Commissioner of Income Tax, Lucknow vs U.P. State Electricity Board

Surya Prakash Kesarwani, J.—This Income Tax Reference u/s 256 of the income tax Act, 1961 relating to the assessment year 1977-78, arises out of the order of the Income Tax Appellate Tribunal dated 21.12.1987 passed in I.T.A. Nos. 1911 and 1961 (Alld.) of 1984. On an application by C.I.T., the Income Tax Appellate Tribunal, Allahabad Bench, Allahabad has referred the following questions of law for opinion of this Court.

R.A. No. 114 (Alld.) of 1988

Whether on the facts and in the circumstances of the case, the Tribunal was, in law, justified in deleting the addition of Rs. 51,00,961/- out of the claim of Rs. 123 lakhs under the head "expenses for transmission?"

R.A. No. 115(Alld.) of 1988

(1) Whether on the facts and in the circumstances of the case, the Tribunal was, in law, justified in allowing Rs. 40,25,052/- claimed by the assessee as written off amount for intangible assets?

(3) Whether on the facts and in the circumstances of the case, the Tribunal was, in law, justified in allowing Rs. 23,00,000/- payment of interest made to the State Government out of fictitious assets?

(4)(a) Whether on the facts and in the circumstances of the case, the Tribunal was, in law, justified in allowing Rs. 14,92,70,091 claimed by the assessee as amount capitalised out of revenue expenditure?

(4)(b) Whether on the facts and in the circumstances of the case, the Tribunal was, in law, justified in confirming the order of the C.I.T.(A) reducing the amount out of capitalised expenditure of capital nature for the different distribution divisions of the assessee concern?

We have heard Sri Shambhu Chopra, learned Senior Standing Counsel appearing for the Income Tax Department and perused the record. No one appears on behalf of the respondent-assessee.

With regard to the question in R.A. No. 114 (Alld.) of 1988, as reproduced above, Sri Shambhu Chopra submits that during the assessment year in question the assessee has claimed Rs. 1,23,00,000/- under the head "expenses for transmission" as against a sum of Rs. 7,53,494/- disclosed under this head during the last year. He submits that steep rise in transmission expenses could not be properly explained by the assessee and thus, the disallowance of Rs. 51,00,961/- was wholly justified. He referred to the findings of the Inspecting Assistant Commissioner in the Assessment order and in the findings recorded by the C.I.T. (Appeals). He submits that the finding recorded by the Tribunal is wholly unjustified.

We have gone through the orders passed by the assessing authority, C.I.T.(Appeals) as well as the I.T.A.T. The I.T.A.T. has recorded the following findings of fact:

We have heard both the sides and have gone through the orders of the authorities below for our consideration. The Commissioner of income tax (Appeals) (CIT(A) for short) had dealt with this point at para 12 of his order. He considered the expansion of electricity facilities to rural areas and maintenance of the lines etc. According to him, some of the expenditure might be of capital in nature and, therefore, the disallowance made was justified. The C.I.T.(A) has also considered that the expenditure during the year has gone up many times. The assessee submits that there was no case at all for the disallowance. In brief, it is urged that the disallowance was not justified. On behalf of the Revenue the order of the C.I.T.(A) is supported. We have considered the facts of the case and the materials available. We find that there is force in the submissions made on behalf of the assessee. It is not the case of the Revenue that the expenditure was not verifiable nor vouched for, in fact, it has been pointed out by the assessee that the accounts were audited not only by the Departmental Auditors but also by the Accountant General. That apart, even if the expenditure was considered as capital, then to that extent, the Assessing Officer would have to consider while allowing the depreciation. In this view of the matter, we are of the opinion that the disallowance was wrongly maintained by the C.I.T.(A). The addition is deleted.

