Disallowances for Income Derecognition, Unpayable Energy Tax, Security Deposit Interest, and Higher UPS Depreciation Are Unsustainable

By | June 10, 2026
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Disallowances for Income Derecognition, Unpayable Energy Tax, Security Deposit Interest, and Higher UPS Depreciation Are Unsustainable

Issue

  1. Derecognition of Income: Whether a disallowance can be made under Section 37(1) for the derecognition of income pertaining to the consumers’ portion of over-achievement efficiency gains, when the same issue was already decided against the Revenue in prior years.

  2. Energy Tax under Section 43B: Whether an addition under Section 43B can be sustained on the “unpayable portion” of Energy Tax, given that municipal bylaws establish it is only payable as and when collected from customers.

  3. Interest on Consumer Security Deposits: Whether interest paid on additional consumer security deposits can be disallowed as a “contingent liability” when it arises from a statutory and contractual obligation.

  4. Depreciation Rate on UPS: Whether a Uninterrupted Power Supply (UPS) qualifies for the higher depreciation rate applicable to computers on the grounds of being an integral part of the computer system.

Facts

  • The Assessee: An electricity distribution and power generation company.

  • Income Derecognition: The Assessing Officer (AO) disallowed a deduction claimed by the assessee for derecognizing income related to the consumers’ share of efficiency gains/over-achievement targets.

  • Energy Tax: The AO made an addition under Section 43B regarding an unpayable portion of Energy Tax. The CIT(A) reviewed the Municipal Corporation of Delhi’s bylaws and found that this tax is legally due for payment only upon actual collection from customers.

  • Security Deposit Interest: The assessee claimed a deduction for interest on additional consumer security deposits. The AO disallowed the amount exceeding the standard recognized deposits, labeling it a contingent liability.

  • UPS Depreciation: The assessee claimed depreciation on UPS units at the higher rate applicable to computers (60% at the relevant time). The AO disputed this classification.

Decision

  • On Income Derecognition: Held, yes (in favor of the assessee). The disallowance must be deleted since the exact same issue had already been resolved against the Revenue in the assessee’s own case for earlier assessment years.

  • On Energy Tax (Section 43B): Held, yes (in favor of the assessee). The addition is unsustainable. The factual finding that Energy Tax is only payable upon collection from customers is affirmed, meaning Section 43B cannot be triggered on uncollected/unpayable portions.

  • On Security Deposit Interest: Held, yes (in favor of the assessee). The Tribunal’s deletion of the addition is upheld. Interest on security deposits is a mandatory statutory and contractual liability owed to every consumer; it is an absolute obligation, not a contingent liability.

  • On UPS Depreciation: Held, yes (in favor of the assessee). A UPS is an integral part of a computer system because a computer’s operations depend completely on an unabated power supply. Therefore, it qualifies for the 60% depreciation rate reserved for computers.

Key Takeaways

  • Consistency in Rule of Law: Where a specific tax treatment (such as efficiency-gain income derecognition) has been settled in favor of the assessee in preceding years, the Revenue cannot arbitrarily change its stance in subsequent years without new facts.

  • Section 43B Limits: Statutory dues like Energy Tax can only be subject to Section 43B disallowances if there is an active, present liability to pay them under the governing municipal or state bylaws.

  • Statutory Obligations are Not Contingent: Contractual or statutory interest owed to consumers on security deposits represents a certain, accrued liability and must be allowed as a business expense under Section 37(1).

  • Functional Test for Computer Peripherals: For depreciation purposes, equipment that is critical to the functional operation of a computer—such as a UPS ensuring continuous power—is legally classified as an integral part of the computer system, making it eligible for higher depreciation rates.

