RAYS POWER EXPERTS PRIVATE LIMITED,JAIPUR vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 2, JAIPUR

2.1 At the outset of hearing, the Bench observed that there is delay of 121 days in filing of the appeal by the assessee for which the ld. AR of the assessee filed an application dated 8th Aug. 2024 for condonation of delay with following prayers :-

“1. In the above case it is submitted that an order has been passed u/s 250 by learned CIT(A)/NFAC on dated 22/2/2024.

Rays Power Experts Pvt. Ltd. vs. ACIT To this effect, the Director of the Company Shri Rahul Gupta filed an affidavit deposing the above facts in the matter. 2.2. During the course of hearing, the ld. DR objected to assessee’s application for condonation of delay and prayed that Court may decide the issue as deemed fit and proper in the interest of justice.

2.3 We have heard the contention of both the parties and perused the materials available on record. The prayer as mentioned above by the assessee for condonation of delay of 121 days has merit for the reason that there was miscommunication as well as sickness of the working director Shri Rahul Gupta and we concur with the submission of the assessee. Thus the delay of 121 days in filing the appeal by the assessee is condoned in view of the decision of Hon’ble Supreme Court in the case of Collector, land Acquisition vs. Mst. Katiji and Others, 167 ITR 471 (SC) as the assessee is prevented by sufficient cause.

2.4. The brief facts of the case are that the assessee company is primarily engaged in providing of Engineering, Procurement and construction service of Solar Power Plants to the customers with the infrastructure facilities for setting up their Solar Power projects. It is also engaged in project management, operational & maintenance service after successful erection of solar power plants. The assessee filed its return of Rays Power Experts Pvt. Ltd. vs. ACIT income on 07.11.2017 declaring total income of NIL after claiming business loss of Rs. 1,34,04,911/-. The case was selected for scrutiny assessment under CASS and notice u/s 143(2) was issued on 18.8.2018, which was duly served upon the assessee. In this case, the assessment order u/s 143(3) was passed by the AO who assessed total income of Rs.5,17,34,650/- by making following additions to the total income of the assessee.  Cash deposit of Rs. 1,25,84,500 u/s 68 r.w.s. 115BBE.

 Disallowance of prior period expenses of Rs. 1,78,21,544/-.  Disallowance of liquidated damages Rs. 2,43,04,000/-.  Disallowance of bad debt amount Rs. 1,03,60,140.  Disallowance u/s 14A is worked out at Rs. 69,374/-.

2.5 Aggrieved from the order of AO, the assessee preferred an appeal before the ld. CIT(A) who partly allowed the appeal of the assessee by giving following finding in the case of the assessee.

