2012 (8) TMI 337 - AT - Income Tax

Denial of claim of deduction u/s 80-IA(4)(iv)(c) - assessee is an electricity distribution company - Held that - For entitlement to claim deduction u/s.80-IA(4)(iv)(c)there should be substantial renovation and modernisation of existing network of transmission or distribution lines by the electricity distribution company & the Assessee had to achieve an increase in the book value of the fixed assets - plant & machinery viz., Lines, Cable Network by at least 50% of the book value of such plant & machinery as on 01.04.2004. The criteria for claim of deduction u/s 80 IA was not satisfied as the assessee seeks to rely on the expenditure incurred during the previous year which were in connection with renovation and modernization of cable and transmission line which were not complete and were in progress and therefore classified as CWIP. The fact that they were shown as CWIP in the books of account would only mean that renovation and modernization of the existing transmission or distribution lines had not been recognized as complete - reliance of assessee on the point the same should be put to use for allowance of deduction is nowhere mentioned - the expression undertakes substantial renovation and modernisation cannot be read in isolation and has to be read along with Explanation to section 80-IA(4)(iv)(c) - against assessee.

Summary

Issues Involved:

1. Entitlement to claim deduction under Section 80-IA(4)(iv)(c) of the Income-tax Act, 1961.
2. Interpretation of "substantial renovation and modernization" and its application to Capital Work in Progress (CWIP).
3. Determination of the first assessment year for allowance of the deduction.

Issue-wise Detailed Analysis:

1. Entitlement to Claim Deduction under Section 80-IA(4)(iv)(c):

The core issue in this appeal is whether the assessee, an electricity distribution company, is entitled to claim deduction under Section 80-IA(4)(iv)(c) of the Income-tax Act, 1961. The assessee claimed this deduction for the profits derived from the distribution of power, asserting that it had undertaken substantial renovation and modernization of its existing network of transmission or distribution lines during the relevant assessment year (AY 2005-06). The deduction under Section 80-IA(4)(iv)(c) requires an increase in the plant and machinery in the network by at least fifty percent of the book value as on April 1, 2004.

2. Interpretation of "Substantial Renovation and Modernization" and Application to CWIP:

The assessee contended that the increase in book value, including CWIP, met the required fifty percent threshold. The book value of lines and cable networks as of April 1, 2004, was Rs. 543.70 crores, and the additions during the year amounted to Rs. 282.17 crores. The assessee argued that CWIP of Rs. 118.84 crores should be considered as part of the fixed assets, citing Accounting Standard (AS-10) and a Supreme Court decision in CIT Vs. Karnataka Power Corporation Ltd., which treated capital work in progress as capital works of fixed assets.

The Revenue, however, maintained that CWIP, being an item of expenditure not yet capitalized in the books of accounts, could not be considered an increase in plant and machinery. The Revenue argued that the increase in value should be recognized only upon completion of the renovation or modernization.

3. Determination of the First Assessment Year for Allowance of the Deduction:

The dispute also involved determining the first assessment year in which the deduction should be allowed. The Revenue had allowed the deduction from AY 2006-07 onwards, while the assessee sought the deduction from AY 2005-06. The Tribunal noted that the provisions of Section 80-IA(4)(iv)(c) allow for a deduction over ten consecutive assessment years starting from the year in which the renovation and modernization are completed.

Judgment:

The Tribunal upheld the Revenue's view, concluding that the capitalization of the expenditure on renovation and modernization in the books of account is a condition precedent for allowing the deduction under Section 80-IA(4)(iv)(c). The Tribunal emphasized that the expression "undertakes substantial renovation and modernization" must be read in conjunction with the explanation provided in the section, which specifies an increase in the book value of the transmission or distribution lines. The Tribunal rejected the assessee's reliance on Accounting Standards and the Supreme Court decision, stating that the provisions of the Act do not contemplate CWIP being treated as substantial renovation and modernization. Consequently, the Tribunal dismissed the appeal by the assessee.

Conclusion:

The appeal by the assessee was dismissed, and the Tribunal held that the assessee did not satisfy the conditions for claiming the deduction under Section 80-IA(4)(iv)(c) for AY 2005-06. The capitalization of the renovation and modernization expenditure in the books of account was deemed necessary for the deduction, and the Tribunal found no grounds to interfere with the order of the CIT(Appeals).