M/S. NORTH EASTERN ELECTRIC POWER CORPORATION LTD.,SHILLONG vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE - SHILLONG, SHILLONG

Per Dr. Manish Borad, Accountant Member:- The captioned appeals filed by the assessee are against the order under section 263 of the Income Tax Act of Ld. Principal Commissioner of Income Tax, Shillong dated 12.12.2018 and against order of Ld. CIT(Appeals) dated 26.07.2019.

ITA No. 45/GAU/2019 Assessment Year: 2014-2015 & ITA No.418/GAU/2019 Assessment Year:2014-2015 M/s. North Eastern Electric Power Corporation Limited (2) On the facts and circumstances of the case, the order passed by the learned PCIT cancelling the assessment order passed by the A.O. is untenable in the absence of order of the A.O. being erroneous as well as prejudicial to the interest of the Revenue. (3) On the facts and circumstances of the case, the learned PCIT has erred both on facts and in law in ignoring the fact that all the issues raised by him in notice under Section 263 were before the A.O during the assessment proceedings under section 143(3) of the Act and as such the jurisdiction on this issue under Section 263 cannot be assumed. (4) On the facts and circumstances of the case, the learned PCIT has erred, both on facts and in law, in rejecting the contention that the issues raised by the PCIT in his notice has been examined by the A.O. and order has been passed by the A.O. after examination of the reply and evidences submitted by the assessee and due application of mind. (5) On the facts and circumstances of the case, the learned PCIT has erred, both on facts and in law, in setting aside the order under section 263 of the Act without there being any adverse material either at the stage of assessment or in the revisionary proceedings. (6) On the facts and circumstances of the case, the learned PCIT has erred in ignoring the contention of the appellant that the proceeding under Section 263 cannot be used for substituting opinion of the AO by that of the PCIT. (7) On the facts and circumstances of the case, the learned PCIT has erred, both on facts and in law, in invoking revisionary power under Section 263 of

ITA No. 45/GAU/2019 Assessment Year: 2014-2015 & ITA No.418/GAU/2019 Assessment Year:2014-2015 M/s. North Eastern Electric Power Corporation Limited the Act despite the fact that even after thorough examination, no specific findings have been given on the issue of how the order is erroneous and prejudicial to the interest of Revenue. (8) On the facts and circumstances of the case, PCIT has erred both on facts and in law in setting aside the issue of recognition of interest due from debtors as per the regular mode of accounting to the file of the A.O. without properly appreciated the explanation of assessee brought on record by the assessee. (9) On the facts and circumstances of the case, the learned PCIT has erred both on facts and in law, in ignoring the contention of the assessee that the assessee has consistently followed the same accounting treatment in subsequent years. (10) On the facts and circumstances of the case, the learned PCIT has erred both on facts and in law, in ignoring the fact that there is no differential tax if the amounts involved are brought to tax in the impugned assessment year as directed by the PCIT or taxed on a later date on cash basis as offered by the assessee, since the assessee is a company. (11) That the appellant craves leave to add, amend or alter any of the grounds of appeal.

ITA No. 45/GAU/2019 Assessment Year: 2014-2015 & ITA No.418/GAU/2019 Assessment Year:2014-2015 M/s. North Eastern Electric Power Corporation Limited (2) On the facts and circumstances of the case, the Ld. CIT(A) has erred both on facts and in law in confirming the action of AO giving effect to the order of Principal Commissioner of Income Tax passed under section 263 of the Income Tax Act.

(3) On the facts and circumstances of the case the Ld CIT(A) has erred both on facts and in law in confirming the action of AO despite the fact that the order passed under section 263 of the Act by the Principal Commissioner of Income Tax based on which re-assessment is made is itself bad in the eyes of law and on facts.

(4) On the facts and circumstances of the case, the Ld. CIT(A) has erred both on facts and in law in passing the order without giving reasonable opportunity of being heard in gross violation of principal of natural justice.

(5)(i) On the facts and circumstances of the case, the Ld. CIT(A) has erred both on facts and in law in not adjudicating the additions made by the AO holding that the addition has been made as per the directions of Principal Commissioner of Income Tax and the same cannot be challenged before him.

(ii)On the facts and circumstances of the case, the Ld. CIT(A) has erred both on facts and in law in holding that challenging the order passed by the AO will indirectly tantamount to challenging the order passed under section 263 passed by Principal Commissioner of Income Tax.

(iii)On the facts and circumstances of the case, the Ld. CIT(A) has erred both on facts and in law in ignoring the fact that since the issues raised by the

ITA No. 45/GAU/2019 Assessment Year: 2014-2015 & ITA No.418/GAU/2019 Assessment Year:2014-2015 M/s. North Eastern Electric Power Corporation Limited assessee before him have not attained finality the same can be adjudicated by him.

(6) On the facts and circumstances of the case, the Ld. CIT(A) has erred both on facts and in law in confirming the addition of Rs.66,80,41,655/- on account of Late Payment Surcharge (LPS) not received by the assessee treating the same as accrued income by applying mercantile system of accounting.

(7) On the facts and circumstances of the case, the Ld. CIT(A) has erred both on facts and in law in ignoring the contention of the assessee that the AO has acted beyond his jurisdiction by making addition on account of Late Payment Surcharge despite the fact that there is no such direction given by PCIT in the order passed under section 263 of the Income Tax Act.

(8) On the facts and circumstances of the case the Ld. CIT(A) has erred both on facts and in law in ignoring the contention of the assessee that the Late Payment Surcharge has been accounted for on receipt basis as per the guidelines issued by CERC regulations and Ministry of Power in this regard.

