ORDER
1. These cross-appeals pertain to the same assessee on various issues arising out of the respective orders of CIT(A). For the sake of convenience, these appeals were heard together and are being disposed of by this consolidated order.
ITA No. 590/Mum/2004 (Revenue’s appeal–Asst. yr. 1999-2000)
2. This appeal has been filed by the Revenue against the order of the CIT(A) for the asst. yr. 1999-2000, on the following ground:
On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in directing the AO to delete the disallowance of expenditure of Rs. 18.17 crores incurred on replacing 1,85,000 electricity meters, treating the same as revenue expenditure.
3. Thus, only issue is with regard to the disallowance of expenditure of Rs. 18.17 crores incurred on replacing 1,85,000 electricity meters, treating the same as revenue expenditure.
4. At the outset of hearing, the learned Authorised Representative of the assessee pointed out that there was a delay in filing the appeal by four days. The reason given for the same was stated to be due to communication gap between the concerned staff. So, it was requested to condone the delay in filing of the appeal by four days. In the interest of justice, we condone the delay of four days as the same is attributable to non-availability of certain relevant records at the relevant point of time. Accordingly, we condone the delay.
5. The brief facts are that the assessee company is engaged in the generation and distribution of electricity to 18 lakhs consumers in the suburbs of Bombay. Each consumer, whether residential or commercial, has to be separately provided electricity meters, so that proper tariffs are charged. During the year, 1,85,000 meters have been replaced on account of faulty readings, The AO did not allow the expenditure incurred on replacement of meters as revenue nature. For the year under consideration, it was noted by the AO that the assessee had capitalised an amount of Rs. 18,17,36,176 being cost of meters. The AO was of the view that as the amount had not been debited to the P&L a/c under the provisions of Section 145 of the IT Act, 1961, the income which is arrived at as per the books of account had to be adopted unless there were valid reasons for deviating from the same. As the assessee had capitalised the cost of meters in its business, such expenditure was in the nature of capital expenditure, lie was also of the view that such a treatment should have been provided by the assessee company because of the Electricity Supply Act. The AO, therefore, held that this expenditure was not revenue in nature and disallowed the claim made by the assessee for income-tax purposes. He also worked out the depreciation for meters held for more than six months and allowed the depreciation to the extent of Rs. 3,33,44,939.
6. The matter was carried before the first appellate authority, wherein various contentions including the contentions raised before the AO were reiterated. After considering the same, the CIT(A) observed that as per Section 145(1) of the IT Act, 1961, income-tax chargeable under the head ‘Profits and gains of business or profession’ is to be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. With effect from 1st April, 1997, the legislature, vide Section 145 of the Act, has also empowered the Central Government to notify the accounting standard to be followed by any class of assessee or in respect of any class of income. So far as only two accounting standards have been issued which are mandatorily, to be followed by all assessees who regularly employed the mercantile system of account. The controversies arise as to whether profits as per the method of accounting followed are sacrosanct in the income-tax assessment. In the light of various decisions, the issue was summarised by the CIT(A) as under:
(i) As per Section 145 of the Act, the income chargeable under the head “Profits and gains of business or profession” is to be computed in accordance with either cash or mercantile system of accounting regularly employed by an assessee;
(ii) The application of the method of accounting for the income-tax purposes will, however, be limited only for the purpose of quantifying the profits or for the valuation of assets. For example, for the purpose of , ascertaining or quantifying the profits arising from construction contracts, the methods described by the I.C.A.I, vide accounting standard may be adopted; and
(iii) The method of accounting will not be decisive in the matter of whether the receipt will be subject to income-tax or expenditure will be allowed as deductions while computing the profits and gains of business. The same will be governed by the provisions of law relating thereto which may either be expressly provided in the Act [which would include accounting standard to be issued by the Central Government in exercise of the powers conferred upon it by Section 145(2) of the Act] or enunciated by various Courts of the country from time to time. Any accounting entry made contrary to such express provision or enunciation of law will be ignored for the purposes of income-tax assessments, notwithstanding the fact that the same may be recognised and accepted in accountancy phraseology. However, this may not be so in respect of proceedings under MTA.
