IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH … · 2018. 3. 25. · The DCIT 1(1), Room...

ITA NO. 4631&4838/MUM/2009(A.Y. 2006-07)

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IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH “D”, MUMBAI

BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI T.R.SOOD(A.M)

ITA NO. 4631/MUM/2009(A.Y. 2006-07)

Reliance Infrastructure Ltd., Reliance Energy Centre, Santacruz (E), Mumbai – 55 PAN:AACCR 7446Q (Appellant)

Vs.

Addl. CIT, Range 1(1) Room No.529, Aaykar Bhavan, M.K.Road, Mumbai -20. (Respondent)

ITA NO.4838/MUM/2009(A.Y. 2006-07)

The DCIT 1(1), Room No.579, Aaykar Bhavan, MK Road, Mumbai – 20. (Appellant)

Vs.

Reliance Infrastructure Ltd., Reliance Energy Centre, Santacruz (E), Mumbai – 55 PAN:AACCR 7446Q (Respondent)

Assessee by : S/Shri Arvind Sonde/ Jitendra Sanghvi

Revenue by : Dr. B. Senthil Kumar

ORDER

PER N.V.VASUDEVAN, J.M, ITA No.4838/Mum/09 is an appeal by the revenue while ITA No.4631/Mum/09 is an appeal by the assessee. Both these appeals are directed against the order dated 19/6/2009 of CIT(A)-I, Mumbai relating to assessment year 2006-07. First we take up for consideration the appeal by the revenue in ITA No.4838/Mum/09. Ground No.1 raised by the revenue reads as follows.

“1.On the facts and in the circumstances of the case and in law, the CIT(A) erred in allowing the assessee’s claim of environment monitoring expenses of Rs. 1,49,34,929/- and community development expenses of Rs. 64,61,794/- treating it as expenditure incurred for the purpose of business.

2. The assessee is engaged in generation and distribution of electricity, execution, procurement and commissioning of power plant etc. The assessee while computing its

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business income had claimed a deduction on account of a sum of Rs. 2,13,96,720/- 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 expenditure incurred on construction of fountain for beautification of traffic island with the purpose of advertising the name of the assessee’s business was held to be deductible expenditure. Similarly contribution to Municipality for providing under ground pipe lines through municipal limits for the disposal of effluence discharged by the assessee’s factory so as to guard against the health hazard to the citizens was held to be allowable as business expenditure. Besides the above several other decisions were also brought to the notice of the Assessing Officer. It was also submitted that Hon’ble ITAT in assessee’s own case has considered similar item of expenditure and has allowed the claim for deduction. The Assessing Officer however for the reasons discussed in assessment orders of the Assessee in AY 1999-2000 and 2000-2001 on identical item of expenditure held that the expenditure was not wholly and exclusively incurred for the purpose of business of the assessee 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.

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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 No. Para No. Page No. of Paper book No.II

ITA No.

1. A.Y 1999-00 13-16 8 13 to 16 590&436/M/04 2. A.Y. 2000-01 20 14 20 -DO- 3. A.Y. 2001-02 3 6&7 39 TO 40 218/M/05 4. A.Y. 2002-03 7 7 78 3505&3370/M/065. A.Y.2003-04 7 7 78 3506&3371/M/066. A.Y. 2004-05 4 12& 13 84 3951/M/07 7. A.Y.2005-06 3 8&9 89 4164/M/07 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 Rs. 75,32,88,942/- as revenue expenditure.”

8. The assessee claimed as deduction a sum of Rs. 75,32,88,942/- 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:-

“(a) Replacing old meters by new meters has resulted only in getting better readings of the current consumption and did not in any way enhance the capital assets or the quantity of power supply. (b) The average cost of each meter is less than Rs. 1,200/- which is negligible compared to the cost of the Assessee’s entire plant and machinery which is in excess of Rs. 2500 crores. The expenditure for replacement of the meters is claimed as revenue expenditure as it is in the nature of current repairs of the existing meters (plant & machinery). Even during the current year, out of total expenditure incurred of Rs. 89,70,71,397/- on capitalization of meters ( as per books), only Rs. 14,37,82,455/- being new meters installed at new customers premises were treated as capital expenditure for tax purposes while only expenditure incurred on replacement of existing meters amounting to Rs. 75,32,88,942/- was claimed as revenue expenditure.”

