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Facts
Cross appeals were filed by the assessee and revenue for AY 2016-2017 against an order by the NFAC. The NFAC had partly allowed the assessee's appeal against the assessment order. The assessee raised several grounds of appeal, including challenges to the disallowance under Section 14A, addition for delayed payment charges, and disallowance of deduction under Section 80IA(4). The revenue's grounds of appeal related to the allowance of prior period expenses.
Held
The Tribunal held that the disallowance under Section 14A was not sustainable due to the Assessing Officer's lack of proper satisfaction. The addition for delayed payment charges was directed to be deleted after verification of realization and subsequent offering to tax. The disallowance under Section 80IA(4) was set aside and restored to the AO for fresh adjudication. The revenue's appeal regarding prior period expenses was dismissed as the CIT(A) had deleted similar disallowances based on consistent policy and judicial precedents.
Key Issues
1. Whether the disallowance made under Section 14A was justified due to lack of satisfaction by the AO. 2. Whether the addition for delayed payment charges was rightly made. 3. Whether the disallowance of deduction under Section 80IA(4) was correct. 4. Whether the allowance of prior period expenses by the CIT(A) was justified.
Sections Cited
Section 14A, Section 143(3), Section 92CA, Section 80IA(4), Section 37(1), Section 147
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
order : 06.02.2026 O R D E R [ Per Rahul Chaudhary, Judicial Member: 1. These are cross appeals preferred by the Assessee and Revenue pertaining to Assessment Year 2016-2017 against the Order, dated 31/01/2025, passed by the National Faceless Appeal Centre (NFAC), &2093/Mum/2025 Assessment Year 2016-2017 Delhi [hereinafter referred to as the ‘CIT(A)’], whereby the Ld. CIT(A) had partly allowed the appeal of the Assessee against the Assessment Order, dated 28/12/2019, passed under Section 143(3) of the Income Tax Act, 1961 [hereinafter referred to as ‘the Act’]. As involved identical issues arising from common factual matrix the same were heard together and are, therefore, being disposed off by way of the present common order. With the consent of both the sides we would first take up appeal pertaining to Assessment Year 2016- 2017 as the lead matter.
“1. On the facts and circumstances of the case and law, the Learned CIT(A) erred in dismissing the contention of the appellant and confirming the action of Assessing Officer in disallowance under section 14A of Income Tax Act 1961.
On the facts and circumstances of the case and in law, the Learned CIT(A) erred in holding that AO has made the disallowance under section 14A as called for in the case of the appellant and the AO has rightly invoked Section 14A and made the disallowance as per the computation in Rule 8D, which is anyway not exceeding the exempt divided income earned by the appellant from such investment without considering factual matrix of the issue more particularly that said investment is only for strategic business purposes only.
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.
4. 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 jurisdictional High Court decision in NAGPUR-INCOME TAX APPEAL NO.17 of 2019, (The Pr. Commissioner of Income-Tax-2 vs. Madhu Kumar Bajal), that it is to be followed and it is permissible for assessee to change the method of accounting.
On the facts and circumstances of the case and law, the Learned CIT(A) erred in not considering the Calcutta High Court in Snow While Food Products 10 Taxman.com 37, CIT vs. Neon Solutions Pvt. Ltd. 387 ITR 667 of Bombay High Court, CIT vs. Motor Credit Co., CIT vs. Kewal Chand 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.
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. 11. 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 ” 3. The Revenue has raised following grounds of appeal in 1. 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 assessee could not establish the one to one correlation about the expenditure and prove that the same was crystallized during the year?
2. 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?
3. 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?"
The relevant facts in brief are that the Assessee is a company formed pursuant to the demerger of the erstwhile Maharashtra State Assessment Year 2016-2017 Electricity Board ('MSEB') and is engaged in the activity of transmission of electricity in the State of Maharashtra with Government of Maharashtra holding entire share capital of the Company.