In this view of the matter, the computation of income under the head “Profits and gains or business or profession” has to be done with Sections 28 to 44 of the IT Act, 1961. The inclusion of income and allowability of expenditure has to be governed by specific provisions contained therein. Whether expenditure is of capital nature or revenue nature has to be decided on the basis of the principles laid down by the Courts. The allowability under Section 37 of the IT Act, 1961, according to the CIT(A), is therefore, distinct from Section 145A of the Act, as the latter does not lay down any criteria for disallowing any expenditure. In view of this reason, the CIT(A) observed that in case any expenditure of capital nature is debited to the P&L a/c, the AC) has full power to deny such expenditure claimed as revenue irrespective of the entry made in the books. Similarly, in a case where the assessee has capitalised the expenditure of revenue nature, he is entitled to the claim it as revenue nature and the AO is duty-bound to take into account while deciding such issues. The assessee incurred expenditure of Rs. 18,17,36,176 towards replacement of around 1,85,000 meters during the year. This amount had been claimed as revenue expenditure. The AO held it as capital expenditure for the reason that the assessee had treated the same as capital in its books. The method, consistently followed, had to be accepted unless there was valid reason for deviating from the same. The issue of capital and revenue expenditure, as stated above, had to be decided on the basis of legal principles enunciated by the Courts.
7. From the perspective of the assessee company, the meters toed at r consumer’s premises are used to measure the amount of electricity consumed for raising bills on consumers. The assessee’s entire plant comprised of generation system, like boiler and turbines, plant and machinery used for transmission and distribution, like cable wires, transformers, etc., and meters which finally measured the quantum of electricity supplied. It was observed that as some of the meters of its existing customers were faulty, burnt out and defective as a result of which these were not recording proper consumption. From the perspective of the assessee company, a network could not function without a meter and a meter could not function without being a part of distribution network. It was therefore, of use only if it were integrated with the distribution system. When considered from the point of assessee, it was observed that efficiency in the distribution system is achieved by reducing distribution losses. For instance, though transmission and distribution losses of 10 per cent are acceptable worldwide, but in India, it exceeds 20 per cent. The distribution losses have been of wide spread concern in the energy sector. For the purpose of mitigating these problems, faulty meters require not only to be replaced, but replaced by temper-proof electronic meters. The meters are, therefore, integral part of the assessee’s distribution network, which is main business of the assessee company. The material fact for consideration is that the expenditure, in this case, is borne for replacement of faulty meters of its existing customers. The expenditure had been incurred by the assessee for increasing the efficiency of its business and is a constant and regular requirement. Under the facts and circumstances, the expenditure incurred is only for preserving and maintaining its existing distribution network with a view to increase efficacy and to generate more profits. Such replacement, according to the C1T(A), does not bring a new asset into existence or does not give the assessee a new or different advantage. In this regard, outlay is deemed to be capital when it was for the initiation of a business, for extension of a business or a substantial replacement of equipment. In view of the fundamental principles that could be deduced from English cases, where the expenditure was related to canying or conducting of the business that it might be regarded as an integral part of the profit-making process and, therefore, it was held to be revenue expenditure. In this regard, the CIT(A) placed his reliance on the decision of Hon’ble Bombay High Court in the case of New Shorrock Spinning & Manufacturing Co. Ltd. v. CIT and also the decision rendered by the Hon’ble Gujarat High Court in the case of CIT v. Baroda Industrial Development Corporation Ltd. . In the light of the abovesaid decisions, the CIT(A) directed the AO to treat the expenditure as revenue expenditure, which has been opposed before us by the learned Departmental Representative. On the other hand, the learned Authorised Representative of the assessee, in addition to the contentions raised before the authorities below, relied on the decision of Hon’ble Delhi High Court in the Case of CIT v. Volga Restaurant (2001) 170 CTR (Del) 206 : (2002) 253 ITR 405 (Del).
