DCIT 1(2), MUMBAI vs. MAHARSHTRA STATE ELECTRICITY BOARD, MUMBAI

आदेश / O R D E R PER BENCH: ITA No1649/Mum/2010 & CO No.198/Mum/2010

This appeal in ITA No.1649/Mum/2010 & CO No.198/Mum/2010 for A.Y.2004-05 arise out of the order by the ld. Commissioner of Income Tax (Appeals)-2, Mumbai in appeal No. CIT(A)-1/IT/14/07-08, CIT(A- 2/IT/115/09-10 dated 22/12/2009 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 24/11/2006 by the Dy. Commissioner of Income Tax-1(2), Mumbai (hereinafter referred to as ld. AO).

ITA No. 945/Mum/2010 & CO No.171/Mum/2010

This appeal in ITA No.945/Mum/2010 & CO No.171/Mum/2010 for A.Y.2005-06 arise out of the order by the ld. Commissioner of Income Tax

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(Appeals)-2, Mumbai in appeal No. CIT(A)-1/IT/14/07-08, CIT(A- 2/IT/115/09-10 dated 30/11/2009 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 31/12/2007 by the Dy. Commissioner of Income Tax-1(2), Mumbai (hereinafter referred to as ld. AO).

Identical issues are involved in all these appeals and hence they are taken up together and disposed of by this common order for the sake of convenience.

2.1. We have heard the rival submissions and perused the materials available on record. The assessee company is engaged in the business of generation and distribution of electricity. The return of income for the Asst Year 2004-05 was filed by the assessee company on 29.10.2004 declaring total loss of Rs 415,79,84,240/-. We find that the ld AO on verification of various details filed by the assessee company in the return of income and during the course of assessment proceedings observed that assessee had debited prior period expenditure to the tune of Rs 501,72,79,228/- and claimed the same as deduction during the year under consideration and was asked to furnish the details with evidences

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to prove that the said expenditure got crystallised during the Asst Year 2004-05. We find that the assessee had replied before the ld AO by drawing specific reference to the relevant annexure to the Tax Audit Report and by stating that the prior period expenditure debited in the books mainly pertain to expenditure in respect of which, a provision was made in earlier year and the exact amounts have been ascertained in the year under consideration and exact amounts have been ascertained in the year and hence the differential amount between provision and actual sum has been debited as prior period expenditure. It was submitted that the said expenditures are mainly in the nature of incentives payable to staff, payment of fees to contractors, payment of arrears to suppliers of power etc. Detailed statements giving account head wise, location code wise were furnished before the ld AO. The assessee also drew the attention of the ld AO that assessee is required to maintain its books of accounts as per Rule prescribed u/s 69 of Electricity Supply Act, 1948, which mandates disclosure of prior period expenditure separately in the books. We find that the ld AO not satisfied with the reply of the assessee , completely ignored the entire submissions with elaborate details submitted thereon and proceeded to make disallowance of prior period expenditure in the sum of Rs 501,72,79,228/- in the assessment for the Asst Year 2004-05.

2.2. We find that the ld CITA had deleted the said disallowance by stating that this is a recurring issue from earlier years and the said issue has been decided in favour of the assessee by his predecessor for the Asst Year 2001-02. We further find that this tribunal in Asst Year 2001-02 in assessee’s own case vide its order in ITA No. 3813/Mum/2009 dated 17.2.2021 had upheld the action of the ld CITA. The relevant operative portion of the said order of the tribunal is reproduced hereunder:-

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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 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

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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/- 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 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

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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:- “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

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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 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.

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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 prior period expenditure. Accordingly, the grounds raised by the revenue in this regard are dismissed.

2.3. Respectfully following the said decision, we dismiss the Ground No. 1 raised by the revenue for both the years in appeal before us.

We have heard the rival submissions and perused the materials available on record. At the outset, the ld DR pointed out that the correct figure which was subject matter of disallowance was only Rs 15,59,789/- and the same has been erroneously mentioned in the grounds of the revenue at Rs 15,59,00,789/- . With the consent of both the parties, this typographical error is hereby rectified and we proceed to adjudicate the issue as to whether the ld CITA was justified in deleting the disallowance made on account of capital expenditure written off in the sum of Rs 15,59,789/- in the facts and circumstances of the case for the Asst Year 2004-05.

