2007 (6) TMI 308 - AT - Income Tax

Addition u/s 68 - Cash credits - difference of deposits in books of account - Deduction u/s 80-IA - Profits of the undertakings - Generation of Power - determination of the market value of power so as to record the income accrued to the assessee on supplies made to its own manufacturing units. HELD THAT - The CIT(A) in his order records a finding that the nature and result of the purported inquiries conducted by the Assessing Officer was not confronted to the assessee at any stage. There is no challenge to this aspect of the addition therefore in the light of the decision of the Supreme Court in the case of Kishinchand Chellaram v. CIT 1980 (9) TMI 3 - SUPREME COURT the impugned addition is unsustainable for the reason that the same is based on material which has been collected at the back of the assessee and the same has not been confronted to the assessee for its rebuttal. In this manner by adverting to the aforesaid short reasoning we hereby affirm the decision of the CIT(A) and Revenue fails in its appeal. Deduction u/s 80-IA - Profits of the undertakings - Generation of Power - determination of the market value of power so as to record the income accrued to the assessee on supplies made to its own manufacturing units - HELD THAT - In this case the assessee received consent u/s 44A of the Electricity (Supply) Act 1948 to establish and operate the captive power plant in terms of a Power Purchase- cum -Wheeling of Power Agreement entered between the State Electricity Board and the assessee. A perusal of Section 43A of the Electricity (Supply) Act 1948 reveals that the tariff is determined on the basis of various parameters contained therein. Thus it is evident that on one hand it is only upon granting of specific consent that a private person can set up a power generating unit having restrictions on the use of power generated and at the same time the tariff at which a power generating unit can supply power to the Electricity Board is also liable to be determined in accordance with the statutory requirements. In this context it can be safely deduced that determination of tariff between the assessee and the Board can be said to be an exercise between a buyer and seller neither in a competitive environment and nor in the ordinary course of trade and business. It is an environment where one of the players has the compulsive legislative mandate not only in the realm of enforcing buying but also to set the buying tariff in terms of preset statutory guidelines. Therefore the price determined in such a scenario cannot be equated with a situation where the price is determined in the normal course of trade and competition. Therefore the price determined as per the Power Purchase Agreement cannot be equated with market value as understood in common parlance. We see no reason for not holding so for the purposes of section 80-IA(8) also. The stand of the Revenue to the aforesaid effect cannot be approved. The price recorded by the assessee at Rs. 3.72 pet unit can be considered to be the market value for the purposes of section 80-IA(8) of the Act - This is the price at which the consumers are able to procure the power. We may consider hypothetical situation as well. Had the assessee not been saddled with restrictions of supplying surplus power to the State Electricity Board it would have supplied power to the ultimate consumers at rates similar to those of the Board or such other competitive rates meaning thereby that price received by the assessee would be in the vicinity of Rs. 3.72 per unit i.e. charged by the Board from its industrial consumers/users. Thus under the given circumstances it would be in the fitness of things to hold that the consideration recorded by the assessee s undertaking generating electric power for transfer of power for captive consumption at the rate of Rs. 3.72 per unit corresponds to the market value of power. Therefore on this aspect we uphold the stand of the assessee and set aside order of the CIT(A) and direct the Assessing Officer to allow relief to the assessee u/s 80-IA as claimed. Assessee succeeds on this ground. In the result whereas the appeal of the Revenue is dismissed the appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Deletion of addition of Rs. 4,06,000 by CIT(A).
2. Deduction under section 80-IA of the Income-tax Act.
3. Disallowance of expenditure on aircraft.
4. Treatment of premium payable to mutual fund under section 28(iv).
5. Denial of depreciation on hydraulic excavator.
6. Method of depreciation on turbines.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Rs. 4,06,000 by CIT(A):
The Revenue's appeal challenged the CIT(A)'s deletion of an addition of Rs. 4,06,000, which represented discrepancies in deposits shown by the assessee and the amounts confirmed by depositors. The Tribunal noted that the CIT(A) found the Assessing Officer (AO) did not confront the assessee with the verification results, violating the principle established in *Kishinchand Chellaram v. CIT* [1980] 125 ITR 713. Thus, the addition was deemed unsustainable, and the CIT(A)'s decision was affirmed.

2. Deduction Under Section 80-IA:
The assessee's appeal involved the deduction under section 80-IA for its power generation units. The AO had reduced the deduction based on the difference in rates charged for power supplied to the State Electricity Board (Rs. 2.32 per unit) and for captive consumption (Rs. 3.72 per unit). The Tribunal evaluated the definition of "market value" and concluded that the price fixed by the State Electricity Board did not reflect the market value due to legislative mandates. The Tribunal held that Rs. 3.72 per unit, the rate at which the assessee paid for power from the Board, was the appropriate market value. Thus, the Tribunal directed the AO to allow the deduction as claimed by the assessee.

3. Disallowance of Expenditure on Aircraft:
The assessee contested the disallowance of Rs. 15,68,171 related to aircraft expenses. The Tribunal reviewed the purposes of various trips and concluded that trips to Delhi-Tirupati and Guna lacked stated purposes, justifying their disallowance. However, other trips, including those for social responsibility (e.g., relief work in Bhuj and Bhavnagar), were deemed allowable under section 37(1) of the Act. The Tribunal directed the AO to rework the disallowance accordingly.

4. Treatment of Premium Payable to Mutual Fund Under Section 28(iv):
The assessee did not press this ground during the hearing. Consequently, it was dismissed as not pressed.

5. Denial of Depreciation on Hydraulic Excavator:
The AO disallowed depreciation on two excavators, questioning their use during the relevant period. The Tribunal found the excavators were ready for use upon purchase, akin to a car being ready to drive. Citing *KCP Ltd. v. ITO* [1991] 38 ITD 15 (Hyd.) and *Capital Bus Service (P.) Ltd. v. CIT* [1980] 123 ITR 404 (Delhi), the Tribunal held that depreciation was allowable even if the asset was kept ready for use. The Tribunal directed the AO to allow the depreciation claim of Rs. 27,71,704.

6. Method of Depreciation on Turbines:
The dispute was about the method of depreciation-straight line method versus written down value basis. The Tribunal noted that this issue was previously decided in favor of the assessee in its own case for the assessment year 2000-01. Therefore, the Tribunal upheld the assessee's method of depreciation.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, providing specific directions on each issue.