2010 (5) TMI 605 - AT - Income Tax

Deductions under 80IA - What is deemed generation - Held that - Where plant was set up for generating and selling electricity the electricity was sold to HPGCL and in case HPGCL is not in a position to buy the electricity from the assessee the generation of electricity had to be stopped in such a situation HPGCL pays certain charges in order to compensate for the fixed costs which are incurred even when there is no generation and are required to be incurred for keeping the plant in ready condition therefore the generated income has a direct nexus with the business of industrial undertaking. Thus is eligible for deduction under 80IA Treatment of Provision for Bad Debt while computation of Book Profit under 115J - Held that - As per amendment made by the Finance (No. 2) Act 2009 in section 115JB whereby clause (i) reading as the amount or amounts set aside as provision for diminution in the value of any asset has been inserted in Explanation 1 to section 115JB of the Act meaning thereby that the amount or amounts set aside as provision for diminution in value of assets shall be added back to the net profit if the same is debited to the profit and loss account for the purpose of determining the book profit under section 115JB of the Act. It is now well settled that the provision for bad debt is amounted to a provision for diminution in the value of any asset. The same shall be added back to the net profit for determining book profit. The ground raised by the assessee is rejected.

Summary

Issues Involved:
1. Deduction under section 80-IA for deemed generation income.
2. Exclusion of sale of scrap and credit balances written back from profits for computing deduction under section 80-IB.
3. Adjustment to declared book profit on account of provision for bad debts under section 115JB.

Issue-wise Detailed Analysis:

1. Deduction under section 80-IA for deemed generation income:
The Revenue contested the deduction under section 80-IA for deemed generation income, arguing that the income was earned merely due to the agreement terms with the Electricity Board without actual power generation. The Commissioner of Income-tax (Appeals) allowed the deduction, reasoning that the plant's readiness to generate electricity and the compensation for fixed costs incurred during non-generation periods had a direct nexus with the business. The Tribunal upheld this view, referencing a prior decision in a similar case, emphasizing that both actual and deemed generation incomes were derived from the industrial undertaking's business of power generation. The Tribunal concluded that the income from deemed generation had a proximate nexus with the business and upheld the Commissioner's order, rejecting the Revenue's appeal.

2. Exclusion of sale of scrap and credit balances written back from profits for computing deduction under section 80-IB:
The assessee's claim for deduction under section 80-IB for income from the sale of scrap and credit balances written back was disallowed by the Assessing Officer, stating these incomes were not derived from the business of power generation. The Commissioner of Income-tax (Appeals) upheld this view, noting the term "derived from" in section 80-IB. The Tribunal found that the specific items of credit balances and scrap sales were not adequately examined to establish a direct link with the business operations. The matter was remanded to the Assessing Officer for fresh adjudication, requiring the assessee to provide evidence of the direct connection to the industrial undertaking's business activities.

3. Adjustment to declared book profit on account of provision for bad debts under section 115JB:
The issue of whether the provision for bad debts should be added back to the net profit for calculating book profit under section 115JB was addressed. The Tribunal noted the amendment by the Finance (No. 2) Act, 2009, which clarified that provisions for diminution in the value of assets, including bad debts, must be added back to the net profit. This amendment applied retrospectively from April 1, 2001. Consequently, the Tribunal upheld the Commissioner's decision to add back the provision for bad debts to the net profit for determining book profit, rejecting the assessee's appeal on this ground.

Conclusion:
The Tribunal dismissed the Revenue's appeal regarding the deduction under section 80-IA for deemed generation income and partly allowed the assessee's appeal for statistical purposes, remanding the issue of exclusion of scrap sales and credit balances written back for further examination. The adjustment to book profit for provision for bad debts was upheld, affirming the Commissioner's decision. This judgment was pronounced on May 28, 2010.