MAHARASHTRA STATE ELECTRICITY TRANSMISSION COMPANY LIMITED,MUMBAI vs. ITO CIRCLE 14(1)(1), MUMBAI

On the facts and circumstances of the case and law, the Learned CIT(A) erred on confirming an addition of Rs.1,00,19,00,000/- made by the Assessing Officer being delayed payment charges.

On the facts and circumstances of the case and law, the Learned CIT(A) erred in rejecting the contention of assessee that not bringing delayed payment charges as income during the year is allowable in view of consistently followed accounting policy in respect of such income and though accrued its realization in uncertain and that the assessee is Govt. undertaking and is paying taxes substantially and is at highest tax rate bracket and non- inclusion of such accrued but uncertain realizable receipts can never be called escapement of liability but can be ascribed as realistic post-ponment of receipt for taxation, to the years it will be really received. Assessment Year 2016-2017

On the facts and circumstances of the case and law, the Learned CIT(A) disregarding the juri ictional High Court decision in NAGPUR-INCOME TAX APPEAL NO.17 of 2019, (The Pr. Commissioner of Income-Tax-2 vs. Madhu Kumar Bagri – Calcutta High Court 1990-53 Taxman536 to the similar effect.

On the facts and circumstances of the case and law, the CIT(A) erred in not properly applying the law laid by the Apex Court in CIT vs. Godhra Electricity Co. 225 ITR 746 SC and Andhra Bank case as reported in 225 ITR 447.SC which held that if income by following book keeping methods, the liability to tax cannot be attracted.

On the facts and circumstances of the case and law, the Learned CIT(A) erred in holding that the appellant has not satisfactorily substantiated its ground against the addition made by the AO on the issue of delayed payment charges disregarding factual matrix, resolution of the Board of Public Sector Under Taking and MERC guidelines and also the established law that AO cannot step in the shoes of the assessee.

On the facts and circumstances and the law, CIT(A) erred in confirming the disallowance of claim made by the Appellant u/s.80IA(4) of the Income-tax Act, 1961. 10. On the facts and circumstances and the law, CIT(A) erred in confirming the disallowance of claim made by the Appellant u/s.80IA(4) of the Income-tax Act, 1961 disregarding the facts that this was not the first year of claiming deduction u/s.80IA was claimed on eligible activity of transmission of electricity based on addition to capital asset being laying of new transmission lines and laying of new transmission lines was over different areas and it was not possible to determine profit from such laying of new transmission lines.

On the facts and circumstances and the law, CIT(A) erred in confirming the disallowance of claim made by the Appellant u/s.80IA(4) of the Income-tax Act, 1961 disregarding the fact that the claim of deduction is claimed in return of income and is evident from the details Assessment Year 2016-2017 accompanying such electronically filed return in the given format and profits arising from the activity of transmitting power viz., laying down of new transmission lines and/or renovation and modernization of the existing network of transmission lines is eligible for a deduction u/s.80A of the Income-tax Act, 1961 and this profit has been calculated based on the ‘return of equity’ as allowed by the Maharashtra Electricity Regulatory Commission [‘MERC’] which is the regulatory commission and established under the Electricity Regulatory Commission Act, 1998, a Central Act which was super ceded by Electricity Act (EA), 2003. 12. On the facts and circumstances of the case and the law, CIT(A) erred in not considering that issue under reference (80IA) is not about ‘Principle of allowability’ but is the issue of ‘Working of allowable claim’ and further erred in holding that appellant has been not able to substantiate its claim of deduction u/s. 80IA on notional profit computed by the above return of equity method and further erred in not formulating the method of claiming deduction u/s.80IA if appellant is otherwise eligible for such beneficial provisions ”

Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was justified in allowing the deduction on account of Prior Period Expenses ignoring the fact that the accounting was not in accordance with the method of accounting stipulated Section 145 of the Act?

Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was justified in allowing the deduction on account of Prior Period Expenses without prejudice to the method of accounting followed by the assessee which is as per the rules of Electricity Supply Annual Accounts Rules 1985 prescribed u/s. 69 of Electricity Supply Act 1948, the assessee ought to have produced evidence and substantiate its claim of crystallization prior period expenses?"