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9. The assessee also pointed out that in the past Tribunal from A.Y. 1999-2000 to 2005-06 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 issue was 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. Para No. 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 1 TO 3 69 TO 70 4. A.Y.2002-03

3505&3370/M/06 3 75

5. A.Y. 2003-04 3506&3371/M/06

3 75

6. A.Y. 2004-05 3951/M/07 17 85 TO 86 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.

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S.No. Name of Unit Nature of business Amount claimed. 1. Samalkot Power Generation Generation &

distribution 60,23,11,654

2. Goa Power Plant -do- 10,44,54,415 3. Dahanu Unit-1 Generation 255,25,33,002 4. Dahanu Unit-2 Generation 234,17,58,239 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 view of section 80IA(5) of the Act. The assessee justified its action of not allocating head office expenses while arriving at the profits of the generation division as follows: For claiming benefit u/s.80-IA, the profit of the undertaking had to be determined by taking into account the income earned from the eligible activities and deducting therefrom the expenses incurred for earning the said income. The profit of the undertaking has to be computed as if such undertaking was the only source of income of the company during the previous year and no head office expenses has been allocated to the undertaking. The benefit in question u/s. 80IA is available on the profits and gains “derived” from such business . Hence it would be incorrect to reduce the profit and gains derived from such business, by any portion of the head office expenses allocated on any basis to the various business. The assessee also drew attention to the decision of Tribunal in their own case for A.Y 2003-04 in which the allocation of head office expenditure for the purpose of computation of deduction u/s. 80IA was considered and the allocation of expenses was not permitted. 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 =================

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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 turnover of the assessee Rs. 4607,88,25,713 Less: Income tax refund Rs. 2,12,52,754 --------------------------- Rs. 4605,75,72,959 ================== 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: 2242471920 X 124,92,70,776 / 4605,75,72,959 = 60,814,149 HO expenses of Samalkot Unit: 2349814874 X 124,92,70,776 / 4605,75,72,959 = 63,725,209 Accordingly head office expenses of Rs. 12,45,39,358/- was allocated in respect of these two units and 80IA deduction was restricted to Rs. 53,85,86,445/ and Rs.4,36,4026/ in respect of Samalkot and Goa Units 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 earlier assessment years. The details of which are as follows: S.No. Particulars Tribunal decisions

ITA No. Para No. Page No. of paperbook No.II

1. A.Y.2002-03 3505&3370/M/06

13 78 to 79

2 A.Y. 2003-04 3506&3371/M/06 13 78 to 79 3. A.Y. 2004-05 3951/M/07 3 & 4 81 to 82 4. A.Y 2005-06 4164/M/07 3&4 87 to 88 18. We may in this regard point out that the issue came up for consideration assessee’s case in ITA No.399/M/04 for A.Y. 2000-01 and this Tribunal held on identical issue as follows.

4. After considering the rival submissions and perusing the relevant material on record we find that this is a recurring issue in assessee’s own case inasmuch as the Tribunal has decided it in assessee’s favour in assessment years 2000-2001 to 2003-04. The copies of the orders passed by the Tribunal have been placed on record. In the order for the assessment year 2002-2003 and 2003-04 this issue has been discussed at page 7 para 13 and thereafter decided in assessee’s favour. The ld. D.R could not point out any distinguishing feature in the facts of the instant year vis-à-vis the

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preceding years. Respectfully following the precedents we reject the ground taken by the revenue.

Respectfully following the precedent, We uphold the order of the CIT(A) on this issue and dismiss ground No.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 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;

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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 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) and distributing it. After the commencement of generation of electricity at Dahanu, the company continued to purchase electricity from TPC as the generation of electricity at Dahanu was only 500 MW whereas the supply in Mumbai region was more than 1200 MW. The Assessee did not sell the electricity that it generated at Dahanu to outsiders but utilized the entire generation in the existing business of distribution of electricity in Mumbai. The company in AY 2000-01 had computed the profit on generation of electricity at Dahanu by taking the average selling price realized from the consumers in Mumbai. The average price was arrived at by dividing the total revenue by the actual power consumed by the consumers. The Assessing Officer in AY 2000-01 did not accept the above method of working of profit of Dahanu Unit as in his view the company was not entitled to the deduction u/s 80IA on the distribution activity. The Assessing Officer held that the company was entitled to deduction only in respect of generation of electricity at Dahanu and the profit / loss in respect of distribution 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 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.

