RELIANCE INFRASTRUCTURE LTD, MUMBAI V. ADDL CIT RG 1(1), MUMBAI

ITA 5692/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 55548 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 2 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-09-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Assessment Year: 2007-2008
• Appeal Filed On: 13-07-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: B SENTHIL KUMAR
• Keywords: Capital asset; Business income; Depreciation; Business expenditure; Bad and doubtful debts; Revenue expenditure
• Section: 14A; 115JB; 80G; 37

Judgement Text

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.5692/MUM/2010(A.Y. 2007-08) RELIANCE INFRASTRUCTURE LTD., RELIANCE ENERGY CENTRE, SANTACRUZ (E), MUMBAI 55 PAN:AACCR 7446Q (APPELLANT) VS. THE ADDL. CIT, RANGE 1(1), ROOM NO.455, AAYKAR BHAVAN, MK ROAD, MUMBAI 20. (RESPONDENT) ITA NO.6760/MUM/2010(A.Y. 2007-08) THE ACIT, RANGE 10(1), ROOM NO.455, AAYKAR BHAVAN, MK ROAD, MUMBAI 20, (APPELLANT) VS. RELIANCE INFRASTRUCTURE LTD., RELIANCE ENERGY CENTRE, SANTACRUZ (E), MUMBAI 55 PAN:AACCR 7446Q (RESPONDENT) ASSESSEE BY : SHRI JITENDRA SANGHVI REVENUE BY : SHRI B.SENTHILKUMAR DATE OF HEARING : 20/09/2011 DATE OF PRONOUNCEMENT : 28/0 9/2011 ORDER PER N.V.VASUDEVAN, J.M, ITA NO.6760/MUM/10 IS AN APPEAL BY THE REVENUE WHI LE ITA NO.5692/MUM/10 IS AN APPEAL BY THE ASSESSEE. BOTH THESE APPEALS ARE DIRECTED AGAINST THE ORDER DATED 10/5/2010 OF CIT(A )-I, MUMBAI RELATING TO ASSESSMENT YEAR 2007-08. FIRST WE TAKE UP FOR CONS IDERATION THE APPEAL BY ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 2 THE REVENUE IN ITA NO.6760/MUM/10. GROUND NO.1 RAI SED BY THE REVENUE READS AS FOLLOWS. 1.ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE CIT(A) ERRED IN ALLOWING THE ASSESSEES CLAIM OF EN VIRONMENT MONITORING AND COMMUNITY DEVELOPMENT EXPENSES OF RS. 3,61,59,800/- TREATING IT AS EXPENDITURE INCURRED F OR THE PURPOSE OF BUSINESS. 2. THE ASSESSEE IS ENGAGED IN GENERATION AND DISTRI BUTION OF ELECTRICITY, EXECUTION, PROCUREMENT AND COMMISSIONING OF POWER P LANT ETC. THE ASSESSEE WHILE COMPUTING ITS BUSINESS INCOME HAD CLAIMED A D EDUCTION ON ACCOUNT OF A SUM OF RS. 3,61,59,800/- TOWARDS COMMUNITY DEVELO PMENT AND ENVIRONMENT MONITORING EXPENSES. THE ASSESSEE EXPL AINED BEFORE THE ASSESSING OFFICER THE PURPOSE FOR WHICH THESE EXPEN SES 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 POND S 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 B OOKS, EDUCATIONAL MATERIALS ETC. 4) ORGANISING MEDICAL CAMPS AND PROVIDING MEDICAL A ID. 5) PROVIDING SPONSORSHIPS, ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 3 3. THE ASSESSEE RELIED ON THE DECISION OF THE HONB LE RAJASTHAN HIGH COURT IN THE CASE OF CIT VS. KAMAL & COMPANY., 203 ITR 1038(RAJ) AND THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE C ASE OF CIT VS. NAVASARI COTTON & SILK MILL LTD., 135 ITR 546. IN THE FIRST CASE EXPENDITURE INCURRED ON CONSTRUCTION OF FOUNTAIN FOR BEAUTIFICATION OF T RAFFIC ISLAND WITH THE PURPOSE OF ADVERTISING THE NAME OF THE ASSESSEES B USINESS WAS HELD TO BE DEDUCTIBLE EXPENDITURE. SIMILARLY CONTRIBUTION TO MUNICIPALITY FOR PROVIDING UNDER GROUND PIPE LINES THROUGH MUNICIPAL LIMITS FO R THE DISPOSAL OF EFFLUENCE DISCHARGED BY THE ASSESSEES FACTORY SO A S TO GUARD AGAINST THE HEALTH HAZARD TO THE CITIZENS WAS HELD TO BE ALLOWA BLE AS BUSINESS EXPENDITURE. BESIDES THE ABOVE SEVERAL OTHER DECIS IONS WERE ALSO BROUGHT TO THE NOTICE OF THE ASSESSING OFFICER. IT WAS ALSO S UBMITTED THAT HONBLE ITAT IN ASSESSEES OWN CASE HAS CONSIDERED SIMILAR ITEM OF EXPENDITURE AND HAS ALLOWED THE CLAIM FOR DEDUCTION. THE ASSESSING OFF ICER HOWEVER FOR THE REASONS DISCUSSED IN ASSESSMENT ORDERS OF THE ASSES SEE IN AY 1999-2000 AND 2000-2001 ON IDENTICAL ITEM OF EXPENDITURE HELD THAT THE EXPENDITURE WAS NOT WHOLLY AND EXCLUSIVELY INCURRED FOR THE P URPOSE OF BUSINESS OF THE ASSESSEE AND WAS, THEREFORE, NOT DEDUCTIBLE UNDER S ECTION 37 OF THE INCOME TAX ACT, 1961(THE ACT). THE ASSESSING OFFICER ALSO OBSERVED THAT THE DEPARTMENT HAS FILED AN APPEAL AGAINST THE ORDERS O F THE TRIBUNAL ON IDENTICAL ISSUE IN THE EARLIER ASSESSMENT YEARS BEF ORE THE HONBLE 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 I N THE EARLIER ASSESSMENT YEARS HAVE ALLOWED THE DEDUCTION OF IDENTICAL ITEM OF EXPENDITURE. FOLLOWING THE AFORESAID ORDERS OF THE TRIBUNAL THE CIT(A) DIR ECTED THE ASSESSING OFFICER TO ALLOW THE CLAIM OF THE ASSESSEE FOR DEDUCTION. ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 4 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 IS SUE HAD COME UP FOR CONSIDERATION IN ASSESSEES OWN CASE AND THE TRIBUN AL HAD ALREADY DIRECTED THE ASSESSING OFFICER TO ALLOW THE CLAIM FOR DEDUCT ION. 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/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 FOLLO WS: ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 5 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. 3 1,20,93,600/- BEING REPAIR TO PLANT AND MACHINERY AND DEBITED TO P&L A CCOUNT AND PERTAINING TO ELECTRICITY METERS REPLACED DURING THE YEAR. ACCOR DING TO THE ASSESSING OFFICER REPLACEMENT OF ELECTRICITY METERS WAS A CAP ITAL EXPENDITURE AND CANNOT BE ALLOWED AS DEDUCTION WHILE COMPUTING THE TOTAL INCOME. THE ASSESSEE EXPLAINED BEFORE THE ASSESSING OFFICER THA T IT HAD ABOUT 2496000 CONSUMERS OF ELECTRICITY IN THE SUBURBS OF MUMBAI A ND THE METERS INSTALLED HAD TO BE PERIODICALLY REPLACED ON ACCOUNT OF OBSOL ESCENCE, METERS BECOMING FAULTY, BURNED OUT METERS ETC. THE ASSESSEE JUSTI FIED ITS CLAIM FOR DEDUCTION AS FOLLOWS:- (A) REPLACING OLD METERS BY NEW METERS HAS RESULTE D 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 . 1,400/- WHICH IS NEGLIGIBLE COMPARED TO THE COST OF THE ASSESSEES E NTIRE PLANT AND MACHINERY WHICH IS IN EXCESS OF RS. 2500 CRORES. T HE EXPENDITURE FOR REPLACEMENT OF THE METERS IS CLAIMED AS REVENUE EXP ENDITURE AS IT IS IN THE NATURE OF CURRENT REPAIRS OF THE EXISTING METER S (PLANT & MACHINERY). EVEN DURING THE CURRENT YEAR, OUT OF T OTAL EXPENDITURE INCURRED OF RS. 47,63,68,435/-/- ON CAPITALIZATION OF METERS ( AS PER BOOKS), ONLY RS. 35,16,54,760/- BEING NEW METERS IN STALLED AT NEW CUSTOMERS PREMISES WERE TREATED AS CAPITAL EXPENDIT URE FOR TAX PURPOSES WHILE ONLY EXPENDITURE INCURRED ON REPLACE MENT OF EXISTING METERS AMOUNTING TO RS. 35,16,54,760/- WAS CLAIMED AS REVENUE EXPENDITURE. ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 6 9. THE ASSESSEE ALSO POINTED OUT THAT IN THE PAST T RIBUNAL FROM A.Y. 1999-2000 TO 2005-06 HAS ALLOWED SIMILAR CLAIM OF T HE 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 ASSESSEES OWN CASE FOR EARLIER ASSESSMENT YEARS, T HE DEPARTMENT HAD PREFERRED APPEAL BEFORE THE HONBLE HIGH COURT. 10. ON APPEAL BY THE ASSESSEE THE CIT(A) DIRECTED T HE ASSESSING OFFICER TO ALLOW THE CLAIM OF THE ASSESSEE FOR DEDUCTION FOLLO WING THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE IN THE EARLIER ASSE SSMENT YEARS. 11. AGGRIEVED BY THE ORDER OF THE CIT(A) THE REVENU E 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 ASSESSEES OWN CASE IN THE EARLIER ASSESSMENT YEARS . THE ORDERS OF THE TRIBUNAL FOR THE FOLLOWING ASSESSMENT YEARS WERE FI ELD BEFORE US. S.NO. PARTICULARS TRIBUNAL DECISION S 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 3 75 ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 7 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 REVENU E. 13. GROUND NO.3 RAISED BY THE REVENUE READS AS FOLL OWS: 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 DEDUCT ION 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. GOA POWER PLANT -DO- 19,32,28,453 3. WINDMILL POWER PROJECT -DO- 7,15,31, 544 4. DAHANU UNIT-1 GENERATION 361,34,31,448 5. DAHANU UNIT-2 GENERATION 375,41,93,817 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 D EDUCTION UNDER SECTION 80IA. THE ASSESSEE WAS FURTHER ASKED TO EXPLAIN WHY OFFIC E EXPENSES SHOULD NOT BE ALLOCATED WHILE CONSIDERING DEDUCTION U/S. 80 IA IN VIEW OF SECTION 80IA(5) OF THE ACT. ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 8 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 U NDERTAKING HAD TO BE DETERMINED BY TAKING INTO ACCOUNT THE INCOME EARNED FROM THE ELIGIBLE ACTIVITIES AND DEDUCTING THEREFROM THE EXPENSES INC URRED FOR EARNING THE SAID INCOME. THE PROFIT OF THE UNDERTAKING HAS TO BE CO MPUTED AS IF SUCH UNDERTAKING WAS THE ONLY SOURCE OF INCOME OF THE CO MPANY 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 BUSIN ESS, 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 TRI BUNAL 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 C ONSIDERED 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, WI NDMILL UNIT AND SAMALKOT UNIT, WHERE IT IS IN THE BUSINESS OF GENERATION AND DISTRIBUTION, HAS BEEN CLAIMED ON THE PROFIT COMPUTED IN THESE UNITS AS PE R 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 T HESE UNITS ARE TO BE COMPUTED AS IF THESE UNITS ARE THE ONLY SOURCE OF I NCOME AND THEREFORE HEAD OFFICE WHICH CONTROLS THE BUSINESS OF THESE UNIT MU ST BE APPORTIONED TO ARRIVE AT THE ELIGIBLE PROFIT. THE A.O ALLOCATED T HE HEAD OFFICE EXPENSES IN PROPORTION THE INCOME OF THESE UNITS TO THE TOTAL I NCOME. ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 9 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 WORKE D 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 I S 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 =5,64,57,70 9 HO EXPENSES ALLOCATED TO WINDMILL UNIT 90250366/65277880265X1379544565 = 19,09,29 9 ACCORDINGLY HEAD OFFICE EXPENSES OF RS. 134,95,44,5 65/- WAS ALLOCATED IN RESPECT OF THESE THREE UNITS AND 80IA DEDUCTION WAS RESTRICTED TO RS. 13,22,39,533/-, RS. 52,50,50,855 AND RS.6,96,24,245 /- IN RESPECT OF SAMALKOT , GOA UNITS AND WINDMILL UNIT RESPECTIVEL Y. ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 10 16. ON APPEAL BY THE ASSESSEE THE CIT(A) FOLLOWING THE ORDERS OF THE TRIBUNAL IN ASSESSEES OWN CASE ON IDENTICAL ISSUE IN ASSESSMENT YEAR 2002- 03 TO 2005-06 DIRECTED THE ASSESSING OFFICER TO ACC EPT THE ALLOCATION OF HEAD OFFICE EXPENSES AS DONE BY THE ASSESSEE. 17. BEFORE US IT IS NOT IN DISPUTE THAT IDENTICAL I SSUE HAS COME UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE IN THE EARLIER ASSESSMENT YEARS. THE DETAILS OF WHICH ARE AS FOLL OWS: S.NO. PARTICULARS TRIBUNAL DECISION S 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 5. A.Y 06-07 4631&4838/M/09 13 TO 19 97-101 18. WE MAY IN THIS REGARD POINT OUT THAT THE ISSUE CAME UP FOR CONSIDERATION ASSESSEES CASE IN ITA NO.399/M/04 FO R A.Y. 2000-01 AND THIS TRIBUNAL HELD ON IDENTICAL ISSUE AS FOLLOWS. 4. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERU SING THE RELEVANT MATERIAL ON RECORD WE FIND THAT THIS IS A RECURRING ISSUE IN ASSESSEES OWN CASE INASMUCH AS THE TRIBUNAL HAS D ECIDED IT IN ASSESSEES FAVOUR IN ASSESSMENT YEARS 2000-2001 TO 2003-04. THE COPIES OF THE ORDERS PASSED BY THE TRIBUNAL HAVE BE EN 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 AN D THEREAFTER DECIDED IN ASSESSEES FAVOUR. THE LD. D.R COULD NO T POINT OUT ANY DISTINGUISHING FEATURE IN THE FACTS OF THE INSTANT YEAR VIS--VIS THE PRECEDING YEARS. RESPECTFULLY FOLLOWING THE PRECED ENTS WE REJECT THE GROUND TAKEN BY THE REVENUE. ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 11 RESPECTFULLY FOLLOWING THE PRECEDENT, WE UPHOLD THE ORDER OF THE CIT(A) ON THIS ISSUE AND DISMISS GROUND NO.3 RAISED BY THE RE VENUE. 19. GROUND NO.4 RAISED BY THE REVENUE READS AS FO LLOWS: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN DIRECTING THE AO TO ADOPT THE MARKE T PRICE OF POWER GENERATED AS PROVIDED UNDER SUBSECTION 8 OF SECTION 80IA AS THE PRICE OF POWER PURCHASED FROM TATA POWER COMPANY AS AGAIN ST 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 BUSINE SS OF GENERATION AND DISTRIBUTION OF ELECTRICITY. ORIGINALLY THE CO MPANY WAS ONLY IN DISTRIBUTION OF ELECTRICITY IN THE SUBURBS OF MUMBA I. SUBSEQUENTLY IN A.Y. 1996-97 IT HAD PUT UP A PLANT FOR GENERATION OF ELE CTRICITY AT DAHANU. THE COMPANY WAS ENTITLED TO DEDUCTION U/S 80IA IN RESPE CT OF INCOME FROM GENERATION OF ELECTRICITY AT DAHANU. THE RELEVANT SECTION READS AS FOLLOWS: [ DEDUCTIONS IN RESPECT OF PROFITS AND GAINS FROM IND USTRIAL UNDERTAKINGS OR ENTERPRISES ENGAGED IN INFRASTRUCTU RE DEVELOPMENT, ETC. 80-IA. (1) WHERE THE GROSS TOTAL INCOME OF AN ASSESSEE INC LUDES ANY PROFITS AND GAINS DERIVED BY AN UNDERTAKING OR AN E NTERPRISE FROM ANY BUSINESS REFERRED TO IN SUB-SECTION (4) (SUCH BUSIN ESS BEING HEREINAFTER REFERRED TO AS THE ELIGIBLE BUSINESS), THERE SHALL, IN ACCORDANCE WITH AND SUBJECT TO THE PROVISIONS OF TH IS SECTION, BE ALLOWED, IN COMPUTING THE TOTAL INCOME OF THE ASSES SEE, A DEDUCTION OF AN AMOUNT EQUAL TO HUNDRED PER CENT OF THE PROFITS AND GAINS DERIVED FROM SUCH BUSINESS FOR TEN CONSECUTIVE ASSESSMENT Y EARS. (2) TO (3). (4) ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 12 (I) TO (III) ( IV ) AN UNDERTAKING WHICH, (A) IS SET UP IN ANY PART OF INDIA FOR THE GENERATION