8. We find that in the year under consideration, the assessee had installed a new connection along with meter and also replaced certain meters in place of old one. The issue before us is regarding replacement of defective meters. In this regard, it was submitted that: to maintain regular supply, it was necessary to replace such meters. It was in the business interest of assessee to replace the defective meters of existing consumers. Though, initially, it was treated as capital, subsequently, the same was treated as revenue as per law. In view of the above, we are not inclined to interfere in the same. The assessee is engaged in the business of distribution of generation and distribution of electricity. The assessee installed new meters with new consumers as well as new meters with old consumers. This is undisputed that in case of new consumers the expenditure incurred towards new meters, it has to be treated as capital. This issue is not before us. The issue is regarding replacement of around 1,85,000 meters by incurring expenditure of Rs. 18,17,36,176. This amount has been claimed as revenue expenditure. The AO capitalised the expenditure amount to Rs. 18,17,36,176 for the reason that the assessee had treated the same as capital in its books. The meters fixed at the premises of consumers were used to measure the amount of electricity consumed for raising the bills on consumers. The assessee’s entire plant comprised of generation systems, like boiler and turbines, plant and machinery used for transmission and distribution, like cable wires, transformers, etc., and meters which finally measured the quantum of electricity supplied. In the course of business some of the meters of existing customers were faulty, burnt out and got defective, as a result of which they were not recording proper consumption. The assessee’s network cannot function without these meters. So, these are integrated part of distribution system. In case defective meters are not replaced, the assessee would have to bear the damages. The distribution losses have been wide spread concern in the energy sector. For the purpose of mitigating these problems, faulty meters require not only to be replaced, but replaced by tamper-proof electronic meters. The meters are, therefore, an integral part of the assessee’s distribution network, which is a main business of the assessee company. It is not in dispute that the expenditure was incurred for replacement of faulty meters of its existing customers. The said expenditure was incurred by the assessee for increasing the efficiency of its business. It is constant and regular requirement. Under the facts and circumstances, the expenditure incurred was not only for preserving and maintaining its existing distribution network but to increase effectiveness and generate more profits. Accordingly, this expenditure did not bring a new asset into existence or did not give the assessee a new or different advantage. Accordingly, the expenditure related to conducting of the business has rightly been held as revenue expenditure. This view is fortified by the decision of the Hon’ble Gujarat High Court in the case of Baroda Industrial Development Corporation Ltd. (supra), wherein the assessee company carrying on business for providing facilities such as electricity and water to industrial units, incurred expenditure on underground electricity cables. These cables were purchased by it for supplying electricity, as the old overhead wing causing problems of the cost of replacement and current repair and were held to be allowable deduction. The Hon’ble Supreme Court in the case of United Commercial Bank v. CIT (1999) 156 CTR (SC) 380 : (1999) 240 ITR 355 (SC) has held that by virtue of Banking Regulation Act, 1949, a bank may oblige to show its balance sheet, the valuation of stock-in-trade at cost, for the purpose of income-tax. The assessee is entitled to value the stock-in-trade at cost or market value, whichever is less. In the case before us, the assessee was under obligation as per the relevant provision of Electricity Act to show the expenditure as capital. But, for the purpose of income-tax, he was justified to treat the same as revenue by the order of United Commercial Bank (supra). In view of the above discussion, the C1T(A) was justified to delete the disallowance of expenditure amounting to Rs. 18,17,36,176 incurred on replacement of 1,85,000 defective electricity meters. We uphold the same.
9. As a result, the appeal filed by the Revenue is hereby dismissed.
ITA No. 436/Mum/2004 (Revenue’s appeal-Asst. yr. 2000-01)
10. Similar issue in respect of allowability of replacement charge of meter arose in the Revenue’s appeal in ITA No. 590/Mum/’2004, for the asst. yr. 1999-2000. Facts being same, so, following the aforesaid reasoning as discussed in the preceding para, the order of CIT(A) allowing replacement expenditure of defective meters needs no interference. The same is upheld.
11. As a result, the appeal of the Revenue for the asst. yr. 2000-01 is also dismissed.
ITA. No. 398/Mum/2004 (Assessee’s appeal-Asst yr. 1999-2000)
12. In this appeal, the assessee has raised the following grounds:
1. (a) The learned CIT(A) erred in confirming the disallowance of Rs. 31,23,355 being the expenditure incurred on community development.
(b) He erred in observing that there was no direct purpose for incurring such expenditure.