“5. Decision: I have carefully considered the appellate documents and order passed by the Ld.JAO. Appellant's case was picked up for a scrutiny under CASS. Statutory notices and questionnaire were issued. It was noticed that the appellant had deposited an amount of Rs.1,25,84,500 in its accounts in SBN Specified Bank Notes. It was found to be not explained and addition under section 68 was made. An addition of prior period expenses of Rs. 1,78,21,544 was made. Addition on account of Liquidated damages of Rs.2,43,04,000 was Rays Power Experts Pvt. Ltd. vs. ACIT made. Addition on account of bad debts of Rs.1,03,60,140 was made. Disallowance under section 14A of ITA 1961 of Rs.69,374 was made. Notice under section 250 were issued, however, there was no compliance and appeal is being decided based on material available on record. Grounds of appeal are adjudicated as follows- Ground of Appeal One is general in nature and not adjudicated thus. Ground of Appeal Two is qua addition of cash deposits in SBN during the demonetization period under section 68 of ITA 1961. 1) Dismissed as, as held by courts the ingredients of "nature and source" are- (i) The identity of the creditor (ii) Ability of the creditor, i.e., his creditworthiness, (iii) Genuineness of the credit transactions. Further, the satisfaction of AO is also important qua above trinity. Ld.JAO when starts enquiry, specifically to satisfy himself of the source of such credit, and if during the enquiry, he is satisfied that the entries are not genuine, he may add the said sum represented by such credit entry as income of the assessee. The satisfaction of the assessing officer is the basis of invocation of provisions of Section 68. Source of such cash deposits and its evidence in this regard was not presented before the Ld..JAO. In para 3.12 Ld.JAO has recorded clear finding of fact that '3.12 Accordingly, the cash deposit made during demonetization period i.e. Rs. 1,25,84,500/- cannot be accepted as explained and by virtue of section 68 of the Act which specifically says that any entry in the books of account should invariably be explained to the satisfaction of the Assessing Officer, in which the assessee has failed." Nothing contrary to finding reached by Ld.JAO has been submitted in the appeal proceedings. The ingredients of section 68 are (i) There is a discovery/identification of credit entry (ii) This discovery is by the AO (iii) The credit entry is found recorded in the books of the assessee maintained by him Rays Power Experts Pvt. Ltd. vs. ACIT (iv) The AO calls for an explanation from the assessee about nature and source of credit entry (v) Where the assessee does not offer an explanation, or explanation offered by him is not found satisfactory in the opinion of the AO (vi) The sum so credited may be charged to income-tax as the income of the assessee. (vii) That (deemed) income is charged for the previous year in which credit entry was found. Thus, the key elements in section 68 are credit entries, books of the assessee, explanation about nature and source, either no explanation is furnished, or if furnished, explanation is not satisfactory, the credit entry may be deemed as income, and of the previous year. When a credit is discovered by the AO in the books of the assessee, he must call for an explanation from the assessee about the nature and source of such credit entry. It is assessee alone who has to offer an explanation initially, or subsequently. He must provide all the relevant information and documents in support of his explanation. This is necessary because initial onus lies on the assessee for furnishing explanation. The explanation may be found false or may be of such nature as does not inspire any confidence, or belief in its truthfulness. In view of the discussion supra ground of appeal is rejected. Ground of Appeal Three It has been also averred that trading results were accepted/books of accounts were not rejected still addition under section 68 was made. It may be noted that section 145(3) lays down that where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting namely cash or mercantile systems or accounting standards as notified by the Central Government, have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in Section 144 of the Act. Ld.JAO can proceed under Section 145(3) under any of the following circumstances. (a) Where he is not satisfied about the correctness or completeness of the accounts: or Rays Power Experts Pvt. Ltd. vs. ACIT (b) Where method of accounting cash or mercantile has not been regularly followed by the assessee, or (c) Accounting Standards as notified by the Central Government have not been regularly followed by the assessee. There is nothing in the Section 68 of IT Act, 1961 mandating that the books of accounts must be rejected for making addition. It is a deeming provision which will apply when the appellant fails to offer explanation for the source of the credits in the books o accounts. Support in this regard can be found from judgment of the Hon'ble ITAT Amritsar in the case of Davinder Singh vs ACIT [2007] 104 ITD 325 (ASR.). The headnotes are reproduced as below for a ready reference- I. Section 68 of the Income-tax Act, 1961-Cash credits-Assessment year 2001- 02-Whether expression 'any sum' used in section 68 does not say that credit should be only in nature of cash receipt, but it covers all credits, including loan, receipts and any other amount of similar nature, be that of cash or kind, and in name of assessee's capital account or in name of a third party - Held, yes Whether there is nothing in section 68 that books of account must be rejected before making an addition under this section; this is an independent and deeming provision and will apply If assessee fails to offer an explanation of source of particular receipt/credit appearing in books of account or if explanation given by assessee is found to be not satisfactory by Assessing Officer-Held, yes Assesses earned income from Dami, being commission agent, for sale of agricultural produce like cotton and narma On scrutiny of assessee's balance sheet, Assessing Officer found credits in names of 52 persons - He also observed that as against those credits, balance sheet Indicated sundry debtors, which belonged to assessee's close relations Assessee though stated that all 52 persons had sold their agricultural produce to him, yet he could not prove that fact nor could he produce those persons Letters sent by Assessing Officer to said persons at addresses given by assessee returned unserved with remarks 'not known' Thus, Assessing Officer held that assessee failed to discharge onus cast on him under section 68 He, accordingly, made addition of those credits under section 68-Commissioner (Appeals) upheld addition - Whether on facts, addition was justified-Held, yes Whether however, since sufficient time was not allowed to assessee to produce those parties, located at different places and make effective representation, addition should be restored to file of Assessing Officer for deciding same afresh, after affording sufficient and reasonable opportunity to assessee-Held, yes Rays Power Experts Pvt. Ltd. vs. ACIT II. Section 37(1) of the Income-tax Act, 1961-Business expenditure - Allowability of -Assessment year 2001-02-Assessee claimed that out of gross Dami received, he had refunded 75 per cent of same to its sister concerns for introduction and responsibility of payments to agriculturists However, there was no evidence, whatsoever, to support claim of assessee that said sister concerns had rendered any services for which commission was paid-Said sister concerns were not able to show any record or evidence about names of persons, who were sent/recommended for selling their produce through assessee Whether, on facts, in absence of any evidence and material on record, authorities below were justified in disallowing claim - Held, yes It is a legal fiction as defined in the case of Bengal immunity Co. vs State of Bihar by Hon'ble SC as 'the supposition of law, that a thing is true, without enquiring whether it be so or not, that it may have effect of truth so far as it is consistent with equity." Legal fiction presupposes the state of facts on which it is based and all the consequences which flow from that state of facts have got to be worked out to their logical extent. Section 68 relates to cash credits. Cash credits as such are not of the nature of income. But if certain conditions laid down in section 68 are satisfied, then cash credit could be charged as income of the assessee. These conditions are 1) any sum is credited (il) such sum is credited in the books of the assessee and il) assessee offers no explanation about the nature and source of the sum so credited or where explanation is offered by the appellant, but such explanation is not found satisfactory by the AO. Once these conditions are satisfied, the sum credited would be deemed income of the assessee of the previous year in which such sum is found credited. This legal fiction u/s.68 does not require Ld.JAO to show the sources of the income before bringing the amount to tax. Thus, there is no requirement qua rejection of books of accounts for making addition under section 68 and ground of appeal is rejected. Ground of Appeal Four and Five It has been argued that addition made on account of PPC Expenses of Rs.1,78,21,544 in not correct in law. Ld.JAO has given following finding in the assessment order- 4.3 The assessee has furnished confirmations of some parties only. The parties in respect of which confirmations are not received remain unverifiable and are therefore, are required to be disallowed. Accordingly, the Power Purchase Commitment expenses claimed on account of following parties in which confirmations have not been received, are to be considered for disallowance.