O R 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 ; 21. THE CLAIM FOR DEDUCTION U/S 80IA WAS MADE IN AY 2000-01 AND SUBSEQUENT YEARS. WE HAVE ALREADY SEEN THAT THE AS SESSEE WAS DISTRIBUTING POWER PRIOR TO ITS COMMENCING THE BUSINESS OF GENER ATION 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 I TS 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 GENERAT ION OF ELECTRICITY AT DAHANU, THE COMPANY CONTINUED TO PURCHASE ELECTRICI TY 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 D ID NOT SELL THE ELECTRICITY THAT IT GENERATED AT DAHANU TO OUTSIDER S 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 O N 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 CONSUME RS. THE ASSESSING OFFICER IN AY 2000-01 DID NOT ACCEPT THE ABOVE METH OD OF WORKING OF PROFIT OF DAHANU UNIT AS IN HIS VIEW THE COMPANY WAS NOT ENTI TLED TO THE DEDUCTION U/S 80IA ON THE DISTRIBUTION ACTIVITY. THE ASSESSI NG OFFICER HELD THAT THE COMPANY WAS ENTITLED TO DEDUCTION ONLY IN RESPECT O F GENERATION OF ELECTRICITY AT DAHANU AND THE PROFIT / LOSS IN RESPECT OF DISTR IBUTION ACTIVITY FROM THE COMMON INTER CONNECT POINT OF ELECTRICITY ACQUIRED FROM DAHANU AND TPC TO ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 13 THE POINT OF CONSUMERS WAS NOT ENTITLED TO THE BENE FIT. THE ASSESSING OFFICER ADOPTED THE AVERAGE PURCHASE PRICE PAID TO TPC BY T HE ASSESSEE AS MARKET VALUE OF THE GOODS SUPPLIED BY ELIGIBLE BUSINESS-G ENERATION OF ELECTRICITY AT DAHANU TO ITS NON ELIGIBLE BUSINESS- DISTRIBUTION T HEREOF. THE ASSESSING OFFICER APPLIED SECTION 80IA(8) WHICH PROVIDES THAT THE GOODS TRANSFERRED FROM ONE BUSINESS TO ANOTHER BUSINESS OF THE SAME A SSESSEE SHOULD BE AT ITS MARKET VALUE TO ASCERTAIN THE PROFIT ELIGIBLE FOR D EDUCTION 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 BUSI NESS CARRIED ON BY THE ASSESSEE, OR WHERE ANY GOODS OR SERVICES HELD F OR THE PURPOSES OF ANY OTHER BUSINESS CARRIED ON BY THE ASSESSEE ARE T RANSFERRED TO THE ELIGIBLE BUSINESS AND, IN EITHER CASE, THE CONSIDER ATION, IF ANY, FOR SUCH TRANSFER AS RECORDED IN THE ACCOUNTS OF THE ELIGIBL E BUSINESS DOES NOT CORRESPOND TO THE MARKET VALUE OF SUCH GOODS OR SER VICES AS ON THE DATE OF THE TRANSFER, THEN, FOR THE PURPOSES OF THE DEDUCTION UNDER THIS SECTION, THE PROFITS AND GAINS OF SUCH ELIGIBLE BUS INESS SHALL BE COMPUTED AS IF THE TRANSFER, IN EITHER CASE, HAD BE EN MADE AT THE MARKET VALUE OF SUCH GOODS OR SERVICES AS ON THAT D ATE : PROVIDED THAT WHERE, IN THE OPINION OF THE ASSESSING OFFICER , THE COMPUTATION OF THE PROFITS AND GAINS OF THE ELIGIBL E BUSINESS IN THE MANNER HEREINBEFORE SPECIFIED PRESENTS EXCEPTIONAL DIFFICULTIES, THE ASSESSING OFFICER MAY COMPUTE SUCH PROFITS AND GAIN S 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 OPE N MARKET. 22. IN WORKING OUT THE PRICE PAID TO TPC BY THE COM PANY, THE ASSESSING OFFICER INCLUDED THE STANDBY CHARGES PAID TO THEM I N RESPECT OF ASSURED UNINTERRUPTED SUPPLY OF ELECTRICITY. STAND BY CHAR GES 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 T O ENSURE THAT THE SUPPLY OF POWER BY TPC IS UNINTERRUPTED. HOWEVER, THERE WAS A DISPUTE BETWEEN THE ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 14 COMPANY AND TPC REGARDING THE AMOUNT PAYABLE AS STA NDBY CHARGES. THE ASSESSING OFFICER INCLUDED UNDISPUTED STANDBY CHARG ES 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 PRIC E, BEING THE MARKET VALUE AS PROVIDED IN SECTION 80IA(8), WAS DECIDED BY CIT (A). THE CIT (A) HAD UPHELD THE ASSESSING OFFICERS ORDER AND REJECTED T HE ASSESSEES CONTENTION TO CONSIDER AVERAGE CONSUMER SELLING PRICE. THUS T HE TPC PRICE WAS CONSIDERED AS MARKET PRICE FOR THE PURPOSE OF SECTI ON 80IA(8). HOWEVER, THE ISSUE REGARDING DISPUTED STANDBY CHARGES WAS APPEAL ED TO THE TRIBUNAL. WHEN THE APPEAL WAS PENDING, THE MATTER WAS RESOLVE D 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 FIN ALLY 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 DEDUCT ION U/S 80IA. THE ASSESSMENTS IN THE LATER YEARS WAS ALSO COMPLETED O N THE SAME BASIS AS THE ASSESSEE COMPANY ACCEPTED THE CIT(A) ORDER ON THE I SSUE 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 A SSESSMENT PROCEEDINGS U/S.143(3) OF THE ACT. 23. ACCORDING TO THE AO, THE ABOVE METHOD OF DETERM 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 AUTH ORITY (MERC). IN EXERCISE OF POWERS CONFERRED BY THE ELECTRICITY ACT, 2003, M ERC NOTIFIED THE MAHARASHTRA ELECTRICITY REGULATORY COMMISSION (TERM S AND CONDITIONS OF ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 15 TARIFF) REGULATION, 2005 WHICH SUPERSEDED THE MERC (TERMS AND CONDITIONS OF TARIFF) REGULATIONS, 2004. UNDER THESE REGULATI ONS, IT WAS MANDATORY FOR ALL POWER GENERATION AND DISTRIBUTION ENTITIES TO A PPLY FOR FIXATION OF TARIFF ULTIMATELY TO BE CHARGED TO VARIOUS CONSUMERS. MER C HAD, FOR THE FIRST TIME ISSUED A TARIFF ORDER ON 1 ST JULY 2004 WHICH IS APPLICABLE FOR FINANCIAL YEAR 2004-05. SIMILAR FOR FY 05-06, APPLICABLE FOR AY 0 6-07, MERC HAS FIXED TARIFFS VIDE ITS ORDER DATED 3/10/2006. THE TARIFF S 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 PRIN CIPLES FOR DETERMINATION OF CAPITAL BASE. CLEAR PROFITS ARE DETERMINED BY CONSI DERING THE INCOME FOR SALE OF ELECTRICITY, NON TARIFF INCOME AND DEDUCTION EXP ENSES, INCOME TAX AND ALLOWING SOME FUNDS FOR CONTINGENCY. IF THE CLEAR PROFITS ARE MORE THAN THE REASONABLE RATE OF RETURN, THEN THE EXCESS IS CONSI DERED WHILE FIXING TARIFFS FOR THE SUBSEQUENT YEAR. THIS EXERCISE OF ADJUSTIN G 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 O UT OF FIXATION OF TARIFF FOR SUBSEQUENT YEAR OR THE TARIFF FOR THE SUBSEQUENT YE AR 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 O F GENERATION AND DISTRIBUTION BUSINESS IN MUMBAI SUBURBS. ACCORDIN G 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 LESS THAN WHAT IS SHOWN BY THE ASSESSEE A S PROFITS FOR CLAIMING DEDUCTION U/S. 80 IA. HE WAS OF THE VIEW THAT THE EARLIER ORDERS OF TRIBUNAL ADOPTING THE PRICE PAID BY ASSESSEE WHILE PURCHASIN G POWER FROM TPC FOR DETERMINING PROFITS OF THE BUSINESS OF GENERATING P OWER IN DAHANU 1 AND ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 16 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, ADOPTING THE PRICE PAID BY ASSESSEE WHILE PURCHASING POWER F ROM TPC FOR DETERMINING PROFITS OF THE BUSINESS OF GENERATING POWER IN DAHA NU 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 DHAN AU-1 AND DHANAU-2 UNIT SHOULD NOT BE ADOPTED AT LESSER SUM FOR ALLOWING DE DUCTION U/S.80-IA OF THE