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TMI Blog2011 (9) TMI 1093X X X X Extracts X X X X X X X X Extracts X X X X ..... ng its business income had claimed a deduction on account of a sum of ₹ 3,61,59,800/- towards community development and environment monitoring expenses. The assessee explained before the Assessing Officer the purpose for which these expenses were incurred as follows: Environment Monitoring Expenses: 1) Pollution Control and Monitoring Expenses. 2) Horticulture and Poly houses for exotic variety of Flowers expenses. 3) Use of drip irrigation and water harvesting ponds 4) Maintenance of Lawns & gardens in and around the generation plants. Community Development Expenses: 1) Maintenance of Public gardens with displaying of placards of company name to create a positive image. 2) Providing scholarships to deserving students. 3) Providing educational assistance and supply of books, educational materials etc. 4) Organising Medical camps and providing medical aid. 5) Providing sponsorships, 3. The assessee relied on the decision of the Hon'ble Rajasthan High Court in the case of CIT vs. Kamal & Company., 203 ITR 1038(Raj) and the decision of the Hon'ble Gujarat High Court in the case of CIT vs. Navasari Cotton & Silk Mill Ltd., 135 ITR 546. In the first case exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2005-06 3 8&9 89 4164/M/07 8. A.Y 2006-07 2 to 4 2 to 6 93-95 4631 &4838/M/09 Respectfully following the decision of the Tribunal on identical issue we uphold the order of CIT(A) and dismiss ground No.1 raised by the revenue. 7. Ground No.2 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 Assessing Officer to allow the expenditure on replacement of meters amounting to ₹ 31,20,93,600/- as revenue expenditure." 8. The assessee claimed as deduction a sum of ₹ 31,20,93,600/- being repair to plant and machinery and debited to P&L account and pertaining to electricity meters replaced during the year. According to the Assessing Officer replacement of electricity meters was a capital expenditure and cannot be allowed as deduction while computing the total income. The assessee explained before the Assessing Officer that it had about 2496000 consumers of electricity in the suburbs of Mumbai and the meters installed had to be periodically replaced on account of obsolescence, meters becoming faulty, burned out meters etc. The assessee justified its claim for deduction as follows:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 7. A.Y 2006-07 4631 &4838/M/09 7 to 12 95 to 97 Respectfully following the decision of the Tribunal we uphold the order of the CIT(A) and dismiss ground No.2 raised by the revenue. 13. Ground No.3 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 Assessing Officer not to allocate any head office expenses for the purpose of computing deduction u/s. 80 IA in respect of profits of Goa Unit and Samalkot Unit." 14. The assessee company has claimed deduction u/s. 80 IA in respect of the following units. S.No. Name of Unit Nature of business Amount claimed. 1. Samalkot Power Generation Generation & distribution 58,15,08,564 2. Goa Power Plant -do- 19,32,28,453 3. Windmill Power Project -do- 7,15,31,544 4. Dahanu Unit-1 Generation 361,34,31,448 5. Dahanu Unit-2 Generation 375,41,93,817 The assessee was asked to justify its claim for the deduction u/s. 80 IA and the basis for arriving at the profit eligible for deduction under section 80IA. The assessee was further asked to explain why office expenses should not be allocated while considering deduction u/s. 80 IA in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal turnover of the assessee ₹ 6575,25,34,334 Less: Income tax refund ₹ 47,46,54,069 ₹ 6527,78,80,265 Proportionate HO expenses in relation to turnover is worked out as Turnover of Unit X Total expenses /Total eligible turnover. HO expenses of Goa Unit: 2885899808/65277880265 x 1379544565 = 6,09,88,920 HO expenses of Samalkot Unit: 2671490036/65277880265 x 137,95,44,565 =5,64,57,709 HO expenses allocated to Windmill Unit 90250366/65277880265x1379544565 = 19,09,299 Accordingly head office expenses of ₹ 134,95,44,565/- was allocated in respect of these three units and 80IA deduction was restricted to ₹ 13,22,39,533/-, ₹ 52,50,50,855 and ₹ 6,96,24,245/- in respect of Samalkot , Goa Units and Windmill Unit respectively. 16. On appeal by the assessee the CIT(A) following the orders of the Tribunal in assessee's own case on identical issue in Assessment Year 2002- 03 to 2005-06 directed the Assessing Officer to accept the allocation of Head Office expenses as done by the assessee. 17. Before us it is not in dispute that identical issue has come up for consideration before the Tribunal in assessee's own case in the earlie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc. 80-IA. (1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred per cent of the profits and gains derived from such business for ten consecutive assessment years. (2) to (3)……. (4) (i) To (iii) (iv) an undertaking which,- (a) is set up in any part of India for the generation or generation and distribution of power if it begins to generate power at any time during the period beginning on the 1st day of April, 1993 and ending on the 31st day of March,2011; 21. The claim for deduction u/s 80IA was made in AY 2000-01 and subsequent years. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods or services as on that date : Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit. Explanation.-For the purposes of this sub-section, "market value", in relation to any goods or services, means the price that such goods or services would ordinarily fetch in the open market. 