Rays Power Experts Pvt. Ltd. vs. ACIT 4.4 Another issue connected to the Power Purchase Commitment expenses claimed by the assessee is that many entries in the PPC ledger pertain to the commitment of previous years and not the FY 2016-17 On perusal of narration of these entries, it is seen that the amounts have been credited towards recovery of deficit in Generation guarantee for F.Y. 2013-14, 2014-15 & 2015-16. As such, it is clear that the expenses are 'Prior Period Expenses". These expenses are, therefore, required to be disallowed. As regards to confirmations not submitted and added back, nothing has been bought on record in the appellate proceedings. Appellant being aggrieved party was required to lead evidence which it has failed to do so. In view of explanation and evidence in this regards action of Ld.JAO is confirmed. Qua Prior period expenses, they are expenses that relate to a previous accounting year but are recorded in the current year. These expenses are generally disallowed for tax purposes because they do not match with the income of the current year. However, there is no specific section in the Income Tax Act, 1961 that deals with the disallowance of prior period expenses. The disallowance is based on the general principles of accounting and taxation, such as the accrual system, the matching concept, and the consistency concept. Some of the sections that allow deductions for certain expenses also specify that the expenses should be incurred in the relevant previous year. For example, section 350 allows deduction for certain pre-commencement expenses, but only if they are incurred before the commencement of the business or within 10 years from the commencement. Similarly, section 36(1)(va) allows deduction for the employer's contribution to provident fund, but only if it is paid within the due date under the relevant act. Therefore, prior period expenses are disallowed under the relevant sections that allow deductions, or under section 37, which is a residual section for business expenses. Section 37 states that any expenditure incurred for the purpose of the business or profession shall be allowed as a deduction, if it is not of capital nature or personal nature, and it is not covered by any other section. Prior period expenses do not satisfy the condition of being incurred for the purpose of the business or profession in the current year, and hence they are disallowed under section 37. Thus. there is no infraction of law in action of Ld.JAO has been pointed out and addition is upheld. Ground of Appeal Six It has been averred that the Ld.JAO has erred in disallowing liquidated damages.