ACT. 25. THE ASSESSEE SUBMITTED BEFORE THE ASSESSING OFF ICER AS FOLLOWS: A) THAT THE AMOUNT OF REASONABLE RETURN DETERMINED BY THE ORDER OF MERC IS AFTER DEDUCTING THE INCOME TAX AND STATUTOR Y APPROPRIATIONS BEING CONTINGENCY AND SPECIAL APPROPRIATION. THE ASSESSEE POINTED OUT THAT THIS ASPECT WOULD BE CLEA R FROM THE CALCULATION OF CLEAR PROFIT IN THE MERC ORDER WHE RE, FROM THE PROFIT BEFORE TAX, INCOME TAX IS DEDUCTED AND FURTHER STAT UTORY APPROPRIATIONS ARE DEDUCTED TO ARRIVE AT CLEAR PROF IT 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 APPROPRIATI ONS. THEREFORE, THE ACTION TO RESTRICT DEDUCTION U/S. 80IA TO REASONABL E RETURN WORKED OUT BY MERC IS TOTALLY INCORRECT AS THE PROFITS WHI CH 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 GENERATIO N ACTIVITY ALONE. THE ASSESSEE POINTED THAT THE SAME WOULD BE EVIDENT FROM THE ITEM OF EXPENDITURE WHICH SHOWS POWER PURCHASE. THE POWE R PURCHASE IS FROM TATA POWER COMPANIES (TPC) WHICH WAS USED FOR DISTRIBUTION OF ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 17 ELECTRICITY TO COMSUNERS IN LICENSED AREAS. THE TA RIFF DETERMINATION BY MERC IS FOR THE ULTIMATE PRICE TO BE CHARGED BY THE ASSESSEE TO DIFFERENT TYPE OF CONSUMERS. THUS MERC ORDER DETER MINES THE PRICE FOR ACTIVITY OF DISTRIBUTION OF ELECTRICITY WHICH I S EITHER GENERATED OR PURCHASED. THEREFORE, THE PROFITS DETERMINED BY ME RC ARE NOT FOR GENERATION ALONE BUT GENERATION AND DISTRIBUTION AS WELL PURCHASE AND DISTRIBUTION. THE COMBINED PROFITS HAVE TO BE BIFU RCATED BETWEEN GENERATION ACTIVITY AND DISTRIBUTION ACTIVITY DIS TRIBUTION OF SELF GENERATED AS WELL AS PURCHASED POWER FOR THE PURPOS E OF COMPUTING DEDUCTION U/S. 80IA. IT WAS SUBMITTED THAT IT WAS AT THIS JUNCTURE, THE BIFURCATION OF TOTAL PROFITS INTO VARIOUS SEGMENTS HAVE TO BE CARRIED OUT. THE ASSESSEE BIFURCATED ITS PROFIT AND LOSS A CCOUNT 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 C OMPARED WITH THE COMBINED FIGURES OF DISTRIBUTION AND GENERATION DIV ISIONS. WHEREAS FOR DEDUCTION U/S. 80 IA ONLY PROFIT OF GENERATION ACT IVITY 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 TH E PETITION WHEREAS MERC HAS WORKED OUT THE SAME AT RS. 266 CRORES. ME RC COMPARED THE REVISED CLEAR PROFIT WORKED OUT BY THEM WITH TH E REASONABLE RETURN AND WORKED OUT THE GAP AT RS. 56 CRORES. TH US THE RESULTS IN THE BOOKS OF ACCOUNTS ARE TOTALLY DIFFERENT FROM TH E CLEAR PROFITS WORKED OUT BY MERC. THE GAP BETWEEN THE CLEAR PROF ITS 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. ACC ORDINGLY THE ABOVE SURPLUS WAS ADJUSTED AGAINST REVENUE SHORTFALL FOR FY 2006-07. THE ASSESSEE POINTED OUT THAT THE ABOVE WOULD BE EVIDE NT FROM A READING OF PAGE 105 OF MERC ORDER DATED 3/10/2006. THE ASSESSEE POINTED OUT THAT BASED ON THE ABOVE OR DER OF MERC IT CAN BE SEEN THAT THE PROFITS OF THE ASSESSEE WHETHE R AS PER BOOKS OF ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 18 ACCOUNTS OR AS ALLOWED TO BE COMPUTED FOR THE PURPO SE OF TARIFF FIXATION WILL MATCH WITH THE REASONABLE RETURN. THIS EXERCI SE 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 B E RECOVERED FROM THE CONSUMERS OUT OF FIXATION OF TARIFF FOR SUBSEQU ENT YEAR OR THE TARIFF FOR THEE SUBSEQUENT YEAR IS ADJUSTED TO TAKE CARE O F THE EXCESS GAP. THUS CLEAR PROFITS WHICH ARE IN EXCESS OF THE REASO NABLE RETURN DOES NOT CEASE TO BE THE PROFIT OF THE COMPANY BUT IS ON LY CONSIDERED FOR FIXING THE TARIFF FOR THE SUBSEQUENT YEAR AND IN S UBSEQUENT YEAR THE PROFITS WILL BE LESS ON ACCOUNT OF LOWER FIXATION O R TARIFF AND DEDUCTION U/S. 80IA WILL ALSO BE LOWER. THE GAP BETWEEN THE CLEAR PROFIT AND REASONABLE RETURN CONTINUE TO REMAIN WITH THE COMPA NY. D) THE ASSESSEE POINTED OUT THAT THERE ARE 3 DIFFER ENT 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 DIFFEREN CE BETWEEN THE ACTUAL AND THE CLEAR PROFITS WORKED OUT BY MERC. THERE WI LL AGAIN BE A DIFFERENCE BETWEEN THE CLEAR PROFITS AND REASONABLE RETURN. DIFFERENCE BETWEEN CLEAR PROFIT AND REASONABLE RETU RN 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 CLE AR PROFITS OR THE PROFITS AS PER BOOKS OF ACCOUNTS, THOUGH THE DIFFER ENCE 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 A CTUAL 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 BOOK S 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 NO T THE CRITERIA FOR ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 19 ALLOWANCE OF DEDUCTION U/S. 80 IA. THE PROFITS WHI CH ARE INCLUDED IN TOTAL INCOME IRRESPECTIVE OF WHETHER THE SAME ARE M ORE OR LESS THAN THE REASONABLE RETURN ARE ELIGIBLE FOR DEDUCTION UNDER SECTION 80 IA. 26. THE ASSESSING OFFICER HOWEVER DID NOT AGREE WI TH THE CONTENTION ON BEHALF OF THE ASSESSEE. THE CIT(A) HOWEVER REVERSE D THE ORDER OF THE A.O. 27. BEFORE US IT IS NOT IN DISPUTE THAT THE ITAT IN A.Y 2006-07 ON THE SAME ISSUE IN ITA NO.4838/MUM/09 HAD HELD AS FOLLOWS: 38. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE HAVE ALREADY SEEN THAT THE ASSESSEE WAS DISTRIBUTING POWER PRIOR TO I TS 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 DISTRI BUTION OF ELECTRICITY PRIOR TO ITS ACTIVITY OF GENERATION AND DISTRIBUTION OF E LECTRICITY, THE ASSESSEE WAS PURCHASING ELECTRICITY FROM TATA POWER COMPANIE S (TPC) AND DISTRIBUTING IT. AFTER THE COMMENCEMENT OF GENERAT ION OF ELECTRICITY AT DAHANU, THE ASSESSEE CONTINUED TO PURCHASE ELECTRIC ITY 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 DAHAN U TO OUTSIDERS BUT UTILIZED THE ENTIRE GENERATION IN THE EXISTING BUSI NESS OF DISTRIBUTION OF ELECTRICITY IN MUMBAI. THE COMPANY IN AY 2000-01 H AD COMPUTED THE PROFIT ON GENERATION OF ELECTRICITY AT DAHANU BY TA KING 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 I N 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 DEDUCT 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 DISTRIBU TION ACTIVITY FROM THE COMMON INTER CONNECT POINT OF ELECTRICITY ACQUIRED FROM DAHANU AND TPC TO THE POINT OF CONSUMERS WAS NOT ENTITLED TO THE B ENEFIT. 