22. In working out the price paid to TPC by the company, the Assessing Officer included the standby charges paid to them in respect of assured uninterrupted supply of electricity. Stand by charges are nothing but an extra payment which the Assessee makes to TPC over and above the price paid for the un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icable for financial year 2004-05. Similar for FY 05-06, applicable for AY 06-07, MERC has fixed tariffs vide its order dated 3/10/2006. The tariffs are fixed based on two concepts viz., clear profits and reasonable return. A reasonable rate of return is fixed on the capital base. There are principles for determination of capital base. Clear profits are determined by considering the income for sale of electricity, non tariff income and deduction expenses, income tax and allowing some funds for contingency. If the clear profits are more than the reasonable rate of return, then the excess is considered while fixing tariffs for the subsequent year. This exercise of adjusting gap between the reasonable return and clear profits is an on going 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. 24. MERC in its order dated 3/10/2006 while fixing tariffs for F.Y. 05-06 (relevant to AY 06-07) had determined the profits of generation and distribution business in Mumbai suburbs. According to the AO, if reasonable rate of return is determined on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 by MERC is for the ultimate price to be charged by the assessee to different type of consumers. Thus MERC order determines the price for activity of distribution of electricity which is either generated or purchased. Therefore, 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. It was submitted that it was at this juncture, the bifurcation of total profits into various segments have to be carried out. The assessee bifurcated its Profit and Loss Account into various divisions, as under: (a) Distribution in Mumbai Region. (b) Generation at Dahanu Plant (c) Wind Mill Division. (d) Elastimold Division (e) EPC Division. Profit in MERC order are therefore required to be compared with the combined figures of distribution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al. 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 Clear Profit and Reasonable Return are adjusted on a rolling manner in subsequent Tariff. Thus on a year to year basis the Reasonable Return will never be same as the Clear Profits or the Profits as per books of accounts, though the difference is always adjusted in a rolling manner as stated above. Thus the Reasonable Return which is computed based on hypothetical figure of Capital Base which is also adjusted on a year to year basis and having no reference to the actuals in the books of accounts is only an exercise for fixation of tariff. However, the actual profit earned which are liable to tax have to be as per the books of accounts and based on the same profits as computed in the books of accounts the deduction u/s. 80 IA has to be computed. It was further pointed out that if the profits as per books of accounts are less than the Reasonable Return the deduction u/s. 80 IA cannot be granted on the amount of Reasonable Return which is a higher figure. Thus the amount of Reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration 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 dispute between the Assessee and the revenue in the past was firstly the assessee wanted to apply the average selling price to consumers as market price and secondly in working out the price paid to TPC by the company, the Assessing Officer included the standby charges paid to them in respect of assured uninterrupted supply of electricity. Stand by charges are nothing but an extra payment which the Assessee makes to TPC over and above the price paid for the units of electricity supplied by TPC to ensure that the supply of power by TPC is uninterrupted. However, there was a dispute between the company and TPC regarding the amount payable as standby charges. The Assessing Officer 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. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excess is considered while fixing tariffs for the subsequent year. This exercise of adjusting gap between the reasonable return and clear profits is an on going 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. 40. Under Sec.80-IA(8) if the goods or services held for the purposes of the eligible business are transferred to any other business carried on by the assessee, then the value for such transfer should be the market value. The market value according to the Assessee is best reflected in the price that the Assessee pays to TPC when it purchases power for use in its distribution business. The price determined by the MERC is not reflective of the correct market price for the following reasons: a) That the amount of Reasonable Return determined by the order of MERC is after deducting the income tax and statutory appropriations being contingency 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e an appropriate yardstick to determine the profits derived by the Assessee from the business of generation of power. 42. The tariff fixed by MERC is inclusive of both the activities of distribution and generation of power. It may not reflect the true rates with regard to the activity of only generation of power. To this submission of the Assessee there is no convincing answer from the revenue. As rightly contended on behalf of the Assessee, the expression "clear profit" and "reasonable return" and the method of its computation would not be relevant while computing income under the Act. Reasonable Return determined by the order of MERC is after deducting the income tax and statutory appropriations being contingency and special appropriation. That is not the basis on which income is computed under the Act. Under Sec.80-IA(8) the following conditions are required to be satisfied: a) Any goods or services held for the purposes of the eligible business are transferred to any other business carried on by 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 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er to allow deduction u/s. 80 IA to the extent of Gross Total Income and not to the extent of the net business income." 