2020 (3) TMI 719 - HC - Income Tax

Additions made on account of de-recognised revenue - recognition of the revenue is on account of efficiency gain - HELD THAT - Tribunal after considering the facts of the case have applied the ratio of the decision of the Supreme Court in Poona Electric Supply Company Limited vs. CIT 1965 (4) TMI 20 - SUPREME COURT wherein the Apex Court has deliberated upon the concept of commercial profits viz-a-viz clear profits. On the basis of this principle, the Court has held that the amount transferable for the benefit of the consumers do not form part of the assesee s real profit and for the purpose of calculating the taxable income, such amount has to be deducted from its total income. On the strength of this reasoning, the Tribunal has relied upon the decision of the Coordinate Bench in Assessment Year 200607 and held that since the Respondent-assessee has no right to appropriate the efficiency gain amount and that such amount is at the disposal of DERC, the amount has to be reduced from the profits and loss account. The approach adopted by the Tribunal in applying the ratio of the decision of the Supreme Court in Poona Electric Supply Company Limited vs. CIT (supra) is wholly justified and does not call for any interference. Accordingly the ground of challenge urged by the revenue on this aspect is rejected. Disallowance deduction made u/s 80 IA - Tribunal has observed that the issue has become redundant and academic in nature - HELD THAT - We do not find any perversity in the view taken by the Tribunal. The circular of CBDT has been issued in view of the decisions of various High Courts that find mention therein. The issue is no longer res integra. The Board has accepted the settled position that the disallowances made under Section 32, 40(a)(ia), 40A(3), 43B, etc. of the Act and other specific disallowances, related to the business activity against which the Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business, and that deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowance

Summary

Issues Involved:
1. Additions made on account of de-recognised revenue.
2. Deleting the disallowance deduction made under Section 80 IA of the Income Tax Act, 1961.

Detailed Analysis:

1. Additions Made on Account of De-Recognised Revenue:

The Revenue challenged the ITAT’s decision to dismiss the additions made on account of de-recognised revenue, arguing that the surplus fund, which remains at the disposal of the Respondent, should be recognized as income. The Tribunal, however, relied on the Supreme Court’s decision in *Poona Electric Supply Company Limited vs. CIT (1965) 57 ITR 521*, which distinguished between commercial profits and clear profits. The Court held that amounts transferable for the benefit of consumers do not form part of the assessee’s real profit and should be deducted from the total income for tax purposes.

The Tribunal noted that the Respondent is obligated to set apart 50% of the additional revenue resulting from efficiency gains, which is considered for future tariff fixation by the Delhi Electricity Regulatory Commission (DERC). This amount, therefore, is not at the disposal of the Respondent for its use. The Tribunal concluded that the ratio of *Poona Electric Supply Company Limited* applies, justifying the reduction of the efficiency gain amount from the profit and loss account.

The Court upheld the Tribunal’s approach, finding it justified and rejecting the Revenue’s ground of challenge on this aspect.

2. Deleting the Disallowance Deduction Made Under Section 80 IA:

The Tribunal referred to Circular No. 37/2016 issued by the Central Board of Direct Taxes (CBDT), which clarified that disallowances related to business activity, resulting in enhanced profits, should allow for higher profit-linked deductions under Chapter VI-A. The Tribunal observed that the disallowances made by the Assessing Officer, related to the business activity against which the deduction under Section 80 IA was claimed, resulted in enhanced profits of the eligible business. Consequently, the deduction under Chapter VI-A was admissible on the enhanced profits.

The Court found no perversity in the Tribunal’s view, noting that the CBDT Circular was based on settled positions from various High Court decisions. The issue was no longer res integra, as the Board had accepted that disallowances related to the business activity against which Chapter VI-A deductions were claimed resulted in enhancement of profits, and such deductions were admissible on the enhanced profits.

Conclusion:

The Court concluded that no substantial question of law arose for consideration and dismissed the appeal.