2001 (8) TMI 310 - AT - Income Tax

Application of MAT - Electricity Company - Corporation - Held that - It is true that the word used in section 115JA of the Act is company . The heading of this section is Deemed income relating to certain companies . The provision begins with a non obstante clause. It applies to every assessee being a company. - a corporation cannot be construed to be a company for the purpose of charging the Minimum Alternate Tax. The case of the assessee falls beyond the ken of section 115JA. We decide this issue in favour of the assessee and against the revenue. - The term book profits is defined in Explanation to section 115JA. It means the net profit shown in the Profit & Loss Account. Only those adjustments, which are specified in the section, are permissible. The scope of the provision cannot be curtailed. The practice adopted by the assessee of debiting the prior period expenses into the revenue account was in consonance with the well-established accounting principle. - provision of ₹ 3.3 crores in respect of bad and doubtful debts, in our opinion, this cannot be disregarded in computing the book profit.

Summary

Issues Involved:
1. Whether the assessee could be construed to be a company for the purposes of applying the provisions of section 115JA of the Income-tax Act, 1961.
2. Whether the provision contained in clause (iv) of the Explanation to section 115JA(2) could be applied in respect of various subsidies, grants, and other miscellaneous receipts.
3. Whether the computation of book profit was correctly applied, particularly regarding deductions for prior period adjustments and provision for bad and doubtful debts.

Issue-wise Detailed Analysis:

1. Assessee as a Company under Section 115JA:
The primary question was whether the assessee could be deemed a company for the purposes of section 115JA. The Tribunal examined the statutory framework under which the Maharashtra State Electricity Board (MSEB) operates, including the Electricity (Supply) Act, 1948, and relevant sections of the Companies Act, 1956.

- Statutory Framework: MSEB is a statutory corporation established under section 5 of the Electricity (Supply) Act, 1948. Section 80 of the same Act deems the Board to be a company for income-tax purposes.
- Definition of Company: According to section 2(17) of the Income-tax Act, a "company" includes a corporation established by or under a Central, State, or Provincial Act.
- Application of Companies Act: Section 616 of the Companies Act applies to companies engaged in the generation or supply of electricity, provided they are companies within the meaning of section 3 of the Companies Act.

The Tribunal concluded that although MSEB is a statutory corporation, it does not meet the criteria to be considered a company under section 3 of the Companies Act. Therefore, it cannot be deemed a company for the purposes of section 115JA. The Tribunal emphasized the legislative intent behind section 115JA, which was to curb the practice of zero-tax companies. Since MSEB is not required to distribute dividends and does not fall within the mischief addressed by section 115JA, it was held that the assessee is not a company for the purposes of this section.

2. Application of Clause (iv) of Explanation to Section 115JA(2):
The Tribunal examined whether various incomes such as subsidies, grants, and other miscellaneous receipts could be included in the book profits under clause (iv) of the Explanation to section 115JA(2).

- Subsidies and Grants: The assessee argued that subsidies received from the State Government were part of the sale price for electricity and thus should not be included in book profits. The Tribunal found that these subsidies were attributable to the business of generation and distribution of power but not derived directly from it.
- Interest and Other Incomes: Various interests received from consumers, staff loans, and other sources were also considered. The Tribunal held that these incomes had only a proximate nexus with the business of generation and distribution of power and did not bear a direct nexus with the profits from such business.

The Tribunal agreed with the CIT(A) that these incomes should be included in the book profits as they were not directly derived from the business of generation and distribution of power.

3. Computation of Book Profit:
The Tribunal addressed the correctness of the computation of book profit, particularly concerning prior period adjustments and provisions for bad and doubtful debts.

- Prior Period Adjustments: The Tribunal noted that the 'book profits' as defined in the Explanation to section 115JA mean the net profit shown in the Profit & Loss Account. The assessee's practice of accounting for prior period expenses in the revenue account was in line with established accounting principles and the Electricity (Supply) (Annual Accounts) Rules, 1985. Therefore, the Tribunal held that the prior period adjustments should be considered in computing the book profit.
- Provision for Bad and Doubtful Debts: The Tribunal found that the provision for bad and doubtful debts was a restatement of the value of assets and not a provision for a liability. Therefore, it should not be added back to the book profits.

Conclusion:
The appeal by the assessee was allowed. The Tribunal held that the assessee, MSEB, could not be construed to be a company for the purposes of section 115JA. Consequently, the provisions of section 115JA, including the computation of book profits and the inclusion of various incomes, were not applicable to the assessee. The Tribunal also ruled in favor of the assessee regarding the prior period adjustments and the provision for bad and doubtful debts.