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Income Tax Appellate Tribunal, Hyderabad ‘ B ‘ Bench, Hyderabad
Before: Shri Manjunatha, G. & Shri K. Narasimha Chary
Per Manjunatha, G. A.M This appeal filed by the assessee is directed against the order dated 15/01/2024 of the learned CIT (A) NFAC Delhi relating to A.Y.2018-19.
The assessee raised the following grounds:
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ITA 244 of 2024 Southern Power Distribution Company of AP
The brief facts of the case are that the assessee company is engaged in the business of distribution of power, filed its return of income for the A.Y 2018-19 on 30.10.2018 declaring total income at Rs “NIL”. The case was selected for scrutiny and during the course of assessement proceedings, the Assessing Officer noticed from the P&L Account for the year ending on 31.3.2018, an amount of Rs.720.59 crores has been claimed as depreciation, out of which an amount of Rs.322.95 crores represents depreciation on assets acq1uired out of consumer contribution. The assessee was requested to furnish the details of
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ITA 244 of 2024 Southern Power Distribution Company of AP
consumer contribution collected and grants received during the financial year 2017-18 relevant to A.Y 2018-19. In response, the appellant submitted that the company has received an amount of Rs.933.48 crores from customers and subsidies/grants from govt./other institutions and the same has been credited to capital reserve account. The assessee further submitted that it has capitalized the amount incurred for capital expenditure out of the said grants to fixed assets. Further, the appellant had claimed depreciation on capital receipts and debited to P&L Account in respect of assets acquired out of contribution received from consumers and subsidies received from govt. The appellant had also withdrawn an equal amount from the capital reserve and credited to P&L Account. But, in the statement of total income, while computing income from business and profession depreciation has been added back to the total income and amount withdrawn from reserve account and credited to P&L Account has been reduced from the income. Further, the appellant has claimed depreciation on net value of the assets(Gross Fixed Assets – Assets acquired out of contribution/grants) as per the provisions of I.T. Act, 1961.
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ITA 244 of 2024 Southern Power Distribution Company of AP
The Assessing Officer after considering the relevant submission observed that as per section 43(1) of the Act, the actual cost means the actual cost of the asset to the assessee reduced by portion of cost thereof, if any, has been met directly or indirectly by any other person or authorities. Further, as per explanation 10 to section (43), where a portion of the cost of asset acquired by the assessee has been met directly or indirectly by the central/state govts, in the form of subsidy or grant shall not be included in the actual cost of the asset to the assessee. Since the appellant has acquired the assets out of contribution received from consumers and subsidies received from govt, cost of asset to the extent of amount received from consumers and govt. should be reduced from the cost of assets. Since the assessee has received consumer contribution of 933.48 crores, the Assessing Officer after allowing depreciation @ 15% has made addition of Rs.793.45 crores as income of the assessee.
Being aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT (A). Before the learned CIT (A), the assessee claimed that it is following the method of
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ITA 244 of 2024 Southern Power Distribution Company of AP
accounting in which contribution received from consumers and subsidies received from govt. has been credited to capital reserves account and the amount of asset created out of the said fund has been capitalized in the books of account. The assessee further claimed that it has claimed depreciation as applicable on fixed assets and debited to P&L Account. The appellant has also withdrawn an equal amount from the capital reserve account and credited to P&L Account, but while computing the income from business both depreciation as well as withdrawal from reserves has been added back and reduced from the income to arrive at the income from business in terms of provisions of I.T. Act, 1961. The assessee further contended that this issue has been squarely covered in favour of the assessee by the decision of the ITAT Hyderabad Benches in assessee’s own case right from A.Y 2009- 10 and the ITAT under identical set of facts has deleted the addition made by the Assessing Officer.
The learned CIT (A) after considering the relevant submission of the assessee and also by following the decision of the ITAT in assessee’s own case for the A.Y 2009-10 deleted the
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ITA 244 of 2024 Southern Power Distribution Company of AP
addition made by the Assessing Officer towards addition on account of contribution received from consumers.
Aggrieved by the order of the learned CIT (A) the assessee is in appeal before the Tribunal.
The learned Counsel for the assessee submitted that this issue is squarely covered in favour of the assessee by the decision of the ITAT Hyderabad Bench in assessee’s own case for the A.Y 2013-14 in ITA No.840 & 841/Hyd/2015 dated 15.05.2018 where under identical set of facts, the Tribunal deleted the additions made by the Assessing Officer towards the amount received from consumers.
The learned DR, on the other hand, fairly agreed that this issue is squarely covered by the decision of the ITAT Hyderabad Benches for earlier A.Ys. However, he submitted that the Assessing Officer has given various reasons to prove contribution from consumers as income of the assessee and thus, the order of the Assessing Officer should be upheld.