3.1. We find that the ld AO had observed from Serial No. 17 of Tax Audit Report that the assessee company has shown a sum of Rs 15,59,789/- as Infructuous Capital Expenditure Written Off under that column in Tax

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Audit Report, among others. The assessee was asked to explain as to why the said expenditure should not be disallowed in the assessment. The ld AO observed that no explanation was furnished by the assessee in this regard and hence he disallowed the same as capital expenditure in the assessment as the same was categorised as capital expenditure in the tax audit report. We find that the assessee explained before the ld CITA that the expenditure is on survey work for extension of transmission lines, being capital expenditure in assessee’s onw line of activity. This extension project got rejected and was never taken up. Accordingly, it was decided to write off the said incurrence of capital expenditure in the books of assessee and deduction claimed for the same on account of infructuous / abandoned projects. 3.2. We find that the write off capital expenditure on infructuous / abandoned projects has been accounted by the assessee in its books of accounts in accordance with ‘The Electricity (Supply) (Annual Accounts) Rules, 1985’ which is mandatorily to be followed by the assessee company. The said rules also mandate that the expenditure incurred on identification, survey and feasibility studies before the project is considered for sanction or rejection and later if the said project is rejected, then the full amount of expenditure shall be charged to the revenue as infructuous capital expenditure in the year in which the project is rejected. Hence it could be safely concluded that the assessee had written off the expenditure in accordance with the mandate provided by the aforesaid rules. It is not in dispute that the project got rejected during the year under consideration. We also find in page 33 of the paper book containing letter addressed by assessee company to The Executive Engineer 400KV L.C.Division, Kalwa, wherein it was specifically pointd out the Chief Engineer (Tr.Plng) Mumbai had informed that the work of 400KV Tarapur-Boisar Line with extention unit 3 and 4 (2

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*500MW) shall be executed by Power Grid Corporation of India Ltd i.e other than M.S.E.B (assessee herein) . Accordingly, the assessee had intimated in the said letter that the amounts incurred towards capital expenditure has been written off in the appropriate head amounting to Rs 15.60 lakhs. We further find that the ld CITA had given a categorical finding that- a) Capital expenditure incurred by the assessee was not doubted by the ld AO. b) The said expenditure was incurred for the purpose of extension of project was not doubted by the ld AO. c) The said extension project has been given up by the assessee and hence the asset generated thereon is not in use.

These factual observations were not controverted by the revenue before us.

3.3. We also find that the co-ordinate bench of this tribunal in the case of DCIT vs Essar Oil Ltd reported in 47 SOT 139 (Mumbai Trib) for the Asst Year 2003-04 had addressed the similar issue by following the tribunal order for the Asst Year 1996-97 (which was subsequently approved by Hon’ble Bombay High Court in ITA No. 921 of 2006 dated 16.10.2008). The relevant operative portion of the facts and decision rendered thereon are as under:- 2. The assessee is in the business of contract drilling, offshore construction, exploration of mineral oil and gases, trading in petroleum products. In the computation of income, the assessee had claimed a deduction of Rs. 72,26,225 being expenses incurred during the year which have been included in Miscellaneous Expenses. The assessee submitted it was in the business of: (a) Operation of rigs for extraction of oil.

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(b) Undertaking offshore contracts for laying of pipelines etc. (c) Setting up of Refinery etc. (d) Marketing of petroleum products. The Assessee submitted that activities at (a) & (b) had been going since inception of the company and were taken over as business in 1993 from Essar Gujarat Ltd. The Assessee submitted that as far as activity at (c) is concerned, during the previous year, the Assessee was in the process of setting up the project of refining, crude oil by setting up a 10.5 million ton refinery. The Assessee submitted that as part and parcel of activity (a) and (b) it has been bidding for various contracts, exploration sites and had incurred expenditure on travelling bidding for tenders, exploration activities at blocks etc. The expenditure so incurred were revenue expenditure in nature. In books of account these expenses have been shown as deferred revenue expenses. The Assessee submitted that since the expenses were in the nature of revenue and directly related with the ongoing business, entire expenses incurred during this financial year should be allowed. The Assessing Officer however was of the view that the expenses incurred were only in the nature of preliminary expenses which can not be related to any business activity carried on by the assessee during the year. The Assessing Officer held that these expenses are to be capitalized in the books as preoperative expenditure on successful completion of the bid and award of contract. The Assessing Officer held that in assessment years 1994-95 & 1995-96, the assessee's claim for similar deduction was disallowed and for the reasons given therein, the deduction claimed was disallowed. 3. On appeal by the assessee, the CIT(A) deleted the addition made by the Assessing Officer following order of ITAT in assessee's own case in assessment years 1996-97 to 1998-99 in ITA Nos. 3643 to 3645/M/02, wherein identical issue had been decided in favour of the Assessee by the Tribunal. Aggrieved by the order of CIT(A), the Revenue has preferred Ground No. 1 before the Tribunal. 4. At the time of hearing it was accepted by the parties before us that the Tribunals order relied upon by the CIT(A) for deleting the addition made by the Assessing Officer has already been confirmed by the Hon'ble Bombay High Court in ITA No. 921 of 2006. The Tribunal in ITA Nos. 3643 to 3645/M/02 on identical issue held as follows: "13. The second issue to be considered for the assessment year 1996-97 is regarding the expenditure of Rs. 1,60,04,350 incurred by the assessee company in the previous year for exploration and production of oil and gases. The assessee company is engaged in the business of operation of rigs for extraction of oil, undertaking off-shore contracts for laying of pipelines and setting up of