5. For the Assessment Year 2016-2017, the Assessee filed its return of income on 29/11/2016 declaring total income of INR.66,70,90,360/-. The case of the Assessee was selected for scrutiny. During the course of proceedings, the Assessing Officer noted that the Assessee had large Specified Domestic Transactions amounting to INR.2716,57,40,718/- with its Associated Enterprises (AEs). Accordingly, a reference was made under section 92CA of the Act the Transfer Pricing Officer (TPO) for determination of Arm's Length Price (ALP) of Specified Domestic Transactions. The Transfer Pricing Officer passed the order, dated 19/03/2019, under Section 92CA(3) of the Act, accepting the ALP of Specified Domestic Transactions reported by the Assessee. Thereafter, the Assessing Officer proceeded to frame assessment under Section 143(3) of the Act. Vide Assessment Order dated 28/12/2019, the income of the Assessee was assessed at INR.4,01,74,97,239/- and the same was computed as under: Particulars Amount (INR.) I. Profits and gains of Business or Profession 2,57,45,64,889 Add: Disallowance under Section 14A (as per para 4 above) 1,41,24,152 Disallowance of proper period expenses ( as per para 5 above) 42,69,08,198 Disallowance on account of DPC charges (as per para 7 above) 1,00,19,00,000 II. Capital Gains: 60,500 0 Less: Brought forward loss: (60,500) Total Income 4,01,74,97,239 6. Being aggrieved, the Assessee preferred appeal before the Learned CIT(A) challenging, inter alia,:
(a) Disallowance of INR.1,41,24,152/- made under Section 14A of the Act (b) Disallowance of INR.42,69,08,198/- in respect of prior period expenditure Assessment Year 2016-2017 (c) Addition of INR.1,00,19,00,000/- on account of delayed payment charges (d) Disallowance of INR.1,90,74,74,529/- in respect of claim made by the Assessee under Section 80IA(4) of the Income- tax Act, 1961 Vide Order dated 31/03/2025, the Learned CIT(A) disposed off the appeal preferred by the Assessee as partly allowed. The Learned CIT(A) granted relief to the Assessee by deleting the disallowance of INR.42,69,08,198/- made by the Assessing Officer in respect of prior period expenditure. As regards, other grounds raised by the Assessee challenging the other additions/disallowances [referred to in Paragraph 5(a), (c) and (d) above], the same were rejected by the Learned CIT(A).
7. Now, both, the Assessee as well as the Revenue are in appeal before us in cross-appeals being aggrieved by the above Order, dated 31/03/2025, passed by the Learned CIT(A). While the Assessee was not satisfied with the partial relief granted by the Learned CIT(A), the Revenue has challenged the deletion of disallowance made on the issue of prior period expenses. The grounds raised
in cross-appeals have been reproduced in Paragraph 2 &3 above.
8. We would first take up appeal preferred by the Assessee for the Assessment Year 2016-2017.
9. The registry has marked delay of 12 days in filing the present appeal. We have heard both the sides on the issue of delay. It emerges that the Assessee had filed appeal on 28/03/2025 [Acknowledgment No.1800017386] and the same was fixed for hearing on 14/05/2025 as ITA No.2188/Mum/2025. During the course of hearing of it was pointed out that the registry had marked some defects in the appeal. Therefore, the Assessee filed rectified appeal on 12/04/2025 [Ack. No.1800019336] which was also numbered as a separate appeal (i.e. the present appeal - ITA Assessment Year 2016-2017 No.2552/Mum/2025). The Assessee has placed on record copy of Order, dated 07/07/2025, passed in whereby the said appeal was dismissed as a duplicate appeal. In the aforesaid, facts and circumstances, the present appeal got to be filed and the Registry marked delay of 12 days in filing the same by taking the date of filing rectified appeal (which was numbered as a separate appeal) as date of filing the appeal. As noted hereinabove, the Assessee had filed the original appeal in time. Therefore, given the facts and circumstances which lead to the filing of the present appeal, we condone the delay of 12 days in filing the present appeal and proceed to adjudicate the grounds raised by the Assessee in the present appeal.
Ground No.1 & 2 10. Ground No.1 to 2 raised by the Assessee pertain to disallowance of INR.1,41,24,152/- made by the Assessing Officer under Section 14A of the Act read with Rule 8D of the Income Tax Rules, 1961 (in short ‘the Rules’).
