Thursday, October 16, 2014

No tax on advance received by NHPC against depreciation as it was part of tariff and would reduce future tariff

Where assessee, engaged in selling electricity, received advance against depreciation (AAD) by way of tariff charges which was to be adjusted against future depreciation, so as to reduce tariff in future years, amount so received was not includible in computation of taxable income.


a)Assessee, a public sector enterprise, was required to sell electricity to State Electricity Board at tariff rates notified by CERC. The Government has introduced a mechanism to generate additional cash flow by allowing power generating companies to collect AAD by way of tariff charge.

b)It was decided that the year in which normal depreciation would fall short of original scheduled loan repayment such shortfall would be collected as advance against future depreciation. Thus, the issue that arose for consideration of the Tribunal was as under: Whether the CIT(A) was right in deleting the addition made by the Assessing Officer on account of 'AAD', in spite of the Hon'ble Supreme Court's ruling ( in case of National Hydroelectric Power Corpn. Ltd v. CIT [2010] 187 TAXMAN 193) wherein, it was held that the advance against depreciation was “income received in advance”?

The Tribunal held in favour of assessee as under:

1)The Supreme Court in case of National Hydroelectric Power Corpn. Ltd ( Supra) held as under: AAD was not meant for an uncertain purpose. It was an amount that was under obligation, right from the inception, to get adjusted in the future, hence, it could not be designated as a reserve.

AAD was nothing but an adjustment by reducing the normal depreciation includible in the future years in such a manner that at the end of useful life of the Plant the same would be reduced to nil.

Therefore, the assessee could not use the AAD for any other purpose except to adjust the same against future depreciation so as to reduce the tariff in the future years.

2)Thus, after considering the categorical finding of the Supreme Court it was to be held that the CIT(A) was correct in holding that AAD could not be added in the computation of the normal income. - UNION OF INDIA V. INTERCONTINENTAL CONSULTANTS & TECHNOCRATS (P.) LTD [2014] 49 520 (SC)

ITAT interprets Formula under Rule 8D for allocating common interest exp.


In the instant case the dispute arose between assessee and revenue in respect of computation mechanism provided under Rule 8D(2)(ii).

The Tribunal held as under:

1)Rule 8D(2)(ii) seeks to allocate 'common interest expenses' to taxable income and tax exempt income. However, the definition of variable 'A' embedded in formula under rule 8D(2)(ii) is clearly incongruous as it specifically excludes interest expenditure directly related to tax exempt income, yet it does not exclude interest expenditure directly related to taxable income.

2)Resultantly, while rule 8D(2)(ii) ends up allocating expenditure by way of interest, which is not directly attributable to any particular income or receipt, plus interest which is directly attributable to taxable income.

3)The incongruity arose due to the wordings of rule 8D(2)(ii), as it provided that out of total interest expenses, only interest expenses directly relatable to tax exempt income were excludible, and interest expenses directly relatable to taxable income were not excludible.

4)Therefore, common interest expenditure could be computed only when interest directly attributable to tax exempt income, i.e., under rule 8D(2)(i), and interest directly relatable to taxable income, were excluded from the definition of variable 'A' in formula as per rule 8D(2)(ii). - GEOJIT INVESTMENT SERVICES LTD. V. ACIT [2014] 50 150 (Cochin - Trib.)