TMI Blog2010 (5) TMI 539X X X X Extracts X X X X X X X X Extracts X X X X ..... nt proceedings u/s.147 of the Act as invalid and consequent cancellation of reassessment proceedings as bad in law. The issues in the appeals by the assessee are on merits of the additions made by the Assessing Officer in the reassessment proceedings. Consequent to the decision of the CIT (A) holding that the initiation of reassessment proceedings u/s.147 of the Act as invalid and consequent cancellation of reassessment proceedings as bad in law, he did not deal with merits of the addition made in the reassessment proceedings. The Assessee in its appeals has prayed that even on merits, the additions made by the Assessing Officer in the reassessment proceedings are unsustainable. We shall first take up for consideration the appeals by the Revenue. 2. The facts and circumstances giving raise to the appeals 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uded 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. 3. However, the Revenue Audit in their report considered the reasonable return worked out by MERC and observed that the profit eligible for deduction u/s 80IA has to be worked out based on reasonable return. Since the reasonable return figure was for the combined activity of generation and distribution, Audit observed that the profit determined in the MERC order should be allocated in the ratio of power generated at Dahanu and total power supplied by the company. Consequent to the audit objection, the Assessing Officer reopened the assessments for the above two impugned assessment years. It was the assessee s objection that a similar issue was considered by the Assessing Officer in the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee company had accepted the Assessing Officer s method of working in AY 2000-01 of adopting price paid to TPC as the market value of electricity generated at Dahanu and transferred to distribution business. However, the computation of profit of Dahanu Unit continued to be a subject matter of appeal as the issue relating to disputed standby charges in the computation of profit of Dahanu Unit and also the issue of allocation of head office expenses were decided by Tribunal. CIT (A) followed his own order for AY 2001-02. The CIT (A) also has stated that the Assessing Officer has reopened the assessment applying section 80IA(10) which is applicable to transactions between two persons. He accordingly cancelled the reassessment proceedings for this Assessment Year also. 6. The revenue is aggrieved on the cancellation of notices u/s 148 by the CIT (A) whereas, the assessee is aggrieved that the issue was not considered on merits as well. Accordingly, there are cross appeals in these two assessment years. 7. Initiating the discussion, the Learned Departmental Representative reiterated the facts and submitted that the assessment for AY 2001-02 was reopened after end of 4 years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r has no reason to believe that income chargeable to tax has escaped assessment. The main contention is that the provisions of section 80IA(10), which was held to be applicable to the assessee are not at all applicable to the assessee. He referred to the provisions of section 80IA(10), more particularly to the wording of the provisions itself where it appears to the Assessing Officer that owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them was so arranged.......... . It was his submission that this provision can be invoked only when there were transactions with any other person . In the assessee s case, it was submitted that transactions were not between the two different organisations but is a case of transfer of goods from eligible business to other non-eligible business with in the organisation. The Assessing Officer, has originally invoked the provisions of subsection (8) as that provision was applicable. Accordingly, his submission that reference to section 80IA(10) in the reasons recorded itself was not correct and so reason to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of completion of reassessment. Referring to the replies given by the Assessing Officer and by the CIT to the audit, placed in the paper book at page 445 to page 455, it was his submission that, since Assessing Officer as well as CIT has not accepted the audit objection, it cannot be stated that they have reasons to believe at the stage of completion of reassessment proceedings. On this proposition alone, the assessment proceedings are bad in law. 8.4 Another contention raised by the Learned Counsel is that the, second proviso to section 147 prevents the Assessing Officer from reopening the assessment in respect of matters, which are subject matter of appeal. It was his submission that the subject matter of appeal in the original assessment was determination of market value of Electricity transferred from Dahanu Unit to distribution network and arriving at the profit on generation by the eligible unit for the purpose of deduction u/s 80IA. The Assessing Officer has determined the market value on the basis of purchase price of Tata Power Corporation (TPC) in determining the sale price