10.1. During the assessment proceedings the Assessing Officer noted that the Assessee had earned exempt income aggregating to INR.10,14,98,992/-. However, the Assessee had not made any disallowance under Section 14A of the Act by attributing expenditure incurred for earning the said exempt income. Therefore, the Assessee was asked explain as to why disallowance under Section 14A of the Act read with Rule 8D of the IT Rules should not be made. Further, vide notice, dated 12/12/2019, the Assessee was asked to provide opening and closing values investments capable of yielding exempt income. In response, vide Letter dated 20/12/2019, the Assessee made submissions contending, inter-alia, that the Assessee had not incurred any expenditure for earning the exempt dividend income of INR.10.14 Crores from the investment of INR.35.75 Crores made in Jaigad Power Transco Limited (JPTL), a joint venture between the Assessment Year 2016-2017 Assessee-company and the JSW Energy Limited. The Assessing Officer was not convinced and therefore, proceeded to make disallowance under Section 14A of the Act by invoking Rule 8D of the IT Rules. The Assessing Officer made a disallowance of INR.1,41,24,152/- under Section 14A of the Act read with Rule 8D of the IT Rules.
10.2. The Assessee challenged the above disallowance in appeal before the Learned CIT(A). It was contended on behalf of the Assessee that the Assessing Officer had invoked the provisions contained is Section 14A of the Act read with Rule 8D of the IT Rules without recording proper satisfaction and without making reference to the accounts of the Assessee. Reliance in this regard was placed upon:
- Decision of Hon’ble Delhi High Court in the case of Joint Investments Pvt. Ltd. Vs. Commissioner of Income Tax [ITA 117/2015 [2015-ITRV-HC-DEL-119] - Decision of Hon’ble Delhi High Court in the case of Maxopp Investment Ltd. Ors. Vs. Commissioner of Income Tax [2011] 347 ITR 272 - JM Financial Limited Vs. Additional Commissioner of Income Tax [ITA. No. 4521/Mum/2012, Assessment Year 2009-2010, dated 26/03/2014] - Decision of Delhi High Court in the case of Commissioner of Income Tax Vs. Taikisha Engineering India Ltd. [2015- ITRVHC-DEL-118][2015] 54 taxmann.com 109 (Delhi) - Decision of Tribunal in the case of Inter Globe Enterprise Ltd. Vs. DCIT [ITA No. 1032 & 1362/Del/2013, Assessment Year 2008-2009 & 2009-2010, dated 04/04/2014] 10.3. The Learned CIT(A) did not deal with the above contention of the Assessee and confirmed the disallowance made by the Assessing Officer. The Learned CIT(A) rejected the alternative contention of the Assessee that no disallowance could be made under Section 14A of the Act since exempt income was earned by the Assessee from the strategic investment made by the Assessee in the joint venture Assessment Year 2016-2017 company. The Learned CIT(A) relied upon the judgment of the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. vs. Commissioner of Income Tax, New Delhi : [2018] 402 ITR 640 (SC) while concluding as aforesaid. However, no finding was returned by the CIT(A) on the issue of lack of satisfaction raised by the Assessee.
10.4. Being aggrieved, the Assessee had carried the issue in appeal before the Tribunal.
10.5. The Learned Authorised Representative for the Assessee reiterated the submission made before the Learned CIT(A) on the issue of lack of satisfaction and placed reliance on judicial precedents. In addition, it was submitted that the Assessee had sufficient funds from internal accruals during the relevant previous year to make the investment. Therefore, the disallowance made by the Assessing Officer under Section 14A of the Act could not be sustained.
10.6. Per Contra, the Learned Departmental Representative submitted that in paragraph 4.3 & 4.4 of the Assessment Order the Assessing Officer had clearly recorded satisfaction before invoking provisions of Section 14A of the Act and Rule 8D of the IT Rules. It was further submitted that the Learned CIT(A) has clearly rejected the contention raised by the Assessee that no expenditure was incurred for earning exempt dividend income. It was also submitted that the Assessee had not raised the contention of making investment from own funds before the Learned CIT(A).