The I.T.A.T. considered the entire materials available on record and found that the case of the Revenue is not that the expenditure are not verifiable or are not vouched. The accounts of the assessee were audited not only by the departmental auditors, but also by the Accountant General. The Assessing Officer, while disallowing the expenses on the apprehension of it being of capital nature has not pointed out as to which entry of expenditure is of capital nature. In the assessment order the Assessing Officer has observed that the expenses under the head ''transmission'' during the last year was Rs. 7,53,494/-, and that the assessee does not know as to what expenditure is and its nature and therefore, double of the expenditure as incurred in the last year is allowed for this year and the balance of Rs. 51,00,961/- is disallowed and capitalized. While doing so, the assessing officer has not considered the aforesaid sum of Rs. 51,00,000/- for depreciation. We find that the disallowance made by the Assessing Officer was without any basis. Since, the accounts of the assessee were not only audited by the departmental auditors, but also by the Accountant General, if there was any discrepancy with regard to the nature of expenditure shown under the head ''transmission expenses'' it should have been specifically pointed out entry-wise. The I.T.A.T. has considered all the facts and has correctly deleted the addition by the Assessing Officer and maintained by the C.I.T. (Appeals). The findings recorded by the I.T.A.T. are findings of fact. We do not find any infirmity in the impugned order with regard to ''transmission expenses'' recorded by the I.T.A.T.

Thus, this question referred by the I.T.A.T. Is answered in affirmative, i.e., in favour of the assessee and against the revenue.

With regard to question No. 1 in RA No. 115 (Alld.) of 1988 referred by the I.T.A.T., reproduced above, Sri Shambhu Chopra submits that the Assessing Officer has lawfully disallowed the claim of Rs. 40,25,052/-. He reiterates the findings recorded by the Assessing Officer.

We find that the assessee company has raised money by way of bonds and security in earlier years at a discount of 1.15% which was written off in five years. Such written off amount for this year aggregated to Rs. 7,08,418/-. Besides this interest of Rs. 33,16,636/- was payable on the loans raised from I.D.B.I. Thus, a sum of Rs. 40,25,052/- was debited in the Profit and Loss account. The assessing officer rejected the claim of the assessee by observing that it did not relate to the business of the assessee in the assessment year in question and further that the expenditure related to capital expenditure as it was for the work in progress and was an initial investment.

Aggrieved by the order of the Assessing Officer the assessee filed an appeal before the C.I.T. (Appeals). The C.I.T. (Appeals) considered the entire facts and evidences on record and thereafter in paragraph 4.2 he recorded the findings as under:

I have considered these contentions and find substantial merit in the same. As far as the redemption is concerned, though it is found that the bonds had been issued for the period ranging from 10 to 12 years and normally the write off should also have been spread over to an equal amount of period. I find that u/s 69 of the Electricity (Supply) Act, 1948, the Board is supposed to keep the accounts in such forms as may be prescribed by the State Government in consultation with the Controller & Auditor General of India. It was in pursuance of these directions from the Government and the C & AG that the appellate as well as other electricity boards of the country are writing off the amounts of redemption uniformly over a period of five years. That similar procedure had been followed over a long period of time right up to assessment year 1975-76 and had been allowed by the department. And in any case, except that variation in the amount, part of allowance will create accounting problem in subsequent years, no material benefit will accrue to the department or any loss to the appellant. Under the circumstances, it is held as a matter of practical proposition that the claim as made should be allowed as such. As regards the interest paid on loans from I.D.B.I., the liability being interest for the current year is a revenue expense and allowable as a deduction in computing the income/profit or loss of the undertaking. Accordingly, the claim of Rs. 40,25,052/- is considered an allowable deduction. The I.A.C. (A) was not justified in rejecting the claim. The disallowance so made is hereby deleted (Relief Rs. 40,25,052).

The order of the C.I.T.(Appeals), was carried by department in appeal before the I.T.A.T. The I.T.A.T. Considered the facts and evidences on record in paragraphs-7 and 8 of the impugned order, and has recorded its conclusion in paragraph-9 as under:

After hearing both the sides at length and after we have gone through the background of the case and the obligation on the part of the assessee as spelled out by the C.I.T.(A), we are of the opinion that the allowance was justified and valid under the facts of the case for the year. No interference is called for.