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refineries, etc. The assessee company during the previous year relevant to the assessment year under appeal had been bidding for various contracts as part of its business of extraction of oil. In this connection, the assessee company have been incurring expenditure towards travelling, bidding of tenders, etc. etc. The assessee company had incurred an amount of Rs. 1,60,04,350 on that account during the relevant previous year. The assessee company in its books of account has treated the expenditure as deferred revenue expenditure and has written off only Rs. 11,22,867 as expenditure pertaining to the relevant assessment year. But in the return of income, the assessee claimed the full amount as revenue expenditure. The Assessing Officer did not allow the expenditure as claimed by the assessee on the ground that expenditure incurred on bidding for exploration was capital in nature. The Assessing Officer did not allow the expenditure as claimed by the assessee on the ground that expenditure incurred on bidding for exploration was capital in nature. The CIT(A) also agreed with the finding of the Assessing Officer and confirmed the disallowance. 14. It is to be seen that the activities carried on by the assessee were not in the nature of an independent business, but it was part of the existing business carried on by it under the control and supervision of the same management. The activities were inter- connected and there was no inter-lacing of funds and resources. The activities were carried out as inseparable from the existing line of business. Therefore, in the light of the decisions of the Supreme Court in the cases of Produce Exchange Corporation Ltd. v. CIT 77 ITR 739 and Veecumsees v. CIT 220 ITR 185 , these expenses need to be allowed as revenue in nature. The very same principle has been followed in the decision of the Tata Chemicals Ltd. v. DCIT by the Bombay Tribunal in 72 ITS 1. Therefore, in the facts and circumstances of the case, we direct the assessing authority to allow the sum of Rs. 1,60,04,350 as deduction on computing the taxable income of the assessee company." The above reasoning of the ITAT would equally apply to the impugned expenditure incurred during the previous year for setting up refinery. We, therefore, confirm the order of the CIT(A) and dismiss Ground No. 1

3.4. In view of our aforesaid observations and respectfully following the judicial precedent relied upon hereinabove, we find no infirmity in the order of the ld CITA granting relief to the assessee. Accordingly , the

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Ground No. 2 raised by the revenue for the Asst Year 2004-05 is dismissed.

We have heard the rival submissions and perused the materials available on record. We find that the ld AO on perusal of Schedule 28 of Audited financial statements observed that assessee company had shown the liability to the tune of Rs 631,01,65,577/- as on 31.3.2004 relevant to Asst Year 2004-05, eventhough the same was collected but not paid to the Government. The ld AO observed that in this regard, the assessee had clarified in Note 4 of the Computation of Income stating that in terms of section 4 of the Bombay Electricity Duty Act, 1958, the assessee is only acting as licensee to collect duty on behalf of the State Government and thus it is not liable for any default for payment without recovery of the same from the customers. Thus Electricity Duty is neither an expenditure of the assessee nor is it claimed by it in its Revenue Account as deduction and accordingly, the provisions of section 43B of the Act cannot be made applicable to the assessee company. We find that the ld AO by applying

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the ratio laid down by the Hon’ble Apex Court in the case of Chowringhee Sales Bureau reported in 222 ITR 344 (SC) observed that recovery of Electricity Duty from customers becomes trading receipt in the hands of the assessee company and the same would be eligible for deduction only on payment basis u/s 43B of the Act. With this observation, we find that the ld AO disallowed the sum of Rs 631,01,65,577/- u/s 43B of the Act in the assessment for the Asst Year 2004-05.