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 BUSINE SS- DISTRIBUTION THEREOF. THE ASSESSING OFFICER APPLIED SECTION 80IA(8) WHICH PROVIDES THAT THE ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 20 GOODS TRANSFERRED FROM ONE BUSINESS TO ANOTHER BUSI NESS OF THE SAME ASSESSEE SHOULD BE AT ITS MARKET VALUE TO ASCERTAIN THE PROFIT ELIGIBLE FOR DEDUCTION U/S 80IA. THE DISPUTE BETWEEN THE ASSES SEE 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, T HE ASSESSING OFFICER INCLUDED THE STANDBY CHARGES PAID TO THEM IN RESPEC T OF ASSURED UNINTERRUPTED SUPPLY OF ELECTRICITY. STAND BY CHAR GES 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 A MOUNT PAYABLE AS STANDBY CHARGES. THE ASSESSING OFFICER INCLUDED UNDISPUTED STANDBY CHARGES IN WORKING OUT THE PRICE. THE COMP ANY WAS CLAIMING THAT THE DISPUTED PORTION OF STANDBY CHARGES SHOULD ALSO BE INCLUDED IN WORKING OUT THE MARKET PRICE. THE ABOVE ISSUE OF A VERAGE 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 U PHELD THE ASSESSING OFFICERS ORDER AND REJECTED THE ASSESSEES CONTENT ION TO CONSIDER AVERAGE CONSUMER SELLING PRICE. THUS THE TPC PRICE WAS CONSIDERED AS MARKET PRICE FOR THE PURPOSE OF SECTION 80IA(8). H OWEVER, THE ISSUE REGARDING DISPUTED STANDBY CHARGES WAS APPEALED TO THE TRIBUNAL. WHEN THE APPEAL WAS PENDING, THE MATTER WAS RESOLVE D BETWEEN TPC AND THE COMPANY AND A COMPROMISE WAS REACHED ON THE AMOUNT OF STANDBY CHARGES. THE TRIBUNAL IN AY 2000-01 HELD T HAT 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 UNI T AT DAHANU FOR THE PURPOSE OF DEDUCTION U/S 80IA. THE ASSESSMENTS IN T HE LATER YEARS WAS ALSO COMPLETED ON THE SAME BASIS AS THE ASSESSEE CO MPANY ACCEPTED THE CIT(A) ORDER ON THE ISSUE OF ADOPTING PRICE PAI D TO TPC. THUS THE AMOUNT ON WHICH THE ASSESSEE WOULD BE ENTITLED TO D EDUCTION U/S.80- IA(4) WAS THUS DETERMINED IN THE ASSESSMENT PROCEED INGS U/S.143(3) OF THE ACT. 39. THE QUESTION IS WHETHER THAT POSITION HAS CHAN GED WITH THE DETERMINATION OF TARIFF RATES BY THE MERC. IN EXER CISE OF POWERS CONFERRED BY THE ELECTRICITY ACT, 2003, MERC NOTIFI ED THE MAHARASHTRA ELECTRICITY REGULATORY COMMISSION (TERMS AND CONDIT IONS OF TARIFF) REGULATION, 2005 WHICH SUPERSEDED THE MERC (TERMS A ND CONDITIONS OF TARIFF) REGULATIONS, 2004. UNDER THESE REGULATIONS , IT WAS MANDATORY FOR ALL POWER GENERATION AND DISTRIBUTION ENTITIES TO APPLY FOR FIXATION OF ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 21 TARIFF ULTIMATELY TO BE CHARGED TO VARIOUS CONSUMER S. MERC HAD, FOR THE FIRST TIME ISSUED A TARIFF ORDER ON 1 ST JULY 2004 WHICH IS APPLICABLE FOR FINANCIAL YEAR 2004-05. SIMILAR FOR FY 05-06, APPL ICABLE FOR AY 06-07, MERC HAS FIXED TARIFFS VIDE ITS ORDER DATED 3/10/20 06. THE TARIFFS ARE FIXED BASED ON TWO CONCEPTS VIZ., CLEAR PROFITS AND REASONABLE RETURN. A REASONABLE RATE OF RETURN IS FIXED ON THE CAPITAL B ASE. 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 FU NDS FOR CONTINGENCY. IF THE CLEAR PROFITS ARE MORE THAN TH E REASONABLE RATE OF RETURN, THEN THE EXCESS IS CONSIDERED WHILE FIXING TARIFFS FOR THE SUBSEQUENT YEAR. THIS EXERCISE OF ADJUSTING GAP BE TWEEN THE REASONABLE RETURN AND CLEAR PROFITS IS AN ON GOING PROCESS AND THE SAME IS EITHER ALLOWED TO BE RECOVERED FROM THE CONSUMER S OUT OF FIXATION OF TARIFF FOR SUBSEQUENT YEAR OR THE TARIFF FOR THE SU BSEQUENT 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 SHOU LD 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 PUR CHASES POWER FOR USE IN ITS DISTRIBUTION BUSINESS. THE PRICE DETERM INED 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 STATUTOR Y APPROPRIATIONS BEING CONTINGENCY AND SPECIAL APPROPRIATION. THE P ROFITS WHICH ARE ELIGIBLE FOR DEDUCTION U/S. 80 IA ARE THE PROFITS B EFORE TAX AND BEFORE THE STATUTORY APPROPRIATIONS (WHICH ARE NOT ALLOWE D TO BE REDUCED WHILE COMPUTING PROFITS ELIGIBLE FOR DEDUCTION U/S. 80IA). B) THE PROFITS DETERMINED BY MERC ARE NOT FOR GENERATI ON ALONE BUT GENERATION AND DISTRIBUTION AS WELL PURCHASE AND DI STRIBUTION. THE COMBINED PROFITS HAVE TO BE BIFURCATED BETWEEN GENE RATION ACTIVITY AND DISTRIBUTION ACTIVITY DISTRIBUTION OF SELF GE NERATED AS WELL AS PURCHASED POWER FOR THE PURPOSE OF COMPUTING DEDUCT ION 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 FI XATION WILL MATCH WITH THE REASONABLE RETURN. THE EXERCISE OF ADJUST ING GAP BETWEEN THE REASONABLE RETURN AND THE PROFITS I,E. CLEAR P ROFITS IS AN ONGOING PROCESS AND THE SAME IS EITHER ALLOWED TO BE RECOVE RED 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 ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 22 CLEAR PROFITS WHICH ARE IN EXCESS OF THE REASONABLE RETURN DOES NOT CEASE TO BE THE PROFIT OF THE COMPANY BUT IS ONLY C ONSIDERED FOR FIXING THE TARIFF FOR THE SUBSEQUENT YEAR AND IN SUBSEQUE NT 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 COMPA NY. D) REASONABLE RETURN WHICH IS COMPUTED BASED ON HYPOTH ETICAL 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 DE DUCTION U/S. 80 IA CANNOT BE GRANTED ON THE AMOUNT OF REASONABLE RE TURN WHICH IS A HIGHER FIGURE. THE PROFITS WHICH ARE INCLUDED IN TO TAL INCOME IRRESPECTIVE OF WHETHER THE SAME ARE MORE OR LESS T HAN THE REASONABLE RETURN ARE ELIGIBLE FOR DEDUCTION UNDER SECTION 80 IA. 41. THE ASSESSEE HAS ALSO GIVEN A RECONCILIATION O F PROFITS OF THE BUSINESS OF GENERATION OF POWER, IF THE PROFIT AS D ETERMINED BY MERC IS ADOPTED AND APPROPRIATE ADJUSTMENTS MADE WHICH WOUL D GIVE A TRUE PROFIT FROM THE BUSINESS OF GENERATION OF POWER. T HE SAID RECONCILIATION IS AT PAGE-135 AND 136 OF THE ASSESSEES PAPER BOOK . THE SAME SHOWS A PROFIT OF RS.465.71 CRORES IN THE BUSINESS OF GEN ERATION OF POWER. THUS IT IS CLEAR THAT CLEAR PROFITS OR REASONABL E RETURN, AS DETERMINED BY THE MERC WOULD NOT BE AN APPROPRIATE YARDSTICK T O DETERMINE THE PROFITS DERIVED BY THE ASSESSEE FROM THE BUSINESS O F GENERATION OF POWER. 42. THE TARIFF FIXED BY MERC IS INCLUSIVE OF BOTH THE ACTIVITIES OF DISTRIBUTION AND GENERATION OF POWER. IT MAY NOT R EFLECT THE TRUE RATES WITH REGARD TO THE ACTIVITY OF ONLY GENERATION OF P OWER. TO THIS SUBMISSION OF THE ASSESSEE THERE IS NO CONVINCING A NSWER FROM THE REVENUE. AS RIGHTLY CONTENDED ON BEHALF OF THE ASS ESSEE, THE EXPRESSION CLEAR PROFIT AND REASONABLE RETURN AND THE METH OD OF ITS COMPUTATION WOULD NOT BE RELEVANT WHILE COMPUTING INCOME UNDER THE ACT. REASONABLE RETURN DETERMINED BY THE ORDER OF MERC I S AFTER DEDUCTING THE INCOME TAX AND STATUTORY APPROPRIATIONS BEING C ONTINGENCY AND SPECIAL APPROPRIATION. THAT IS NOT THE BASIS ON WH ICH INCOME IS COMPUTED UNDER THE ACT. UNDER SEC.80-IA(8) THE FOL LOWING 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 ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 23 THIS CASE THE ELIGIBLE BUSINESS IS GENERATION OF PO WER AND POWER GENERATED IS TRANSFERRED TO THE BUSINESS OF DISTRIB UTION OF POWER WHICH IS ALSO CARRIED ON BY THE ASSESSEE. B) THE CONSIDERATION, IF ANY, FOR SUCH TRANSFER AS REC ORDED IN THE ACCOUNTS OF THE ELIGIBLE BUSINESS DOES NOT CORRESPO ND TO THE MARKET VALUE OF SUCH GOODS OR