Case nº AAR No. 550 of 2001 of Authority for Advance Rulings, December 17, 2004 (case In Re: National Hydroelectric Power Corporation Ltd. Vs)

JudgeFor Appellant: V.U. Eradi, Pawan Kumar and Piyush Kaushik, Advs. And For the CIT: N.P. Sahani and Umesh Chandra, Advs.
PresidentSyed Shah Mohammed Quadri, J. (Chairman) and K.D. Singh, Member
Resolution DateDecember 17, 2004


Syed Shah Mohammed Quadri, J. (Chairman)

  1. M/s National Hydroelectric Power Corporation Ltd. (NHPC), a public sector undertaking, filed this application under Section 245Q(1) of the IT Act, 1961 (for short the "Act"), seeking advance rulings of the Authority on the questions mentioned at the end of this para. It is engaged in the construction and operation of hydroelectric power projects. The power generated by the applicant is supplied to various States/State Electricity Boards (hereinafter referred to as "beneficiaries") at tariff rates notified by Central Electricity Regulatory Commission (CERC) of the Government of India. The tariff is fixed by CERC for each generating station separately. The components of the tariff are: (a) the basic expenses incurred by the company; (b) depreciation and advance against depreciation (for short AAD); (c) return on equity; and (d) incentive for higher production. The usual life of a plant for working out component (b) is taken between 25 and 30 years. Under the rules, the total depreciation which includes AAD cannot exceed 90 per cent of the capital cost during the life of the project but 90 per cent of the cost is allowed to be recovered, is through tariff over a shorter period of 12 years. The AAD component of the tariff is meant to facilitate repayment of loan taken by a company for the equipments/projects. On capital assets depreciation is an allowable deduction under Section 32 of the Act, which is calculated on straight-line method at the rates prescribed under the Electricity (Supply) Act, 1948, as notified from time to time. As an accounting policy the applicant has reduced from the total sales of the year, the amount representing AAD component in the tariff and shown it as income received in advance on the liability side of the balance sheet to be transferred to sales in P&L a/c in subsequent years, namely, when the depreciation charged in the book is more than the depreciation rate, fixed for tariff purposes. The applicant's case is that the AAD cannot be taken into consideration while computing the book profit for the purposes of minimum alternate tax (for short the "MAT") under the provisions of Section 115JB of the Act. In support of its case, it relies on the expert opinion of: (a) expert advisory committee of the Institute of Chartered Accountants of India; and (b) the Price Waterhouse & Company. On these facts, the applicant seeks advance rulings of the Authority on the following questions:

    (a) As to whether the amount of advance against depreciation is to be included for the computation of "book profit" under Section 115JB of the IT Act in the year of receipt or in the year the depreciation relates to.

    (b) As to whether the said amount of advance against depreciation can be treated as applicant's income under Section 28(i) of the IT Act in the year of receipt or in the year the depreciation relates to.

  2. In the comments of the CIT, the facts stated by the applicant are not disputed. It is stated that Section 209 of the Companies Act, 1956, (hereinafter referred to "Companies Act"), specifically requires that accounts should be kept on accrual basis, and any system of accounting other than accrual basis is not permissible so the company cannot recast the accounts. Accrual basis applies also to preparation of the P&L a/c. The applicant has received AAD as part of the sale price as per notified tariff and has credited the same to the P&L a/c. It cannot deduct the AAD component of tariff for purposes of calculating book profit. What can be reduced from the book profit is clearly identified and defined in the Explanation to Section 115JB of the Act. It is stated that the Hon'ble Supreme Court in Surana Steels (P) Ltd. v. Dy. (1999) 237 ITR 777 (SC) held that the AO can compute the income for the purposes of MAT on the book profit under company law subject to adjustments specifically authorized by the Act for purposes of book profit tax. The amount of AAD accrues to the applicant at the time of supplying power to beneficiaries as sale price which is quantified at the time of raising the bill. The book profit has to be arrived at from P&L a/c prepared according to Parts II and III of Sch. VI of the Companies Act. In the additional comments filed by the CIT it is added that the assessee while making computation of income for the asst. yrs. 1996-97 to 2000-01 used to include the said amount of AAD while working out profits under Section 23(i) of the Act. It, however, discontinued that practice after asst. yr. 2001-02. This change of stand by the applicant is not permissible in law.