6.1. We find that the ld CITA by following the order passed by his predecessor for the Asst Year 2001-02 and by following the decision of Hon’ble Gujarat High Court in the case of Ahmedabad Electricity Company Ltd reported in 262 ITR 97 (Guj). We find that the ld CITA by accepting the alternative argument of the assessee , had also directed the ld AO to grant deduction for payment of electricity duty made by the assessee before the due date of filing the return of income u/s 43B of the Act.

6.2. We find that this issue was the subject matter of adjudication by this tribunal in assessee’s own case for the Asst Years 2001-02 to 2003-04 in CO Nos. 11, 196 and 197/Mum/2010 dated 30.9.2015 wherein it was held as under:-

5.2.Before us,the AR argued that assessee was not accounting for the duty collected by it, that it had not claimed same in the books of account, that duty was paid to the government in the year under appeal or the subsequent year, that for applicability of section 43B there should be some allowance. He referred to cases of Kerala State Electricity Board (329 ITR 91),Maharashtra State Electricity Distribution Co. Ltd.(ITA/762/Mum/2010-AY-06-07 dated 12.8.2015).DR supported the order of the FAA . 5.3.We have heard the rival submissions and perused the material before us.We find that issue of applicability of the provisions of section 43B of the Act has been discussed and decided by the Hon'ble Kerala High Court in the case of Kerala State Electricity Board(supra) as under:

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"Section 43B(a) deals with "any sum payable by the assessee by way of tax, duty, . . . under any law for the time being in force". The words, "by way of tax" are indicative of the nature of liability.The liability to pay and the corresponding authority of the State to collect the tax (flowing from a statute) is essentially in the realm of the rights of the sovereign, whereas the obligation of the agent to account for and pay the amounts collected by him on behalf of the principal is purely fiduciary. The nature of the obligation continues to be fiduciary even in a case wherein the relationship of principal and agent is created by a statute. Section 43B(a) deals with amounts payable to the sovereign qua sovereign,not amounts payable to the sovereign qua principal. Therefore section 43B cannot be invoked in the case of the Electricity Board with regard to electricity duty collected by it pursuant to the obligation under section 5 of the Kerala Electricity Duty Act, 1963." In the matter of Maharashtra State Electricity Distribution Co. Ltd.(supra)the Tribunal has decided the issue follow: "28. Ground no.2,this ground deals with the action of Ld. CIT(A) in holding that electricity duty collected and paid/adjusted by the assessee company amounting to Rs.23291.59 lakhs is covered under the provisions of section 43B of the Income Tax Act 1961. The ld. AO has discussed this issue at para no.12.1 to 12.2 on pages 3 to 4 of the assessment order whereas the Ld. CIT(A) has discussed this issue in para no.12 to 12.3 on page no.25 to 27 of the order. During the course of assessment proceedings the AO noticed that the assessee company had shown liability to the tune of aforesaid amount Accordingly, he was of the opinion that the said amount of duty was collected but was not paid to the Government and consequently the provisions of section 43B were attracted and the impugned amount was disallowable and accordingly, the AO made an addition of this amount to the income of the assessee. The assessee carried the matter before the Ld. CIT(A) and submitted before Ld. CIT(A) that the assessee collected electricity duty from the consumers on behalf of the Government of Maharashtra and was required to pay the same to the Government. It was further submitted that since the GOM itself was required to make payment to the appellant under a variety of accounts, or to certain poor or backward region/section of society, at Nil or subsidized charges, to be recovered from the government, the GOM settles its inter se accounts with the appellant on account of electricity duty by setting off/adjusting the amount receivable against the amount payable. The inter se payments were thus effected through set off of mutually receivable/payable balances, for which notifications were issued by the GOM from time to time. The process of issue of such notification was complex and time consuming, since it involved a variety of procedure with various authorities. During the appellate proceedings the appellant furnished a copy of notification dt.31.03.2008 issued by the GOM in support of its contention.

