9911796707
TMI Blog2011 (1) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... ed and the AO has to adopt a reasonable basis or method consistent with all relevant facts and circumstances and after affording reasonable opportunity to the assessee to place all germane material on the record. AO is correct treating net interest income amounting to Rs. 293,83,36,422/- received on Govt. Securities, Interest on Inter company deposits and bank deposits and other interest as "income from other sources" instead of the same taxed as “business income" X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee and was, therefore, not deductible under section 37 of the Income Tax Act, 1961(the Act). The Assessing Officer also observed that the department has filed an appeal against the orders of the Tribunal on identical issue in the earlier assessment years before the Hon'ble High Court and, therefore, the disallowance is being made. 4. On appeal by the assessee the CIT(A) deleted the addition made by the Assessing Officer as he noticed that the Tribunal in the earlier assessment years have allowed the deduction of identical item of expenditure. Following the aforesaid orders of the Tribunal the CIT(A) directed the Assessing Officer to allow the claim of the assessee for deduction. 5. Aggrieved by the order of the CIT(A) the revenue has raised the aforesaid ground of appeal before the Tribunal. 6. Before us it is not in dispute that identical issue had come up for consideration in assessee's own case and the Tribunal had already directed the Assessing Officer to allow the claim for deduction. The details in this regard are as follows: S.No. Particulars Tribunal Decisions Page Para No. No. Page No. of Paper book o.II ITA No. 1. A.Y 1999-00 13-16 8 13 to 16 590&436/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 06 has allowed similar claim of the assessee. The Assessing Officer however, held that these expenses were capital in nature and refused to allow the claim for deduction. The Assessing Officer also observed that against the decision of the Tribunal on identical issue in assessee's own case for earlier assessment years, the department had preferred appeal before the Hon'ble High Court. 10. On appeal by the assessee the CIT(A) directed the Assessing Officer to allow the claim of the assessee for deduction following the decision of the Tribunal in assessee's own case in the earlier assessment years. 11. Aggrieved by the order of the CIT(A) the revenue has raised the aforesaid ground of appeal before the Tribunal. 12. We have heard the rival submissions. It is not in dispute before us that identical issuewas considered and decided by the Tribunal in assessee's own case in the earlier assessment years. The orders of the Tribunal for the following assessment years were field before us. S.No. Particulars Tribunal decisions ITA No. ParaNo. Page No. of paperbook No.II 1. A.Y 1999-00 590&436/M/04 2&3 2 TO 11 2. A.Y. 2000-01 590&436/M/04 4&5 11 3. A.Y. 2001-02 218/M/05 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. 15. The A.O however did not agree with the stand of the Assessee. He held that the deduction u/s. 80 IA in respect of Goa and Samalkot unit, where it is in the business of generation and distribution, has been claimed on the profit computed in these units as per books. However, in the profit and loss accounts of these units head office expenses has not been apportioned. As per section 80 IA(5), profits of these units are to be computed as if these units are the only source of income and therefore head office which controls the business of these unit must be apportioned to arrive at the eligible profit. The A.O allocated the head office expenses in proportion the income of these units to the total income. Head office expenses Rs. 124,41,90,011 Less:Depreciation as per Books Rs. 1,09,08,188 Add: Depreciation as per IT Act Rs. 1,59,95,347 Less: Loss on sale of assets Rs. 6,394 ---------------------------- Net allocable HO expenses of the Assessee. Rs. 124,92,70,776 ================= The turnover for the purpose of allocation is worked out as under after considering the gross turnover of the assessee and excluding income from the income-tax refund accordingly. Total tu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .3 raised by the Revenue. 19. Ground No.4 raised by the revenue reads as follows: "On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the AO to adopt the market price of power generated as provided under subsection 8 of section 80IA as the price of power purchased from Tata Power Company as against the reasonable rate of return of 16% as per the orders of MERC adopted by A.O for the purpose of computing the deduction u/s. 80IA." 20. The facts and circumstances giving raise to the above ground of appeal by the Revenue are as follows: The assessee is a company. It is engaged in business of generation and distribution of electricity. Originally the company was only in distribution of electricity in the suburbs of Mumbai. Subsequently in A.Y. 1996-97 it had put up a plant for generation of electricity at Dahanu. The company was entitled to deduction u/s 80IA in respect of income from generation of electricity at Dahanu. The relevant section reads as follows: [Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc. 80-IA. (1) Where the gross total income of an asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibution activity from the common inter connect point of electricity acquired from Dahanu and TPC to the point of consumers was not entitled to the benefit. The Assessing Officer adopted the average purchase price paid to TPC by the Assessee as "market value' of the goods supplied by eligible business-generation of electricity at Dahanu to its non eligible business- distribution thereof. The Assessing Officer applied section 