(9) On the facts and circumstances of the case, the Ld. CIT(A) has erred both on facts and in law in confirming the action of AO in making the above addition ignoring the real income theory whereby income assessed is to be the real income and not hypothetical. (10) That the appellant craves leave to add, amend or alter any of the grounds of appeal.

ITA No. 45/GAU/2019 Assessment Year: 2014-2015 & ITA No.418/GAU/2019 Assessment Year:2014-2015 M/s. North Eastern Electric Power Corporation Limited 4. We will first take up ITA No. 45/GAU/2019 for assessment year 2014-15 through which assessee has challenged the revisionary proceedings carried out u/s 263 of the Income Tax Act.

ITA No. 45/GAU/2019 Assessment Year: 2014-2015 & ITA No.418/GAU/2019 Assessment Year:2014-2015 M/s. North Eastern Electric Power Corporation Limited payment surcharge are charges levied by all power generating companies in case the payment of any bill for charges payable under the regulation of Electricity commission is delayed by beneficiary beyond stipulated time. The assessee is following mercantile system of accounting and it recognizes all of its income on ‘accrual’ basis only i.e. it is recognized as and when the certainty of its realization arises. Due to high level of uncertainty involved in its ultimate collection of these LPS charges the recognition of the same is postponed by the assessee till the reasonable certainty arises which arises when the income is actually received by the assessee. The said treatment has been accepted by the statutory auditor, CAG as well as the tax auditor.

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submissions given by the assessee the assessment was completed vide the assessment order u/s 143(3) dated 24.11.2016. whereby the returned income of the assessee was accepted by Ld.AO. Copy of the said assessment order is placed at PB page no. 120 to 121.

In the Notes on Accounts and Accounting Policies it is mentioned that “interest on debt on account of sale of power (post securitization) is accounted for on case sales”. However, on reference to the Balance Sheet, it is seen that the Trade Receivables are shown at Rs. 791.90 crores. Hence, it appears that the sum of Rs. 18.86 crore declared to income only accounts for 2.3% of actual trade receivables of Rs. 791.90 crore. This low percentage of interest booked to income appears to be due to non- accounting of the non- cash portion, as required under the mercantile accounting system followed by your company.

In view of the above facts, I propose to hold the assessment order passed u/s 143(3) of the I. T. Act to be erroneous in as much as being prejudicial to the interest of the revenue. The order is therefore proposed to be revised in terms of Section 263 of the I. T. Act. ’’

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(b)However, none of the beneficiaries were paying up these LPS to the generating companies and the amount kept on soaring in the books of the power generating CPSUs creating an unhealthy financial position and cash crunch. This resulted in huge amount of trade receivable becoming due from the beneficiaries.

(c)Thereafter in 2001, an Expert Committee constituted by the Govt, of India* under the chairmanship of Dr. Montek Singh Ahluwalia to overcome the crisis, recommended that 60% of the outstanding dues on account of late payment surcharge be waived. This recommendation was adopted and huge amounts had to be written off overnight thereby severely affecting the health of the Power CPSUs. The assessee also suffered loss of Rs. 254.10 crs due to waiver of surcharge in FY 2002-03.

(d)This event created a need to have a relook at the accounting policy of all the Power Sector CPSUs as regards

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recognition of Late Payment of Surcharge. All the CPSUs decided to follow the principles of erstwhile AS-9 and decided to account the LPS on cash basis.

(e)The Audit Committee of NEEPCO in the year 2003, after a detailed deliberation agreed to the modification its Accounting Policy to recognize LPS on Cash basis which was then approved by the Board of Directors. The same policy is still in vogue in NEEPCO. The accounting treatment is in the line with the current accounting standards issued by the ICAI. (The Copy of Extract of Audited committee Resolution is enclosed at PB Pg. 126 to 127).

(f)Moreover, the Dy. Secretary (Finance), Ministry of Power vide letter No. DO No. DS (F)/NEEPCO/2003-04 dated 19- 08-2003 had intimated that other CPSUs including NHPC, were accounting for surcharge on receipt basis and NEEPCO should adopt the same policy so as to maintain uniformity. The Copy of letter of ministry is also enclosed at PB Pg. 129).

(g) The above accounting treatment is consistently followed by NEEPCO thereafter. There has been more cases of write off of LPS in the following years also.

However, without appreciating the above detailed submissions, explanations along with the evidences brought on record by the assessee, Id. Pr. CIT held that the asssessment order is erroneous and prejudicial to the interest of the revenue and

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directed the AO to re-compute the income of the assessee after taking into account the late payment surcharge on accrual basis.

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Committee in 2003 had pointed out that the accounting of surcharge has to be done on receipt basis to avoid any future loss on account of any policy of the Government. The Dy. Secretary (Finance), Ministry of Power vide letter No. DO. Nos DS(F)/NEEPCO/2003-04 dated 19.08.2003 intimated that other CPSUs including NFIPC, were accounting for surcharge on receipt basis and NEEPCO should adopt the same policy so as to maintain uniformity due to loss suffered on account of waiver of surcharges started accounting of surcharge on receipt basis. The issue was taken up in the Audit Committee of the NEEPCO constituted under the Companies Act 1956. After detailed deliberation modification to the policy for accounting surcharge on cash basis was approved by the Board of Director, NEEPCO, which has been in vogue since Financial Year 2003-04. This approach is also aptly apply supported by clause 9 of "AS 9-Revenue Recognition" so far as revenue recognition in the event of uncertainty of realization is concerned.