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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 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. 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 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 on 1st July 2004 which is applicable 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 suburb at

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Rs.210 Crores. According to the AO, if reasonable rate of return is determined on pro rata basis of self generated power and purchased power, the profits of Dahanu 1 and Dahanu 2 units would be Rs.57 Crores and Rs.53 Crores respectively. He was of the view that the earlier orders of Tribunal adopting the price paid by Assessee while purchasing power from TPC for determining profits of the business of generating power in Dahanu 1 and Dhanau 2 units for allowing deduction u/s.80-IA of the Act, was no longer relevant because of the determination of tariff by MERC. He was of the view that the claim of the Assessee for deduction u/s.80-IA of the Act, at Rs.489.43 Crores, adopting the price paid by Assessee while purchasing power from TPC for determining profits of the business of generating power in Dahanu 1 and Dhanau 2 units for allowing deduction u/s.80-IA of the Act, as was done in the past need not be followed. He therefore called upon the Assessee to show cause as to why the profits of business of generating power of Dhanau-1 and Dhanau-2 unit should not be adopted at Rs.110 crores for allowing deduction u/s.80-IA of the Act. 25. The assessee submitted before the Assessing Officer as follows:

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 Assessee pointed out that this aspect would 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 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

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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 and generation divisions. Whereas for deduction u/s. 80 IA only profit of generation activity is to be considered. c) MERC while fixing up the tariff redraws upon the profitability based on allowance or disallowance of certain items. It was pointed that from page 57 of the MERC order for F.Y 2005-06, the Clear Profit worked out by the assessee was Rs. 158 crores in the petition whereas MERC has worked out the same at Rs. 266 crores. MERC compared the revised Clear Profit worked out by them with the Reasonable Return and worked out the gap at Rs. 56 crores. Thus the results in the books of accounts are totally different from the Clear Profits worked out by MERC. The gap between the clear profits and Reasonable Return are adjusted by MERC against the revenue requirement of the Distribution function. The said surplus has been utilized to reduce tariff burden on consumers. Accordingly the above Surplus was adjusted against revenue shortfall for FY 2006-07. The Assessee pointed out that the above would be evident from a reading of page 105 of MERC Order dated 3/10/2006. The Assessee pointed out that based on the above order of MERC it can be seen that 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. This 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 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.

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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 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 Reasonable Return is not the criteria for allowance of deduction u/s. 80 IA. The profits which are included in total income irrespective of whether the same are more or less than the Reasonable Return are eligible for deduction under section 80 IA.

26. The Assessing Officer however did not agree with the contention on behalf of the assessee and he held as follows:

“The MERC has determined the profit of generation and distribution business in Mumbai Suburb for F.Y 2005-06 at Rs. 210 crore. Reasonable return of generating units can be computed on pro rata basis of self generated power and purchased power. Accordingly pro rata return for Dahanu 1 and Dahanu 2 will be Rs. 57 crore and Rs. 53 crore respectively. The assessee has objected the appropriation of profit on the basis of purchased power and self generated power on the ground that there is no uniform profit in generation and distribution. Assessee has claimed that there is huge loss in the distribution business, as assessee has to sell power to large number of consumers at less than its purchase price. Assessee also submitted computation of loss on distribution and argued to adjust from the combined profit worked out by the MERC, in order to arrive at the profit from the generation business, but same can not be accepted as MERC has not computed loss in the distribution business. Assessee’s computation is also not accepted as the reasonable 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

