TMI Blog2011 (1) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... nces and after affording reasonable opportunity to the assessee to place all germane material on the record. AO is correct treating net interest income amounting to Rs. 293,83,36,422/- received on Govt. Securities, Interest on Inter company deposits and bank deposits and other interest as "income from other sources" instead of the same taxed as “business income" - ITA NO. 4631, 4838 /MUM/2009 - - - Dated:- 31-1-2011 - SHRI N.V.VASUDEVAN, SHRI T.R.SOOD, JJ. 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 dated19/6/2009of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, not deductible under section 37 of the Income Tax Act, 1961(the Act). The Assessing Officer also observed that the department has filed an appeal against the orders of the Tribunal on identical issue in the earlier assessment years before the Hon ble High Court and, therefore, the disallowance is being made. 4. On appeal by the assessee the CIT(A) deleted the addition made by the Assessing Officer as he noticed that the Tribunal in the earlier assessment years have allowed the deduction of identical item of expenditure. Following the aforesaid orders of the Tribunal the CIT(A) directed the Assessing Officer to allow the claim of the assessee for deduction. 5. Aggrieved by the order of the CIT(A) the revenue has raised the aforesaid ground of appeal before the Tribunal. 6. Before us it is not in dispute that identical issue had come up for consideration in assessee s own case and the Tribunal had already directed the Assessing Officer to allow the claim for deduction. The details in this regard are as follows: S.No. Particulars Tribunal Decisions Page Para No. No. Page No. of Paper book o.II ITA No. 1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ises 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. 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 issuewas considered and decided by the Tribunal in assessee s own case in the earlier assessment y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 mus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rlier assessment years. The details of which are as follows: S.No. Particulars Tribunal decisions ITA No. ParaNo. 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 pricerealized 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... othing 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 sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n business in Mumbai suburb at 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 sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 dated3/10/2006. The Assessee pointed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for AY 06-07, MERC has fixed tariffs vide its order dated3/10/2006. 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 pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 Fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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. TheHon ble Courtalso dealt with the decision of the Special Bench of the ITAT in the case of Daga Capital Management Pvt.Ltd. 117 ITD 169 (mum) (SB) and has laid down the following proposition: i) Dividend income and income from mutual funds falling within the ambit of Section 10(33) of the Income Tax Act 1961, as was applicable for Assessment Year 2002-03 is not includible in computing the total income of the assessee. Consequently, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to such income which does not form part of the total income under the Act, by virtue of the provisions of Section 14A(1); ii) The payment by a domestic company under Section 115O(1) of additional income tax on 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 pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asis or method consistent with all relevant facts and circumstances and after affording reasonable opportunity to the assessee to place all germane material on the record. We, therefore, remit the issue to the A.O for fresh consideration as stated above. 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 ------------------ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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