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(ii) Kerala State Electricity Board vs. DCIT reported in (2010) 329 ITR 91 (iii) A.W. Figgis & Co. Ltd. vs. CIT reported in (2003) 256 ITR 268 (iv) CIT vs Ovira Logistics Pvt. Ltd. reported in (2015) 58 taxmann.com 206 33. It was further submitted by Ld. Counsel that the credit for the similar amount was granted by the AO in the assessment order passed for A.Y. 2007- 08 copy of the assessment order is placed in paper book at page no.161 to 175 on our attention has been drawn on page no.174. On the other hand, Ld. DR relied upon the orders of authorities below and requested for confirming the order of Ld. CIT(A). 33A. We have gone through the arguments made by both the sides as well as the material placed before us.We have also considered the case laws relied upon by the ld. Counsel on this issue, copies of which have also been placed before us. It is seen that in the case of 'Kerala State Electricity Board'(su.),it was held by the Hon'ble High Court that in these circumstances the provisions of s.43B would not be applicable. We also placed reliance on the judgment of Hon'ble Bombay High Court in the case of 'CIT vs. Ovira Logistics Pvt. Ltd.' (su.),wherein their Lordships have held that in the case of service tax payment by that assessee where it was found that before end of the year,amount on which service tax was payable have not been received from the parties to whom services were rendered, the claim of service tax paid could not be disallowed. It was held that s.43B does not contemplate liability to pay the service tax before actual receipt of funds in the account of the assessee and it was further held that the liability to pay service into the treasury will arise only upon the assessee receiving funds and not otherwise,and it was accordingly held that liability to pay the service tax in respect of consideration payable will arise only upon receipt of such consideration, and not otherwise. In the case before us, the admitted position is that because of some settlements pending between the assessee company and the Government of Maharashtra, payments could not be made during the financial year.It is further seen that the admitted facts are that the assessee has not routed this amount through the P&L account.We rely with the judgment of Hon'ble Calcutta High Court in the case of CESC Ltd.(su.) and Hon'ble Kerala High Court in the case of 'Kerala State Electricity Board' (supra) to hold that the electricity duty is not being a sum payable by the assessee as a primary liability by way of tax, duty cess or fee, section 43B is not attracted to the assessee in respect of electricity duty collected by it for being passed on the State Govt. Two relevant paras from the recent order of the Hon'ble Calcutta High Court in the case of 'CESC Ltd. (supra), vide its order dated 14.05.2015 are reproduced hereunder: "19. Thus, in our view, the electricity duty, not being a sum payable by the assessee as a primary liability by way of tax, duty, cess or fee, Section 43B is not attracted to the licencee/assessee in respect of electricity duty collected by it for being

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passed on the State Government. On this point we are in ITA/3813 &others/Mum/09-MSEB/01-02to03-04 respectful disagreement with the decision of the Gujarat High Court in the case of Commissioner of Incme Tax- vs-Ahmedabad Electricity Co. Ltd. (supra) and we are in agreement with the decision of the Kerala High Court in the case of Kerala State Electricity Board-vs-Deputy Commissioner of Income Tax (supra). We are of the opinion that Section 43B of the Income Tax Act is attracted to a case where payable is to be made to the State Government in the capacity of the State as a sovereign and not to a case where payment is to be made to the State Government in its capacity as a principal by an agent. In the instant case, the relationship between the State and the licensee is of a principal and agent/fiduciary and not that of a sovereign and a subject. 20) Looking at the issue from another angle, the electricity duty collected by the licensee from the consumers is so done by the licensee as an agent of the State and, hence, the same cannot be considered to a trading receipt in the hands of the licensee. It does not constitute income of the licensee and cannot be included in the licensee's income for the purpose of computation of income tax. It is not a business receipt of the licensee which the licensee collects on its own behalf in connection with its business of generating and supplying electricity. The licensee does not collect the electricity duty for its own consumption or utilization. If the licensee collects the duty but does not pay the same to the Government, the statute provides mechanism for the Government to recover the same from the licensee. Even iii a case where the licensee is unable to recover the duty but recovers the energy charges, the statutes still provides a procedure for the Government to recover the duty either from the consumer or from the licensee. This view of ours finds support from the decision of the Andhra Pradesh High Court in the case of Commissioner of Income Tax-vs.-Devatha Chandraiah (supra). Though the said case deals with sales tax, the principle laid down in that case supports our view. The mischief that Section 43B of the Income Tax Act intended to present, is taken care of by the provisions of the Bengal Electricity Duty Act itself." 34. Thus, in our considered view, the assessee deserves to succeed. The disallowance made by Ld. AO on this ground for Rs.23291.59 lakhs is hereby deleted and ground no.2 of the assessee is allowed." Following the above mentioned two decisions, we reverse the order of the FAA and decide ground no.1 in favour of the assessee “. 6.3. Respectfully following the said decision of this tribunal in assessee’s own case for earlier years as referred to supra, the Cross Objections

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raised by the assessee in Ground Nos. 1.1. to 1.3. for both the Asst Years are allowed.