Rays Power Experts Pvt. Ltd. vs. ACIT Liquidated damages are payments made by one party to another for breach of contract or non-performance of obligations. The taxability of liquidated damages depends on whether they are compensatory or penal in nature. Compensatory damages are those that are meant to indemnify the aggrieved party for the actual loss or injury suffered, whereas penal damages are those that are imposed as a punishment for the defaulting party. Section 37 of the Income Tax Act, 1961 allows deduction for any expenditure incurred for the purpose of the business or profession, provided that it is not of capital nature or personal nature, and it is not covered by any other section. However, section 37 also excludes any expenditure incurred for any purpose which is an offence or which is prohibited by law. Therefore, if the liquidated damages are compensatory in nature and are incurred for the purpose of the business or profession, they may be allowed as a deduction under section 37. However, if the liquidated damages are penal in nature and are imposed for violation of any law or contract, they may be disallowed under section 37 as they are not incurred for the purpose of the business or profession. The nature of liquidated damages must be determined based on the facts and circumstances of each case, such as the terms of the contract, the intention of the parties, the quantum of damages, the actual loss suffered, etc. The burden of proof lies on the assessee to establish that the liquidated damages are compensatory and not penal. As nothing has been bought on record in appellate proceedings, ground of appeal is dismissed. Ground of Appeal Seven Appellant has averred that Ld.JAO has erred in law and fact by disallowing bad debts. Bad debts are debts that are irrecoverable and written off in the accounts of the assessee. Section 36. (1) (vii) of the Income Tax Act, 1961 allows deduction for bad debts in respect of any debt or part thereof which is taken into account in computing the income of the assessee and which is written off as irrecoverable in the previous year. However, the deduction is subject to certain conditions and exceptions. One of the conditions is that the debt or part thereof must have been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year. Another condition is that the debt or part thereof must not represent a provision for bad and doubtful debts made in the accounts of the assessee.