10.7. We have considered the rival submission and have perused the material on record.
10.8. We note that in the case of Godrej & Boyce Mfg. Co. Ltd. v. Deputy Commission of Income Tax : 328 ITR 81, the Hon’ble Bombay High Court had, while rejecting the challenge to the validity of Section 14A of the Act, held as under: Assessment Year 2016-2017 "57. Now in dealing with the challenge it is necessary to advert to the position that Sub-section (2) of Section 14A prescribes a uniform method for determining the amount of expenditure incurred in relation to income which does not form part of the total income only in a situation where the Assessing Officer, having regard to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. It therefore merits emphasis that Sub-section (2) of Section 14A does not authorize or empower the Assessing Officer to apply the prescribed method irrespective of the nature of the claim made by the assessee. The Assessing Officer has to first consider the correctness of the claim of the assessee having regard to the accounts of the assessee. The satisfaction of the Assessing Officer has to be objectively arrived at on the basis of those accounts and after considering all the relevant facts and circumstances. The application of the prescribed method arises in a situation where the claim made by the assessee in respect of expenditure which is relatable to the earning of income which does not form part of the total income under the Act is found to be incorrect. In such a situation a method had to be devised for apportioning the expenditure incurred by the assessee between what is incurred in relation to the earning of taxable income and that which is incurred in relation to the earning of non-taxable income. As a matter of fact, the memorandum explaining the provisions of the Finance Bill 2006 and the CBDT circular dated 28 December 2006 state that since the existing provisions of Section 14A did not provide a method of computing the expenditure incurred in relation to income which did not form part of the total income, there was a considerable dispute between tax payers and the department on the method of determining such expenditure. It was in this background that Sub-section (2) was inserted so as to provide a uniform method applicable where the Assessing Officer is not satisfied with the correctness of the claim of the assessee. Sub-section (3) clarifies that the application of the method would be attracted even to a situation where the assessee has claimed that no expenditure at all was incurred in relation to the earning of non-taxable income.
Parliament has provided an adequate safeguard to the invocation of the power to determine the expenditure incurred in relation to the earning of non-taxable income by adoption of the prescribed method. The invocation of the power is made conditional on the objective satisfaction of the Assessing Officer in regard to the correctness of the claim of the assessee, having regard to the accounts of the assessee. When a statute postulates the satisfaction of the Assessing Officer "Courts will not readily defer to the conclusiveness of an executive authority's opinion as to the existence of a matter of law or fact upon which the validity of the exercise of the power is predicated".- M.A. Rasheed v. The State of Kerala AIR 1974 SC 2249 (at para 7 page 2252). A decision by the Assessing Officer has to be arrived at in good faith on relevant considerations. The Assessing Officer must furnish to the assessee a reasonable opportunity to show cause on Assessment Year 2016-2017 the correctness of the claim made by him. In the event that the Assessing Officer is not satisfied with the correctness of the claim made by the assessee, he must record reasons for his conclusion. These safeguards which are implicit in the requirements of fairness and fair procedure under Article 14 must be observed by the Assessing Officer when he arrives at his satisfaction under Sub-section (2) of Section 14A. As we shall note shortly hereafter, Sub-rule (1) of Rule 8D has also incorporated the essential requirements of Sub-section (2) of Section 14A before the Assessing Officer proceeds to apply the method prescribed under Sub-rule (2)."(emphasis supplied) 10.9. On perusal of the above it becomes clear that the Hon’ble Bombay High Court upheld the validity of Section 14A of the Act observing that the recording of satisfaction by the Assessing Officer to the effect that the claim of the Assessee was not correct was the safeguard built into Section 14A of the Act to meet the requirements of fairness and fair procedure contained in Article 14 of the Constitution. The Hon’ble High Court held that the invocation of the power under Section 14A of the Act read with Rule 8D of the IT Rules was conditional upon the recording of objective satisfaction by the Assessing Officer with regard to the correctness of the claim of the Assessee having regard to the accounts of the Assessee. The Assessing Officer has to first consider the correctness of the claim of the assessee having regard to the accounts of the assessee. In the event that the Assessing Officer is not satisfied with the correctness of the claim made by the Assessee, the Assessing Officer is required record reasons for the aforesaid conclusion. In the present case, the Assessee had earned exempt dividend income from investment in joint venture company and had has claimed that no expenditure was incurred for earning exempt income. The above judgment of the Hon’ble Bombay High Court would apply even to a situation where an assessee claims that no expenditure has been incurred in relation to the earning of exempt income. The Assessing Officer is not empowered to apply Rule 8D of IT Rules straightaway without considering the correctness of the assessee's claim.