Sri Shambhu Chopra has failed to point out any infirmity in the findings recorded by the C.I.T.(Appeals) and the I.T.A.T. We also find that the findings recorded by the C.I.T.(Appeals) and the I.T.A.T. do not suffer from any infirmity. The I.T.A.T. has lawfully and correctly upheld the findings recorded by the C.I.T.(Appeals) after discussing the facts and evidences on record.

The question referred by the I.T.A.T. is thus answered in affirmative, i.e., in favour of the assessee and against the revenue.

With regard to the next question relating to allowance of payment of interest to the tune of Rs. 23 lacs made by the assessee to the State Government, Sri Shambhu Chopra submits that the assessing authority has correctly disallowed Rs. 23 lacs on two grounds, namely, the liability has not been accepted by the assessee and it does not relate to the capital expenditure or loan amount. He submits that the findings recorded by the C.I.T.(Appeals) and the I.T.A.T. are wholly unsustainable.

We find that the assessee had taken over the private sector electricity companies in the year 1959 and 1965 and the compensation was paid by the State Government to the private companies. The payment so made by the State Government were taken over as loan by the electricity board and depicted in the accounts as loans against fictitious assets. The Assessing Officer estimated a sum of Rs. 23 lacs being interest relatable to the aforesaid loans and disallowed the same. In the appeal filed before the C.I.T.(Appeals), the assessee submitted that it was wrong representation of facts in the account. In fact the assets were taken over from the private companies for the purposes of the business and were used. The loans in question represented the compensation for the said assets by the State Government to the private companies which were treated as loans by the Board in respect of the assets and therefore, the interest thereon was for the purpose of business and is an allowable expenditure. The plea was accepted by the C.I.T.(Appeals), who considered the entire facts and evidences and thereafter recorded the findings in para-7.2 of this order as under:

7.2- I have considered these contentions and find them to be justified. The sums paid by the State Government at the time of acquisition of private sector electricity undertakings had been converted by the State Government into loans to the Board with a stipulation to charge of interest. Although the Board has been representing that these loans should be written off, till they are written off, the appellant''s liability subsists. Upto the end of the accounting year relevant to the assessment year 1977-78, the State Government had not acceded to the appellant''s request. Under the circumstances, the loans given in respect of fictitious assets were liable to the payment of interest and, if any interest is paid thereon, it would constitute an allowable deduction. At the same time, since the actual payment of interest is much less than the total liability worked out on accrual basis, it cannot be said that any part of the interest paid related to the fictitious assets. On either count, the disallowance cannot be justified. The disallowance made by the I.A.C. (A) is accordingly deleted. (Relief Rs. 23 lacs).

Aggrieved by the order of C.I.T.(Appeals), the revenue filed an appeal before the I.T.A.T., which has upheld the findings recorded by the C.I.T.(Appeals) after discussing the facts and evidences in detail in paragraphs-13 of the impugned order.

The CIT(Appeals) as well as the I.T.A.T. has recorded the findings of fact that the amount paid by the State Government as compensation for acquisition of private sector Electricity Companies for the assessee were treated as loans by the Electricity Board and reflected as such in the account books. The assessee was under obligation to pay interest thereon. The interest so paid would constitute an allowable deduction. Thus, we find no infirmity in the findings recorded by the C.I.T.(Appeals) and upheld by the I.T.A.T.

In result, this question is also answered in affirmative, i.e., in favour of the assessee and against the revenue.

With regard to question relating allowance of Rs. 14,92,70,091/- claimed by the assessee as amount capitalized out of revenue expenditure, Sri Shambhu Chopra submits that this amount was relatable to the capital works under construction and, therefore, C.I.T.(Appeals) committed an error in allowing the same as revenue expenditure. The I.T.A.T. has also committed an error in passing the impugned order.