The assessee was asked to explain as to why the said expenditure should not be disallowed in the assessment. The ld AO observed that no explanation was furnished by the assessee in this regard and hence he disallowed the same as capital expenditure in the assessment as the same was categorised as capital expenditure in the tax audit report. We find that the ld CITA held that these are recurring issues in the case of the assessee company from year on year and by following the order passed by his predecessor for the Asst Year 2001-02, upheld the action of the ld AO in respect of loss on obsolescence of fixed assets and disallowance of

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Intangible assets written off. With regard to loss to fixed assets due to flood, cyclone, fire etc, we find that the ld CITA had observed that assessee had not furnished any details to prove that loss had been incurred and accordingly upheld the action of the ld AO. With regard to disallowance of Deferred Revenue Expenditure written off, we find that the ld CITA had observed that assessee had not furnished any details regarding the same and hence upheld the action of the ld AO.

7.1. We find with regard to disallowance made on account of deferred revenue expenses written off, we find that the ld AR submitted that assessee company had incurred expenditure of Rs 63,62,526/- wholly and exclusively for the purpose of business as under:- Cost of upgrading and modernization of Hydro Power Plant - Rs 37,26,503/- Deferment of group insurance - Rs 20,16,671/- Other Expenditure - Rs 5,95,467/-

The entire correspondences in this regard containing documentary evidences are enclosed in pages 36 to 45 of the paper book filed before us. On perusal of the same, we find that the assessee had rightly claimed deduction on account of aforesaid deferred revenue expenditure written off in the years under consideration. Accordingly, we reverse the order of the ld CITA in this regard.

7.2. We find that the aforesaid remaining 3 issues were subject matter of adjudication by this tribunal in assessee’s own case for the Asst Years 2001-02 to 2003-04 in CO Nos. 11, 196 and 197/Mum/2010 dated 30.9.2015 wherein it was held as under:-

23 ITA No.1649/Mum/2010 and other appeals Maharashtra State Electricity Board

“6.Second and third grounds are about disallowance of loss of Rs.6.95 lacs and Rs.4.08 lacs respectively suffered by the assessee on account of flood, cyclone/storm, theft etc. During the assessment proceedings the AO found that the assessee had incurred loss of properties to the extent of Rs.6.80 crores due to storm, theft, accident. As per the AO, detailed nature of the assets was not furnished by the assessee. He held that the loss was capital in nature and hence not allowable as deduction. 6.1.Before the FAA it was contended that under the electricity supply Rules losses incurred on account of natural calamities were to be treated as losses for the year in which they had occurred, that assessee had claimed losses of Rs.11.00 lacs only. After considering the submission of the assessee ,he held that the details of the actual loss was not available, that nature of loss claimed by it appeared to be loss of capital asset and accordingly the AO was correct to disallow the deduction, that AO had wrongly disallowed an amount of Rs.68.00 lacs, that the assessee had made actual claim of Rs.11.04 lacs only (Rs.6.95 lacs and Rs.4.08 lacs).The FAA upheld the disallowance of loss of Rs.11,04,040/- and deleted the balance addition. 6.2.Before us the AR argued that loss had occurred during the year under appeal, that the AO had allowed depreciation on the assets, that the assets were part of the block of assets, that depreciation should be allowed as per provisions of section 43(6)(c) of the Act, that loss of Rs.4.06 pertained to loss of stock-in-trade, that same was allowable. He referred to page no.254 and 370 of the paper book and relied upon the cases of Unitex Products Ltd. (22 SOT 429); Packwell Printers (359 ITD 340).Departmental Representative(DR) supported the order of the FAA . 6.3.We have heard the rival submission. As far as loss of stock in concerned, we are opinion that ITA/3813 &others/Mum/09-MSEB/01-02to03-04 same is to be allowed as revenue expenditure. So,the order of the FAA is reversed to that extent. For the balance amount we hold that the assets were forming part of block of assets. Therefore, depreciation should be allowed with regard to them.We find that issue of the claim of depreciation about assets of block has been decided in favour of the assessee by the decision of Tribunal relied upon by the assessee. Ground no.2-3 are allowed in favour of the assessee, in part. 7.Last ground of appeal is about write off of intangible assets of Rs.1.95 crores. During the assessment proceedings the AO found that the assessee had claimed that it would amortise intangible assets over the estimated period during which it was going derive benefits therefrom, that a proportionate amount calculated with reference to the benefits during the year such as additional revenue arising as a result of the asset was being charged to revenue account for each of the years benefitted. However, the AO disallowed the claim on the ground that the same was capital in nature. 7.1.Before the FAA ,during the appellate proceedings the assessee submitted that treatment given to the intangible assets was in accordance with the electricity rules. It relied upon the case of Tapadia Tools Ltd.(260 ITR 102).It was also stated that similar issue was decided in favour of the assessee by the