Rays Power Experts Pvt. Ltd. vs. ACIT Therefore, if the assessee has not considered the debt or part thereof in computing the income of the previous year or an earlier previous year, or if the assessee has made a provision for bad and doubtful debts in the accounts, then the deduction for bad debts under section 36 (1) (vii) will be disallowed. No evidence in line with provisions of ITA as discussed supra have been submitted and onus is still on appellant. Thus, ground of appeal is dismissed. Ground of Appeal Eight As regards to disallowance made under section 14A rwr 8D, the direction of the undersigned are as follows. In the case of ACIT vs Vireet Investment Pvt. Ltd. 82 taxmann.com 415 Hon'ble Delhi ITAT in Special Bench judgment vide order dated 16/06/2017 held that 'only those investments are to be considered for computing average value of Investment which yielded exempt income during year' (emphasis supplied) In para 11.16 of the above order, it has been emphatically held that "11.16 Therefore, in our considered opinion, no contrary view can be taken under these circumstances. We, accordingly, hold that only those investments are to be considered for computing average value of investment which yielded exempt income during the year." It may also be noted that this has been affirmed by Hon'ble Delhi HC in PCIT vs M/s Vireet Investment Pvt. Ltd. ITA 243 & CM APPL 7362/2018 and ITA 247 & CM APPL 7365/2018 vide order dated 26/02/2018 as follows- "The Revenue urges two questions of law. One, ie. with respect to upholding the value of shares adopted for disallowance under 14A of the Income Tax Act, 1961 ('the Act') by applying Rule 8D(2). The issue is covered by a judgment of this Court in ACB India Ltd. vs. Assistant Commissioner of Income Tax. [2015] 374 ITR 108 (Del) against the Revenue. Consequeritly, no question of law arises." Following above decision, I direct the LJAO to calculate disallowance following above directions of Hon'ble HC 'that only those investments are to be considered for computing average value of investment which yielded exempt income during the year. Incase calculated amount as per above direction is less than the suc-moto disallowance made, if any, it should be taken at suo-moto disallowance.

Rays Power Experts Pvt. Ltd. vs. ACIT It may also be mentioned that as per decision of Hon'ble Delhi HC in the case of PCIT vs Era Infrastructure (India) Ltd 141 taxmann.com 289 rendered on 20/07/2022, the amendment to section 14A by insertion of non-obstante clause and explanation will take effect from 01/04/2022 and not retrospectively. (This view of Hon'ble HC must prevail till final decision of the Supreme Court in the SLP filed in the case of IL & FS Energy Development Co. Ltd.") 6. Appeal for AY 2017-18 is partly allowed.” 2.6. During the course of hearing, the ld. AR for the assessee prayed that the lower authorities have passed ex-parte orders and the assessee was not provided adequate opportunity of being heard. Thus, the assessee may be provided one more opportunity in the interest of equity and justice to contest his arguments/submissions before the AO so that necessary documents and additional evidences can be filed before the AO. Thus the issue raised above could be decided on merit.

2.7. During the course of hearing, the ld. DR supported the order of the ld. CIT(A)

2.8. We have heard both the parties and perused the materials available on record. In this case, it is noticed that the AO made the above mentioned additions on the hands of the assessee on the ground that he did not find the reply made by the assessee as acceptable. The assesee did not make submissions in the desired format required to compare the figures with preceding previous years. It is also noted that no confirmation had been filed in respect to any party against which Rays Power Experts Pvt. Ltd. vs. ACIT liquidated damages had been claimed despite being specifically asked to do so and no ledgers in respect of the parties had been furnished by the assessee before the AO which shows that the assessee was not cooperating the AO to submit the desired information and thus he made the addition. The ld. CIT(A) has also confirmed the action of the AO by observing same reasoning. However, the ld. AR of the assessee prayed that one more chance may be given to submit all the documents including the additional evidences in order to settle the dispute in question. The Bench considers the prayer of the ld. AR of the assessee and feels that it is an admitted fact that the assessee is ex-parte before the AO and also before the ld. CIT(A). Therefore, he could not put forth his defence. It was the bounded duty of the assessee to appear before the statutory authorities as and when called for. It is noticed that various opportunities were provided to the assessee for settling the issue but the assessee remained lethargic. However, the Bench is of the view that lis between the parties has to be decided on merits so that nobody’s rights could be scuttled down without providing opportunity of being heard to the assessee. Hence, the matter is restored to the file of the AO to decide it afresh by providing one more opportunity of hearing, however, the assessee will not seek any adjournment on frivolous ground and remain 2.9. Before parting, we may make it clear that our decision to restore the matter back to the file of the AO shall in no way be construed as having any reflection or expression on the merits of the dispute, which shall be adjudicated by AO independently in accordance with law. 2.10. In the result, the appeal of the assesee is allowed for statistical purposes as indicated hereinabove. Order pronounced in the open Court on 18/03/2025.