80IA(8) which provides that the goods transferred from one business to another business of the same assessee should be at its market value to ascertain the profit eligible for deduction u/s 80IA. The provisions of Sec.80-IA(8) read as follows: Sec.80-IA ( 8) Where any goods or services held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods or services held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods or services as on the date of the transfer, then, for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee company accepted the CIT(A) order on the issue of adopting price paid to TPC. Thus the amount on which the Assessee would be entitled to deduction u/s.80-IA(4) was thus determined in the assessment proceedings u/s.143(3) of the Act. 23. According to the AO, the above method of determination of profits eligible for deduction u/s.80-IA worked out by the Revenue in the past assessments of the Assessee was no longer relevant because of the Tariff fixed by the Maharastra Electricity Regulatory Authority (MERC). In exercise of powers conferred by the Electricity Act, 2003, MERC notified the Maharashtra Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulation, 2005 which superseded the MERC (Terms and Conditions of Tariff) Regulations, 2004. Under these regulations, it was mandatory for all power generation and distribution entities to apply for fixation of tariff ultimately to be charged to various consumers. MERC had, for the first time issued a tariff order on1st July 2004which is applicable for financial year 2004-05. Similar for FY 05-06, applicable for AY 06-07, MERC has fixed tariffs vide its order dated3/10/2006. The tariffs are fixed based on two conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be clear from the calculation of "Clear Profit" in the MERC Order where, from the profit before tax, income tax is deducted and further statutory appropriations are deducted to arrive at Clear Profit and the gap between Clear Profit and Reasonable Return. Reasonable Return is compared with the clear profit which is a profit after debit of income tax and statutory appropriations. Therefore, the action to restrict deduction u/s. 80IA to Reasonable Return worked out by MERC is totally incorrect as the profits which are eligible for deduction u/s. 80 IA are the profits before tax and before the statutory appropriations (which are not allowed to be reduced while computing profits eligible for deduction u/s. 80IA). b) The above working of Clear Profit and Reasonable Return as given in MERC order are in respect of the combined activity of generation and distribution and the same are not for the generation activity alone. The Assessee pointed that the same would be evident from the item of expenditure which shows "power purchase". The power purchase is from Tata Power Companies (TPC) which was used for distribution of electricity to comsuners in licensed areas. The tariff determination b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the profits i,e. clear profits is an ongoing process and the same is either allowed to be recovered from the consumers out of fixation of tariff for subsequent year or the tariff for thee subsequent year is adjusted to take care of the excess gap. Thus Clear Profits which are in excess of the Reasonable Return does not cease to be the profit of the company but is only considered for fixing the Tariff for the subsequent year and in subsequent year the profits will be less on account of lower fixation or tariff and deduction u/s. 80IA will also be lower. The gap between the Clear Profit and Reasonable Return continue to remain with the company. d) The Assessee pointed out that there are 3 different figures of profits: i) Profit as per books of accounts. ii) Profits as computed by MERC i.e. Clear Profit iii) Reasonable Return. The Tariff fixation if done prior to the end of the year will take into account the estimate of revenue and expenditure and will not match the actual. In such an even there will be difference between the actual and the Clear Profits worked out by MERC. There will again be a difference between the Clear Profits and Reasonable Return. Difference between C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sonable return formula for the distribution as well as generation companies is same. MERC has computed the profit on the combined business of generation and distribution and assessee expressed its inability to compute reasonable return on Dahanu unit 1 and Dahanu unit 2 as stand alone. I accordingly compute the profit of two generating units Dahanu 1 and Dahanu 2 in the ratio of power generated by them to power purchased from the TPC. The total claim of deduction u/s. 80IA in respect of these units is accordingly computed at Rs. 110 crore. Though, the above method of computation includes distribution profit on self generated power, but considering the fact that assessee is selling power to large number of consumer below the purchase price and the fact that Tata Power Corporation has claimed deduction u/s. 80IA of Rs.37.47 crore on its Trombay unit 7 Power Plant with installed capacity of 180 MW on the basis of reasonable return and deduction as per same rate for Dahanu Power Plants for 500 MW installed capacity would come to almost same amount, the deduction u/s. 80IA of Rs.110 crore in respect of Dahanu Units is reasonable." 27. Before CIT(A) it was submitted that proviso to sec. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C is not concerned with the separate profit of generation and distribution. The assessee argued that the Assessing Officer is not correct to proceed on the basis of reasonable return worked out by the MERC. The profit worked out by the MERC is after deducting the Income-tax and statutory appropriations. The entire basis of adopting the MERC order is wrong. The order of the MERC is only for fixing of tariff and reasonable return to be earned and retained by the generating companies. The assessee clarified that clear profit is the profit as per books of the assessee. Reasonable return is worked out @16% on the capital employed. If there is difference between clear profit and reasonable return, it is carried over to the next cycle of tariff fixation. If the clear profit i.e. actual profit as per books is more than the reasonable rate of return the balance is carried over to the next cycle of tariff fixation and tariff is fixed accordingly. So between the two, the correct basis is to adopt the clear profit and not the reasonable return. Further, the clear profit as per books of account is required to be adjusted according to the provisions of the Income tax Act i.e. depreciation as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PC. In addition to this, the assessee has also incurred a loss in the distribution of power generated at Dahanu unit, if the power generated at Dahanu is valued on the TPC rate. 30. The assessee further contended that the Assessing Officer has ignored these facts and adopted the proportionate share of the combined profit worked out by the MERC. It was submitted that as held by the Bombay High Court in the case of CIT vs. Win Lab Ltd., 254 ITR 187, the profit from eligible business is to be worked out considering the method prescribed by section 80 IB(8). The ITAT in assessee's own case has been consistently following the provisions of section 80 IA(8) and has not found the proviso to the said section to be applicable. The assessee objected to the Assessing Officer's reference to the profitability of TPC in respect of their Trombay unit 7 power plant to justify his allocation of combined profit to generation activity at Rs. 110 cores. The assessee submitted that the Assessing Officer cannot rely on the documents of other persons without confronting the said documents to the assessee. In the absence of such documents the assessee cannot comment on the result of the said company. Tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich the TPC has sold power to the assessee is the rate which was fixed by MERC in its case for bulk supply of power. There is another bulk supplier of power, i.e. MSEB. The rate of power supplied by MSEB was higher than the rate of power supplied by TPC. So there is no difficulty in ascertaining the market price of power as mentioned in the provisions of subsection (8) of sec. 80 IA. The various rates fixed by MERC for different types of producers and consumers is in no way relevant to the issue in had. 33. He was also of the view that even if proviso to sub-section(8) of section 80 IA is to be applied the computation of profits eligible for deduction under section 80 IA had to be done on a reasonable basis. In this regard he held that the reasonable rate of return prescribed by MERC would not be a reasonable basis on which profits of the eligible business can be computed under section 80 IA(8) of the Act. He held that reasonable rate of return is a hypothetical calculation of a percentage of capital employed. The same cannot be considered as income under the Income Tax Act. 33. With regard to the clear profit determined by the MERC order he held that the same is the book profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al is allowed." 35. Aggrieved by the order of the CIT(A), the Revenue has raised ground No.4 before the Tribunal. 36. We have heard the rival submissions. The learned D.R. submitted before us that the profits arrived at on the basis of applying the rate at which power was purchased by the Assessee from TPC would no longer be relevant after the fixation of tariffs by the MERC. He submitted that MERC is the authority for fixation of tariffs and the basis on which they fix the tariffs is very much relevant for arriving at the profits of the activity of generation of electricity by the Assessee. In this regard it was pointed out by him that "clear profit" and "reasonable return" from the combined activity of generation and distribution inMaharashtrahas been worked out at Rs.266 crore and Rs.210 Crore respectively by MERC. He pointed out that during the previous year the Assessee generated 2250 KWH million and 2073 KWH million from the Dahanu-1 and Dhanu-2 units respectively and purchased 3921 KWH Million from TPC for distributing power to its consumer in Mumbai suburb. The Assessee had paid Rs.1087,55,69,303 for purchase of power from TPC. The Assessee has taken Rs.27,73,673 per KW ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to any goods or services, means the price that such goods or services would ordinarily fetch in the open market." It was his submission that the price paid by the Assessee for purchasing power from TPC will not be a good yardstick for determining the price that would ordinarily fetch in the open market in view of the order of the MERC determining the price at which the service has to be provided by all power generating companies to the ultimate consumers. It was his final submission that the action of the AO was reasonable and had to be restored. 