SERVICES AS ON THE DATE OF T HE TRANSFER. C) IT IS ONLY WHEN CONDITION (B) IS SATISFIED THEN THE REVENUE GETS A RIGHT TO DETERMINE PROFITS AND GAINS OF SUCH ELIGI BLE BUSINESS AT THE MARKET VALUE OF SUCH GOODS OR SERVICES AS ON THE DA TE OF ITS TRANSFER. TILL A.Y. 05-06, THE REVENUE CONSIDERED THE RATES A T WHICH POWER WAS PURCHASED BY THE ASSESSEE FROM TPC AS THE MARKET VA LUE. THERE IS NOTHING BROUGHT ON RECORD TO SHOW AS TO HOW THE RAT ES, 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 RA TE IF APPLIED IN THE CASE OF THE ASSESSEE. IN THE GIVEN FACTS AND CIRCUMSTAN CES 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.8 0-IA OF THE ACT, AS WAS DONE IN THE PAST. 43. WE ALSO DO NOT AGREE WITH THE CONCLUSION OF TH E AO THAT AFTER THE PASSING OF THE ORDER BY MERC, THE DETERMINATION OF PRICE OF POWER PURCHASED BY THE ASSESSEE FROM TPC PRESENTS EXCEPTI ONAL DIFFICULTIES. THE FIXATION OF TARIFF BY MERC UNDERGOES SEVERAL PR OCESSES LIKE PUBLIC HEARING OF ALL INTERESTED PARTIES AND OTHER STAKE H OLDERS. 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 TH E TRANSACTION BETWEEN THE ASSESSEE IS AT ARMS LENGTH BETWEEN UNRE LATED PARTIES. 44. IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE CA SE, WE ARE OF THE VIEW THAT THE PROFITS OF THE BUSINESS OF GENERATION OF P OWER 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 I N THE PAST AND AS APPROVED BY THE ITAT IN ASSESSEES CASE. WE THEREF ORE DISMISS GROUND NO.4 OF THE REVENUE. ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 24 29. RESPECTFULLY FOLLOWING THE DECISION OF THE ITA T FOR AY 06-07 ON IDENTICAL ISSUE, WE UPHOLD THE ORDER OF THE CIT(A) AND DISMIS S GR.NO.4 RAISED BY THE REVENUE. 28. GROUND NO.5 RAISED BY THE REVENUE READS AS FOLL OWS: 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 T O THE EXTENT OF THE NET BUSINESS INCOME. 29. IN THIS GROUND THE REVENUE HAS PROJECTED ITS G RIEVANCE 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 GROSS TOTAL INCOME AS AG AINST THE ACTION OF THE AO IN RESTRICTING THE DEDUCTION U/S.80IA OF THE ACTTO THE EXTENT OF BUSINESS INCOME. THE ASSESSEE HAD CLAIMED A DEDUCTION U/S. 80IA OF THE ACT RS.821,38,93,826/- IN THE RETURN OF INCOME FILED FO R THE YEAR. THE CLAIM FOR DEDUCTION U/S. 80IA WAS MORE THAN THE PROFIT UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION BUT WAS LESS THAN THE GROSS TOTAL INCOME. THE ASSESSEE HAD CLAIMED THAT THE DEDUCTION UNDER S ECTION 80IA SHOULD BE GRANTED TO THE EXTENT OF GROSS TOTAL INCOME AND SHO ULD NOT BE RESTRICTED TO THE INCOME UNDER THE HEAD PROFITS AND GAINS FROM B USINESS /PROFESSION. 30. THE AO CALLED UPON THE ASSESSEE TO EXPLAIN AS T O WHY THE DEDUCTION U/S.80IA SHOULD NOT BE RESTRICTED TO THE INCOME FRO M BUSINESS AS PER PROVISIONS OF SECTION 8OAB. 31. THE ASSESSEE EXPLAINED BEFORE THE AO THAT SIMI LAR ISSUE HAD COME UP IN THE APPEAL FOR EARLIER YEARS IN APPELLANTS OWN CAS E A.Y. 2001-02 AND THE TRIBUNAL HAD ALLOWED THE APPELLANTS APPEAL UPHOLDI NG THE CLAIM OF THE ASSESSEE THAT DEDUCTION UNDER CHAPTER VIA INCLUDIN G DEDUCTION U/S 80IA ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 25 SHOULD BE ALLOWED AGAINST GROSS TOTAL INCOME AND NO T RESTRICTED TO BUSINESS INCOME ONLY. IN OTHER WORDS, THE TRIBUNAL HELD THAT DEDUCTION U/S. 80IA IS TO BE ALLOWED TO THE EXTENT OF GROSS TOTAL INCOME AND NOT RESTRICTED TO INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PR OFESSION. THE ABOVE ORDER OF TRIBUNAL WAS FOLLOWED IN THE APPELLANTS C ASE FOR SUBSEQUENT YEARS UPTO A.Y.2005-06. 32. THE ASSESSING OFFICER DID NOT ACCEPT THE ASSESS EES CLAIM IN THIS REGARD ONLY FOR THE REASON THAT THE DEPARTMENT HAS CONTEST ED THIS MATTER BEFORE BOMBAY HIGH COURT AND THEREFORE IN LINE WITH THE EA RLIER ASSESSMENT ORDERS, THE DEDUCTION ULS.801A WAS RESTRICTED TO GROSS TOTA L INCOME. 33. THE CIT(A) FOLLOWING THE TRIBUNALS ORDER IN T HE EARLIER AYS DIRECTED THE AO TO ALLOW DEDUCTION U/S.80-IA OF THE ACT TO THE E XTENT OF GROSS TOTAL INCOME. AGGRIEVED BY THE ORDER OF THE CIT(A), THE REVENUE HAS RAISED GR.NO.5 BEFORE THE TRIBUNAL. 34. BEFORE US IT IS NOT IN DISPUTE THAT TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y2001-02 TO A.Y.2005-06 HAS DECIDED SIMILAR ISSUE IN FAVOUR OF THE ASSESSEE. IN THE ORDER OF THE TRIBUNAL IN ITA NO I TA NO.218/M/05 FOR AY 2001-02 ORDER DATED 24 TH JAN. 2008 IT WAS HELD AS FOLLOWS: 16. WE HAVE HEARD RIVAL SUBMISSIONS AND CONSIDERED THEM CAREFULLY. AFTER CONSIDERING 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 C ASE OF ROYAL CUSHION VINYL PRODUCTS (SUPRA) BY WHICH THE TRIBUNA L 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 ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 26 THE DEDUCTION SHOULD BE ALLOWED UPTO RS.11,84,54,51 7/- I.E. UPTO THE GROSS TOTAL INCOME. SEC. 80A(1) SAYS THAT IN C OMPUTING THE TOTAL INCOME OF AN ASSESSEE, THERE SHALL BE ALLOWED FROM HIS GROSS TOTAL INCOME IN ACCORDANCE WITH AND SUBJECT T O THE PROVISIONS OF THIS CHAPTER, THE DEDUCTION SPECIFIED IN SEC. 80G TO 80U. SUB.SEC.(2) SAYS THAT THE AGGREGATE AMOUNT O F THE DEDUCTIONS UNDER THE CHAPTER SHALL NOT IN ANY CASE EXCEED THE GROSS TOTAL INCOME OF THE ASSESSEE. SEC. 80B(5) DE FINES GROSS TOTAL INCOME AS MEANING THE TOTAL INCOME COMPUTED I N ACCORDANCE WITH THE PROVISIONS OF THIS ACT, BEFORE MAKING ANY DEDUCTION UNDER THIS CHAPTER. SEC. 80HH(1) SAYS THAT WHERE TH E GROSS TOTAL INCOME OF AN ASSESSEE INCLUDES ANY PROFITS AND GAIN S DERIVED FROM AN INDUSTRIAL UNDERTAKING OR THE BUSINESS OF A HOTEL TO WHICH THIS SECTION APPLIED, THERE SHALL, IN ACCORDA NCE WITH AND SUBJECT TO THE PROVISIONS OF THIS SECTION, BE ALLOW ED, IN COMPUTING THE TOTAL INCOME OF THE ASSESSEE, A DEDUCTION FROM SUCH PROFITS AND GAINS OF AN AMOUNT EQUAL TO 20% THEREOF. SEC . 