We have heard both the parties, perused the material available on record and gone through the orders of the authorities below. The fact with regard to impugned dispute are that, during the financial year relevant to asst. year 2018-19, the assessee has
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ITA 244 of 2024 Southern Power Distribution Company of AP
received an amount of Rs. 933.48 crores from consumers and state or central govts. towards their share of capital cost for erecting transmission lines and sub stations for power distribution. Further, the company has capitalized the amount spent for capital expenditure out of the said grants to fixed assets. Further, the appellant had claimed depreciation on capital assets and debited to P&L Account in respect of assets acquired out of contribution received from consumers and subsidies received from govt. The appellant had also withdrawn an equal amount from the capital reserve and credited to P&L Account. But, in the statement of total income, while computing income from business and profession depreciation has been added back to the total income and amount withdrawn from reserve account and credited to P&L Account has been reduced from the income. Further, the appellant has claimed depreciation on net value of the assets(Gross Fixed Assets – Assets acquired out of contribution/grants) as per the provisions of I.T. Act, 1961. During the ending on 31.3.2018, an amount of Rs.720.59 crores has been claimed as depreciation, out of which an amount of Rs.322.95 crores represents depreciation on assets acquired out
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ITA 244 of 2024 Southern Power Distribution Company of AP
of consumer contribution. On perusal of financial statements, we find that the assessee is followed a method of accounting to account amount received from consumers and subsequent capitalization to assets and depreciation on such assets does not have any bearing on total income computed under the head income from business or profession as per the Income Tax act, 1961, because the appellant nullified the effect of entries passed in the books by adjusting said entries in statement of total income. Therefore, we are of the considered view that the AO is erred in making addition towards contribution from consumers as income of the assessee.
We further noted that, the issue involved in the present appeal i.e. additions made by the Assessing Officer towards amount received from consumers as contribution for capital expenditure and deleted by the learned CIT (A) is no longer res integra. The Coordinate Bench of the Tribunal in assessee’s own case for the A.Y 2009-10 in ITA No.1460/Hyd/2013 order dated 27.04.2018 has considered an identical issue and after considering relevant facts upheld the reasons given by the learned CIT (A) and deleted the addition made by the Assessing Officer
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ITA 244 of 2024 Southern Power Distribution Company of AP
towards the amount received from consumers. The relevant findings of the Tribunal reads as under: “16. In the Revenue’s appeal, the Revenue has raised the following grounds of appeal: “1. The order of the CIT(A) is erroneous both on facts and in law; 2. The CIT(A) was erroneous in treating the capital contributions from the customers and RGGVY subsidy to an extent of Rs.60,90,62,319/- as capital receipts which was credited to P&L account. 3. The CIT(A) ought to have upheld the order of the Assessing Officer since the assessee could not prove the additions made in respect of the items pertaining to the Provision for FBT and Provision for Leave Encashment. 4. The decision of the Ld CIT(A) is unilateral as no opportunity was given to the Assessing Officer on the submissions made by the applicant in respect of the items mentioned in point 3 supra”.
As regards Ground No.2, the CIT (A) has considered the assessee’s contention at length and has held as under: “5. During the appellate proceedings, the appellant was represented by Sri Y.Balakrishna Reddy, CA., and Sri B.Ravindra, CA., as authorized representatives. The. submissions as made by them are placed on record. I have perused the assessment order and all the submissions made, as well as the remand report dt.29.1.2013 received from the Assessing Officer. The appeal filed by the appellant is disposed off as under: 1) GROUNDS No.1 & 2: The first ground of appeal pertains to treatment of Rs.58,53,98,096/- as taxable income. The facts relevant to this issue are that, the appellant company is engaged in distribution of power to six circles viz., Vijayawada, Guntur, Ongole, Nellore, Kadapa and Chittoor. It has nearly sixty five lakh consumers of power. For every new connection, the appellant company is collecting
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ITA 244 of 2024 Southern Power Distribution Company of AP
contributions/charges from consumers towards cost of service line charges and development charges. The appellant company has submitted that "on receipt of contributions from consumers, the company is debiting to cash/bank account and crediting to consumer contributions received as they are capital receipts towards the cost of fixed assets". The appellant has submitted that its Accounting Policy, is that the assets so created/constructed, out of the contributions from consumers, will be depreciated as per rates specified under GO No.265 (FE) dt.27.3.1994. The depreciation is debited to P&L account every year and the same is recognized as income and credited to P&L Account, by reducing it from the amount of capital fund received, to reduce the depreciation charged to P&L account on the assets purchased out of consumer contribution. For easy explanation the appellant has given the details of entries passed in