U.P State Electricity Board, Lucknow vs Department Of Income Tax

Dy.C.I.T., Vs. U.P. State Electricity Board, Special Range-II, Shakti Bhawan, Ashok Marg, Lucknow. Lucknow. (Appellant) (Respondent)

Appellant by Dr Anand Kumar Agarwal, CIT, D.R. Respondent by Shri Sandeep Kumar, C.A. Date of hearing 13/01/2015 Date of pronouncement 24/02/2015

ORDER PER A. K. GARODIA, A.M.

Both these appeals are filed by the Revenue, which are directed against two separate orders of learned CIT(A)-III, Lucknow both dated 17/07/1992 for the assessment years 1980-81 and 1986-87. Both the appeals were heard together and are being disposed of by way of this common order for the sake of convenience.

2. First we take up the Revenue's appeal i.e. I.T.A. No.2199/Lkw/92 for assessment year 1980-81. In this appeal, the Revenue has raised the following grounds:

"1(i) That the Ld. CIT( Appeals) has erred in law and on the facts of the case in deleting the addition of Rs.1,10,09,911/- which represented the value of intangible assets written off and which was rightly disallowed by the assessing officer as it consisted of expenses incurred in connection with the construction of new projects and, as such, amounted to capital expenditure.

2 1(ii) That the Ld. CIT(Appeals) has erred in law and on the facts of the case in deleting the addition of Rs.71,00,000/- which was made on account of disallowance of interest relateable to fictitious assets.

1(iii) That the learned CIT(A) has erred in law and on the facts of the case in deleting the addition of Rs.7,47,00,000/- which was made on account of treating a part of the expenses debited to the revenue account as attributable to the construction of new projects.

1(iv) That the I.T.A.T.'s decisions for financial year 72-73, 74- 75 and 77-78 in the assessee's case, which have been relied upon by the CIT(Appeals), have not been accepted by the department and for financial year 72-73 and the I.T.A.T. has referred certain question of law to the Hon'ble Allahabad High Court (vide stt. of case pre-passed on 30.6.89 in R.A.No.319(Alld) of 1988) where the natter is still pending for disposal."

3. Learned D.R. of the Revenue supported the assessment order. He also submitted that the details of these expenses of Rs.1,10,09,911/- are available on page No. 2 of the assessment order. He further submitted that it is noted by the Assessing Officer in Para 4 of the assessment order that the assessee had issued bonds many years back and allowed discount on it and incurred expenses in raising loan but no such activity has been carried out in the present year. The Assessing Officer however noted that the assessee adopted a method of claiming deduction for deferred revenue expenditure but this may be a method of accounting of the assessee but this has nothing to do with the liability of expenses under the I.T. Act. The Assessing Officer also noted that the deduction for expenses is allowed in the year in which it is incurred and not in the year in which the assessee claims the deduction. He however submitted that the judgment of Hon'ble Allahabad High Court in assessee's own case for assessment year 97-98 is available on pages 42 to 48 of the paper book in R.A. No.115/All/1988 in particular to Para Nos. 7 to 10 of the order and then he also drawn our attention to the order of CIT (A) for the 3

present year and pointed out that as per the facts noted by CIT(A) on page No. 2 of his order, it was noted that in the present year also, an amount of Rs.2737.68 lac was received by raising bonds and hence, it has to be seen as to how much expenditure was incurred during the present year for raising of bonds of Rs.2737.68 lac and whether the same is claimed in full in the present year or proportionately and how much claim is in respect of bonds issued in 97-98. He submitted that such details of expenses are not available in the order of CIT(A) and therefore, the matter should go to CIT(A) for fresh decision.

4. Learned A.R. of the assessee supported the order of CIT(A).

5. We have considered the rival submissions. We find that in Para 3, it is noted by CIT (A) that as per Schedule-2 of the balance sheet, the assessee had raised capital of Rs.2737.68 lacs during the present year. We fail to understand that if the expenses are incurred for raising capital, as noted by CIT(A), then the expenses incurred for raising capital is not allowable as per the judgment of Hon'ble Apex Court rendered in the case of Brooke Bond, 225 ITR 798 (SC). But if this amount of Rs.2737.68 lac was raised by way of loan by issuing bonds, the expenses incurred is allowable. This is also not coming out from the order of CIT(A) that how much amount is incurred for raising this amount during the present year and how much amount is in respect of bonds, which was proportionately written off in the present year. Hence, we feel that in the facts of the present case, the issue should go to CIT(A) for fresh decision. Accordingly, we set aside the order of CIT (A) on this issue and restore the matter to his file for fresh decision. He should pass necessary order as per law in the light of above discussion after affording reasonable opportunity of being heard to both the sides. Accordingly, ground No. 1 is allowed for statistical purposes.

6. Regarding ground No. 2, Learned D.R. of the Revenue supported the assessment order. He also drawn our attention to Para No. 13 of the 4

judgment of Hon'ble Allahabad High Court rendered in the case of the assessee for assessment year 1977-78 as reported in 104 DTR 24 (All) where it is noted by Hon'ble High Court that as per the finding of CIT (A) in that year, the assessee has been representing before the State Government that the loan should be written off but till the loan is written off, the assessee's liability subsists. It is also noted that up to the accounting year 77-78, the State Government had not accepted the assessee's request. This finding is also given by CIT(A) that the capital payment of interest is much less than the total liability worked out on accrual basis. Thereafter, it was pointed out by him that in the year 1982, the State Government had accepted the request of the assessee and written off the liability to the extent of Rs.100 lacs. He submitted that the impact of such write off of liability by the State Government has to be looked into and therefore, this matter should go back to CIT (A) for fresh decision.