ITA No. 45/GAU/2019 Assessment Year: 2014-2015 & ITA No.418/GAU/2019 Assessment Year:2014-2015 M/s. North Eastern Electric Power Corporation Limited High Court in the case of CIT –vs.-Max India (2004) 268 ITR 128. Further, it was submitted that the issue is revenue neutral since the LPS, which are offered to tax on cash basis and not on accrual basis, then the dispute at best is with regard to the year of taxability and, therefore, there is no loss to the revenue and thus the assessment order dated 24.11.2016 cannot be said to be prejudicial to the interest of revenue. Reliance placed on the judgment of the Hon’ble Delhi High Court in the case of CIT –vs.- Dinesh Kumar Goel (2011)331 ITR 10. Ld. Counsel for the assessee further submitted that the delayed payment surcharge is to be recognized on cash basis due to uncetainity of recovery and such delayed payment was also on account of the fact that the same was chargeable to the State Government. Such charging of the delayed payment on cash basis was held to be justified in the decision of ITAT, Delhi in the case of DCIT, Hisar –vs.- Dakshin Haryana Bijli Vitran Nigam Ltd. Hisar (2011)(11) TMI 721- dated 30th November, 2011, which was subsequently affirmed by the Hon’ble Punjab & Haryana High Court and SLP filed by the Revenue was dismissed. Further it was submitted that the assessee is following the same treatment for last many years and since AY 2003-04 the assessee’s case is being assessed under section 143(3) of the Act and such treatment of delayed payment charges on cash basis is

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being accepted by the Department, and, therefore, the principle of consistency is applicable to the assessee. Reliance placed on plethora of judgment including that of Hon’ble Supreme Court in the case of Radhasoami Satsang –vs.- CIT 193 ITR 321; CIT –vs.- Rajasthan Beweries; SLP (C) 1379/2014(SC); CIT –vs.- Realest Builders and Services 307 ITR 202 (SC). Further it was submitted that the books of account are audited by three auditors including the Controller of Auditor General (CAG) and all auditors have accepted the treatment of the surcharge/interest on outstanding payments. Similar accounting treatment is also consistently followed by various other Power Sector Companies, copy of which is placed at pages 227 to 577 of the paper book.

(B) That, Meghalaya Electricity Corporation Ltd. (MeECL) is recording its liability towards delayed payment surcharge and making payment of the same to the assessee which

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contradicts the stand taken by the assessee that recovery of delayed payment surcharge is uncertain (C) That, since the customers of the assessee are wholly owned government entities, the dues from them cannot be termed as uncertain. (D) That, waiver for dues prior to FY 2002-03 was a special situation/one time situation and" there has been no waiver again since FY 2002-03. (E) That, the letter of Deputy Secretary (Finance) requiring the assessee and other CPSUs to recognize delayed payment surcharge on cash basis cannot override provision of Income Tax Act. (F) That, reliance was placed by AO on the judgment of Tuticorin Alkali Chemicals and Fertilizers Limited vs CIT (1997)227ITR 172(SC) to conclude that provisions of law gain precedence over the AS—9. (G) That, the principle of res-judcata is not applicable to income tax proceedings.

(H) That the judgments relied upon by the assessee pertain to period prior to amendment made in section 145 of the Act.

ITA No. 45/GAU/2019 Assessment Year: 2014-2015 & ITA No.418/GAU/2019 Assessment Year:2014-2015 M/s. North Eastern Electric Power Corporation Limited revenue. The issue raised by the ld. PCIT in the SCN relates to accounting of delayed payment surcharge (in short ‘LPS’) on cash basis. It is observed by ld. PCIT that upto assessment year 2002-03, the assessee was declaring LPS on outstanding credit receivables on accrual basis. But from A.Y. 2003-04, it changed its method of accounting in respect of LPS on unrealisable amount relying on the directions contained in the DO letter of Deputy Secreary (Finance), Ministry of Power dated 19.08.2003. The ld. PCIT was of the view that since the assessee is maintaining the books of account on mercantile system, therefore, hybrid system of accounting is not allowed as per the provisions of section 145(1) of the Act and also the assessee-company, whose main debtor is Meghalaya Electricity Corporation Limited (in short “MECL”) and its subsidiaries, bills for LPS are regularly raised to MECL from time to time but the assessee shows income of LPS only when it is received on cash basis. Based on these observations, ld. PCIT held the assessment order as erroneous so far as prejudicial to the interest of revenue. Before adverting to the facts of the case and the justification of the revisionary proceedings carried out by the ld. PCIT, we will first go through the provisions of section 263 of the Act and the settled judicial precedence in this regard.

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"263(1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. Explanation- For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,- (a) an order passed on or before or after the 1st day of June, 1988 by the Assessing Officer shall include- (i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A; (ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief Commissioner or Director General or Commissioner authorized by the Board in this behalf under section 120; (b) record shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Commissioner; (c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Commissioner under this sub-section shall extend and shall be 18

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deemed always to have extended to such matters as had not been considered and decided in such appeal. (2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed. (3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, National Tax Tribunal, the High Court or the Supreme Court. Explanation- In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded." 16. On a bare perusal of the sub section-1 would reveal that powers of revision granted by section 263 to the learned Commissioner have four compartments. In the first place, the learned Commissioner may call for and examine the records of any proceedings under this Act. For calling of the record and examination, the learned Commissioner was not required to show any reason. It is a part of his administrative control to call for the records and examine them. The second feature would come when he will judge an order passed by an Assessing Officer on culmination of any proceedings or during the pendency of those proceedings. On an analysis of the record and of the order passed by the Assessing Officer, he formed an opinion that such an order is erroneous in so far as it is prejudicial to the interests of the Revenue. By this stage the learned Commissioner was not 19