10.10. On perusal of paragraph 4.1 to 4.6 of the Assessment Order, we find Assessment Year 2016-2017 that the Assessing Officer has not made reference to any expenditure debited to the Profit & Loss Account and claimed as deduction by the Assessee which could be attributable to earning exempt dividend income by the Assessee. The Assessing Officer has made general observation regarding direct/indirect expenses being attributable to earning exempt income without making reference to the accounts of the Assessee. In our view, the satisfaction recorded by the Assessing Officer does not meet the requirement of Section 14A of the Act. Accordingly, as per the judgment of the Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra), the Learned Assessing Officer could not have invoked provisions of Rule 8D of IT Rules in absence of recording proper satisfaction and therefore, the disallowance of INR.1,41,24,152/- made by the Assessing Officer under Section 14A of the Act read with Rule 8D of the IT Rules cannot be sustained.
10.11. Further, we note that following disclosures were made by the Assessee in the financial statements for the relevant previous year:
“51. Joint Venture Operations (AS 27): (A) Jaigad Power Transco Ltd. (JPTL), a joint venture between the Company (26%) and JSW Energy Ltd. (74%), was incorporated on 23rd April 2008 and awarded Transmission license on 08th February, 2009 by Maharashtra Electricity Regulatory Commission (MERC) under Section 14 of Electricity Act, 2003. Section The object of the jointly controlled entity is to establish 400 kV D/C Jaigad New Koyna Transmission Line and 400 KV D/C Jaigad -Karad Transmission Line. Construction of Transmission Line has been completed and has been declared for commercial operations w.e.f. 7th July 2010 and 02nd December 2011. During the FY 2008-09, the Company had paid Rs. 1,521.77 Lakhs to acquire 1,52,17,670 Nos. of equity shares of JPTL. Further during the FY 2010-11 the Company had paid Rs. 1,505.24 Lakhs to acquire 1,50,52,414 Nos. of equity shares of JPTL and during FY 2011-12, the company had paid Rs. 547.99 Lakhs to acquire additional 54,79,916 number of equity shares Assessment Year 2016-2017 of JPTL. Thus the total equity shares of JPTL held by MSETCL is Rs. 3,575.00 Lakhs [3,57,50,000 Nos of Equity Shares)
The Company's interest in joint venture is reported as Long Term Investment and stated at cost less provision for diminution other than temporary, if any, in the value of such investment.” It has been contended on behalf of the Assessee that the Assessee had sufficient funds from internal accruals to make the above investments in the joint venture company disclosed in Note 57 to the Financial Statements. In this regard, the Assessee had furnished following details:
SNo Financial Assessment Profit for the Year Investment made Cumulative Year Year for the year Investment 1. 2008-09 2009-10 137,51,35,306 15,21,76,800 15,21,76,800 2. 2010-11 2011-12 329,34,11,333 15,05,24,140 30,27,00,940 3. 2011-12 2012-13 570,29,13,615 5,47,99,060 35,75,00,000 On perusal of the material on record it is clear that the profits earned by the Assessee Company during the relevant previous year far exceeded the quantum investments made during the said previous year. Further, even otherwise we find that during the relevant previous year the Assessee-Company had share capital of INR.898,497.47 Lakhs which far exceeded the investment of INR.3,575 Lakhs that yielded exempt income during the relevant previous year. As per the judgment of Hon’ble Supreme Court of India in the case of South Indian Bank Ltd. Vs. Commissioner of Income Tax [2021] 130 taxmann.com 178 (SC) the presumption lies in favour of the Assessee that the interest free funds were utilized by the Assessee for making the investments. Therefore, disallowance of INR.1,21,19,542/- made under Section 14A of the Act read with Rule 8D(2)(ii) of the IT Rules was warranted in the facts and circumstances of the present case.