7. Learned A.R. of the assessee supported the order of learned CIT(A).

8. We have considered the rival submissions. We find that the order of Hon'ble Allahabad High Court for assessment year 1997-98 in assessee's own case is on the basis of finding of CIT(A) that the assessee was representing before State Government for write off of liability but till the end of the year relevant to assessment year 1977-78, the State Government has not acceded to the assessee's request and on this basis, it was held that since the capital payment of interest is much less than the total liability worked out, it cannot be said that any part of the interest paid related to earlier assessment years. Now a new fact has been pointed out by the Revenue that in the year 1981- 82, the State Government has agreed to the request of the assessee and written off liability to the extent of Rs.100 lacs. The impact of this development has to be looked into and examined and therefore, we set aside the order of CIT(A) on this issue and restore the matter back to his file for fresh decision. The CIT(A) should examine as to what is the impact of write 5

off of liability and thereafter decide the issue afresh by way of passing a speaking and reasoned order after affording reasonable opportunity of being heard to both the sides. This ground of appeal is allowed for statistical purposes.

9. Regarding ground No. 3, it was submitted by Learned D.R. of the Revenue that the assessee has capitalized 12.5% of the establishment expenses and general expenses on the basis that this much expenses were incurred towards the construction activities of the new project. As against this the Assessing Officer adopted the rate of 22.5% for such capitalization and thus resorted to addition of Rs.747 lac. He submitted that on this issue, CIT(A) has followed the Tribunal order for assessment year 77-78. He drawn our attention to Para 17 to 20 of the Hon'ble Allahabad High Court judgment for assessment year 77-78 in assessee's own case where it is noted by Hon'ble High Court that bifurcation of establishment and general expenses in between capital and Revenue expenses is depending on the extent of capital work going on in each particular unit/division. He submitted that under these facts, the position has to be examined regarding the ratio of distribution of electricity in the present year and construction work going on in the present year. He submitted that no finding has been given by CIT (A) on this aspect and therefore, the matter should go back to the file of CIT (A) for fresh decision.

10. Learned A.R. of the assessee supported the order of learned CIT(A).

11. We have considered the rival submissions. We find that as per the judgment of Hon'ble Allahabad High Court in assessee's own case for assessment year 77-78, it is held by Hon'ble Allahabad High Court that this is matter of general practice adopted by all electricity boards to bifurcate its establishment and general expenses between capital and revenue depending on the expenditure of capital work going on in each particular unit/division. In the light of this finding of Hon'ble Allahabad High Court, it is essential to 6

examine the ratio of distribution of power and construction activities in the present year. Since this was not done by CIT(A), his order on this issue is not sustainable. We, therefore, set aside his order on this issue and restore the matter back to his file for fresh decision. The assessee is to bring details and evidences on record regarding quantum of distribution of electricity and also the quantum and value of construction activities undertaken in the present year and after considering those facts, the reasonable ratio should be considered for the purpose of capitalization of establishment and general expenses because there cannot be a fixed ratio in this regard and the ratio has to be determined in each year on the basis of quantum of distribution of electricity and also the quantum and value of construction activities undertaken in the year. The CIT (A) should pass necessary order as per law as per above discussion after providing reasonable opportunity of being heard to both the sides. This ground is also allowed for statistical purposes.

12. In the result, the appeal of the Revenue stands allowed for statistical purposes.

13. Now we take up the appeal for assessment year 86-87 i.e. I.T.A. No.2200/Lkw/92. In this appeal, the revenue has raised the following grounds:

"1(i) That the Ld. CIT( Appeals) has erred in law and on the facts of the case in holding that the interest of Rs.126 crores being the interest on capital employed in the capital work in progress in new projects is a revenue expenditure and is an allowable deduction from the income of the assessee.

1(ii) That the Ld. CIT(Appeals) has erred in law and on the facts of the case in holding that the amount of Rs.2,34,63,120/- being the deferred revenue expenditure written off during the year, which also represented the interest on capital employed in capital work in progress is an allowable deduction.

7 1(iii) That the learned CIT(A) has erred in law and on the facts of the case in deleting the addition of Rs.2,13,54,874/- which was rightly made by the Assessing Officer on account of disallowance writing off of intangible assets in the form of interest on loan from IDBI and discount on bonds which were utilized for construction of new projects.

1(iv) That the I.T.A.T.'s decisions for financial year 72-73, 74- 75 and 77-78 in the assessee's case, which have been relied upon by the CIT(Appeals), have not been accepted by the department and for financial year 72-73 and the I.T.A.T. has referred certain question of law to the Hon'ble Allahabad High Court (vide stt. of case pre-passed on 30.6.89 in R.A.No.319(Alld) of 1988) where the natter is still pending for disposal."

14. It was fairly agreed by both the sides that all the issues raised by the Revenue in the present year are identical to the issue raised by the revenue in assessment year 80-81 and hence, the same may be decided on similar line. In assessment year 80-81, all the three issues raised by the Revenue have been restored to the file of CIT(A) for fresh decision. Accordingly, in the present year also, all the issues are restored to the file of the CIT (A) for fresh decision with similar direction as in the assessment year 80-81.

15. In the result, the appeal of the Revenue stands allowed for statistical purposes.

16. In the combined result, both the appeals of the Revenue are allowed for statistical purposes.

(Order was pronounced in the open court on the date mentioned on the caption page) Sd/. Sd/.

(SUNIL KUMAR YADAV) ( A. K. GARODIA ) Judicial Member Accountant Member

Dated:24/02/2015 *C.L.Singh Copy of the order forwarded to : 1. The Appellant 2. The Respondent. 3. Concerned CIT 4. The CIT(A) 5. D.R., I.T.A.T., Lucknow Asstt. Registrar