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required the assistance of the assessee. Thereafter the third stage would come. The learned Commissioner would issue a show cause notice pointing out the reasons for the formation of his belief that action u/s 263 is required on a particular order of the Assessing Officer. At this stage the opportunity to the assessee would be given. The learned Commissioner has to conduct an inquiry as he may deem fit. After hearing the assessee, he will pass the order. This is the 4th compartment of this section. The learned Commissioner may annul the order of the Assessing Officer. He may enhance the assessed income by modifying the order. He may set aside the order and direct the Assessing Officer to pass a fresh order. At this stage, before considering the multi- fold contentions of the ld. Representatives, we deem it pertinent to take note of the fundamental tests propounded in various judgments relevant for judging the action of the CIT taken u/s 263.

“There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase 'prejudicial to the interests of the revenue’ has to be read in conjunction with an erroneous order passed by the

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Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the ITO is unsustainable in law. It has been held by this Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the revenue - Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84 (SC) and in Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC)”.[Emphasis Supplied] 18. Hon’ble Apex Court in the case of CIT vs. Max India Limited as reported in 295 ITR 0282 has held that:

“ 2. At this stage we may clarify that under para 10 of the judgment in the case of Malabar Industrial Co. Ltd. (supra) this Court has taken the view that the phrase "prejudicial to the interest of the Revenue" under s. 263 has to be read in conjunction with the expression "erroneous" order passed by the AO. Every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interest of the Revenue. For example, when the ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the Revenue, unless the view taken by the ITO is unsustainable in law.” 19. Hon'ble Madhya Pradesh High court in the case of CIT vs. Associated Food Products (P) Ltd as reported in 280 ITR 0377 has held that:

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imperative to be present. In the absence of such foundation exercise of a suomoto power is impermissible. It should not be presumed that initiation of power under suomoto revision is merely an administrative act. It is an act of a quasi-judicial authority and based on formation of an opinion with regard to existence of adequate material to satisfy that the decision taken by the AO is erroneous as well as prejudicial to the interests of the Revenue. The concept of "prejudicial to the interests of the Revenue" has to be correctly and soundly understood. It precisely means an order which has not been passed in consonance with the principles of law which has in ultimate eventuate affected realization of lawful revenue either by the State has not been realized or it has gone beyond realization. These two basic ingredients have to be satisfied as sine qua non for exercise of such power. On a perusal of the material brought on record and the order passed by the CIT it is perceptible that the said authority has not kept in view the requirement of s. 263 of the Act inasmuch as the order does not reflect any kind of satisfaction. As is manifest the said authority has been governed by a singular factor that the order of the AO is wrong. That may be so but that is not enough. What was the sequitur or consequence of such order qua prejudicial to the interest of the Revenue should have been focused upon. That having not been done, in our considered opinion, exercise of jurisdiction under s. 263 of the Act is totally erroneous and cannot withstand scrutiny. Hence, the Tribunal has correctly unsettled and dislodged the order of the CIT. [Emphasis supplied] 20. In the light of the provisions of section 263 of the Act and a settled position of law, powers u/s 263 of the Act can be exercised by the Pr. Commissioner/Commissioner on satisfaction of twin conditions, i.e., the assessment order should be erroneous and also prejudicial to the interest of the Revenue. By 'erroneous' is meant contrary to law. Thus, this power cannot be exercised unless the Commissioner is able to establish that the order of the Assessing Officer is erroneous and prejudicial to the

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interest of the Revenue. Thus, where there are two possible views and the Assessing Officer has taken one of the possible views, no action to exercise powers of revision can arise, nor can revisional power be exercised for directing a fuller enquiry to find out if the view taken is erroneous. This power of revision can be exercised only where no enquiry, as required under the law, is done. It is not open to enquire in case of inadequate inquiry. Our view is fortified by the judgment of Hon'ble High Court of Bombay in the case of CIT vs. Nirav Modi, [2016] 71 taxmann.com 272 (Bombay).

"Whether the Tribunal is right in law and on facts in upholding the order passed by the CIT under section 263 of the Act on merits and still storing the issue of allowability of deduction under section 54 of the Act to the file of Assessing Officer even though the working of allowability of deduction under section 54F is available in the order under section 263 which is not disputed by the assessee before ITAT." 22. Hon'ble Delhi High Court in the case of CIT vs. Anil Kumar reported in 335 ITR 83 has held that where it was discernible from record that the A.O has applied his mind to the issue in question, the ld. CIT cannot invoke section 263 of the Act merely because he has different opinion. Relevant observation of the High Court reads as under:

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"63. We find the Hon'ble Delhi High Court in the case of Vikas Polymer reported in 341 ITR 537 has held as under: “We are thus of the opinion that the provisions of s. 263 of the Act, when read as a composite whole make it incumbent upon the CIT before exercising revisional powers to: (i) call for and examine the record, and (ii) give the assessee an opportunity of being heard and thereafter to make or cause to be made such enquiry as he deems necessary. It is only on fulfillment of these twin conditions that the CIT may pass an order exercising his power of revision. Minutely examined, the provisions of the section envisage that the CIT may call for the records and if he prima facie considers that any order passed therein by the AO is erroneous insofar as it is prejudicial to the interest of the Revenue, he may after giving the assessee an opportunity of being heard and after making or causing to be made such enquiry as he deems necessary, pass such order thereon as the circumstances of the case justify. The twin requirements of the section are manifestly for a purpose. Merely because the CIT considers on examination of the record that the order has been erroneously passed so as to prejudice the interest of the Revenue will not suffice. The assessee must be called, his explanation sought for and examined by the CIT and thereafter if the CIT still feels that the order is erroneous and prejudicial to the interest of the Revenue, the CIT may pass revisional orders. If, on the other hand, the CIT is satisfied, after hearing the assessee, that the orders are not erroneous and prejudicial to the interest of the Revenue, he may choose not to exercise his power of revision. This is for the reason that if a query is raised during the course of scrutiny by the AO, which was answered to the satisfaction of the AO, but neither the query nor the answer were reflected in the assessment order, this would not by itself lead to the conclusion that the order of the AO called for interference and revision. In the instant case, for example, the CIT has observed in the order passed by him that the assessee has not filed certain documents on the record at the time of assessment. Assuming it to be so, in our opinion, this does not justify the conclusion arrived at by the CIT that the AO had shirked his responsibility of examining and 24

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investigating the case. More so, in view of the fact that the assessee explained that the capital investment made by the partners, which had been called into question by the CIT was duly reflected in the respective assessments of the partners who were I.T. assessees and the unsecured loan taken from M/s Stutee Chit & Finance (P) Ltd. was duly reflected in the assessment order of the said chit fund which was also an assessee.” 64. Since in the instant case the A.O. after considering the various submissions made by the assessee from time to time and has taken a possible view, therefore, merely because the DIT does not agree with the opinion of the A.O., he cannot invoke the provisions of section 263 to substitute his own opinion. It has further been held in several decisions that when the A.O. has made enquiry to his satisfaction and it is not a case of no enquiry and the DIT/CIT wants that the case could have been investigated/ probed in a particular manner, he cannot assume jurisdiction u/s 263 of the Act. In view of the above discussion, we hold that the assumption of jurisdiction by the DIT u/s 263 of the Act is not in accordance with law. We, therefore, quash the same and grounds raised by the assessee are allowed." 23. The ITAT in the case of Mrs. Khatiza S. Oomerbhoy vs. ITO, Mumbai, 101 TTJ 1095, analyzed in detail various authoritative pronouncements including the decision of Hon'ble Supreme Court in the case of Malabar Industries 243 ITR 83 and has propounded the following broader principle to judge the action of CIT taken under section 263:

“(i) The CIT must record satisfaction that the order of the AO is erroneous and prejudicial to the interest of the Revenue. Both the conditions must be fulfilled. (ii) Sec. 263 cannot be invoked to correct each and every type of mistake or error committed by the AO and it was only when an order is erroneous that the section will be attracted.

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(iii) An incorrect assumption of facts or an incorrect application of law will suffice the requirement of order being erroneous. (iv) If the order is passed without application of mind, such order will fall under the category of erroneous order. (v) Every loss of revenue cannot be treated as prejudicial to the interests of the Revenue and if the AO has adopted one of the courses permissible under law or where two views are possible and the AO has taken one view with which the CIT does not agree. If cannot be treated as an erroneous order, unless the view taken by the AO is unsustainable under law (vi) If while making the assessment, the AO examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determine the income, the CIT, while exercising his power under s 263 is not permitted to substitute his estimate of income in place of the income estimated by the AO. (vii) The AO exercises quasi-judicial power vested in his and if he exercises such power in accordance with law and arrive at a conclusion, such conclusion cannot be termed to be erroneous simply because the CIT does not fee stratified with the conclusion. (viii) The CIT, before exercising his jurisdiction under s. 263 must have material on record to arrive at a satisfaction. (ix) If the AO has made enquiries during the course of assessment proceedings on the relevant issues and the assessee has given detailed explanation by a letter in writing and the AO allows the claim on being satisfied with the explanation of the assessee, the decision of the AO cannot be held to be erroneous simply because in his order he does not make an elaborate discussion in that regard.” 24. Apart from above stated broader principles, one more principle needs to be added in view of the judgment of Hon’ble Delhi High Court in the case of ITO vs. D.G. Housing Projects Ltd. [2012] 343 ITR 329 (Delhi) that the ld. CIT has to examine and verify the issue himself and give a finding on merits and form an

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opinion on merits that the order passed by the AO is erroneous and prejudicial to the interest of the Revenue. Relevant extract is reproduced below:

“In the present case, the findings recorded by the Tribunal are correct as the CIT has not gone into and has not given any reason for observing that the order passed by the Assessing Officer was erroneous. The finding recorded by the CIT is that "order passed by the Assessing Officer may be erroneous". The CIT had doubts about the valuation and sale consideration received but the CIT should have examined the said aspect himself and given a finding that the order passed by the Assessing Officer was erroneous. He came to the conclusion and finding that the Assessing Officer had examined the said aspect and accepted the respondent’s computation figures but he had reservations. The CIT in the order has recorded that the consideration receivable was examined by the Assessing Officer but was not properly examined and therefore the assessment order is "erroneous". The said finding will be correct, if the CIT had examined and verified the said transaction himself and given a finding on merits. As held above, a distinction must be drawn in the cases where the Assessing Officer does not conduct an enquiry; as lack of enquiry by itself renders the order being erroneous and prejudicial to the interest of the Revenue and cases where the Assessing Officer conducts enquiry but finding recorded is erroneous and which is also prejudicial to the interest of the Revenue. In latter cases, the CIT has to examine the order of the Assessing Officer on merits or the decision taken by the Assessing Officer on merits and then hold and form an opinion on merits that the order passed by the Assessing Officer is erroneous and prejudicial to the interest of the Revenue. In the second set of cases, CIT cannot direct the Assessing Officer to conduct further enquiry to verify and find out whether the order passed is erroneous or not.” 25. Now examining the facts of the insant case in the light of the judicial precedence as referred above, we observe that three issues need to be adjudicated, firstly whether the ld. Assessing Officer has made enquiry on 27