10.12. 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.
10.13. 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 11. 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.
11.1. 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 11.2. 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.
11.3. Being aggrieved, the Assessee has carried the issue in appeal before the Tribunal.
11.4. 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.
11.5. 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.
11.6. 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.
11.7. 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): “55. Other Notes a) to d) xx xx e) Ultimate realization of Delayed Payment Charges is uncertain. Therefore, for the F.Y.2015-16 DPC amounting to Rs.83,495 lakhs has not been booked. Major portion of this is from MSEDCL.” In support the Assessee had filed Resolution passed by the Assessee- Company on 01/09/2016 wherein it was stated that matter of waiver of DPC of INR.834.95 Crores was finalized and it was resolved that the aforesaid DPC shall not be booked as income and shall be disclosed in the notes to the financial statements for the previous year relevant to the Assessment Year 2016-2017. In accordance with the aforesaid Resolution, the above disclosure was made in Note 55(e) of the financial statements of the relevant previous year.
11.8. 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) 11.9. 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/- RInfra-D DPC share disbursed to MSETCL as on 31/03/2016 INR.32,61,38,719/- Amount paid by RInfra-D & disbursed to MSETCL Disbursement (INR) Date 21,69,38,413/- 28/11/2017 9,82,80,276/- 16/04/2018 1,09,20,031/- 10% TDS 16/04/2018 32,61,38,720/- Details of DPC Received as provided by STU Section Year Reliance Infra Tata Power Total 2017-2018 21,69,38,413/- 44,97,07,708/- 66,66,46,121/- 2018-2019 10,92,00,307/- 22,63,96,084/- 33,55,96,391/- Total 32,61,38,720/- 67,61,03,792/- 1,00,22,42,512/- “ 11.10. 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
12. Ground No.9 to 12 relates to disallowance of claim of deduction made by the Assessing Officer under Section 80IA(4) of the Act.
12.1. 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.
12.2. 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 12.3. Being aggrieved, the Assessee has carried the issue in appeal before the Tribunal.
12.4. 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 15. 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/-].
15.1. 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.
15.2. Being aggrieved, the Revenue has challenged the above relief granted by the Learned CIT(A) in appeal before the Tribunal.
15.3. We have heard both the sides and have perused the material on record in relation to this issue. Assessment Year 2016-2017 15.4. 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:
“9.2.2. Decision: The above ground is against the disallowance of Rs.42,69,08,198/- on account of being prior period expenses. As per the assessment order, the AO had noted that during the year the assessee had debited an amount of Rs.95,42,07,718/- to the P&L Account under the head “prior period expenses”. In the computation of income, the assesse had suo-moto disallowed an amount of Rs.52,72,99,520/- on account of depreciation but the balance amount was not disallowed, and the same has been disallowed by the AO on the reason that the claim pertains to earlier years and also for the reason that similar additions have been made in assesssee’s own case in earlier year also. On the other hand, the appellant has contended in the submissions made, as extracted above, that the above claim on account of prior period expense is very minimal compared to the overall expenditure of the appellant. The appellant has claimed that the above expenses have not been claimed in the earlier years and most of the expenditure classified as prior period expenditure were incurred at various site offices of the appellant located at remote locations in the state and were transmitted to the head office only after the appellant consolidated the said expenses at the head office level. This practice has been consistent practice followed by the appellant and even though the expenditure items are Assessment Year 2016-2017 technically treated as prior period expenses, they relate to a continuous flow of expenditure and are just spill over of earlier years, which have not been claimed/allowed in the earlier years. The appellant has also relied upon the decision of Hon. Delhi High Court in the case of CIT Vs.Vishnu Industrial Gases Pvt. Ltd in wherein the Department had not disputed that the expenditure was deductible in principal but was only disputing the year in which the deduction could be claimed and allowed, and the Hon. High Court had allowed the claim and observed that when the tax rates were same in both years, the Department should not fritter away its energies in raising questions as to the year of deductibility/taxability. Even otherwise, the appellant has stated that in the earlier years for AY 2007-08 and 2010-11, the CIT(Appeal) had held that the prior period expenditure is an allowable expenditure. The relevant extract of the order of CIT(Appeal) for AY. 2012-13 is as under: “I have considered the facts of the case and the appellant's submissions. I find that this issue of allowability of prior period expenses has been examined and allowed by my Id, predecessors for A.Y.s 2001-02 to 2007-08. In the appeal order dated 08.03.2009 for A. Y. 2001-02, the issue has been decided as under:
So far as the other items are concerned, the treatment given in 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 network 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 in 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 standards are otherwise allowable, the appellant cannot be denied the deduction which has been claimed following proper accounting standards. Further, the AO has included 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.