24 ITA No.1649/Mum/2010 and other appeals Maharashtra State Electricity Board

then FAA while deciding the appeal for A.Y. 97-98. The FAA ,after considering the submission of the assessee and the assessment order, held that the details of the calculation of amounts written off towards intangible assets were not available, that the assessee was writing off a part of the costs of the fixed assets every year, it was not allowable as revenue expenditure, that the similar claim was disallowed by the FAA in the AYs.99-00 and 00-01.Following them, he upheld the order of the AO and dismissed the ground raised by the assessee . 7.2.Before us, the AR contended that the assessee was amortising the expenses ,that those expenses pertained to purchase of software and payment lawyer's fee etc, that the assessee had incurred expenses towards fee paid with regard to Dabhol Project. He referred to page No.340 of the paper book. He relied upon the case of Tapadia Tools(372ITR 605),Raychem RPG Ltd.(346 ITR138), Richardson Hindustan Ltd.(169 ITR 516)and Bombay Cycle and Motor agencies Ltd. (118 ITR 42).DR supported the order of the FAA . 7.3.We have heard the rival submissions. We find that the judgment of Tapadia Tools, delivered by the Hon'ble Bombay High Court(supra)and relied upon by the FAA has been reversed by the Hon'ble Supreme Court.In the matter of Raychem RPG Ltd.(supra),the Hon'ble Bombay high Court has held that of the software facilitated the assessee's trading operations or enabled the management to conduct the assessee's business more efficiently or more profitably then it was not in the nature of profit-making apparatus and that the expenditure was to be allowed. We find that lawyer's fees has been held to allowable expenditure in the matter of Bombay Cycle and Motor agencies Ltd.(supra).In that matter fees was paid to draw up lease agreement. We find that the FAA has followed the orders for AY.99-00 and 2000-01,but has not distinguished the facts of the case of AY.1997-98 and the facts of the matter under appeal. Order passed without giving any reason for not following the decision favouring the assessee, comes under the category of non speaking order. The order of the FAA falls under that category, hence cannot be endorsed. So, reversing his order, we decide last ground in favour of the assessee. 8.As the grounds raised by the AO.s and the assessee in the appeals and in the CO.s are almost similar to the ground raised by the them in the appeal and CO for the AY.2001-02,so following our order for that year, we partly allow their Appeals/CO.s for the above mentioned two years.”

7.3. Respectfully following the said decision of this tribunal in assessee’s own case for earlier years as referred to supra, we direct the ld AO to - (i) grant depreciation on loss on obsolescence of fixed assets (ii) grant deduction for loss fixed assets due to flood, cyclone, fire etc

25 ITA No.1649/Mum/2010 and other appeals Maharashtra State Electricity Board

(iii) grant deduction for intangible assets written off

7.4. Accordingly, the Cross Objections raised by the assessee in Ground Nos. 2 to 5 for the Asst Year 2004-05 are partly allowed and Ground Nos. 2 to 4 for the Asst Year 2005-06 are allowed.

8.1. We find that the ld CITA identified the break up of the aforesaid expenditure as under:- Stamp duty - Rs 46,02,345/- Service Fee - Rs 88,00,795/- Commitment Charges - Rs 57,86,787/- Other Expenses - Rs 50,51,900/-

26 ITA No.1649/Mum/2010 and other appeals Maharashtra State Electricity Board

We find that the ld CITA applied the proviso to section 36(1)(iii) of the Act which is applicable from Asst Year 2003-04 onwards by stating that all expenses on borrowed funds could be allowed to be capitalised until the asset is put to use and accordingly upheld the action of the ld AO.

