The assessee sells electricity to the State Electricity Boards (DISCOMs). The tariff is determined and identified by the Central Electricity Regulatory Commission (CERC). The assessee filed its return of income for relevant AY. The assessee computed book profit u/s 115JB at about Rs.58 crores in the original return. The AO, upon examining the computation of book profit, noticed that the provision for tariff adjustment of about Rs. 51.80 crores was not considered for addition while computing the book profit u/s 115JB. The AO held that the liability was not ascertained and was contingent upon the order of the CERC. The AO added back Rs. 51.80 crores to the book profit for the purpose of computing the minimum alternate tax u/s 115JB. On appeal, CIT(A) upheld the assessee's contention that this was not a contingent liability as calculated as per the CERC guidelines and was, therefore, an accrued liability. The Tribunal upheld the order of the CIT (A). Aggrieved Revenue filed appeal before the High Court.
High Court held that,
++ the assessee is not entitled to fix the tariff. It is the CERC which fixes the tariff, albeit upon the assessee's application. Upon completion of the period for which tariff is fixed, the assessee is bound to make an application to the CERC for fixing the future tariff. This application is made after the completion of the earlier period for which the tariff is fixed. There is, therefore, a time-lag between the expiry of the period for which the tariff is fixed and the date on which the CERC fixes the tariff for the subsequent period. In the present case, the earlier period came to an end on 31.03.2004 and the tariff was fixed for the subsequent period i.e. 01.04.2004 to 31.03.2009 on 29.05.2006 and 31.05.2006. On account thereof, there was a difference in the tariff collected to the extent of Rs.51.80 crores for the assessment year. During this period, namely, 01.04.2004 onward, the assessee made an adjustment towards tariff charged as per its application filed with the CERC. The assessee has been following this accounting practice consistently in accordance with the principle of conservatism as laid down in Accounting Standard-1 as per which all known ascertained liabilities have to be accounted for. The assessee is following the mercantile system of accounting;
++ the liability in the present case has definitely arisen, although it would have to be quantified and discharged to adjust it at a future date, the date on which the CERC determined the tariff. It is not even suggested by the revenue that the liability was not likely to be incurred. Considering the nature of the assessee's enterprise and the mode of fixation of tariff, it is reasonably certain that the liability would arise. Nor is it suggested that the liability was not capable of being estimated with reasonable certainty. The assessee estimated the liability after taking all the relevant factors into consideration. Indeed, the liability was enhanced on account of the CERC fixing the tariff at a rate lower than that sought by the assessee. The Delhi High Court dealt with a similar question in NTPC Ltd. Vs. Commissioner of Income Tax-V, 2014-TIOL-519-HC-DEL-IT . The Division Bench of the Delhi High Court held "21. There is authority, in the form of Supreme Court judgments in Shree Sajjan Mills Ltd v. CIT, 2002-TIOL-972-SC-IT-LB, Bharat Earth Movers Ltd v. CIT, 2002-TIOL-123-SC-IT-LB and Metal Box Company of India Ltd v. Their Workmen,2002-TIOL-941-SC-IT, that a provision made on a reasonable basis, it would be in the nature of an ascertained liability and that in a mercantile system of accounting, provision for liability ascertained during the course of the relevant accounting period, which is payable at a future is permissible." It was decided to pass order in favour of the assessee and against the revenue.
(See 2019-TIOL-257-HC-P&H-IT)