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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. 80IA(8) can be applied only when computation of profits and gains of the eligible business. In the manner specified in sec. 80IA(8) presents exceptional difficulties. He pleaded that section 80IA(8) required the Assessing Officer to adopt the value of goods transferred from eligible business to non eligible business. There was no exceptional difficulties in computing the market value of goods in the assessee’s case. He further pointed out that indication of the market price of power is readily available as the assessee has also purchased power from TPC. So the rate at which the assessee has purchased power from TPC can be taken as the market price of the goods generated by the assessee. He made a mention here that the price charged by the TPC to the assessee is lower than what MSEB charges to its customers. So the lower market price has been adopted. He further pointed out that the details of the price to be charged by the distribution division to the ultimate consumers is not relevant. What is relevant is the price which the assessee should apply to the power generated by it and transferred to the distribution division. The stage at which MERC order is applicable is a stage after the stage of transfer of power from generation to distribution. So the tariff structure decided by the MERC in the assessee’s case is not relevant at all. The assessee further pointed out that in the order for A.Y 2001-01, the Assessing Officer rejected the assessee’s claim of applying the price charged to the ultimate consumer as the market price for the power generated by it. The CIT(A) maintained the Assessing Officer’s order and by invoking the proviso to sec. 80 IA(8) and held that the purchase price from TPC is to be applied as market value of power generated and transferred by the assessee in place of the ultimate selling price to the consumers. So the assessee submitted that a reference cannot be made to the same proviso now, to adopt the ultimate selling price to the consumers as the market value of power generated and transferred by the appellant which alone is relevant for the purpose of working out the profit to work out the deduction allowable u/s. 80 IA. 28. The assesee further submitted that profit worked by MERC is a combined activity of generation and distribution and it is required to be bifurcated between generation and distribution. The working made by the MERC 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.

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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 sec. 32, disallowance u/s.40(a)(ia), 43B etc. The Assessing Officer has wrongly adopted the reasonable return which is the figure after tax thereon and statutory appropriations, without making any adjustment as per the Income-tax Act. In doing so the Assessing Officer has ignored the provisions of Income-tax Act in working out the deduction u/s. 80IA. 29. It was further submitted by the assessee that tariff structure is the ultimate price realised from the customer and nothing to do with the value of power generated at the assessee’s unit which is transferred to the distribution division. For distribution activity there are two source of power procurement i.e. power generated at Dahanu and power purchased from TPC. The rate at which the power was supplied by TPC is determined by MERC in its case as the rate applicable to bulk supply. The assessee’s Dahanu unit also supplies power to the distribution division on bulk supply basis as the entire production is given to the distribution business. So for the purpose of working out the profit of the generation unit, what is relevant is not the tariff structure determined by MERC for the tariff to be charged to the ultimate consumers, but the price to be realized by the generating unit for the power generated and sold, by comparing the same with the similar entities doing similar activity, that is supply of power on bulk basis. It was further submitted that the Assessing Officer has wrongly bifurcated the combined profit of distribution and generation. The assessee is generating power which meets about 50 to 55% of the demand in the licensed area and therefore the assessee has to procure power from another company generating power i.e. TPC. The power purchased from TPC is sold to consumers and therefore it is a trading activity. In this distribution of power purchased from TPC, the assessee is incurring loss. The assessee submitted that the figures of sales, purchase and proportionate distribution expenses to demonstrate the loss on distribution of TPC power. According to assessee, the assessee’s cost of purchase from TPC is Rs. 3.15 per unit and distribution cost is Rs. 1.50 per unit, thus making the total cost at Rs.4.65 per unit. As against this the average realization of sale prices works out to Rs.3.94 per unit resulting in a loss of Rs. 0.71 per unit in the distribution activity of the power purchased from TPC. 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

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documents to the assessee. In the absence of such documents the assessee cannot comment on the result of the said company. Taking into the entirety of the facts and earlier orders in the assessee’s own case, the assessee submitted that the deduction u/s. 80 IA should be worked out by applying the market rate under sub section (8) of sec. 80 IA to the power generated in the generating unit. 31. On consideration of the above submissions the CIT(A) held that in the assessment of the assessee in the past the revenue has always treated generation, transaction and distribution of power as separate revenue yielding activities and that it was only the income from generation of electricity which is entitled to deduction under section 80 IA of the Act. The CIT(A) also found that in the past the revenue applied the provisions of section 80IA(8) considering the rate of purchase of power from TPC as appropriate market price for the power generated and transferred by the generation division to the distribution division. This method of working the deduction under section 80 IA has been accepted by the Tribunal from the assessment year 2000-01 to 2005-06. 32. With regard to the order of MERC the CIT(A) was of the view that the reasonable rate of return and clear profit worked out by MERC is for the purpose of the electricity tariff to be charged to the ultimate consumers. According to CIT(A) with passing of the MERC order there could be no change in the method of calculation of profits for the purpose of deduction under section 80 IA of the Act. The CIT(A) held that the price at which the assessee purchased electricity from outside party would be the most appropriate yardstick for the purpose of comparison under section 80 IA(8) of the Act. He also held that the proviso to section 80 IA(8) would not be applicable. In this regard the CIT(A) held that the proviso only supplements the provisions of sec. 80IA. The sub-section (8) say that any transfer of goods by or to the eligible business will be valued at the market rate. In the assessee’s case it has transferred power generated by it to the distribution business. So the question is whether there was any difficulty in computing the market value of this power in view of the tariff rates prescribed by MERC. The various rates of tariff fixed by MERC was for different types of consumers including bulk suppliers. In the assessee’s case market rate of power is available because the assessee itself has purchased power from TPC. Further, the rate at which 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 sub-section (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.