The above decision has been consistently followed by Assessment Year 2016-2017 my Id. predecessors in the appeals of subsequent assessment years. Facts and circumstances obtaining in the instant appeal being the same as that of the earlier years, respectfully following the decision of my Id. predecessors, the AO is directed to allow the prior period expenses as claimed. This ground of appeal is allowed.” 9.2.3 Considering the facts of the case and the reasoning of the AO for making such disallowance and the submissions of the appellant as discussed and the various judicial pronouncements and also noting that the above claim has not been made in the earlier years and also respectfully following the orders passed by the predecessor CsIT(Appeal) on the same issue in the earlier years, which has not been disturbed by ITAT, the AO is directed to delete the above disallowance on the issue of prior period expenses. The ground of appeal is allowed.” 15.5. The Learned CIT(A) had deleted the disallowance made in respect of the prior-period expenses by following the above decision rendered in the case of the Assessee for the preceding assessment year. We note that the Revenue has not contested stand taken by the Assessee that the Assessee had not claimed deduction for these expenses in the preceding assessment years (though that the same were allowable as deduction). The grievance of the Revenue is that the expenses did not crystallize during the relevant previous year. We note that the Assessee has been following a consistent policy. Taking note of the same, deduction has been allowed to the Assessee in appeal for the Assessment Years 2001-2002 to 2007-2008. The Revenue has not placed any material on record to show that the decision of the Learned Commissioner of Income Tax (Appeals) for the Assessment Years 2001-2002 to 2007-2008 has since been overturned in appeal preferred by the Revenue. Therefore, we do not find any infirmity in the order passed by the Learned CIT(A).
15.6. Further, it has also not been disputed that there was no difference in the applicable tax rate. The Learned CIT(A) had taken note of the judicial precedents wherein it was held that where the rate of tax had Assessment Year 2016-2017 remained same the relevant assessment years, there was no need for the Revenue to continue litigation as the Revenue was not deprived of any tax. We note that in this regard the Assessee had placed reliance upon the judgment of the Hon’ble Supreme Court in the case of Commissioner of Income-tax vs. Excel Industries Ltd. [2013] 358 ITR 295 (SC) wherein it was held as under:
32. Thirdly, the real question concerning us is the year in which the assessee is required to pay tax. There is no dispute that in the subsequent accounting year, the assessee did make imports and did derive benefits under the advance licence and the duty entitlement pass book and paid tax thereon. Therefore, it is not as if the Revenue has been deprived of any tax. We are told that the rate of tax remained the same in the present assessment year as well as in the subsequent assessment year. Therefore, the dispute raised by the Revenue is entirely academic or at best may have a minor tax effect. There was, therefore, no need for the Revenue to continue with this litigation when it was quite clear that not only was it fruitless (on merits) but also that it may not have added anything much to the public coffers.
15.7. In view of the above, we do not find any infirmity in the approach adopted by the Learned CIT(A) by deleting disallowance made in respect of prior period expenses by following orders passed by his predecessor in the preceding assessment years. Accordingly, we decline to interfere with the order passed by the Learned CIT(A). Therefore, Ground No. 1 to 3 raised by the Assessee are dismissed.
In result appeal preferred by the Revenue is dismissed.
In conclusion, the appeal preferred by the Assessee is partly-allowed and appeal preferred by the Revenue is dismissed.