As regards, the disallowance of INR.20,04,610/- made by the Assessing Officer under 14A read with Rule 8D(iii) of the Act is concerned, we find have already concluded in paragraph 10.11 above Assessment Year 2016-2017 that in absence of proper satisfaction, disallowance made by the Assessing Officer under Section 14A of the Act read with Rule 8D(2)(ii)/(iii) of the IT Rules, the same cannot be sustained.

Accordingly, we delete the disallowance of INR.1,41,24,152/- made under Section 14A of the Act read with Rule 8D of the Rules. Accordingly, Ground No.1 and 2 raised by the Assessee are allowed.

Ground No.3 to 8 raised by the Assessee pertain to the addition of INR.1,00,19,00,000/- made in respect of Delayed Payment Charges.

During the assessment proceedings the Assessing Officer noted that in Note 55(e) of the Audited Financial Statements it was stated that the Delayed Payment Charges (DPC) to the tune of INR.854.95 Crores receivable from 9 entities, has not been recognized as income in the Profit & Loss Account. According to the Assessing Officer the DPC were in the nature of accrued income and therefore, the Assessee was asked to show cause as to why DPC charges should not be brought to tax in the hands of the Assessee. In response, the Assessee explained that since the realization of DPC was uncertain the same was not recognized as income. The Assessing Officer accepted the contention of the Assessee in relation to DPC of INR.754.76 Crores receivable from Maharashtra State Electricity Distribution Company Limited (MSEDCL) observing that the Assessee had, during the course of transfer pricing proceedings, vide letter dated 18/02/2019, submitted that MSEDCL has admitted to inability to make payment of DPC of INR.754.76 Crores. As regards, the balance amount of DPC of INR.100.19 Crores, the Assessing Officer rejected the contention of the Assessee observing that the Assessee had failed to furnish any explanation or supporting evidence. Thus, Assessing Officer made addition of INR.100.19 Crores in the hands of the Assessee. Assessment Year 2016-2017

In appeal preferred by the Assessee, the Learned CIT(A) rejected the ground raised by the Assessee challenging the above addition observing that there was no reason to interfere with the order passed by the Assessing Officer in this regard in view of the following - (a) the Assessee has itself stated that the Assessee was following mercantile system of accounting and had raised invoices for DPC during the relevant previous year, therefore, the DPC income had accrued during the relevant previous year; (b) the Assessee had failed to provide documentary evidence about uncertainty in realization of DPC of INR.100.19 Crores; and (c) the Assessee has not stated whether subsequently the DPC charges were waived or the same were received by the Assessee.

Being aggrieved, the Assessee has carried the issue in appeal before the Tribunal.

The Learned Authorised Representative for the Assessee submitted that the Assessee had placed before the Assessing Officer the accounting policy followed by the Assessee as well as the Board Resolution dated 01/09/2016 passed by the Board of Directors of the Assessee wherein it was resolved not to recognize DPC of INR.854.95 Crores as income since its realization was uncertain and that the Assessee was considering waiving off of DPC which were collected for delay in payment. It was submitted that while the Assessing Officer accepted the contention of the Assessee in respect of DPC of INR.754.76 Crores receivable from MSEDCL, the Assessing Officer rejected identical submission of the Assessee in respect of DPC of INR.100.19 Crores receivable from 8 other entities. It was submitted that the Assessee was a government undertaking and did not set to gain anything by delaying the recognition of DPC as income and that the Assessee was recognizing income as per statutory framework (including tariff orders passed by the Maharashtra State Electricity Regulatory Commission and Multi-Year Tariff Regulation, 2011). It Assessment Year 2016-2017 was submitted that DPC of INR.100.19 Crores was recognised as income in subsequent years as per the accounting policy followed by the Assessee for recognition of ‘Other Income’. It was further submitted that DPC recognized as income in subsequent years was received by the Assessee and therefore, addition of DPC as income for the Assessment Year 2016-2017 would amount to double taxation. In support, the Learned Authorised Representative for the Assessee placed on record the details of receipt of DPC in subsequent years.