ITA No. 45/GAU/2019 Assessment Year: 2014-2015 & ITA No.418/GAU/2019 Assessment Year:2014-2015 M/s. North Eastern Electric Power Corporation Limited the issue raised in the impugned show-cause notice during the course of assessment proceedings; and secondly whether the view taken by the ld. Assessing Officer after conducting the enquiry was admissible in the eyes of law and that whether order of ld. Assessing Officer is erroneous as well as prejudicial to the interest of revenue.

ITA No. 45/GAU/2019 Assessment Year: 2014-2015 & ITA No.418/GAU/2019 Assessment Year:2014-2015 M/s. North Eastern Electric Power Corporation Limited under section 143(3) of the Act from A.Y. 2003-04 till A.Y. 2012-13 accepting the assessee’s treatment of LPS charges on cash basis accepted the same treatment for A.Y. 2014-15. In our considered view, the instant case is not of “No enquiry” but a case where detailed enquiry has been conducted and a consistent view has been taken by ld. A.O. accepting the assessee’s treatment of LPS accounted for on cash basis.

ITA No. 45/GAU/2019 Assessment Year: 2014-2015 & ITA No.418/GAU/2019 Assessment Year:2014-2015 M/s. North Eastern Electric Power Corporation Limited a sudden, 60% of the outstanding of LPS charges were waived and since the assessee as well as most of its debtors are Government companies, such directions have to be followed on outstanding dues. Thereafter Deputy Secretary (Finance), Ministry of Power dated 19.08.2003 gave direction for changing the method of accounting in respect of the items of accrued interest, i.e. LPS on unrealised sales amount to be accounted for only on cash basis. Subsequently on the basis of this direction as well as taking support from the Accounting Standard, the assessee stopped to book income of LPS on accrual basis and offered it to tax when actually received by it, i.e. on cash basis.

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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 rt 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.”

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5.3. In view of these tacts, coupled with the fact that assessee changed its method of accounting after seeking necessary approval of CAG, shows that as far as the assessee is concerned, the colection of sur- charge was contingent and did not accrue due to assessee. The feabfity will accrue on the basis of crystallization i.e. the payment of the surcharge or passing of a suitable order by the appropriate authority on the dispute raised by the customer. 5.4. Coming to the case laws, Hon’ble Supreme Court in the case of Shoorji Vallabh Das & Co. had to deal with an issue of managing agency commission transferred by the assessee to two other companies. Subsequent agreement after the end of accounting year resulted in assessee’s receiving lesser commission, though book entries of higher amount were made. Revenue sought to tax the higher income, Hon’ble Court held that assessee cannot be taxed on the basis of hypothetical income. In our view this judgment is applicable to the facts of assessee’s case, keeping in mind following prepositions: (i) Assessee s method of accounting has been accepted by the department. (ii) Since the assessee could defer the payment of sur-charge under consumer protest, the taxing of such contingent receipt is a hypothetical income. 5.5. In case of UCO Bank (supra), in case of sticky advances, the interest income though provided in the books of accounts, were not assessable. 5.6. In case of Godhara Electricity Co. Ltd. (supra), though the tariff was revised and was enforceable by rules, its deferment by state of Gujarat was held to be resulting into nonaccrual of deferred portion on the basis of real income concept. 5.7. In the case of Poona Electric Supply Co. (supra), also the Hon’ble Supreme Court held that portion exceeds over clear profits returned as rebate to the consumers was not part of taxable income of the assessee. Thus, though the amount from consumers accrued to the assessee, due to the return on account of stipulation provided, rebate was held to be non-taxable rebate. 5.8. In case of Modi Rubber Ltd. (supra), The Hon’ble Delhi High Court affirmed the order of ITAT holding that mere unilateral act of the assessee debiting the books of account with the amount of interest, which was disputed by the debtor, did not amount to accrual of income to the assessee.

