THE COMMISSIONER OF INCOME-TAX vs. SRI M.D. YASHODHARAN

4 Rs.72,02,83,028/- and after setting off unabsorbed depreciation of Assessment Years 1988-89 and 1989-90 amounting Rs.72,02,83,028/-, the income was determined to be ‘NIL’. The Commissioner in exercise of powers under Section 263 of the Act vide order dated 12.11.2007 held that the order of assessment dated 26.12.2012 is erroneous and prejudicial to the interest of revenue and consequently set aside the same with a direction to re-work the income in the light of observations made in the order. The Assessing Officer vide order dated 31.12.2008 inter alia held that the assessee is following mercantile system of accounting. The Assessing Officer made an addition of Rs.52.89 Crores on account of wheeling charges, as the same was not offered by the assessee in the relevant Assessment Year on the ground that it would recognize the revenue of wheeling charges only when the same is collected from the current Assessment Year onwards. It was further held that the assessee having followed the

5 accrual system of accounting i.e., the mercantile system cannot pick and choose other system of accounting to suit it needs and the wheeling charges became due to the assessee once electricity supply is made available to other agencies since, inherent expenditure towards transportation / wheeling expenditure has been debited to the books of accounts of the assessee and since, the assessee has utilized the amount as revenue, it cannot refuse to treat the same as income and cannot be permitted not to offer the same to tax merely on the ground that the aforesaid revenue was not realized in the relevant financial year. In the result, an amount of Rs.52.89 Crores was added as wheeling charges to the income of the assessee. 3. The assessee thereupon filed an appeal before the Commissioner of Income Tax (Appeals) who by an order dated 31.08.2010 upheld the order of the Assessing Officer. Being aggrieved, the assessee filed an appeal before the Income Tax Appellate Tribunal

6 (hereinafter referred to as 'the tribunal' for short). The Tribunal vide impugned order dated 30.11.2012 held that no expenditure is incurred by the assessee for transmission of electricity to other states and assessee has not debited any expenditure towards transmission of electricity to other states. It was further held that there was a dispute with regard to wheeling charges amongst all the constituent states of Southern Regional Electricity Board. It was also held that there was an uncertainty of receiving the transmission charges though the assessee has raised its demand for the same, therefore, the assessee has rightly divested itself from recognizing the same as income during the relevant Assessment Year as it would have resulted in distortion of profits. It was also held that an hypothetical income would not arise to the assessee merely because it has accounted in its books of accounts, but it should arise and accrue to the assessee. The tribunal also took note of 134th meeting of Southern Regional Electricity Board and held that the

7 issue of sharing of wheeling charges by the constituent states itself was scrapped and the assessee has not raised any demand for wheeling charges in the following years and had placed on record the orders of assessment for the subsequent years i.e., 2003-04 and 2004-05, which were completed by the authorities without making any addition on account of wheeling charges. It was further held that revenue having accepted the assessee's method of accounting for the Assessment Year 2003-04 and 2004-05 cannot take a different stand only for the assessment year 2001-02. Thus, it was held that the assessee has not deviated from its method of accounting but has only recognized the revenue earned by it during the relevant Assessment Year and there is no infirmity in the method of accounting. In the result, the appeal preferred by the assessee was partly allowed. In the aforesaid factual background, the revenue is in appeal before us.

8 4. Learned counsel for the revenue submitted that the assessee has been following mercantile system of accounting and therefore, the income accrues, on raising a demand on the other parties. It is also urged that the doubtfulness of the assessee to receive the amount is immaterial under the mercantile system of accounting and the only remedy available to the assessee is under Section 36 of the Act. It is further submitted that once the assessee has recognized the right to receive, the income accrues and the same is taxable irrespective of the fact whether or not the same is actually accrued to the assessee. It is also contended that reference to other Assessment Years by the tribunal is immaterial and the amount / demand made by the assessee was legally due to it and therefore, the same accrued to it. In support of aforesaid submissions, reliance has been placed on decisions 'MORVI INDUSTRIES LTD. VS. COMMISSIONER OF INCOME-TAX', (1971) 82 ITR 835 (SC), 'KESHAV

