Cash basis accounting of late payment surcharge on electric bill held not prejudicial to Revenue
In a recent judgment, the Hon’ble High Court of Meghalaya has upheld the order of ITAT that accounting of electricity late payment surcharge on cash basis instead of accrual basis was not prejudicial to the Revenue.
ABCAUS Case Law Citation:
4226 (2024) (08) abcaus.in HC
The respondent assessee was a public sector enterprise formed in 1976 under the Ministry of power to plan, investigate, design, construct, generate, operate and maintain power stations in the North Eastern Region of the country. The assessee operated the largest hydro power plant in North Eastern Region. The books of accounts of the assessee were regularly audited by statutory auditors appointed under the Companies Act, the Comptroller and Auditor General of India (‘CAG’) as well as Tax auditors.
During the year under consideration, assessee had declared the income on account of late payment surcharge (‘LPS’) under the schedule of other income’. The LPS 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 was following mercantile system of accounting recognising all of its income on ‘accrual’ basis. Due to high level of uncertainty involved in its ultimate collection of these LPS charges the recognition of the same was postponed by the assessee till the reasonable certainty arises when the income is actually received by the assessee. The said treatment had been accepted by the statutory auditor, CAG as well as the tax auditor.
The case of assessee was taken up for scrutiny under CASS and notice under section 143(2) was issued to the assessee. During the course of assessment proceedings, the Assessing Officer (AO) vide notice under section 142(1) of the Act had specifically asked the assessee to provide the details of other income. The assessee in response thereto submitted its reply and also mentioned the reference to the notes to accounts. Thus, the fact that the LPS income was recognized on cash basis was well before the AO during the original assessment proceedings.
Thereafter, on the basis of submissions given by the assessee the assessment was completed vide the assessment order u/s 143(3) whereby the returned income of the assessee was accepted by AO.
Subsequently, the PCIT Shiilong issued a show cause notice (‘SCN’) to the assessee under section 263 of the Act whereby it sought to revise the earlier assessment order passed under section 143(3) of the Act. According to PCIT, the accounting of LPS income on cash basis was against the mercantile accounting system followed by the company and resulted to under reporting of income.
The PCIT was of the view that since the assessee was maintaining the books of account on mercantile system, therefore, hybrid system of accounting was not allowed as per the provisions of section 145(1) of the Act and also the assessee-company bills for LPS were regularly raised from time to time but the assessee showed income of LPS only when it was received on cash basis.
However, without appreciating the detailed submissions of the assessee, along with the evidences brought on record the PCIT held that the asssessment order was erroneous and prejudicial to the interest of the revenue and directed the AO to re-compute the income of the assessee after taking into account the late payment surcharge on accrual basis. Aggrieved by the order of the PCIT, the assessee challenged it before the ITAT.
The Tribunal observed that earlier the assessee was declaring LPS on outstanding credit receivables on accrual basis. But it changed its method of accounting in respect of LPS on unrealisable amount relying on the directions of Ministry of Power.
The Tribunal observed that 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.
The Tribunal noted that the above view was affirmed by the Hon’ble High Court of Bombay and further supported by the decision of the Hon’ble Gujarat High Court. Further, Hon’ble Delhi High Court 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.
The Tribunal further observed that the AO specifically asked the assessee to provide the details of other income, which included the LPS charges also. In reply complete details of the other income were filed by the assesseee and clarification for the above accounting treatment of LPS charges on cash basis made following the Accounting Standard-9 issued by the Instituted of Chartered Accountants of India was also mentioned in the notes on account attached to the audited balance-sheet. The Assessing Officer after considering the details filed by the assessee, notes on account appearing in the audited balance-sheet and also taking a consistent view as taken by predecessors in the scrutiny proceedings completed the assessment accepting the accounting of LPS income on cash basis.
Further, the Tribunal observed that earlier an Expert Committee of the Government had recommended that 60% of the outstanding dues on account of late payment charges be waived. Since the assessee as well as most of its debtors were Government companies, such directions had to be followed on outstanding dues. Thereafter, Ministry of Power 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.