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33. With regard to the clear profit determined by the MERC order he held that the same is the book profit of the assessee on the basis of company law and is worked out after debiting Income tax and depreciation as per company law. If proper adjustment is made as per the Income tax Act then such profit would be around 334.72 crores. He held that even this profit cannot be assessed as income under the Act and for the very reason the same cannot be adopted as income for allowing deduction under section 80 IA of the Act. 34. The CIT(A) also held that the profits determined by the order of the MERC is the profit of the entire business of generation and distribution of power by the assessee and that it was only the activity of generation of power that was to be considered for deduction under section 80 IA of the Act. In this regard CIT(A) found that the assessee maintained separate books of account in respect of its generation unit and there was no reason to deviate from the method of computing profits of generation as was done in the past. The CIT(A) also held as follows:

“There are three options for adopting the market price, the price charged by the MSEB, the price charged by the appellant to its consumers or the price charged by TPC on its sales of power to the appellant has adopted the TPC price as the market price for transfer of its goods, there is no scope for interference , particularly because this position has been adopted by the Assessing Officer in the earlier years and upheld by the ITAT after elaborate discussion on this subject. The order of MERC will in no way change the method of calculation of deduction of 80IA of the I.T. Act. 10.29 Taking into consideration the entire facts of the appellant’s case, I am of the view that the deduction u/s. 80 IA in respect of the appellant’s generation units has to be worked out on the basis of sub-section (8). The market price for this purpose is to be adopted as the price of power purchased from TPC as settled by the ITAT in A.Y. 2000-01 and followed in subsequent years the principle of consistency has to be adhered to in this regard and the orders by MERC has not been changed the scenario, so far as deduction u/s. 80 IA of Income-tax is concerned . Since the facts and circumstances of the case are the same as in the earlier years, I respectfully follow the orders of the ITAT on this issue and direct the Assessing Officer to compute the deduction u/s. 80 IA as directed in the said order. This ground of appeal 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 in Maharashtra has been worked out at Rs.266 crore and Rs.210 Crore respectively by MERC. He pointed

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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 KWH million as transfer price to distribution division for its self generated power. The profit shown by these units for deduction under Sec.80-IA has accordingly worked out at Rs.255,25,33,002 and Rs.234,17,58,239. He pointed out that TPC is also a power generating company and the rate at which it has to sell power has been determined by MERC. The MERC has determined the profit of generation and distribution business in Mumbai Suburb for F.Y 2005-06 at Rs. 210 crore. Reasonable return of generating units can be computed on pro rata basis of self generated power and purchased power. Accordingly pro rata return for Dahanu 1 and Dahanu 2 will be Rs. 57 crore and Rs. 53 crore respectively and the AO therefore adopted this as the basis for determining profits on which deduction u/s.80-IA of the Act, had to be allowed. It was submitted by him that under Sec.80-IA(8) of the Act, the profits and gains of eligible business has to be computed by adopting the market value of goods or services as on the date of transfer. It was his submission that the market value adopted in the past assessment considering the price paid by the Assessee to TPC cannot be said to be conclusive and if a better and scientific method is available, it was open to the revenue to resort to such method to determine profits on which deduction u/s.80-IA is to be worked out. It was this exercise which the AO had carried out in determining the profits of the business for allowing deduction u/s.80-IA of the Act. It was also submitted by him that the AO has in the alternative considered the profits generated by Tata Power Corporation and the fact that it 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 of Rs.110 Crore, the deduction u/s. 80IA of Rs.110 crore in respect of Dahanu Units was reasonable. According to him the proviso to Sec.80-IA(8) clearly empowers to compute profits and gains on a reasonable basis when determination of market value in relation to any goods or services presents exceptional difficulties. In this regard it was argued by him that explanation below Sec.80-IA(8) provides as follows.