Per Contra, the Learned Departmental Representative submitted that the Assessing Officer and the CIT(A) has clearly recorded that the DPC had accrued to the Assessee and that the Assessee had failed to provide material to show that the realization of DPC was uncertain. It was contended that the subsequent realization of DPC clearly showed that the realization of DPC was not uncertain.

We have considered the rival submission and have perused the material on record. It is admitted position that during the relevant previous year the Assessee had not recognized aggregate DPC of INR.854.95 Crores as income in the Profit & Loss Account. Out of the aforesaid amount of DPC, the Assessing Officer made addition only to the extent of INR.100.19 Crores. The contention of the Assessee is that DPC were not recognized as income since its realization was uncertain.

We note that as per Mutli-Year Tariff Regulation, 2011 the state transmission utility is required to raise monthly bills for inter-state transmission charges. Delay in payment of same, attracted DPC being late payment surcharge of 1.25% per month. The DPC fall into the category of ‘Other Income’. By way of Board Resolution, dated …., the Assessee had resolved not to recognize DPC as income in view of the uncertainty of recovery and pendency of proposal to waive the DPC of INR834.95 Crores. The submissions of the Assessee in relation to DPC charges of INR.754.76 Crores to be received from MSEDCL whereas Assessment Year 2016-2017 the balance amount of INR.100.19 crores was added in the hands of the Assessee on the ground that Assessee had failed to bring any material to show on record that the realization of above amount was uncertain. We note that in the audited financial statement for the relevant previous year, the Assessee has made following disclosure in Note 55(e):

On perusal of 2.1(42) and 43.1 e) of Maharashtra Electricity Regulatory Commission (Multi Year Tariff) Regulations, 2011, we find that while delayed payment charges form part of total revenue the same are categorized under the head ‘Non Tariff Income’. In the Financial Statements the Assessee for the relevant previous year has categorized its revenue in the following four categories – (a) Transmission income, (b) Other income (c) Sale of scrap and (d) Liquidated damages. It was submitted by the Learned Authorized Representative for the Assessee that the DPC shall fall into the category of ‘Other Income’. We note that as per accounting policy on revenue recognition followed by the Assessee, as disclosed in Note 2 i) of the Financial Statements for the relevant previous year, Assessment Year 2016-2017 the other income is recognized in the following manner: “2 i) Revenue Recognition i. Transmission income xx xx ii. Other income is recognized on accrual basis except when ultimate realization of such income is uncertain” (Emphasis supplied)

Thus, we find that the Assessee has not recognized DPC as income as per its accounting policy which provides that in case where the ultimate realization is uncertain, the Other Income/DPC shall not be recognized on accrual basis. In support of the contention that the realization of DPC was uncertain, the Assessee had placed before the Assessing Officer Board Resolution passed on 01/09/2016 before finalization of accounts. Therefore, we do not find any infirmity in the approach adopted by the Assessee. Further, we note that by way of aforesaid Resolution the Board of Directors of the Assessee Company had resolved to not recognize aggregate DPC of INR.834.95 Crores on account of uncertainty of realization. The Assessing Officer had accepted the assessment of the Board of Directors of the Assessee Company regarding uncertainty of realization of DPC amounting to INR.754.76 Crores to be received from MSEDCL. We find merit in the contention advanced on behalf of the Assessee that the Assessee- Company, being an electric power transmission utility engaged in transmission of electricity in State of Maharashtra with its shares held wholly by the Government of Maharashtra, did not set to gain anything by postponing the realization of DPC income to subsequent years. We note that while rejecting the grounds raised by the Assessee in relation to DPC, the Learned CIT(A) had noted that the Assessee had failed to provide any details about the subsequent waiver or realization of DPC of INR.100.19 Cores. During the course of hearing the Learned Authorized Representative for the Assessee had placed on record details of subsequent realization of DPC of INR.100.19 Crores. Assessment Year 2016-2017 “TPC-D DPC share disbursed to MSETCL as on 31/03/2016 INR.67,61,56,792/- Amount paid by TPC-D & disbursed to MSETCL Disbursement (INR) Date 44,97,60,708/- 28/11/2017 22,63,96,084/- 16/04/2018 67,61,56,792/-

