LexNATIONAL HYDROELECTRIC POWER CORPN. LTD. versus COMMISSIONER OF INCOME TAX
Open in Lexace · Ask the AI about this caseJudgment (excerpt)
A
B
[2010] 1 S.C.R. 16
NATIONAL HYDROELECTRIC POWER CORPN. LTD.
v.
COMMISSIONER OF INCOME TAX
(Civil Appeal No. 6 of 2010)
JANUARY 5, 2010
[S.H. KAPADIA AND AFTAB ALAM, JJ.]
Income Tax Act, 1961: s.115JB, Explanation-I Clause (b)
- Applicability of - Advance against depreciation -(AAD) -
C Held: AAD is a timing difference - It is not carried to profit
and loss account - It is income received in advance subject
to adjustment in future and not a reserve and hence clause
(b) of Explanation (I) to s. 115JB is not applicable.
D
Assessee is supplier of electricity at notified tariff rate.
The sale price included Advance against Depreciation
(AAD) which is shown by assessee as sales in its profit
and loss account. While computing the book profit,
assessee deducted the AAD component from total sale
price and took only balance amount into the profit and
E loss account.
According to the Authority for Advance Rulings,
reduction of AAD from the sales was reserve which had
to be added back on the basis of Clause (b) of
F Explanation-I to Section 115JB of the Income Tax Act,
1961.
Allowing the appeal, the Court
HELD: On reading Explanation-I, to Section 115JB of
G Income Tax Act, 1961, it is clear that to make an addition
under clause (b}, the two conditions which must be
jointly satisfied are that there must be a debit of the
amount to the profit and loss account and the amount so
H
16
NATIONAL HYDROELECTRIC POWER CORPN. LTD.
17
v. COMMNR. OF INCOME TAX
debited must be carried to the reserve. Since the amount A
of AAD is reduced from sales, there is no debit in the
profit and loss account. The amount did not enter the
stream of income for the purposes of determination of net
profit at all, hence clause (b) of Explanation-I was not
applicable. Further, "reserve" as contemplated by clause
B
(b) of the Explanation-I to Section 115JB of the Act is
required to be carried through the profit and loss
account. There are broadly two types of reserves, viz.
those that are routed through profit and loss account and
those which are not carried via profit and loss account, c
for example, a Capital Reserve such as Share Premium
Account. AAD is not a reserve. It is not appropriation of
profits. It is an amount that is under obligation, right from
the inception, to get adjusted in the future, hence, cannot
be designated as a reserve. It is nothing but an
D
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 (which is normally 30 years)
the same would be reduced to nil. At tho end of the life
of the Plant, AAD will be reduced to nil. In fact, Schedule
E
XII-A to the balance sheet for the financial years 2004-05
onwards indicates recouping. AAD is "income received
in advance". It is a timing difference and represents
adjustment in future which is in-built in the mechanism
notified on 26.5.1997. This adjustment may take place
F
over a long period of time. [Paras 10 and 11] [20-A-H;
21-A]
.
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 6
of 2010.
From the Judgment & Order dated 17.12.2004 in AAR
550 of 2010 of the Authority for Advance Rulings (Income Tax),
New Delhi.
G
Soli Dastur, Nishant Thakker, Sunita Dutt, Rajiv Mehta for
the Appellant.
H
18
SUPREME COURT REPORTS
[2010] 1 S.C.R.
A
Parag P. Tripathi, ASG, D.K. Singh, Kuna! Bahri, Rahul
B
Kaushik, B.V. Balaram Das for the Respondent.
The Judgment of the Court was delivered by
S.H. KAPADIA, J. 1. Leave granted.
2. In this civil appeal filed by the assessee we are
concerned with accounting treatment of Advance Against
Depreciation ("AAD", for short).
c
3. We are concerned with assessment year 2001-02.
4. Assessee is a public sector enterprise registered under
the Companies Act, 1956. Its accounts are prepared in
accordance with Parts II and Ill of Schedule VI to the Companies
Act. The entire shareholding of the assessee is with
D Government of India. Its accounts are audited by Comptroller
and Auditor General of India. They are laid before both the
Houses of Parliament.
5. Assessee is required to sell electricity to State Electricity
E Board(s), Discoms etc. at tariff rates notified by CERC. The
tariff consists of Depreciation, AAD, Interest on loans, Interest
on working capital, Operation and Maintenance Expenses,
Return on equity.
6. On 26.5.97, GOI introduced a mechanism to generate
F
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