“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.”

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.

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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) and distributing it. After the commencement of generation of electricity at Dahanu, the Assessee continued to purchase electricity from TPC as the generation of electricity at Dahanu was only 500 MW whereas the supply in Mumbai region was more than 1200 MW. The Assessee did not sell the electricity that it generated at Dahanu to outsiders but utilized the entire generation in the existing business of distribution of electricity in Mumbai. The company in AY 2000-01 had computed the profit on generation of electricity at Dahanu by taking the average selling price realized from the consumers in Mumbai. The average price was arrived at by dividing the total revenue by the actual power consumed by the consumers. The Assessing Officer in AY 2000-01 did not accept the above method of working of profit of Dahanu Unit as in his view the company was not entitled to the deduction u/s 80IA on the distribution activity. The Assessing Officer held that the company was entitled to deduction only in respect of generation of electricity at Dahanu and the profit / loss in respect of distribution 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 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. 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

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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. 39. The question is whether that position has changed with the determination of tariff rates by the 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 on 1st July 2004 which is applicable 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. 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 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

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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) Reasonable Return which is computed based on hypothetical figure of Capital Base which is adjusted on a year to year basis and which has no reference to the actual figures in the books of accounts is only an exercise for fixation of tariff. 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. The profits which are included in total income irrespective of whether the same are more or less than the Reasonable Return are eligible for deduction under section 80 IA.

41. The Assessee has also given a reconciliation of profits of the business of generation of power, if the profit as determined by MERC is adopted and appropriate adjustments made which would give a true profit from the business of generation of power. The said reconciliation is at page-135 and 136 of the Assessee’s paper book. The same shows a profit of Rs.465.71 crores in the business of generation of power. Thus it is clear that “clear profits” or “reasonable return”, as determined by the MERC would not be 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 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

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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/s.80-IA of the Act, as was done in the past.

43. We also do not agree with the conclusion of the AO that after the passing of the order by MERC, the determination of price of power purchased by the Assessee from TPC presents exceptional difficulties. The fixation of tariff by MERC undergoes several processes like public hearing of all interested parties and other stake holders. The AO has nothing to do with those processes. As far as the AO is concerned, the purchase price from TPC is the best yardstick as the transaction between the Assessee is at arms length between unrelated parties.

44. In the given facts and circumstances of the case, we are of the view that the profits of the business of generation of power worked out by the Assessee on the basis of the price that it paid to TPC for purchase of power continues to be the best basis even after the order of MERC and therefore the same has to be accepted as was done in the past and as approved by the ITAT in Assessee’s case. We therefore dismiss ground No.4 of the revenue.

45. Ground No.5 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 holding that the income from sale of units of mutual fund and securities is business income without appreciating the fact that the assessee is making the said claim in order to avail the undue benefit of set off of deduction u/s. 80IA from the enhanced business income by way of including the income from sale units and securities in its business income.

46. The assessee had income of Rs. 4,97,12,653/- on account of trading in mutual fund which was declared under the head income from business. The Assessing Officer was of the view that the same should be assessed under the head income from capital gain. The assessee before the Assessing Officer submitted that the Company was engaged in providing financial activities and has been trading on a very large scale in government securities and mutual funds since financial year 2002-03. The Assessee dealt in Mutual Fund and other tradable instruments and in this regard had entered into numerous transactions during the year amounting to more than a daily purchase and / or sale. Further the number of days for which the mutual fund units redeemed have been held is very low indicating a very regular and continuous rotation of funds. The company’s business operations 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.