9 MILLS LTD. VS. COMMISSIONER OF INCOME-TAX', (1953) 23 ITR 230 (SC) and 'COMMISSIONER OF INCOME-TAX VS.A.GAJAPATHY NAIDU', (1964) 53 ITR 114 (SC). 5. On the other hand, learned counsel for the assessee has submitted that the mercantile system and accrual system of accounting are synonymous. In this connection, reference has been made to guidance note on accrual system of accounting and our attention has been invited to clause 2.1 and clause 3 of the aforesaid note. It is also pointed out that notification dated 29.09.2016 issued by Central Board of Direct Taxes (CBDT) applies to the assessee's who follow the mercantile system of accounting and as per the Annexure annexed to the aforesaid notification, accrual refers to assumption that revenues and costs are accrued that is recognized that they are earned or incurred and recorded in the Previous Year to which they relate. Our attention has also been invited to the

10 annexure to the aforesaid notification and it has been contended that the revenue shall be recognized when there is a reasonable certainty of its ultimate collection, It is also urged that object sought to be achieved by accounting standards, which is mandatory is to see that accounting income is adopted as taxable income and not merely as basis from which taxable income is to be computed. In this connection, reliance has been placed on the decision of the Supreme Court in 'J.K.INDUSTRIES LTD. VS. UNION OF INDIA', 297 ITR 176 (SC). It is also urged that hypothetical income cannot be brought to tax as income and only real income can be taxed. In this connection, reference has been made on decision of the Supreme Court in 'COMMISSIONER OF INCOME TAX VS. BOKARO STEEL LTD.', 263 ITR 315 (SC). It is also argued that decision relied upon by learned counsel for the revenue do not apply to the fact situation of the case as Accounting Standard-9 was not in existence at the time

11 when the decisions were rendered. 6. We have considered the submissions made by learned counsel for the parties and have perused the record. Admittedly, the assessee follows the mercantile system of accounting. It is pertinent to mention here that in exercise of powers under Section 145(2) of the Act, the Central Government has issued Accounting Standards, which are to be followed by the assessee following mercantile system of accounting vide Notification dated 25.01.1996. Clause 6(b) of the aforesaid Notification defines the expression 'accrual' means that revenue and costs are accrued i.e., recognized as they are earned or incurred and recorded in the financial statements of the period to which they relate. The Notification dated 29.09.2016 issued by Central Board of Direct Taxes (CBDT), which applies to the assessee's following the mercantile system of accounting also provides that the expression 'accrual' refers to the assumption that revenue and costs are

12 accrued that is recognized as they are earned or incurred and recorded in the Previous Year, to which they relate. The Supreme Court in Bokaro Steels Ltd. supra has held that entry in a book which was made about a hypothetical income which did not materialize cannot be subjected to tax as the entry reflects hypothetical income and only real income can be brought to tax. 7. Now we may advert to the facts of the case in hand. The Southern Regional grid in South India comprises Karnataka, Andhra Pradesh, Tamil Nadu, Kerala and Pondicherry. The aforesaid states form a network for smooth transmission of exchange of electricity amongst the States, which includes drawl of their share of energy from central generating station owned by central public sector undertakings and the energy flow and grid operations in the southern region. The Karnataka Electricity Board which owned transmission lines in Karnataka decided to recover

13 wheeling charges from State Electricity Board's of Tamil Nadu, Andhra Pradesh and Kerala to the tune of Rs.52.89 Crores. The assessee therefore, did not raise any demand on account of wheeling charges and since, there was uncertainty with regard to recovery / collection of the outstanding amount, the assessee for the Assessment Year in question decided not to recognize revenue of Rs.52.89 Crores for wheeling charges. In the meeting held on 04.11.2000 and the same was approved by the board of the assessee. Thus, the aforesaid income never accrued to the assessee and was in fact, an hypothetical income and not a real income. Subsequently, on 16.03.2004 in 134th meeting of Southern Regional Electricity Board, the arrangement of cost sharing of wheeling charges by the constituent States itself was scrapped and on the date when the Assessing Officer passed an order i.e., on 31.12.2008, the aforesaid decision was already in existence. Thus, from the aforesaid narration of facts, it is axiomatic that

14 the income did not accrue to the assessee but was a hypothetical income, which could not have been subjected to tax and in view of Accounting Standard-9, the assessee rightly decided not to recognize the revenue of Rs.52.89 Crores for wheeling charges for the relevant assessment year. In view of preceding analysis, the substantial questions of law are answered against the revenue and in favour of the assessee. In the result, the appeal fails and is hereby dismissed. Sd/- JUDGE Sd/- JUDGE ss