80I(1) IS SIMILAR IN SUBSTANCE. THESE PROVISIONS, READ TOGET HER, INDICATE THAT THOUGH THE QUANTIFICATION OF THE DEDUCTION UN DER THE VARIOUS SECTIONS OF CHAPTER VI-A IS TO BE MADE WITH REGARD TO THE PROFITS OF THE LEGIBLE BUSINESS, ALL SUCH DEDUCTIONS ARE TO BE AGGREGATED AND GRANTED AGAINST THE GROSS TOTAL INCOME, IN ORDE R TO ARRIVE AT THE GROSS TOTAL INCOME AT RS. 11,84,54,517/. HE HAS ALSO RIGHTLY QUANTIFIED THE DEDUCTIONS AVAILABLE TO THE ASSESSEE U/S 80HH, 90I AND 80HHC. HOWEVER, HE HAS TAKEN THE VIEW THAT THE AGGREGATE OF THE DEDUCTIONS SHOULD BE RESTRICTED TO THE BUSINESS INCOME OF RS. 11,67,51,200/-. THERE IS NO WARRANT F OR THIS VIEW, REGARD BEING HAD TO THE PROVISIONS OF THE ACT REFER RED ABOVE. THE COMBINED EFFECT OF THE AFORESAID PROVISIONS IS THAT THE AGGREGATE OF THE DEDUCTIONS UNDER CHAPTER VIA HAS TO BE ALLOW ED AGAINST THE FIGURE OF GROSS TOTAL INCOME. THE LANGUAGE OF SEC. 80A(1) IS VERY CLEAR AND UNAMBIGUOUS IN THIS REGARD. IT IS NO BODYS CASE THAT THE DEDUCTIONS COMPUTED UNDER THE VARIOUS SECT IONS OF THIS CHAPTER VI-A EXCEED THE PROFITS FROM THE ELIGIBLE B USINESS. THERE CAN BE NO SUCH CASE. THE SCHEME OF CHAPTER VI-A IS THAT ALL THE DEDUCTIONS THERE UNDER ARE TO BE AGGREGATE AND THE AGGREGATE AMOUNTS OF THE DEDUCTIONS HAVE TO BE ALLOWED AGAINS T THE FIGURE OF GROSS TOTAL INCOME. THE FACT THAT THE FIGURE OF GROSS TOTAL INCOME INCLUDES INCOME UNDER HEADS OTHER THAN BUSIN ESS INCOME IS NO GROUND TO RESTRICT, AS THE ASSESSING OFFICER HAS DONE THE DEDUCTIONS TO THE INCOME COMPUTED UNDER THE HEAD B USINESS INCOME. THE ONLY LIMIT OR RESTRICTION PLACED IS BY SEC. 90A(2), WHICH SAYS THAT THE AGGREGATE AMOUNT OF THE DEDUCTI ONS UNDER CHAPTER VI- CANNOT EXCEED THE FIGURE OF GROSS TOTAL INCOME. IN OTHER WORDS IN THE PRESENT CASE, THE ASSESSEE CANNO T CONTEND THAT THE AMOUNT OF RS. 12,96,15,832/- SHOULD BE ALLOWED ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 27 AGAINST THE GROSS TOTAL INCOME OF RS. 11,84,54,517/ - 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 ASSES SEE 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 INDI VIDUAL HEADS OF INCOME. THE DEDUCTIONS HAVE TO BE AGGREGAT ED 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 O F THE ACT. ACCORDINGLY, WE OLD THAT THE ASSESSEE IS ENTITLED T O 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 A ND THE FACTS OF THE CASE, WE ARE OF THE VIEW THAT THE RATIO OF THE DECI SIONS OF THE TRIBUNAL IN THE CASE OF ROYAL CUSHION VINYL PRODUCTS (SUPRA) , IS SQUARELY APPLICABLE ON THE FACTS OF THE PRESENT CASE. FOLLO WING THE DECISION OF THE TRIBUNAL, WE HOLD THAT THE ASSESSEE IS ENTITLED TO SET OFF THE DEDUCTION AGAINST THE GROSS TOTAL INCOME COMPUTED A ND NOT AGAINST THE NET BUSINESS INCOME ONLY. THEREFORE, THE GROUND OF THE ASSESSEE IS ALLOWED AND THE ASSESSING OFFICER IS DIRECTED TO RE -COMPUTE THE DEDUCTION AND PROFIT OF THE ASSESSEE ACCORDINGLY. WE ORDER ACCORDINGLY. 35. THE ABOVE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE IS APPLICABLE TO THE PRESENT A.Y. ALSO BECAUSE THE AO WHILE COMING T O THE CONCLUSION THAT DEDUCTION UNDER CHAPTER VIA HAS TO BE RESTRICTED TO THE INCOME UNDER THE HEAD INCOME FROM BUSINESS OR PROFESSION HAD FOLLO WED THE EARLIER ORDER OF THE AO, WHICH HAS BEEN FOUND BY THE TRIBUNAL TO BE NOT CORRECT. THE FACT THAT AN APPEAL HAS BEEN FILED AGAINST THE ORDER OF THE TRIBUNAL BEFORE THE HONBLE HIGH COURT IS NO GROUND FOR REJECTING THE C LAIM OF THE ASSESSEE. IN THE EVENT OF A CONTRARY DECISION OF THE HONBLE HIG H COURT, THE REVENUE HAS OTHER REMEDIES OPEN IN LAW. WE THEREFORE, RESPECTF ULLY FOLLOWING THE DECISION OF THE TRIBUNAL REFERRED TO ABOVE, UPHOLD THE ORDER OF THE CIT(A) AND DISMISS GR.NO.5 RAISED BY THE REVENUE. ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 28 36. GROUND NO.6 RAISED BY THE ASSESSEE READS AS FO LLOWS: 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A) ERRED IN HOLDING THAT THE PROVISIONS OF SECTION 115JB ARE NOT APPLICABLE TO THE ASSESSEE, SINCE THE ACCOUNTS PREP ARED BY THE ASSESSEE ARE IN ACCORDANCE WITH THE PROVISIONS OF ELECTRICITY SUPPLY ACT AND NOT IN ACCORDANCE WITH THE PROVISIONS OF PA RT II & III OF SCHEDULE VI OF THE COMPANIES ACT. 37. GROUND NO.6 IS AGAINST THE VIEW TAKEN BY THE LE ARNED C1T(A) ON THE NON-APPLICABILITY OF PROVISIONS OF SECTION 115JB O F THE ACT. AT THE VERY OUTSET THE LEARNED COUNSEL CONTENDED THAT THIS IS A LSO A RECURRING ISSUE AS THE TRIBUNAL HAS DECIDED THIS POINT IN ASSESSEE-S FAVOUR IN ASSESSMENT YEARS 2001-2002 TO 2003- 2004. THE LEARNED DR. FAIRLY C ONCEDED THE FACTUAL POSITION. 38. HAVING HEARD THE RIVAL SUBMISSIONS AND AFTER PE RUSING THE RELEVANT MATERIAL ON RECORD WE FIND THAT THE TRIBUNAL IN ASS ESSEES OWN CASE IN ASSESSMENT YEAR 2001- 2002 IN PARA 29 HAS HELD AS U NDER: AS DISCUSSED ABOVE, THE ASSESSEE IS FOLLOWING THE ACCOUNTING POLICIES WIDER THE ELECTRICITY SUPPLY ACT AND PREPARED ITS A CCOUNTS IN VIEW OF THOSE VERY POLICIES. FOLLOWING THOSE VERY POLICIES, THE ACCOUNTS IN ACCORDANCE WITH PART II & III OF SCHEDULE VI OF THE COMPANIES ACT ARE NOT APPLICABLE AT ALL. ONCE THERE IS NO POSSIBILITY FOR PREPARING THE ACCOUNTS IN ACCORDANCE WITH THE PART II AND II OF S CHEDULE VI OF COMPANIES ACT THEN THE PROVISIONS OF SEC. I15JB CAN NOT BE FORCED. THEREFORE, IN VIEW OF THE ABOVE FACTS AND CIRCUMSTA NCES AND RESPECTFULLY FOLLOWING THE ABOVE DECISIONS OF THE H ONBLE SUPREME COURT AND THE DECISION OF THE TRIBUNAL FOR A.Y 88-8 9, 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. RESPECTFULL Y FOLLOWING THE PRECEDENTS ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 29 WE ACCEPT THE ASSESSEES CLAIM AND HOLD THAT THE PR OVISIONS OF SECTION 115JB CANNOT BE APPLIED. 40. IN THE RESULT, THE APPEAL BY THE REVENUE IS DIS MISSED. ITA NO.5692/MUM/10: ASSESSEES APPEAL: 41. GROUND NO.1 RAISED BY THE ASSESSEE RELATES TO D ISALLOWANCE 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 HONBLE BOMBAY HIGH COURT IN INCOME TAX APP EAL NO.626 OF 2010 IN THE CASE OF GODREJ & BOYCE MFG.CO.LTD. MUMBAI. VS. DY. COMMISSIONER OF INCOME TAX,RANGE 10(2), MUMBAI & AN R. AND W.P. 758/10 GODREJ & BOYCE MFG.CO.LTD. MUMBAI. VS.DY. COMMISSIO NER OF INCOME TAX RANGE 10(2), MUMBAI & ORS. BY JUDGMENT DATED 12-8-2 010 HAS DEALT WITH THE DISALLOWANCE THAT CAN BE MADE U/S.14-A OF THE A CT. THE HONBLE COURT ALSO DEALT WITH THE DECISION OF THE SPECIAL BENCH O F 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 FAL LING WITHIN THE AMBIT OF SECTION 10(33) OF THE INCOME TAX ACT 1961, AS WAS A PPLICABLE FOR ASSESSMENT YEAR 2002-03 IS NOT INCLUDIBLE IN COMPUTING THE TOT AL INCOME OF THE ASSESSEE. CONSEQUENTLY, NO DEDUCTION SHALL BE ALLOWED IN RESP ECT 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 O F 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 ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 30 COMPONENT OF THE PROFITS OF THE COMPANY. THE COMPAN Y IS CHARGEABLE TO TAX ON ITS PROFITS AS A DISTINCT TAXABLE ENTITY AND IT PAYS TAX IN DISCHA RGE OF ITS OWN LIABILITY AND NOT ON BEHALF OF OR AS AN AGENT FOR ITS SHAREHOLDER S. 