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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 discussion has been made in para 8 of the order and it was finally held that the CIT(A) had correctly decided for considering such income as ‘Business Income’. In the absence of any distinguishing features having been pointed out by the ld. D.R in this year vis-à-vis the earlier years, we uphold the impugned order on this issue. Ground No.5 about the deletion of expenses also stands consequently dismissed. 51. In the result , the appeal of the revenue is dismissed. ITA NO.4631/MUM/09: 52. Ground No.1 raised by the assessee relates to disallowance of expenses incurred in earning income which does not form part of the total income under the Act by invoking the provisions of section 14 A read with Rule 8D of the Act. 53. 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.

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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 profits declared, distributed or paid is a charge on a component of the profits of the company. The company is chargeable to tax on its profits as a distinct taxable entity and it pays tax in discharge of its own liability and not on behalf of or as an agent for its shareholders. In the hands of the shareholder as the recipient of dividend, income by way of dividend does not form part of the total income by virtue of the provisions of Section 10(33). Income from mutual funds stands on the same basis; iii)The provisions of sub 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 from 24 March 2008 shall 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 Officer shall determine as to whether the assessee has incurred any expenditure (direct or indirect) in relation to dividend income / income from mutual funds which does not form part of the total income as contemplated under Section 14A. The Assessing Officer can adopt a reasonable basis for effecting the apportionment. While making that determination, the Assessing Officer shall provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case. 54. In view of the aforesaid decision of the Hon’ble Bombay High Court the issue with regard to disallowance under section 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

ITA NO. 4631&4838/MUM/2009(A.Y. 2006-07)

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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. 55. Ground No.2 raised by the assessee reads as follows:

“The ld. CIT(A) erred in confirming the action of the AO in 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”.

56. The assessee received interest income of Rs. 462.96 cores . the break up which is as follows: “Interest income on investments bond/G Sec. Rs. 7,63,43,084 Interest income on Inter Company Depoist(ICD) & Bank Deposits. Rs. 450,19,58,574 Inrwewar on Others Rs. 3,00,03,069 Interest income Income Tax Refund Rs. 2,12,52,754 ---------------------- Total interest income Rs. 462,95,57,481 =============== The assessee claimed that the aforesaid interest income was business income. The Assessing Officer however held that the income in question was income from other sources. 57. On appeal by the assessee the CIT(A) upheld the order of the Assessing Officer by following the decision of the Hon’ble Madras High Court in the case of South India Shipping Corporation Ltd. 240 ITR 24. 58. Before us ld. Counsel for the assessee submitted that the assessee carried on a systematic activity of making ICD’s in various companies, bonds, bank deposits and, therefore, the income in question should be considered as income from business. 59. We have considered the submissions and are of the view that the stand of the assessee cannot be accepted. From perusal of the nature of interest income it is clear that it was surplus business funds which were deployed to earn interest income. The same was, therefore, rightly treated as income from other sources. We do not find any grounds to interfere with the order of the CIT(A) on this issue. Consequently ground No.2 riased by the assessee is dismissed. 60. Ground No.3 is relating to levy of interest under section 234B is purely consequential and the Assessing Officer is directed to given consequential relief. 61. In the result, the appeal of the assessee is partly allowed for statistical purposes. 62. In the result, appeal of the revenue is dismissed, while appeal of the assessee is partly allowed for statistical purposes.

ITA NO. 4631&4838/MUM/2009(A.Y. 2006-07)

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Order pronounced in the open court on the 31st day of Jan.2011 Sd/- Sd/- (T.R.SOOD) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated. 31st Jan.2011 Copy to: 1. The Appellant 2. The Respondent 3. The CIT City –concerned

4. The CIT(A)- concerned 5. The D.R”D” Bench. (True copy) By Order Asst. Registrar, ITAT, Mumbai Benches MUMBAI. Vm. Details Date Initials Designation 1 Draft dictated on 21/01/2011 Sr.PS/PS 2 Draft Placed before author 27/01/2011 Sr.PS/PS 3 Draft proposed & placed before the

Second Member JM/AM

4 Draft discussed/approved by Second Member

JM/AM

5. Approved Draft comes to the Sr.PS/PS

Sr.PS/PS

6. Kept for pronouncement on Sr.PS/PS 7. File sent to the Bench Clerk Sr.PS/PS 8 Date on which the file goes to the

Head clerk

9 Date of Dispatch of order

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH … · 2018. 3. 25. · The DCIT 1(1), Room...

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