HIGH COURT OF DELHI
Principal Commissioner of Income-tax
v.
Tata Power Delhi Distribution Ltd.*
Dinesh Mehta and Vinod Kumar, JJ.
IT Appeal No. 277 of 2026
CM APPL. No. 20832, 20834 & 20835 of 2026
APRIL  2, 2026
Siddhartha Sinha, SSC, Ms. Easha Gurung, JSC, Nring Chamwibo Zeliang and Ms. Anu Priya Nisha Minz, Advs. for the Appellant. Pravesh Sharma, Sushil Kumar and Ms. Shashi M. Kapila, Advs. for the Respondent.
ORDER
CM APPL. 20833/2026 (delay of 67 days in filing the appeal)
1. Issue notice under Section 5 of the Limitation Act, 1963. Ms. Shashi
M. Kapila, learned counsel for the respondent accepts notice.
2. Having heard learned counsel for the parties, the delay of 67 days in filing the appeal is condoned.
3. The application stands allowed accordingly.
CM APPL. 20836/2026 (delay of 120 days in refiling the appeal)
4. For the reasons stated in the application, the delay of 120 days in refiling the appeal is condoned.
5. The Application is allowed.
ITA 277/2026
6. The following Substantial questions of law have been proposed by the Income Tax Department in the instant appeal :
A) Whether on the facts and circumstances of the case and in law, the Ld. ITAT erred in sustaining the deletion made by the Ld. CIT(A) of the disallowance on account of derecognition of income pertaining to consumer’s portion of over achievement of minimum target or efficiency gain of Rs.59,18,86,000/-?
B) Whether on the facts and circumstances of the case and in law, the Ld. ITAT erred in sustaining the deletion made by the Ld. CIT(A) of the addition under Section 43B of the Act on account of unpayablc portion of Energy Tax of Rs.13,45,26,097/-?
C) Whether on the facts and circumstances of the case and in law, the Ld. ITAT erred in deleting the addition made on account of statutory obligation to pay interest on additional consumer security deposit to consumers of Rs.2,69,00,000/-?
D) Whether on the facts and circumstances of the case and in law, the Ld. ITAT erred in not considering the AO’s and CIT(A)’s findings relating to the disallowance of excess depreciation claimed on UPS of Rs.49,43,803/-?
E) Whether on the facts and circumstances of the case and in law, the Ld. ITAT erred in not considering the AO’s and CIT(A)’s findings relating to disallowance of claim of deduction under Section 80IA of the Act of Rs.37,72,33,487?
7. Ms. Shashi M. Kapila, learned counsel for the respondent submitted that all the issues involved in the present appeal is covered by various judgments of this Court or other High Court.
8. Mr. Siddhartha Sinha, learned Senior Standing Counsel could not refute such position. We, however, propose to deal with each issue one after another.
9. The question No. A is concerned, the same has been decided against the Department by the Judgment dated 11.03.2020 passed by this Court in ITA 186/2020 Dy. CIT v. Tata Power Delhi Distribution Ltd.  (Delhi)/NC: 2020:DHC:1650-DB. Hence, we decide ground no. A against the appellant.
10. So far as the question No. B is concerned, the learned Commissioner of Income Tax(Appeals) [CIT(A)] has dealt with the relevant agreements and bylaws of the Municipal Corporation of Delhi (MCD) and came to the conclusion that as per the existent law, the energy tax is required to be paid as and when the same is collected from the customers. Such finding of fact has been affirmed by the Income Tax Appellate Tribunal (hereinafter referred to as ‘the Tribunal’). Similar view has also been taken by Punjab and Haryana High Court vide its judgment dated 03.08.2022 in the case PCIT v. Dakashin Haryana Bijli Vitran Nigam Ltd. [2022] 449 ITR 605 (Punjab & Haryana) which view has been upheld by Hon’ble the Supreme Court vide its order dated 21.04.2023 in Pr. CIT v. Dakshin Haryana Bijli Vitran Nigam Ltd. (SC). This issue is thus decided against the Department.
11. Question No. C relates to interest on security deposited which the Assessing Officer(AO) had disallowed by observing thus :
5.3 The contention of the assessee has been examined and is not found tenable. On the other hand, the assessee has been disputing the principal amount i.e. the consumer security deposit, in the High Court of New Delhi, while on the other hand the assessee has been charging the interest on the unrecognized liability in the financial statements. Therefore, the expense of interest over and above the recognized consumer security deposit is contingent in nature and hence cannot be allowed. Accordingly, out of the interest expenses of Rs.1196.04 lacs, only that interest portion of expenses is allowed to that extent to which the liability has been recognized. The balance interest expenses .in respect of unrecognized consumer security deposit are disallowed.
12. Though the CIT(A) had affirmed the addition, but when the matter came up before the Tribunal, it deleted the same by following its decision taken in previous years.
13. Mr. Siddhartha Sinha, learned counsel through accepted that previous orders for AYs 2011-12 and 2012-13 remain unassailed, as the tax effect involved in those appeals was less than the permissible limits for which an appeal could be filed, but nevertheless contended that this question requires consideration.
14. Having heard learned counsel for the appellant we are of the view that the Tribunal has taken a correct view.
15. The AO had disallowed the interest which the respondent-assesee was statutorily obliged to pay to the consumers on the security amount deposited. The amount of interest paid on security deposit cannot be said to be contingent, as every consumer is entitled to receive interest on the security money which it had deposited with the respondent.
16. The payment of interest being a statutory and contractual liability which has to be paid and accordingly the consumer cannot be disallowed on the pretext that it is a contingent liability. We therefore, affirm the order of the Tribunal in this regard.
17. So far as the question D is concerned, it relates to depreciation of UPS (Uninterrupted Power Supply) which the AO gave/allowed at a lesser rate. The Tribunal has allowed such ground of appeal and held that the depreciation rate, which at the relevant time was 60%, would be applicable.
18. It cannot be disputed that a UPS is an integral part of the computer and not even an accessory. If unabated power supply to the computer is not ensured, the same would definitely impact the computer and operations of the respondent company.
19. According to us, the AO had clearly erred in disallowing the depreciation at the rates applicable to the computers. This issue is therefore decided against the Department.
20. So far as the fifth question of law is concerned, the same has also been decided against the Department by this Court vide the very same judgment dated 11.03.2020 in Tata Power Delhi Distribution Ltd. (supra).
21. All the questions are decided accordingly against the Department.
22. Consequently, the appeal is dismissed along with pending applications.