  3. At the outset, we may record that question (b) is not pressed by Mr. V.U. Eradi, advocate, who appeared for the applicant. The sole question that survives for consideration is question (a) noted above.

  4. Mr. V.U. Eradi argued that the applicant prepared its P&L a/c on the basis of the advice of the expert advisory committee of the Institute of Chartered Accountants of India and accordingly AAD amounting to Rs. 133.8 crores was shown as a deduction from the sales of power treating it as revenue received in advance which would be adjusted in the later years. For the accounting year ending on 31st March, 2001 the total amount representing sale was Rs. 1142.8 crores after deducing AAD component of Rs. 133.8 crores. The AO did not accept the book profit thus arrived at as the total income of the relevant assessment year under Section 115JB, which would be contrary to the judgement of the Hon'ble Supreme Court in Apollo Tyres Ltd. v. CIT (2002) 255 ITR 273 (SC). After the annual accounts of the applicant were audited, they were laid before the annual general meeting and were approved; the applicant being a Government company, the Comptroller and Auditor General (for short the "CAG") has power to conduct supplementary or test audit of the company's account and to direct the manner in which the company's account should be audited by the auditor and accordingly the supplementary audit was also done by the office of CAG. The figure of sale, Rs. 1142.8 crores, adopted after deduction of AAD (Rs. 133.8 crores) was approved. The annual accounts were also laid before both the Houses of Parliament in accordance with the statutory requirement in Companies Act. In the return of income for the asst. yr. 2001-02 filed by the applicant on 30th Oct., 2001, it was indicated that the question as to whether the provisions of Section 115JB would apply in relation to the amount of AAD (Rs. 133.8 crores) is sub judice before the Authority and as such the same is not included for the purposes of computing MAT. This does not have any effect on the question of finality of the accounts. The result of the application before the Authority also would not have any impact on the finality of the P&L a/c because the net profit as per Part n and Part HI of Sch. VI of the Companies Act would remain unaltered under all circumstances, It is further argued that the applicant's P&L a/c for the relevant previous year was prepared in the manner laid down in Sub-section (2) of Section 115JB which would correspond to Sub-section (1A) to Section 115J. None of the clauses of the Explanation is attracted, therefore, the AO cannot reject the figures of book profit mentioned in the P&L a/c of the company.

  5. Mr. N.P. Sahani, advocate, appearing for the CIT, has argued that AAD is nothing but a part of tariff (sales price) charged by the company for supply of the energy; AAD is not shown separately in the bills. The tariff mechanism is intended to prevent electricity generating companies from charging high rates or earning high margin of profit. Once the notification of the tariff is issued by CERC, the individual components lose their significance and relevance in the absence of any provision in any rule or notification, the applicant is not justified in picking up AAD, a specific item of tariff, and giving it a separate treatment in the regular accounts which are required to be maintained in accordance with the Companies Act. The AAD cannot be treated as advance tariff, if that were so, it would not have found part of invoiced sale price and it would also not form part of gross sale as turnover of the company. There was no case of adjustment or reduction of particular tariff component from gross sale, credited to P&L a/c. The applicant itself had been adding back AAD from asst. yr. 1996-97 and when this practice was deviated in 1998-99, the AO added back the same, which was not disputed by the applicant in appeal. It is only after MAT provisions were made applicable to electricity generating companies from 1st April, 2001, that the applicant sought advance ruling from the Authority and in the significant accounting policies for the financial year 2001-02, inter alia, indicated in Clause (d) of para 10.1 that AAD was a component of tariff in the initial years to facilitate repayment of loans; it was on that basis the AAD component was reduced from the sales and shown as deferred income to be included in the sales in the subsequent years. To comply with Accounting Standard 22 'On accounting for taxes on...

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