its books pertaining to the receipts from consumers. The appellant has stated that the contributions received from consumers are capital contributions and should not be treated as income. From the accounting entries passed by it, the appellant has stated that, "it can be observed that the capital contributions which has part funded the fixed assets of the company, are adjusted to the cost of fixed assets and also the depreciation originally charged on the fixed assets are reversed, thereby the assets are shown at net values in the books of account and there is no impact on the P&L account, as the capital contributions are not on the revenue account and the depreciation originally charged attributable to the cost of assets partly funded by the capital contributions are reversed". The appellant has submitted that during the asst.year 2009-10, the company has received consumer contributions including subsidies and grants towards cost of capital assets amounting to Rs.147.77 cr. and an amount of Rs.58.53 cr. has been reduced from the capital contributions and transferred to P&L account which is equal to the amount of depreciation charged on the assets purchased out of capital contributions. The appellant has also submitted that it has followed Accounting Standard- 12 regarding treatment of consumer contributions. Accounting Standard-12 is as under:
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ITA 244 of 2024 Southern Power Distribution Company of AP
Accounting Standard-12 which deals with capital based grants suggests two methods for treating grants received for specific asset? As per para-14 of the Standard, grants related to specific assets can be reduced from the cost of the fixed assets or the grants can be treated as deferred revenue grants. Para-14 is reproduced below: "Government grants related to specific fixed assets should be presented in the balance sheet by showing the grant as a deduction from the gross value of the assets concerned in arriving at their book value. Where the grant related to a specific fixed assets equals the whole, or virtually the whole, of the cost of the asset, the asset should be shown in the balance sheet at a nominal value. Alternatively, government grants related to depreciable fixed assets may be treated as deferred income which should be recognized in the Profit and loss statement on a systematic and rational basis over the useful life of the asset, i.e., such grants should be allocated to income over the period and in the proportion in which depreciation on those assets is charged. Grants related to non-depreciable assets should be credited to capital reserve under this method. However, if a grant related to a non-depreciable asset requires the fulfillment of certain obligations, the grant should be credited to income over the same period over which the cost of meeting such obligations is charged to income. The deferred income balance should be separately disclosed in the financial statements”. The appellant has further referred to the treatment prescribed in the Income tax Act for such capital contributions. As per Sec.43(1) "Actual Cost" means the actual cost of the asset to the assessee, reduced by that portion of the cost, if any, as has been met directly or indirectly by any other person or authority. Explanation 10 states that, where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly, by the Central Government or State Government, or any authority established under any law, or by any other person, in the form of a subsidy or grant or reimbursement, then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee. Provided, that where such subsidy or grant or reimbursement is of such nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total subsidy or reimbursement or grant
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ITA 244 of 2024 Southern Power Distribution Company of AP
the same proportion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement is so received, shall not be included in the actual cost of the asset to the assessee. The appellant has gone on to state that the Assessing Officer has misunderstood the accounting policy and accounting entries passed in the books and erroneously treated the capital contributions received from consumers as income. Therefore, the amount of Rs.58,53,98,095/- added to the total income under the normal provisions, is not correct. The appellant has 'placed reliance on the decision in the case of Jodhpur Vidyut Vitran Nigam Vs CIT 321 ITR 18(2010). 2. Ground No.2 is regarding the treatment of subsidy received under Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) credited to P&L Account amounting to Rs.2,36,64,224/-. This subsidy has been received from the Government towards construction/purchase of fixed assets. The appellant has stated that on receipt of subsidy from Government, the amount is spent for procurement· of capital stock/material and payment of service/labour charges for laying of service lines and fixing of transformers. The appellant has explained that the accounting treatment of such subsidy is similar to the accounting treatment followed in the case of capital contributions by the consumers. In respect of this subsidy, the appellant has again referred to Accounting Standard- 12 as well as Sec.43(1) of the I.T.Act. The Assessing Officer in his remand report dt.29.1.2013 has stated that the above two amounts viz., Capital contributions from Consumers and RGGVY subsidy have not been found in the details of 'other income: furnished by the appellant. The Assessing Officer has further stated that statement of computation filed by the assessee reveals that the capital contributions to the extent of Rs.58,53,98,095/- and RGGVY subsidy of Rs.2,36,64,224/- were treated as Revenue receipts are not correct. The Assessing Officer stated that this statement of the appellant is contradictory, and the additions made should be sustained. There appears to be an error in the interpretation given by the Assessing Officer. It is seen that the contributions from consumers were reflected in the balance-sheet as