29. In this ground the Revenue has projected its grievance against the order of the CIT(A) whereby the CIT(A) directed the AO to allow deduction U/S.80-IA to the extent of Gross total income as against the action of the AO in restricting the deduction u/s.80IA of the Actto the extent of business income. The Assessee had claimed a deduction u/s. 80IA of the Act ₹ 821,38,93,826/- in the return of income filed for the year. The claim for deduction u/s. 80IA was more than the profit under the head "profits and gains of business or profession" but was less than the gross total income. The Assessee had claimed that the deduction under section 80IA should be granted to the extent of gross total income and should not be restricted to the income under the head "profits and gains from business /profession. 30. The AO called upon the Assessee to explain as to why the deduction u/s.80IA should not be restricted to the income from business as per provisions of section 8OAB. 31. The Assessee explained before the AO that similar issue had come up in the appeal for earli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apter, the deduction specified in sec. 80G to 80U. Sub.sec.(2) says that the aggregate amount of the deductions under the chapter shall not in any case exceed the gross total income of the assessee. Sec. 80B(5) defines gross total income as meaning the total income computed in accordance with the provisions of this Act, before making any deduction under this chapter. Sec. 80HH(1) says that where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or the business of a hotel to which this section applied, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to 20% thereof. Sec. 80I(1) is similar in substance. These provisions, read together, indicate that though the quantification of the deduction under the various sections of chapter VI-A is to be made with regard to the profits of the legible business, all such deductions are to be aggregated and granted against the gross total income, in order to arrive at the gross total income at ₹ 11,84,54,517/. He has also rightly quantified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hion Vinyl Products (supra), is squarely applicable on the facts of the present case. Following the decision of the Tribunal, we hold that the assessee is entitled to set off the deduction against the gross total income computed and not against the net business income only. Therefore, the ground of the assessee is allowed and the Assessing Officer is directed to re-compute the deduction and profit of the assessee accordingly. We order accordingly. 35. The above order of the Tribunal in Assessee's own case is applicable to the present A.Y. also because the AO while coming to the conclusion that deduction under Chapter VIA has to be restricted to the income under the head "Income from Business or Profession" had followed the earlier order of the AO, which has been found by the Tribunal to be not correct. The fact that an appeal has been filed against the order of the Tribunal before the Hon'ble High Court is no ground for rejecting the claim of the Assessee. In the event of a contrary decision of the Hon'ble High Court, the revenue has other remedies open in law. We therefore, respectfully following the decision of the Tribunal referred to above, uphold the order of the CIT(A) and d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions of section 14 A read with Rule 8D of the Act. 42. The Hon'ble Bombay High Court in INCOME TAX APPEAL NO.626 OF 2010 in the case of Godrej & Boyce Mfg.Co.Ltd. Mumbai. Vs. Dy. Commissioner of Income Tax,Range 10(2), Mumbai & Anr. And W.P. 758/10 Godrej & Boyce Mfg.Co.Ltd. Mumbai. Vs.Dy. Commissioner of Income Tax Range 10(2), Mumbai & Ors. by Judgment dated 12-8-2010 has dealt with the disallowance that can be made u/s.14-A of the Act. The Hon'ble Court also dealt with the decision of the Special Bench of the ITAT in the case of Daga Capital Management Pvt.Ltd. 117 ITD 169 (mum) (SB) and has laid down the following proposition: i) Dividend income and income from mutual funds falling within the ambit of Section 10(33) of the Income Tax Act 1961, as was applicable for Assessment Year 2002-03 is not includible in computing the total income of the assessee. Consequently, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to such income which does not form part of the total income under the Act, by virtue of the provisions of Section 14A(1); ii) The payment by a domestic company under Section 115O(1) of additional income tax on pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 14A has to be made in accordance with the principle laid down by the Hon'ble Bombay High Court. Rule 8D should not be applied 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. We, therefore, remit the issue to the A.O for fresh consideration as stated above. 44. Ground No.2 raised by the assessee reads as follows: "The ld learned CIT(A) erred in confirming the action of the Assessing Officer in disallowing the bad debts of ₹ 7,29,42,769/- being loan written off." 45. Through this ground of appeal, the Assessee has agitated against the disallowance of ₹ 7,29,42,769/-, which was claimed by the Assessee as loan written off. During the year, the Assessee had debited an amount of ₹ 10,71,04,553 as bad debts. Out of the above sum, ₹ 7,29,42,769/- represented loan given to Reliance Thermal Energy Ltd. which was written off as irrecoverable. This loan was received by Reliance Venture Ltd. as a part of scheme of arrangement under S.391 to 394 of the Companies Act, 1956 and with the approval order of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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