Against the disallowance of Rs. 14,92,70,091/- by the Assessing Officer as capital expenditure, the assessee filed an appeal before the C.I.T.(Appeals) who considered the submissions of both sides and the facts and the evidences on record and observed in para 8 and para 8.2 as under:

Para-8:--

In the next ground it is submitted that the I.A.C. (A) was not justified in capitalizing expenditure on establishments and general charges in respect of combined construction and maintenance units at 22�% of the expenses as against 12�% capitalized by the appellant. It is submitted that the Board undertook study in the year 1968 when this percentage was found reasonable and ever since it was being followed in its accounts. The department had accepted this percentage without any dispute. That similar method is being followed by other electricity boards in the country and a letter is being produced to show that in the case of Kerala State Electricity Board, this percentage had been adopted at 10�%, in the case of West Bengal Electricity Board at 10%, in the case of Andhra Pradesh Electricity Board it was being adopted at 7�%. These accounts were duly audited and approved by the C & A.G. of India. Since it is not possible to work out the percentage year after year, the findings of the working group in the year 1968 is being uniformly adopted for all the subsequent years. The I.A.C.(A) has increased this percentage without giving any basis. The capitalization done by the I.A.C.(Asst.) as such is unjustified.

Para 8.2:--

I have considered these contentions. It is general practice that all electricity boards to bifurcate its establishment and general expenses between capital and revenue depending on the expenditure of capital work going on in catch particular unit/division. It is for this reason that certain divisions 100% of the expenditure is being capitalized where only capital project is in progress, 60% where major part of the work is of capital nature while in other units the bifurcation is 50, 50 (fifty-fifty). It is only in respect of combined construction and the maintenance units where major part of the work is maintenance and distribution, that the appellant has been uniformly adopting 12�% of such expenditure as capital. It is true, that the appellant had shown his inability to give exact working of expenditure relating to capital projects, it is true that it is not possible to work out these percentage year after year. Keeping in view the fact that in other Electricity Boards even much lesser percentage of expense is being capitalized in similar circumstances and at the same time the appellant having adopted a uniform method of capitalizing 12�% of the expenditure ever since the study, I hold, the accounts as prepared by the appellant should have been accepted. The amount capitalized by the I.A.C.(A) while framing the assessment is held unjustified. The same is to be treated as revenue expenditure.

Aggrieved by the order of the C.I.T.(Appeals), the revenue filed an appeal before the I.T.A.T. The I.T.A.T. upheld the order of the C.I.T. (Appeals). The I.T.A.T. observed that it was a general practice for the electricity board to bifurcate the establishment and general expenditure in between the capital and revenue in the past also the procedure adopted by the assessee was accepted by the department.

In our opinion, the C.I.T.(Appeals) as well as the I.T.A.T. has sufficiently considered the facts and evidences on record and reached at the correct conclusion regarding apportionment of expenses in the manner as done by the assessee. In the facts and circumstances of the case and also as matter of general practice adopted by all electricity boards to bifurcate its establishment and general expenses in between capital and revenue expenses depending on the extent of capital work going on in each particular unit/division. It is only in respect of construction and the maintenance units where major part of work is maintenance of distribution, the assessee uniformly adopted 12�% of such expenditure as capital expenses. The C.I.T.(Appeals) has found that in other electricity boards much lesser percentage of expenses is being capitalised in similar circumstances and at the same time the assessee having adopted the uniform method of capitalizing 12�% of the expenditure ever since study undertaken by the Board in the year 1968, the accounts prepared by the assessee should have been accepted.

In our view, the findings of the C.I.T.(Appeals) as well as the I.T.A.T. do not suffer from any infirmity. The findings recorded by the C.I.T.(Appeals) and the I.T.A.T. are the findings of fact. The last two questions as reproduced above are also answered in affirmative, i.e., in favour of the assessee and against the revenue. In result, all the questions referred for our opinion are answered in affirmative, i.e., in favour of the assessee and against the revenue.