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ITA 244 of 2024 Southern Power Distribution Company of AP
contributions and subsidies towards cost of capital assets, while cost of the material/capital cost incurred for giving connections to customers was capitalized and shown as additions to fixed assets. The appellant has submitted that while computing depreciation in the books, the appellant calculated depreciation on gross value of assets which included assets purchased contributions received from customers as well as subsidy received. Since, the deprecation debited to the P&L Account included depreciation on the value of assets created out of consumers contributions, as well as out of subsidy received under RGGVY, the depreciation relating to assets credited out such contribution/subsidy was credited to the P&L account under the head 'other income'. As a result, in the books of account of the appellant, gross depreciation was debited and deprecation on assets created out of consumer contributions and RGGVY subsidy was credited to the P&L account under the head "other incomes". In the next stage the appellant while computing its taxable income under the Income tax Act has deleted both the items from the net profit as per the books, by adding gross depreciation and reducing the depreciation attributable to consumers contribution/subsidy. The appellant has then claimed depreciation allowable under the Income tax Act on the net value of assets. The net value of assets is the gross value as reduced by consumers contributions/subsidy as is required under. explanation-l0 to sec.43(1). It is logical that adjustments are made to net profit for entries in the P&L account towards depreciation, before allowing deductions towards depreciation as per the I.T.Act. In the normal course such adjustment is required only for the depreciation debited to the P&L account. In the assessee's case· there is also a credit of such amount in accordance with ESAAR (Electricity Supply Annual Account Rules) even though it is not in the nature of income. It logically follows that this amount is to be reduced from net profit for the purpose of computation of total income. To sum up the amount of Rs.58,53,98,095/- and Rs.2,36,64,224/-were the amounts of depreciation claimed on assets generated out of the capital contributions/subsidy and had been credited to the P&L account since the P&L account had been debited by gross depreciation and not depreciation as per actual cost. Subsequently, while computing the income, gross depreciation was added back and depreciation as per I.T.Act was reduced. This depreciation as per I.T.Act took into account the provisions of sec.43(1) and expalantion-10
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ITA 244 of 2024 Southern Power Distribution Company of AP
and hence the depreciation was proportionately reduced amount taking into account capital contributions. In view of the same the depreciation on capital contributions credited to the P&L account was also reduced in the computation of income and, correctly so. The accounting method followed by the appellant is not only correct but also as per provisions of the I.T.Act and Accounting Standards and the addition made is deleted. Appeal on Grounds No.1 & 2 is hence allowed”.
We find that the CIT (A) has brought out the actual accounting treatment given by the assessee and its impact on the computation of income u/s 115JB of the Act. The learned DR has not been able to rebut the findings of the CIT (A) and demonstrate as to how the findings of the CIT (A) are not sustainable. In view of the same, we see no reason to interfere with the order of the CIT (A) on this issue and the Revenue’s ground of appeal No.2 is accordingly rejected.”
Further, the ITAT Hyderabad ‘B’ Bench in assessee’s own case has decided the issue in ITA Nos 807 & 808/Hyd/2018 for the A.Y 2013-14 & 2014-15 dated 12/09/2018 and after considering the relevant facts decided the issue as under: “4. Having considered the rival contentions, we find that the very same issue had arisen in the earlier A.Y and the Tribunal had considered the issue at length to hold in favour of the assessee. Respectfully following the decision to which both of us are signatories, the Revenue’s appeals are dismissed”.
In this view of the matter and by following the decision of the Coordinate Bench of the ITAT Hyderabad B Bench in assessee’s own case for the A.Ys 2013-14 & 2014-15, we are of the considered view that there is no error in the reasons given by learned CIT (A) to delete the addition made by the Assessing Officer towards contribution received from consumers as income
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ITA 244 of 2024 Southern Power Distribution Company of AP
of the assessee. Thus, we are inclined to uphold the findings of the learned CIT (A) and dismiss the appeal filed by the Revenue.
In the result, appeal filed by the Revenue is dismissed.
Order pronounced in the Open Court on 16th July, 2024. Sd/- Sd/- (K. NARASIMHA CHARY) (MANJUNATHA, G.) JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, dated 16th July, 2024 Vinodan/sps Copy to: S.No Addresses 1 ACIT, Circle 1(1) Room No.306, 2nd Floor, Aayakar Bhavan, KT Road, Tirupati, A.P 2 Southern Power Distribution Company of A.P, H.No.19-13/65/A Srinivasapur AM, Keshavayanagunta, Tiruchanur Road Tirupati 517503 A.P 3 Pr. CIT - Tirupati 4 DR, ITAT Hyderabad Benches 5 Guard File By Order
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