8.2. We find that this issue was the subject matter of adjudication by this tribunal in assessee’s own case (ie hived off company) for the Asst Year 2006-07 in ITA No. 419/Mum/2010 dated 22.8.2019 wherein it was held as under:-

27 ITA No.1649/Mum/2010 and other appeals Maharashtra State Electricity Board

of the assessee of these expenses as business expenditure under section 37(1) of the Act and hence, we do not want to interfere in the same. This issue of Revenue‟s appeal is dismissed.

8.3. Respectfully following the said decision, we direct the ld AO to grant deduction towards cost of raising funds for both the Asst Years in appeal before us. Accordingly, the Ground Nos. 6.1. to 6.3. for the Asst Year 2004-05 and Ground Nos. 5.1. to 5.3. for the Asst Year 2005-06 raised by the assessee are allowed.

We have heard the rival submissions and perused the materials available on record. We find that the ld AO had observed that assessee company had paid penal interest of Rs 4,55,562/- towards its capital liabilities. He observed that since amount is penal in nature, the same is not allowable as deduction u/s 37(1) of the Act by applying the Explanation thereon. We find that since the ld AO had not given any reasoning for the disallowance of the aforesaid expenditure, the ld CITA called for the details of the expenditure from the assessee which were duly provided as under:- (i) Provision made towards interest on delayed payment of purchase of assets payable to Lasalgaon Electricity Co-operative Society – Rs 23,650/- (ii) Provision made towards interest on delayed payment of purchase of assets payable to Ahmedabad Cantonment Board – Rs 16,060/- (iii) Penal Interest on loan from REC – Rs 4,15,852/-

28 ITA No.1649/Mum/2010 and other appeals Maharashtra State Electricity Board

9.1. On perusal of the same, the ld CITA deleted the disallowance made in the aforesaid sums of Rs 23,650/- and Rs 4,15,852/- , against which, the revenue had not preferred any appeal before us. The ld CITA upheld the disallowance made in the sum of Rs 16,060/- as above. Hence the only dispute to be decided before us is allowability of interest on delayed payment of purchase of assets payable to Ahmedabad Cantonment Board in the sum of Rs 16,060/-. We find from letter dated 15.11.2006 filed before the ld AO by the assessee that this sum of Rs 16,060/- represent interest on balance amount (interest on delayed payment) of purchase of assets payable to Ex.Licensee viz M/s Ahmedabad Cantonment Board , Aurangabad and that the same is payable as per C.E. (Comm) letter No. CE(Com)/PG/Acctts-32/832 dated 23.3.2004 by the assessee. Hence this is a statutory payment made by the assessee which is squarely compensatory in nature and hence cannot be construed as penal in nature. Accordingly, the provisions of Explanation to Section 37(1) of the Act would not be applicable to the same. Moreover, the said interest of Rs 16,060/- is similar to the interest payable in the sum of Rs 4,15,852/- to REC which has been allowed by the ld CITA. We find that the nature of both the transactions are similar. Hence we find that the ld CITA is not justified in upholding the disallowance on account of Rs 16,060/- alone. Accordingly, the Ground Nos. 7.1. to 7.3. raised by the assessee are allowed.

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ITA No. / CO No. Asst Particulars Result Year ITA No. 1649/Mum/210 2004-05 Revenue Appeal Dismissed CO No.198/Mum/2010 2004-05 Cross Objections of Partly assessee Allowed ITA No. 945/Mum/2010 2005-06 Revenue Appeal Dismissed CO No. 171/Mum/2010 2005-06 Cross Objections of Allowed assessee

Order pronounced on 21/04/2021 by way of proper mentioning in the notice board.

Sd/- Sd/- (RAVISH SOOD) (M.BALAGANESH) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated 21/04/2021 KARUNA, sr.ps

Copy of the Order forwarded to : The Appellant 1. The Respondent. 2. The CIT(A), Mumbai. 3. CIT 4. DR, ITAT, Mumbai 5. 6. Guard file. //True Copy//

BY ORDER,

(Asstt. Registrar) ITAT, Mumbai