In view of the above, we find merit in the contention advanced on behalf of the Assessee that since the DPC of INR.100.19 Crores was subsequently offered to tax and the same has been accepted by the Revenue, therefore, bringing to tax the same DPC again to tax during the relevant previous year would amount to double taxation. Thus, keeping in view totality of the facts and circumstances of the present case as discussed hereinabove, we deem it appropriate to direct the Assessing Officer to delete the addition of INR.100.19 Crores made in respect of DPC after verifying that the same were realized as per the details furnished by the Assessee and that the same were offered to tax in the return of income filed by the Assessee for the Assessment Year 2018-2019 and 2019-2020. In terms of aforesaid Ground No.3 to 8 raised by the Assessee is allowed for statistical purposes. Assessment Year 2016-2017

Ground No.9 to 12 relates to disallowance of claim of deduction made by the Assessing Officer under Section 80IA(4) of the Act.

During the course of assessment proceedings the Assessing Officer noted that in the Computation of Income the Assessee has claimed deduction under Section 80IA of the Act amounting to INR.1,90,74,74,529/-. Vide, notice dated 12/12/2019, issued under Section 142(1) of the Act the Assessee was required to provide the audit report in Form 10CCB along with the audited accounts of the 80- IA undertaking, and also to show cause as to why the claim of deduction under Section 80-IA should not be disallowed as held in the Assessment Years from 2010-2011 to 2012-2013. In response the Assessee furnished reply letter, dated 20/12/2019, wherein it was stated that the Assessee has claimed the deduction under Section 80IA in respect of the profits arising from the activity of transmitting power viz., laying down of new transmission lines and/or renovation and modernization of the existing network of transmission lines. The Assessee had claimed deduction under Section 80-IA of the Act on profits computed on the basis of ‘Return of Equity’. The Assessing Officer was of the view that the Assessee had claimed deduction under Section 80IA of the deduction on notional income and that in the preceding assessment years by way of orders passed under Section 143(3) read with Section 147 of the Act claim of deduction under Section 80IA of the Act was disallowed by the Assessing Officer. Therefore, the Assessing Officer disallowed the deduction of INR.190,74,74,529/- claimed by the Assessee under Section 80IA of the Act.

In appeal preferred by the Assessee, the Learned CIT(A) declined to grant any relief on this issue concurring with the view taken by the Assessing Officer. Assessment Year 2016-2017

Being aggrieved, the Assessee has carried the issue in appeal before the Tribunal.

We have heard both the sides of this issue and have perused the material on record. As per Form 10CCB filed by the Assessee for the relevant assessment year [placed at page 94 to 98 of the paper- book], Assessment Year 2010-2011 has been stated to be initial assessment year for claim of deduction under Section 80IA(4) of the Act. We note that the Assessing Officer has recorded in paragraph 6.1 of the Assessment Order that Assessee had made identical claim of deduction under Section 80IA(4) of the Act in the Assessment Year 2010-2011 to 2012-2013. Reassessment proceedings were initiated in the preceding assessment years and the Assessing Officer had disallowed deduction claimed by the Assessee under Section 80IA(4) of the Act. By placing reliance upon the assessment framed on the Assessee under Section 143 read with Section 147 of the Act in the preceding assessment years, and making reference to the Assessment Order, dated 21/12/2017, (passed in preceding assessment year), the Assessing Officer rejected Assessee’s claim for deduction under Section 80IA(4) of the Act for the Assessment Year 2016-2017. Without taking into consideration the result of appeal preferred by the Assessee for the initial/preceding assessment years pending before the CIT(A), the appeal preferred by the Assessee for the Assessment Year 2016-2017 was dismissed by the Learned CIT(A) even though the disallowance made by the Assessing Officer by following the assessment framed for the initial/preceding assessment years. In our view, the aforesaid approach adopted by the Learned CIT(A) cannot be countenanced. It is admitted position that the appeals preferred by the Assessee for the initial/preceding assessment years are still pending adjudication before the Learned CIT(A). Further, the Assessee has now placed on record Assessment Order, dated 20/01/2026, for the Assessment Year 2023-2024 wherein identical Assessment Year 2016-2017 method of computing deduction under Section 80IA(4) of the Act has been accepted by the Assessing Officer as no disallowance has been made in respect of the same. Given the aforesaid we deem it appropriate to set aside the disallowance of INR.1,90,74,74,529/- made by the Assessing Officer by rejecting claim of deduction made by the Assessee under Section 80IA(4) of the Act with the direction to the Assessing Officer to adjudicate issue of computation of deduction under Section 80IA(4) of the Act afresh after taking into consideration (i) the result of appeal preferred by the Assessee for the initial/preceding Assessment Years, (ii) the Assessment Order, dated 20/01/2026, for the Assessment Year 2023-2024, and (iii) order passed by the TPO on 05/11/2018 in relation to Specify Domestic Transactions to the extent the same is relevant for adjudication of the issue under consideration. Since we restore the issue back to the Assessing Officer all the rights and contentions are left open. In terms of the above, Ground No.9 to 12 raised by the Assessee are treated as allowed for statistical purpose.