ITA No. 45/GAU/2019 Assessment Year: 2014-2015 & ITA No.418/GAU/2019 Assessment Year:2014-2015 M/s. North Eastern Electric Power Corporation Limited 5.9. There is no dispute on the issue raised by the learned DR that principles of res- judicata are not applicable to income-tax proceedings. However, in view of Hon’ble Supreme Court judgment in the case of Radha Swami Satsang (supra), has laid down rule of consistency, which has been followed in facts of various cases in subsequent judgments. By now it is a settled principle that unless facts and circumstances have drastically changed, the principle of consistency is to be maintained in departmental action. In view thereof, we are of the view that department having accepted a clear cut amendment of method of accounting as per the provisions of Income-tax Act, in the above mentioned facts, it will not be desirous that the course of action accepted by the department is subject to variation by adopting different interpretation on any settled issue. 5.10. In our view the Woodward Governor case (supra), relied on by Id. D.R. is of no avail to revenue as itsetf lays down that profits and gains of any previous year are required to be computed in accordance with relevant accounting standards. Similarly, the case of G.R. Karthkeyan (supra) also w#l not benefft the revenue as it did not decide any controversy of accrual or mercanfie system of accounting. The judgment deals with winning from gambling and batting income, there is no issue about accounts or accrual in this case. 5.11. Coming to learned DR reliance on the case of Tuticorin Alkali Chemicals (supra the same deals with the receipts being in the nature of capital or revenue. The factum of receipt was not disputed and whether the receipt was capital or revenue Hon’ble Supreme Court held that while deciding the question, the same has to be on the basis of principle of law and not in accordance with the accountancy practice. In our view the case before us pauses a picture on different facts wt- ch have been mentioned in detail above. 5.12. In our considered opinion, all the above judgments clearly favour the stand taken by the assessee may hasten to mention that looking at the intricacies the facts may vary, therefore case pnciples of accrual or mercantile system as laid down by various authorities are to be applied in a careful manner. The assessee being a state PSU; the surcharge on delayed payment being disputable item; was not mandatorily payable at the time of payment of electricity consumption bill; was not an accrued receipt in view of the accounting policy accepted by the revenue. Therefore, such amount of surcharge cannot be held to be taxable as it is not the real income of the assessee and is hypothetical by nature in given facts and circumstances. 5.13. In view of the foregoings, we are of the view that the amount of surcharge not realized by the assessee, does not amount to accrued of receipt taxable as income. CIT(A) has rightly deleted the addition, which we uphold”.

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Since all the auditors have accepted the treatment of the assessee to be in accordance with the provisions of the Act as well as commercial parlance and even CAG has also not raised any objection on the above issue and the ld. Assessing Officer in the scrutiny proceedings under section 143(3) from A.Y. 2003-04 to A.Y. 2012-13 have consistently accepted the said treatment of LPS on cash basis, we fail to find out any error in the findings of the ld. Assessing Officer of having accepted the said tratment

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of ‘LPS’ on cash basis following the “principle of consistency”. Various Hon’ble Courts including the Hon’ble Apex Court have repeatedly held that where the fundamental facts remain the same in different years, it is not open for the revenue to take one view in certain years and another view in another years. Thus once an issue has been examined, treatment remains the same over the years and the fundamental facts remain the same, the Depatment should not be entitled to take a different stand in view of the principle of consistency. We find support on this principle of consisency by the following decisions:- (1) CIT v. Rajasthan Breweries: SLP (C) 1379/2014 (SC) (2) CIT v. Reaiest Builders and Services: 307 ITR 202 (SC) (3) Radhasoami Satsang v. CIT 193 ITR 321 (SC) (4) CIT v. Excel Industries: 358 ITR 295 (SC) (5) CIT V. Daimia Promoters Developers (P) Ltd: 281 ITR 346 (Del.) (6) DIT v. Escorts Cardiac Diseases Hospital: 300 ITR 75 (Del.) (7) CIT V. A.K.J. Security Printers: 264 ITR 276 (Del) (8) DIT v. Apparel Export Promotion Council 244 ITR 734 (Del) (9) CIT v. Neo Poly Pack (P) Ltd. 245 ITR 492 (Del) (10) CIT v. Gilds'- Mohan Ganeriwala: 260 ITR 417 (P&H) (11) Thirani Chemicals Ltd. v. DCIT 153 Taxman 45 (Del) 12. Vesta Investmemnt and Trading Co.(P) Limited –vs.- CIT: 70 ITD 200(Chd.)

ITA No. 45/GAU/2019 Assessment Year: 2014-2015 & ITA No.418/GAU/2019 Assessment Year:2014-2015 M/s. North Eastern Electric Power Corporation Limited 31. Further we observe that the assessee is maintaining mercantile system of accounting as per Section 145 of the Act except for the accounting of delayed payment surcharge on cash basis which means that the assessee is following hybrid system of accounting. The assessee being a Government Company was bound to follow the direction of the Ministry of Power so as to change the metehod of LPS from accrual to cash basis.That, in the case of the assessee as well as the other power generation companies, the customers invariably contest to pay the late payment surcharge. Surcharge is a disputable item and many a time is reduced or waived and as a matter of fact, late payment surcharge has been waived many times. Further, there is no corresponding liability acknowledged by the customers. In fact, it is pertinent to point out that none of the customers have deducted TDS in respect of such late payment surcharge which fact too establishes that they have not accounted for liability. Moreover, as per the practical trend, there is no reasonable certainty of collection of such amount. In such circumstances applying the 3 tests laid down by the Hon’ble Apex Court in the case of Excel Industries (supra) to the facts of the given case, accrual cannot said to have taken place and the late payment surcharge is at best a hypothetical income.

ITA No. 45/GAU/2019 Assessment Year: 2014-2015 & ITA No.418/GAU/2019 Assessment Year:2014-2015 M/s. North Eastern Electric Power Corporation Limited 2019-20 against the LPS due to Rs.265.43 crores, the assessee received only Rs.13.19 crores during the A.Y. 2019-20, which itself depicts that ‘MECL’ is not paying the LPS amount to the assessee and the recoverbility of the same is highly uncertain. It was observed by the ld. PCIT that since the customers of the assessee are only owned Government entities, the dues from them cannot be termed as uncertain. The recovery of only Rs.13.91 crores against the LPS of Rs.281.43 croes for the period from AY 2014-15to AY 2019-20 proves that there is no guarantee of realisation merely because an entity is owned by the State Government. We find merit in the contention of Ld. Counsel for the assessee that not all the beneficiaries pay ‘LPS’ unless a settlement scheme has been put forward by the Government of India and the same happened in the year 2001 and expert committee recommended that 60% of the outstanding dues on account of late payment surcharge be waived. Further we find merit in the contention of the assessee that the decision of ITAT, Chennai Bench in the case of M/s. NLC India Limited –vs.-DCIT in ITA Nos. 868 & 869/CHNY/2018 relied by the ld. D.R. is not applicable in the present case on account of the following reasonings:- (i) in the said case, in para 5.3, it has been stated that there is a Tri-party Agreement between Government of India, RBI and the assessee. However, this is factually incorrect. The assessee is

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not a party to the Tri-party agreement. The agreement is between Government of India, RBI and the State Government. Thus, the assessee has no legal right to enforce the said agreement. Consequently, the analysis made by the Hon’ble ITAT is based on incorrect facts.