of the generated unit. The only issue contested is also with reference to the sale price on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consumer by the MERC and why the submissions made therein cannot be the basis for determining the profits of the assessee. He also referred to the various workings given by the assessee to the MERC for fixation of tariff and explained the intricacies about the fixing of tariffs to the consumers depending on the nature domestic/ industrial consumers and various tariff rates for various class of people, which has no basis for determining the profits of generation unit. The tariff rates are applicable for distribution of electricity and while arriving at the tariff, they have various parameters including 16% reasonable return on capital investment. This is only one of the consideration in fixing the tariffbut MERC also takes into consideration the actual profits earned so for and possible profits in future and various other considerations/ parameters in determining the tariffs, which has no relevance at all in arriving at the profits of the generation unit. He also made reference to the audit objection, replies to the audit objection, placed in the paper book to submit that reopening pursuant to audit objection is invalid and referred to the Hon ble Bombay High Court judgement in IL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 01-02 on 31.10.2001 declaring total income at Nil and taxable income u/s 115JB at Rs 3,41,86,93,066/-. The assessment order u/s 143(3) of the act has been passed on 23.03.2004 assessing the total income under normal provisions of the Act at Rs 38,31,48,980 and u/s 115JB of the Act at Rs 3,41,95,51,266. In the same assessment order, the assessee has been allowed the deduction u/s 80IA of the Act at Rs 1,46,72,642 (in respect of profit from Elastimold business) and also at Rs 3,14,31,23,593 in respect of profit from generation activity. Section 80IA(10) of the I.T. Act, 1961 provides that where it appears to the AO that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produced to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the AO shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been deri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsferred from generated unit 3231 Total sales in license area 5415 Prorate Reasonable profit 137.23 80IA deduction computed 480.41 80IA availed after restricting to available total income 314.31 Excess 80IA deduction availed 177.08 Therefore, I have reason to believe that in the case of the assessee, the income of the assessee chargeable to tax to the extent of Rs 177.08 crores has escaped the assessment for AY 2001-02. This escapement of income is by reason of the failure on the part of the assessee to disclose fully and truly all material fact necessary for the assessment for the assessment year 2001-02 Issue notice u/s 148 of the Act. 10. As can be seen from the above, the Assessing Officer s reason to believe arises from the interpretation of section 80IA(10) and further the determination of profits as reasonable rate of return on capital on the basis of Electricity Act 1948 and MERC order which admittedly was issued after completion of assessment order. These issues are dealt with as under 10.1 Issue of applicability of section 80IA(10) The provision of section 80IA(10) relied upon by the Assessing Officer is as under:- 10. Where it appears to the Assessing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 10.1.3 In view of the clear provisions of section 80IA(8) applicable to the assessee s business, where there are transactions between eligible business and any other business carried on by the assessee (generally called non-eligible business), the Assessing Officer has to determine the market value of goods and services in arriving at the profits. This aspect was taken care by the Assessing Officer at the time of original assessment from AY 2000-01 and onwards and so the Assessing Officer s opinion in invoking the provisions of 80IA(10) is not according to the law and facts. 10.2 Tariff determined in the MERC O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the tariff, there are various parameters to be considered and in that one such parameter is the reasonable rate of return at 16% of the capital cost. However, there are various methodologies in arriving at various workings for determining the tariff and this is based on the provisions of the Act, various instructions and findings of the commission. As per the MOP Notifications investments made after 31.3.1999 are eligible for reasonable return of 16%. licencees were also entitled for 0.5% return on loans from approved institutions and on the investment allowances reserve. Further it indicates that on account of commission s philosophy in reducing the reserves to match the shortfall in clear profit on yearly basis stated capital base was higher than the capital base projected by the BSES. Accordingly, the restated level of reasonable returns for the period FY 2002-03 to financial year 2004-05 has been given in detail in page 117 of the order. As seen from the order and the table, there are various rates of return for