Accordingly, appeal preferred by the Assessee is partly allowed.

We would now take up appeal preferred by the Revenue for the Assessment Year 2016-2017. Ground No. 1 to 3

During the assessment proceedings, on verification of details filed by the Assessee, the Assessing Officer noted that the Assessee had debited an amount of INR.95,42,07,718/- to the Profit & Loss Account under the head ‘Prior Period Expenses’. Vide, notice dated 12/12/2019, the Assessee was required to provide the details/explanation in relation to the same. In response, the Assessee, filed reply letter, dated 20/12/2019, and submitted that the prior period expenses amounting to INR.95,42,07,718/- should Assessment Year 2016-2017 not be disallowed considering the fact that total revenue of the Assessee was INR.35,69,50,97,682/- and prior period expenditure were only marginal. Further, out of total prior period expenses, depreciation of INR.52,72,99,520/- had been suo moto disallowed by the Assessee in the computation of income. After considering the submission of the Assessee, the Assessing Officer concluded that since the expenditure pertained to earlier years, deduction for the same could not be allowed to the Assessee in terms of Section 37(1) of the Act. The Assessing Officer noted that similar disallowance was made in the Assessee’s own case in earlier years. Therefore, made disallowance of INR.42,69,08,198/- [INR.95,42,07,718/- less INR.52,72,99,520/-].

The Assessee challenged the above disallowance in appeal before the Learned CIT(A). Before the Learned CIT(A), it was submitted though the expenses were classified as prior period expenses, the same related to ‘continuous flow of expenditure’. There was no difference in the rate of tax applicable to the relevant assessment year and the preceding assessment year. Since the Assessee was following a consistent policy since its inception, there was no need to differ from the same. The Learned Commissioner of Income (Appeals) had deleted similar disallowances made for the Assessment Years 2007-08 and 2010-2011. The aforesaid submissions of the Assessee found favour with the Learned CIT(A). Placing reliance upon the decision in appeals preferred by the Assessee for the Assessment Years 2001- 2002 to 2007-2008 the Learned CIT(A), deleted the disallowance made by the Assessing Officer in respect of prior period expenses.

Being aggrieved, the Revenue has challenged the above relief granted by the Learned CIT(A) in appeal before the Tribunal.

We have heard both the sides and have perused the material on record in relation to this issue. Assessment Year 2016-2017

We find that the Learned CIT(A) has recorded that identical disallowance made by the Assessing Officer in the preceding assessment years [i.e Assessment Years 2001-2002 to 2007-2008, 2010-2011 and 2012-2013] was deleted by the Learned CIT(A) and the aforesaid orders have not been disturbed by the appellate authorities. The aforesaid finding has not been controverted in the appellate proceedings before this Tribunal. We note that the Learned CIT(A) has reproduced the order passed by the Learned Commissioner of Income Tax (appeals) in appeal preferred by the Assessee for the Assessment Year 2012-2013 wherein it has been recorded that the issue of allowability of prior-period expenses was considered and allowed in appeal for the Assessment Years 2001- 2002 to 2007-2008. The Learned CIT(A) had also reproduced relevant extract of Order, dated 08/03/2009, passed in appeal for the Assessment Year 2001-2002. The relevant extract of the impugned Order passed by the Learned CIT(A) has been set out herein under: