreported decisions of the Mumbai Bench of the Income Tax Appellate in the case of Rashtriya Chemicals & Fertilizers Ltd. v/s. JCIT ITA Nos. 1013/Mum/2001 and 3863/Mum/2006 8.7. Further reliance was placed on the decision of the Delhi High Court in the case of CIT vs. Vishnu Industrial Gases P. Ltd. in ITR No.229/1988 wherein the High Court, while dealing with a case where the department had not disputed that the expenditure was deductible in principle but was only disputing the year in which the deduction could be allowed, held, that as the tax rates were the same in both years, the department should not fritter away its energies in raising questions as to the year of deducibility/taxability. 8.8. Without prejudice to the foregoing, the Ld.AR submitted that the following amounts (out of the prior-period expenses) have been suo-moto disallowed by the Appellant and hence disallowing the same once again would tantamount to double deduction: 1. Depreciation under provided - Rs. 31,02,01,481/- 2. Excess provision of income-tax / short provision - Rs. 156,66,42,865/- & 3634/M/2017-Maharashtra State Power Generation Co. Ltd., Documents were filed evidencing the fact that the aforesaid items have been suo-moto disallowed. 8.9. I have carefully considered the submissions of the Ld.AR and gone through the material brought before me. First of all, if the appellant has worked out the loss computed as per return of income after disallowing and adding back short provisions for income tax amounting to Rs.156,66,42,865/- and short provision of depreciation amounting to Rs.31,02,01,481/-, the same two items cannot be added back again to the returned loss which has been adopted by the AO. The AO is directed to verify and make necessary corrections in this regard. 8.10 So far as the other items are concerned, the treatment given to them is according to the guidelines framed for preparing the accounts of the electricity companies. The facts showing the entirety of the appellant's operations and its huge net work explains the time taken to account for various expenses. The accounts of the appellant are audited by internal auditors and statutory auditors under the Companies Act and the Income-tax-Act. Further the reference to the Board's Circular is also in favour of the appellant. The AO has not come out with any finding that any of these expenses are not allowable as deduction. Since the expenses are otherwise allowable, the appellant cannot denied the deduction which has been claimed following proper accounting standards. Further, the AO has included the prior period revenue in the appellant‟s income. So there is no logic to disallow the prior period expenses. In view of this the AO is directed to allow the prior period expenses as claimed.” 4.1. It is not in dispute that the accounts of the assessee have been prepared in accordance with the mandate provided under the Electricity Act. We also find that the ld. AR drew our attention to the page 254 of the paper book containing the statutory mandate in the form of Commercial Accounting System for State Electricity Boards together with the Electricity (Supply) Annual Accounts Rules 1985 issued by the Government of India, Ministry of Energy, Department & 3634/M/2017-Maharashtra State Power Generation Co. Ltd., of Power, wherein it has been categorically stated that the prior period expenses or prior period revenues are to be shown separately which arise on account of difference between an accounting estimate made for accrual and actual values involved or on account of any other reason. The State accounting mandate statutorily stated that the same shall be accounted only prospectively and no retrospective re-stating of past years figures was permitted in the accounts. This clear statutory mandate issued by the Government with regard to maintenance of accounts enabled the assessee company, being a Public Sector Undertaking (PSU), to disclose the prior period expenses and prior period income separately in its accounts. Moreover, we find that the ld. CIT(A) had duly recognised the method of accounting regularly followed by the assessee in the instant case. We find that the ld. CIT(A) had taken due cognizance of each and every item pertaining to prior period expenses and had understood the modus operandi thereon and duly appreciated the fact of assessee company conducting its operations with huge net work which eventually explains the time taken for accounting of various expenses contributing to the delay and slippage of an annual accounting year. The ld. CIT(A) also took note of the accounts of the assessee company getting scrutinized by Statutory Auditors, Internal Auditors and also by the Controller of Auditor General of India. It is pertinent to note that none of them had given any adverse remarks about the aspect of prior period expenditure. We find that the ld. CIT(A) had categorically given a finding that all the expenses reflected in the prior period expenses except the one which were voluntarily disallowed by the assessee in the return of income, though debited to prior period expenditure during the year, got crystallised during the year under consideration and hence, becomes allowable expenditure. None of these findings given by the ld. CIT(A) were rebutted by the Revenue before us. We also find that the Hon‟ble Jurisdictional High Court in the case of yet another Public Sector Undertaking in CIT vs. Mahanagar Gas Ltd., reported in 42 Taxmann.com 40 had an occasion to go through the same issue. The question raised before the Hon‟ble Jurisdictional High Court was as under:-

ITA No. 4440/M/15 & 3634/M/2017-Maharashtra State Power Generation Co. Ltd., “B. Whether on the facts and in the circumstances of the case and in law, the Tribunal was correct in confirming the order of CIT(A) in deleting the disallowance of Rs.92,91,343/- made by the Assessing Officer on account of prior period expenses?” 4.2. The Hon‟ble Jurisdictional High Court disposed off the aforesaid question by holding as under:- “4) Regarding Question B : (a) In its return of income for assessment year 2004-05 while declaring total income of Rs.100.76 crores the Respondent-assessee claimed an expenditure of Rs.92.81 lacs as prior period expenses. The Assessing Officer disallowed the expenditure relating to prior period on the ground that as the respondent followed mercantile system of accounting expenditure relatable to an earlier year cannot be allowed as deduction in the assessment year under consideration. Thus an amount of Rs.92.81 lacs was added to the income of the Respondent assessee. b) In appeal, the CIT(A) held that the method of accounting consistently followed since many years by the respondent was that expenses were claimed as a liability as and when the bills were received even though the work was done in earlier year and not in the assessment year under consideration. The liability to make payment for work and services received in an earlier year was crystallized only in current assessment year when the bills were received by the respondent assesses from the person who did the work and/or rendered services. The CIT(A) also noted that the Assessing Officer had taxed income attributable to work rendered in the earlier years in the year under consideration depending upon the time when the amounts were crystallized. On the same principle, the expenses attributable to earlier years but crystallized in the year under consideration ought to be allowed. In view of the above, the CIT(Appeals) held that in view of the consistent practice followed by the Respondent-assessee and accepted by the Revenue the prior period expenses which were crystallized during the assessment year under & 3634/M/2017-Maharashtra State Power Generation Co. Ltd., consideration, on receipt of the bills are to be allowed as an expenditure. (c) On further appeal by the revenue the Tribunal upheld the finding of fact arrived at by the CIT(Appeals) and held that prior period expenditure was claimed in respect of the bills received during the assessment year 2004-05, even though the work/services was received in an earlier year. This has been consistent practice followed by the respondent-assesses according to which the liability is to be accounted when the bills are received and the payments made in the subsequent year. Thus the appeal of the Respondent-assessee was allowed. (d) The Revenue's grievance is that in mercantile system of accounting the respondent assessee has to account for the expenditure in the year in which the work/service was received by them and not when the bills were received by the respondent assesses. (e) We find that the liability in respect of work/services rendered in earlier year was crystallized only on receipt of the bill in the current assessment year. Moreover, the method adopted by the respondent assesses has been accepted by the revenue for the earlier assessment year and also while accounting for the income earned in respect of the work done in earlier years. In the circumstances, the Revenue is required to adopt consistent approach and allow the expenditure which was crystallized during the assessment year under consideration as done in the earlier years. This finding of fact has not been shown to be perverse. In view of the above we see no reason to entertain question B as the same does not raise any substantial question of law as it is essentially a finding of fact arrived at by two authorities concurrently.” 4.3. In view of the aforesaid observations and respectfully following the decision of the Hon‟ble Jurisdictional High Court referred to supra, we find no infirmity in the order of the ld. CIT(A) granting relief to the assessee in respect of ITA No. 4440/M/15 & 3634/M/2017-Maharashtra State Power Generation Co. Ltd., prior period expenditure. Accordingly, the grounds raised by the revenue in this regard are dismissed.

5. In the result, appeals of the revenue are dismissed in respect of grounds raised for deletion of disallowance of prior period expenses.”

8. We find that the facts are identical to the present case. The Honble tribunal has considered the Honble jurisdictional High Court decision and up held the order of Ld.CIT(A) in granting relief to the assessee on disputed issue of claim of prior period expenditure and dismissed the grounds of appeal raised by the Revenue. Whereas in the present case, the Ld.DR could not controvert the observations of the Ld.CIT(A) with any New cogent evidence or information but relied only on the assessment order. Accordingly, we do not find any infirmity in the order of the Ld.CIT(A) and we uphold the same and dismiss the grounds of appeal of the revenue.

9. In the result, the appeal filed by the revenue is dismissed. , A.Y 2012-13.

10. As the facts and circumstances in this appeal are identical to A.Y. 2011- 12, the decision rendered in above paragraphs would apply mutatis mutandis for this case also. & 3634/M/2017-Maharashtra State Power Generation Co. Ltd., Accordingly, grounds of appeal of the revenue are dismissed