37. The learned counsel for the Assessee reiterated the submission of the Assessee as put forth before CIT(A) and further relied on the order of the AO. 38. We have considered the rival submissions. We have already seen that the Assessee was distributing power prior to its commencing the business of generation and distribution of power. The activity of distribution of electricity was not entitled to the benefit of deduction u/s.80-IA(4) of the Act. In its business of distribution of electricity prior to its activity of generation and distribution of electricity, the Assessee was purchasing electricity from Tata Power Companies (TPC) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er included undisputed standby charges in working out the price. The company was claiming that the disputed portion of standby charges should also be included in working out the market price. The above issue of average consumer selling price vs TPC price, being the market value as provided in section 80IA(8), was decided by CIT (A). The CIT (A) had upheld the Assessing Officer's order and rejected the Assessee's contention to consider average consumer selling price. Thus the TPC price was considered as market price for the purpose of section 80IA(8). However, the issue regarding disputed standby charges was appealed to the Tribunal. When the appeal was pending, the matter was resolved between TPC and the company and a compromise was reached on the amount of standby charges. The tribunal in AY 2000-01 held that the amount finally settled between the company and TPC should be included for working out the average price paid to TPC and that should become the market value for computing profit of generation unit at Dahanu for the purpose of deduction u/s 80IA. The assessments in the later years was also completed on the same basis as the assessee company accepted the CIT(A) order on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gency and special appropriation. The profits which are eligible for deduction u/s. 80 IA are the profits before tax and before the statutory appropriations (which are not allowed to be reduced while computing profits eligible for deduction u/s. 80IA). b) The profits determined by MERC are not for generation alone but generation and distribution as well purchase and distribution. The combined profits have to be bifurcated between generation activity and distribution activity - distribution of self generated as well as purchased power for the purpose of computing deduction u/s. 80IA. c) The profits of the assessee whether as per books of accounts or as allowed to be computed for the purpose of tariff fixation will match with the Reasonable Return. The exercise of adjusting gap between the Reasonable Return and the profits i,e. clear profits is an ongoing process and the same is either allowed to be recovered from the consumers out of fixation of tariff for subsequent year or the tariff for the subsequent year is adjusted to take care of the excess gap. Thus Clear Profits which are in excess of the Reasonable Return does not cease to be the profit of the company but is only considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. In this case the eligible business is generation of power and power generated is transferred to the business of distribution of power which is also carried on by the Assessee. b) The consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods or services as on the date of the transfer. c) It is only when condition (b) is satisfied then the Revenue gets a right to determine profits and gains of such eligible business at the market value of such goods or services as on the date of its transfer. Till A.Y. 05-06, the Revenue considered the rates at which power was purchased by the Assessee from TPC as the market value. There is nothing brought on record to show as to how the rates, based on the determination of power tariffs by MERC, is the true market rate especially in the light of the reasons given by the Assessee as to why the said rates do not reflect the correct market rate if applied in the case of the Assessee. In the given facts and circumstances of the case, we are of the view that there is no reason to deviate from the mode of computation of profits eligible for deduction u/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perations were also within the purview of object 8M and 15 of the Company's Memorandum of Association which provided as follows: "Object 8-M: To invest and deal with the moneys of the company in such manner as may from time to time be determined. Object 15: To subscribe absolutely, or subject to any condition or contingency for, or purchase or acquire in any way, any shares, stock, debentures, debenture-stock or other obligations of any other company of any description." The Assessee submitted that considering the above features, the earnings from these transactions should not be classified as capital gains but should be treated as business income. 47. The Assessing Officer however treated the income from sale of units of mutual funds and securities as capital gain. 48. On appeal by the assessee the CIT(A) following the earlier orders of the Tribunal in assessee's own case held that the income in question has to be assessed as income from business. 50. After considering the rival submissions and perusing the relevant material on record we observe that this issue came up before the Tribunal in the immediately preceding year i.e. assessment year 2003-04. The relevant discussi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sections (2) and (3) of Section 14A of the Income Tax Act 1961 are constitutionally valid; iv)The provisions of Rule 8D of the Income Tax Rules as inserted by the Income Tax (Fifth Amendment) Rules 2008 are not ultra vires the provisions of Section 14A, more particularly sub section (2) and do not offend Article 14 of the Constitution; v) The provisions of Rule 8D of the Income Tax Rules which have been notified with effect from24 March 2008shall apply with effect from Assessment Year 2008-09; vi)Even prior to Assessment Year 2008-09, when Rule 8D was not applicable, the Assessing Officer has to enforce the provisions of sub section (1) of Section 14A. For that purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record; vii)The proceedings for Assessment Year 2002-03 shall stand remanded back to the Assessing Officer. The Assessing Office ..... X X X X Extracts X X X X X X X X Extracts X X X X
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