TaxTMI 
TaxTMI 
2011 (9) TMI 1093
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.... of power plant etc. The assessee while computing its business income had claimed a deduction on account of a sum of Rs. 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 ....
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.... 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/06 5. A.Y.2003-04 7 7 78 3506&3371/M/06 6. A.Y. 2004-05 4 12& 13 84 3951/M/07 7. A.Y.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 Rs. 31,20,93,600/- as revenue expenditure." 8. The assessee claimed as deduction a sum of Rs. 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 explain....
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....ns Page No. of paper book No. II ITA No. Para No. 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 3 75 3506&3371/M/06 6. A.Y. 2004-05 3951/M/07 17 85 TO 86 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. G....
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....ome. Head office expenses Rs. 139,01,61,443 Less:Depreciation as per Books Rs. 1,26,86,600 Add: Depreciation as per IT Act Rs. 1,72,33,808 Less: Loss on sale of assets Rs. 2,70,809 Less :Provision for doubtful debts Rs. 1,48,93,277 Net allocable HO expenses of the Assessee. Rs. 137,95,44,565 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. 6575,25,34,334 Less: Income tax refund Rs. 47,46,54,069 Rs. 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 Rs. 134,95,44,565/- was allocated in respect of the....
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.... 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 de....
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....eration 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 compu....
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....ination 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, incom....
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....le 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....
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.... is adjusted to take care of the excess gap. Thus Clear Profits which are in excess of the Reasonable Return does not cease to be the profit of the company but is only considered for fixing the Tariff for the subsequent year and in subsequent year the profits will be less on account of lower fixation or tariff and deduction u/s. 80IA will also be lower. The gap between the Clear Profit and Reasonable Return continue to remain with the company. d) The Assessee pointed out that there are 3 different figures of profits: i) Profit as per books of accounts. ii) Profits as computed by MERC i.e. Clear Profit iii) Reasonable Return. The Tariff fixation if done prior to the end of the year will take into account the estimate of revenue and expenditure and will not match the actual. In such an even there will be difference between the actual and the Clear Profits worked out by MERC. There will again be a difference between the Clear Profits and Reasonable Return. Difference between 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 Prof....
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....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....
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....r 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. ....
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....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 submissio....
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....PC 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. 29. Respectfully following the decision of the ITAT for AY 06-07 on identical issue, we uphold the order of the CIT(A) and dismiss Gr.No.4 raised by the Revenue. 28. 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 directing the Assessing Officer 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 ....
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....idering the submissions and the orders of the lower authorities, we find that the claim of the assessee deserves to be allowed. The provisions of sec. 80A(2) and 80B(5) are very clear and these provisions show that the deduction has to be set off against the total gross income and not the net business income alone 17. Similar issue came before the Tribunal in the case of Royal Cushion Vinyl Products (supra) by which the Tribunal has held that; "The question is whether the Assessing Officer was justified in restricting the aggregate deductions under Chapter VIA to the business income o whether the assessee is right in its claim that the deduction should be allowed upto Rs. 11,84,54,517/- i.e. upto the gross total income. Sec. 80A(1) says that in computing the total income of an assessee, there shall be allowed from his gross total income in accordance with and subject to the provisions of this Chapter, 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 ac....
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....so that a negative figure of total income is arrived at. All he can claim is that he should be allowed deduction of Rs. 11,84,54,517/- making the total income nil. This is what the assessee in the present case claims. It must be remembered that the deductions envisaged in the various sections under chapter VI-A are not to be given against the income computed under the individual heads of income. The deductions have to be aggregated and have to be allowed against the gross total income, so as to arrive at the total income. This, in our view is the scheme of the Act. Accordingly, we old that the assessee is entitled to the deduction under Chapter VI-A to the extent of figure of gross total income. The ground is allowed." 18. After going through the order of the Tribunal and the facts of the case, we are of the view that the ratio of the decisions of the Tribunal in the case of Royal Cushion 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 g....
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....ompanies Act then the provisions of sec. I15JB cannot be forced. Therefore, in view of the above facts and circumstances and respectfully following the above decisions of the Hon'ble Supreme Court and the decision of the Tribunal for A.Y 88-89, we hold that provisions of sec. 115JB are not applicable on the facts of the present case." 39. Similar view has been taken by the Tribunal in assessment years 2002-03 and 2003-04 as has been discussed in para 14 of the said order and also in the order for A.Y 2004-05. Respectfully following the precedents we accept the assessee's claim and hold that the provisions of section 115JB cannot be applied. 40. In the result, the appeal by the revenue is dismissed. ITA NO.5692/MUM/10: ASSESSEE'S APPEAL: 41. 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. 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....
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....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. 43. 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 relev....