Further, the Tribunal opined that the change of system of accounting was revenue neutral because the quantum of late payment charges was not in dispute and only year of taxability was on dispute. Since the assessee offered the income of LPS as and when received only the
year of taxability charges but there was no loss of revenue.
The Tribunal found that the Hon’ble Supreme Court had held that when the rate of tax remained the same in the present assessment year as well as in the subsequent assessment year, the dispute raised by the Revenue was entirely academic or at best may have a minor tax effect. Similar view was also taken by the Hon’ble Delhi High Court. Further similar issue of late payment charges to be realised on cash basis due to its high uncertainity of recovery was decided in favour of the assessee by the Co-ordinate Bench Delhi.
Further, the Tribunal noted that cash basis has been consistently followed by the assessee from last 10 years onwards and the said disclosure appears in the audited balance-sheet which are audited by three auditors including the tax auditor, Government Auditor and Controller Auditor of India and all the auditors have accepted the treatment of assessee and no objection has been raised regarding non-compliance of section 128 of the Companies Act. Therefore, no error can be found in the findings of the Assessing Officer of having accepted the said treatment.
Further, the Tribunal observed that 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.
Further, the Tribunal noted that the PCIT was of the view that since the customers of the assessee were only owned Government entities, the dues from them cannot be termed as uncertain. However, the Tribunal observed that very poor recovery rate proved that there was no guarantee of realisation merely because an entity was owned by the State Government. The Tribunal found merit in the contention that not all the beneficiaries pay ‘LPS’ unless a settlement scheme has been put forward by the Government of India and the same happened when expert committee recommended that 60% of the outstanding dues on account of late payment surcharge be waived.
In view of the above, the Tribunal held that the view on LPS accounting taken by the Assessing Officer was permissible in the law and not unsustainable and, therefore, the order of the Assessing Officer was neither erroneous nor prejudicial to the interest of revenue.
Accordingly, the Tribunal quashed the revisionary proceedings carried out under section 263 of the Act. However, during the pendency of the appeal, the AO passed order u/s 147.
Not satisfied with the order of the Tribunal, the Income Tax Department challenged it before the Hon’ble High Court.
Before the Hon’ble High Court, the company contended that there was no real income accrued to the Company and in fact, the income accrued was only hypothetical, as the transaction recorded under the advance licences or under the duty entitlement passbook do not represent the real income of the assessee and as such, the re-assessment order passed u/s 147 of the Authority concerned on the basis of Hybrid System of accounting has no legs to stand.
The assessee contended that there was no substantial question of law raised by the Revenue and the question of fact had already been decided by the Punjab and Haryana High Court by holding that as and when the assessee receives payment of surcharge, it would be obliged to pay tax on such amount and dismissed the appeal of the revenue and the Supreme Court also confirmed the order by dismissing the Special Leave Petition (SLP) of the Department. The assessee also relied upon the judgment of the Hon’ble Supreme Court which was considered by the ITAT.
The Hon’ble High Court stated that once the order under Section 263 of the Act had become final and stood quashed, no question of passing another order will arise in view he fact that the subsequent order passed by the Assessing Officer is invalid in the eye of law, as the opinion formed by the Assessing Officer is not sustained on the reasoning that revision under Section 263 is not permissible. When the order of assessment is found to be erroneous and prejudicial to the interest of Revenue, the right vests with the Principal Commissioner to review the order and since the said stipulation has not been satisfied, the order passed under Section 263 cannot stand on its leg.
With respect to the ground taken by the Department on hybrid system of accounting in contravention of the provisions of Section 145 of the IT Act, 1961, the Hon’ble High Court opined that the ground taken was a question of fact which it cannot interfere with the finding of fact dealt with by the Tribunal.
The Hon’ble High Court further observed that it is true that the term ‘res judicata’ cannot be blindly applied to the income-tax proceedings as held by the Supreme Court but at the same time, in the absence of challenge to the fundamental aspect permeated through different assessment years, no attempt could be made to alter the position in the subsequent year.
The Hon’ble High Court observed that the issue raised in this appeal was elaborately dealt with by the Punjab & Haryana High Court, which got the assent from the Supreme Court as well. T
Accordingly, the appeal of the Revenue was dismissed.
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