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 PROV ISIONS OF SECTION 10(33). INCOME FROM MUTUAL FUNDS STANDS ON THE SAME BASIS; III)THE PROVISIONS OF SUB SECTIONS (2) AND (3) OF S ECTION 14A OF THE INCOME TAX ACT 1961 ARE CONSTITUTIONALLY VALID; IV)THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULE S AS INSERTED BY THE INCOME TAX (FIFTH AMENDMENT) RULES 2008 ARE NOT ULT RA VIRES THE PROVISIONS OF SECTION 14A, MORE PARTICULARLY SUB SECTION (2) A ND DO NOT OFFEND ARTICLE 14 OF THE CONSTITUTION; V) THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULE S 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 OFFICE R IS DUTY BOUND TO DETERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED I N 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 CON SISTENT WITH ALL THE RELEVANT FACTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTUNITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON TH E RECORD; VII)THE PROCEEDINGS FOR ASSESSMENT YEAR 2002-03 SHA LL STAND REMANDED BACK TO THE ASSESSING OFFICER. THE ASSESSING OFFICER SHA LL DETERMINE AS TO WHETHER THE ASSESSEE HAS INCURRED ANY EXPENDITURE (DIRECT O R INDIRECT) IN RELATION TO DIVIDEND INCOME / INCOME FROM MUTUAL FUNDS WHICH DO ES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED UNDER SECTION 14A. THE ASSESSING OFFICER CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPO RTIONMENT. WHILE MAKING THAT DETERMINATION, THE ASSESSING OFFICER SHALL PRO VIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUN TS AND RELEVANT OR GERMANE MATERIAL HAVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CASE. ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 31 43. IN VIEW OF THE AFORESAID DECISION OF THE HO NBLE 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 ADO PT A REASONABLE BASIS OR METHOD CONSISTENT WITH ALL RELEVANT FACTS AND CI RCUMSTANCES AND AFTER AFFORDING REASONABLE OPPORTUNITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON THE RECORD. WE, THEREFORE, REMIT THE I SSUE TO THE A.O FOR FRESH CONSIDERATION AS STATED ABOVE. 44. GROUND NO.2 RAISED BY THE ASSESSEE READS AS FOL LOWS: THE LD LEARNED CIT(A) ERRED IN CONFIRMING THE ACT ION OF THE ASSESSING OFFICER IN DISALLOWING THE BAD DEBTS OF RS. 7,29,42 ,769/- BEING LOAN WRITTEN OFF. 45. THROUGH THIS GROUND OF APPEAL, THE ASSESSEE HAS AGITATED AGAINST THE DISALLOWANCE OF RS.7,29,42,769/-, WHICH WAS CLAIMED BY THE ASSESSEE AS LOAN WRITTEN OFF. DURING THE YEAR, THE ASSESSEE HA D DEBITED AN AMOUNT OF RS. 10,71,04,553 AS BAD DEBTS. OUT OF THE ABOVE SUM, RS . 7,29,42,769/- REPRESENTED LOAN GIVEN TO RELIANCE THERMAL ENERGY L TD. WHICH WAS WRITTEN OFF AS IRRECOVERABLE. THIS LOAN WAS RECEIVED BY REL IANCE VENTURE LTD. AS A PART OF SCHEME OF ARRANGEMENT UNDER S.391 TO 394 OF THE COMPANIES ACT, 1956 AND WITH THE APPROVAL ORDER OF THE HONBLE HIG H COURT OF MUMBAI DATED 09.12.2005 OF THE COAL BASED ENERGY UNDERTAKI NG OF RELIANCE INDUSTRIES LTD. W.E.F. 01.09.2005. THE LOAN WAS AC COUNTED IN THE BOOKS OF THE APPELLANT COMPANY ON ACCOUNT OF AMALGAMATION OF RELIANCE ENERGY VENTURES LTD. WITH THE COMPANY. THE LEARNED ASSESS ING OFFICER DISALLOWED THE LOAN WRITTEN OFF OF RS. 7,29,42, 769 FOR THE RE ASON THAT THE LOAN WAS NOT ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 32 ADVANCED IN THE ORDINARY COURSE OF BUSINESS AND SIN CE THE ASSESSEE ITSELF HAS OFFERED THE INTEREST INCOME EARNED ON LCD AS IN COME FROM OTHER SOURCES AND NOT BUSINESS INCOME. THE ASSESSING OFFICER ALSO HELD THAT DEBT CAN BE WRITTEN OFF ONLY IF IT IS IN THE REVENUE FIELD AND THAT THE AMOUNT WRITTEN OFF CANNOT BE ALLOWED UNDER S. 37 IN VIEW OF THE SPECIF IC PROVISIONS OF S. 36(1) (VII) R.W.S. 36(2) OF THE ACT. 46. BEFORE CIT(A), THE ASSESSEE SUBMITTED THAT IT WAS ALSO ENGAGED IN THE BUSINESS OF FINANCING TO COMPANIES. THE ASSESSEE HA D GIVEN ICD TO VARIOUS COMPANIES AMOUNTING TO RS. 7,740.31 CRORES AS ON 31 .03.2007 AND HAD ALSO PUT ITS FUNDS IN FIXED DEPOSITS FOR SMALL DURATION TO MAXIMIZE THE RETURNS. THE MAGNITUDE OF THE INVESTMENTS IN ICD AND FIXED D EPOSITS FOR SMALLER DURATION TO EARN HIGHER RETURNS IS A PART OF THE BU SINESS ACTIVITY OF THE ASSESSEE. THE LOAN WAS PART OF SUCH FINANCING ACTIV ITY AND HAS BEEN WRITTEN OFF AS IRRECOVERABLE AND ACCORDINGLY IS ALLOWABLE A S BUSINESS LOSS. 47. THE CIT(A) FOUND THAT THE LOAN TO RELIANCE TH ERMAL ENERGY LTD. WAS RECEIVED AS PART OF SCHEME OF ARRANGEMENT WHICH THE ASSSESSEE WROTE OFF AS BAD DEBTS. THE APPELLANT HAD WRITTEN OFF THE SAID AMOUNT AND CLAIMED IT AS BAD DEBT BEFORE AO BUT BEFORE CIT(A), THE ASSESSEE HAS NOT RELIED UPON THE PROVISIONS OF SECTION 36(L)(VII) RELATING TO BAD DE BTS. THE ASSESSEES CLAIM WAS REGARDING ALLOWABILITY AS BUSINESS LOSS. ACCORDING TO CIT(A), IN ORDER TO CONSIDER THE CLAIM AS BUSINESS LOSS U/S.28 OF THE A CT, THE FACT THAT THE AMOUNT ADVANCED HAS BECOME NON RECOVERABLE IS REQUI RED TO BE PROVED. THE CIT(A) FOUND FROM THE DETAILS SUBMITTED AND THE SUB MISSIONS MADE, THAT THE EVIDENCE FILED BY THE ASSESSEE WAS NOT TO CONCLUDE THAT THE LOAN BECAME BAD ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 33 AND THEREFORE A LOSS. THE CIT(A) THEREFORE HELD THA T THE AMOUNT OF LOAN WRITTEN OFF WAS NOT ALLOWABLE EITHER ULS.36 AS BAD DEBT OR U/S.28 AS BUSINESS LOSS. ACCORDINGLY, THE ASSESSING OFFICERS ACTION W AS CONFIRMED. 48. BEFORE US THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED SUBMISSION MADE BEFORE CIT(A). WE ARE OF THE VIEW THAT THE OR DER OF THE CIT(A) ON THE ISSUE DOES NOT CALL FOR ANY INTERFERENCE. ADMITTED LY THE CLAIM OF THE ASSESSSEE WAS TO BE TESTED ONLY ON THE TOUCHSTONE O F THE PROVISIONS OF SEC.28 OF THE ACT. THE ASSESSEE HAD THEREFORE TO ESTABLIS H THAT THE DEBT WRITTEN OFF AS A BUSINESS LOSS HAD CRYSTALLIZED OR HAD BECOME I RRECOVERABLE DURING THE PREVIOUS YEAR. THE ASSESSEE COULD NOT ESTABLISH TH E ABOVE FACTS. IN SUCH CIRCUMSTANCES THE CLAIM OF THE ASSESSEE WAS RIGHTLY REJECTED BY THE REVENUE AUTHORITIES. WE THEREFORE CONFIRM THE ORDER OF CIT (A) AND DISMISS GR.NO.2 RAISED BY THE REVENUE. 49. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS P ARTLY ALLOWED FOR STATISTICAL PURPOSES. 50. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISS ED, WHILE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES . ORDER PRONOUNCED IN THE OPEN COURT ON THE 28 TH DAY OF SEPT., 2011. SD/- SD/- (T.R.SOOD ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED. 28 TH SEPT.2011 ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 34 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RD BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. ITA NO.5692 & 6760/MUM/2010(A.Y. 2007-08) 35 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 20/9/11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 22/9/11 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