(ii)In the said case, in para 5.3, it has been stated that “The assessee has accounted surcharge receivable from Electricity Boards on accrual basis in the books of accounts, but for the purpose of taxation, the same has been offered to tax as and when the amount is received from Electricity Boards. ” Accordingly, in the said case, the assessee admitted that accrual took place for AS-9 and that there was reasonable certainty, however, denied the same for the purpose of Income Tax Act. However, in the present case, the assessee has made no such contradictory stand and has maintained that the accrual has not taken place owing to uncertainty in collection of revenue.

(iii)In the said case, there is a factual finding that “The assessee has not demonstrated with the facts that recovery through Ministry of Finance is unenforceable". However, in the present case, it is submitted that it is evident from records that, recovery through Ministry of Finance is not sacrosanct. Had it been the case, then there would have been no delays in payment by State Discoms. the payment through tri-party agreement would have been received immediately after the exc y of stipulated period of payment of 90 days, and there would have been no requirement for waiver/settlement scheme. Yet, the payments have not been received for many years as noted above in the case of MeECL and waivers have been granted. There was waiver of 60% of LPS in 2015-16 as well. The said facts itself depict that recovery through Tri-Party Agreement is not sacrosanct.

(iv)Tne clause 15.2 (as captured in the judgment as well) itself provides that in case supplies are continued to be made by a CPSU to the State Discoms despite not receiving the payment within the stipulated payment, then the recovery in respect of such supply would not be guaranteed by the Government. As a matter of fact, per direction from Ministry of Power, the supply has neither been stopped not can it be stopped as the same will result in black out in the respective states which will reflect poorly on the Country and the cooperative federalism. Thus, the guarantee given under the Tri-Party agreement itself becomes redundant once supplies are continued which as a matter of fact have to be continued to avoid black-outs.

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(v) That, legal backing of guarantee in any case is not determinative. The issue has to be examined from practical point of view as held in the case of Excel Industries. In the present case, there is no certainty as pointed out above. Further, in case of bank agreements, payments are not received within stipulated period. There is a clause in agreement which entitles the Bank to charge overdue charges. Despite there being security of assets, Courts have often held that there is no reasonable certainty of collection in respect of overdue charges and thus, the same is to be taxed on cash basis. The present case is no different as guarantee is not sacrosanct and recovery remains doubtful. (vi) Moreover, the said judgment has been rendered without taking note of the earlier judgment of ITAT Delhi in the case of Dakshin Haryana as well as the judgment of Punjab and Haryana High Court which has affirmed it and against which SLP has also been dismissed despite the fact that these judgments were rendered prior in time and are directly on the same issue. ITAT Chennai was bound to follow the earlier judgments and the judgment of a higher forum as it was binding on it.

ITA No. 45/GAU/2019 Assessment Year: 2014-2015 & ITA No.418/GAU/2019 Assessment Year:2014-2015 M/s. North Eastern Electric Power Corporation Limited that in the past also huge amount of outstanding LPS are waived of and there is no certainity of receiving LPS charges from the Government companies and also consdiering the fact that similar views of accepting such treatment of LPS charges on cash basis even when the books of account are mainained on mercantile system have been taken by judicial forums, the view taken by the ld. Assessing Officer was permissible in the law and not unsustainable and, therefore, in our considered view, the order of the ld. Assessing Officer dated 24.11.2016 is neither erroneous nor prejudicial to the interest of revenue. We accordingly quash the revisionary proceedings carried out under section 263 of the Act dated 12.12.2018 by ld. PCIT and allow the grounds of appeal raised by the assessee in ITA No. 45/GAU/2019.

ITA No. 45/GAU/2019 Assessment Year: 2014-2015 & ITA No.418/GAU/2019 Assessment Year:2014-2015 M/s. North Eastern Electric Power Corporation Limited 12.12.2018 becomes infructuous and liable to be quashed. Therefore, appeal of the assessee for A.Y. 2014- 15 in ITA No. 418/GAU/2019 is dismissed as infructuous.

Sd/- Sd/- (Rajpal Yadav) (Manish Borad) Vice-President Accountant Member

Kolkata, the 12th day of December, 2022

ITA No. 45/GAU/2019 Assessment Year: 2014-2015 & ITA No.418/GAU/2019 Assessment Year:2014-2015 M/s. North Eastern Electric Power Corporation Limited Copies to : (1) M/s. North Eastern Electric Power Corporation Limited, Brookland Compound, Lower New Colony, Shillong-793003

(2) Principal Commissioner of Income Tax, Aayakar Bhawan, M.G. Road, Shillong, Meghalaya-793001

(3) Assistant Commissioner of Income Tax, Circle- Shillong, Aayakar Bhawan, M.G. Road, Shillong, Meghalaya-793001

(4) Commissioner of Income Tax- , (5) The Departmental Representative (6) Guard File