investments made by the assessee company from capital base on 31st March 1965 to 1st April 1999 and at various percentages of reasonable return. The probable reasona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s claim of profit is on the actual average sale price to the customers, which was higher than what was as determined while basing the sale price on the power purchased from Tata Power Companies. Since the Assessing Officer has originally exercised the correct provisions of the Act in determining the profit of the eligible unit, the present Assessing Officer s exercise in re-determining the profit on the basis of the Tariff Fixation Order r. w. Electricity Supply Act has no basis at all. Accordingly, we are of the view that reference by the Assessing Officer to MERC s order and invoking provisions of section 147 for reassessment is not correct and has no basis at all. 10.3 Failure to furnish fully and truly all material facts For the assessment year 2001-02, the assessment was reopened after 4 years from the end of the assessment year. As per the first proviso to section 147, the Assessing Officer cannot reopen the assessment unless there is failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. As rightly submitted by the Learned Counsel, the Electricity Act 1948 and its notification issued way back in 1992 are in the publ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action or to grant permission as may be provided under the Foreign Exchange Regulation Act, 1973. That, however, could not be a ground for the Income-tax Officer to assume jurisdiction to start reassessment proceedings either under section 147(a) or section 147(b) of the Act on the ground that that it would be in consequence of information in his possession in the shape of these two letters. Both the Acts-the Income-tax Act and the Foreign Exchange Regulation Act-operate in different fields. The two letters were wholly irrelevant and could not be treated as information to the Income-tax Officer to initiate reassessment proceedings. Therefore, there was inherent lack of jurisdiction in the Income-tax Officer to issue notices under section 148 of the Act on the basis of any income of the appellant escaping assessment either under clause (a) or clause (b) of section 147 of the Act. All the notices under section 148 of the Act were liable to be quashed. In this case also we are of the opinion that the MERC order given subsequently for fixation of tariff on the basis of Electricity Supply Act and its Notifications operate in different field and has no bearing for determination of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tention of the assessee that Assessing Officer has changed his opinion in re-determining the profits. As discussed earlier, the Assessing Officer originally invoked section 80IA(8) in assessment year 2000-01 in re-determining profits and the same was followed in later years including the impugned years. now, again re-determining the profits under 80IA(10) which is not applicable to the assessee at all, can only be considered as change of opinion. Accordingly, it was argued that change of opinion cannot be a basis for reopening of the assessments. In this regard reliance was placed on the judgment of the Hon ble Supreme Court in the case of Kelvinator India Ltd 320 ITR 561(SC). In the present case we find that there was an audit objection based on which the assessment proceedings were reopened. Though the Assessing Officer did not accept the audit objection later after initiation of reassessment proceedings, yet the fact remains that there was some material based on which he issued notice u/s.148 of the Act. In the decision of the Hon ble Supreme Court in the case of Kelvinator India Ltd. (supra) it has been clarified that even after 1st April, 1989, Assessing Officer has power to r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer should have reason to belief not only at the time of assessment but also at the time of completion of assessment. This argument can t be accepted as the parameters for reopening on the basis of Reason to believe has to examined only at the time of issue of notice u/s 147 r w s 148. In fact, the sufficiency of the material available with the Assessing Officer was called in question many a time, but there is consistent judicial opinion on this issue that sufficiency of material for reason to believe that income has escaped assessment has to be examined at the time of initiation of the proceedings. Even though the Assessing Officer was empowered to drop proceedings, initiated u/s 147 by virtue of provisions of section 152(2), there is no restriction in concluding the proceedings, having been initiated validly. However, this issue becomes academic, as proceedings u/s 147 are held to be bad in law by virtue of first proviso to section 147 for assessment year 2001-02 and in both the years it involved merger of the orders of the higher authorities and second proviso to section 147 limits the jurisdiction of AO and also on the basis of change opinion, and other reasons as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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