(c) He failed to appreciate that such expenditure was incurred in and around the area in which the power generation facilities of the appellant are situated and is an expenditure incurred wholly and exclusively for the purpose of business.
(d) The appellant prays that the aforesaid expenditure is allowable under Section 37(1) of the IT Act and the disallowance of Rs. 31,23,355 as made by the learned CIT(A) be deleted.
2. (a) The learned CIT(A) erred in confirming the disallowance of claim of Rs. 24,22,000 being amount payable to Amerace Corporation by treating it as contingent liability ignoring the fact that it was contractual liability and the dispute regarding the quantum does not make it contingent.
(b) The appellant prays that the liability towards Amerace Corporation is a liability incurred in the course of business and ought to be allowed as claimed.
(c) The appellant prays that the liability towards Amerace Corporation is a liability incurred in the course of business and ought to be allowed as claimed.
3. (a) The learned CIT(A) erred in enhancing the disallowance under Section 14A to Rs. 82,796 as compared to disallowance of Rs. 27,877 made by the AO by considering 0.50 (per cent) of exempt receipts as disallowable.
(b) He failed to appreciate that the investment in funds giving rise to exempt income was made out of surplus funds available to the appellant and since the dividend income therefrom did not require any expenditure to be incurred, no disallowance under Section 14A was called for.
12.1 At the outset of hearing, the learned Authorised Representative of the assessee has submitted that he is not pressing ground No. 2. As such, the same is dismissed as not pressed.
13. The next issue is with regard to the disallowance of Rs. 31,23,355 being the expenditure incurred towards community development. The AO made disallowance of a sum of Rs. 12,70,949.26 being 50 per cent of the expenditure of Rs. 25,41,898.52 incurred by the assessee on construction of borewells, school, colleges and an amount of Rs. 18,52,416 being expenditure of toilets at Dahanu on the ground that the same were not directly related to the assessee’s business, which was confirmed by the CIT(A).
13.1 In this regard, the learned Authorised Representative of the assessee submitted that the assessee company had to set up its generation plant at Dahanu, which was an agricultural area. At the time of setting up, there were environmental concerns. There was strong opposition against the setting up of the generation plant on the ground that it would disturb the ecological balance and create various types of pollutions in the area. The assessee, thus, took steps to protect and conserve the environment. In the same sequence the expenditure was incurred on community development, which has been detailed at pp. 1 to 3 of one of the paper books of the assessee. The AO did not allow the following two items:
i) Construction of toilets - Sulabh International. Rs. 18,52,416.00
ii) 50 per cent construction of borewells, schools
and colleges. Rs. 25,41,878.52
13.2 With regard to the construction of toilets, namely, Sulabh International, the learned Authorised Representative of the assessee has submitted that the issue in dispute is covered in favour of the assessee by the order of Mumbai Bench 'D' of the Tribunal in ITA Nos. 727, 2086 & 2087/Mum/1999, for the asst. yrs. 1993-94, 1994-95 and 1995-96 in the case of The Great. Eastern Shipping Co. Ltd. v. Dy. CIT. The relevant portion of the said order is as under:
We have heard the rival submissions, perused the material on record and have gone through the orders of authorities below and judgments cited by both the sides. We find that the judgment of Hon’ble jurisdictional High Court relied upon by the learned Departmental Representative of the Revenue rendered in the case of National Organic Chemical Industries Ltd. v. CIT (supra), is not against the assessee and rather it supports the case of the assessee because the issue involved in this case was regarding construction of jetty for handling materials manufactured by assessee under licence granted by the State Government. The jetty was owned by State Government and the assessee was given the right to use the jetty without payment of charges for three years from its completion and after three years, the assessee was to pay fee at the discretion of the State Government and under these facts, expenditure on construction of jetty was considered as incurred with a view to obtaining a commercial advantage and the expenditure was considered as revenue in nature. The judgment of Hon’ble Madras High Court rendered in the case of CIT v. Madras Refinery Ltd. (supra) supports the case of the assessee because in this case, the expenditure was incurred for bringing drinking water as also for establishing or improving the school meant for the resident of the locality in which business is situated and the expenses incurred for these purposes were not considered as being wholly outside the ambit of the business concerns of the assessee and it was held that the expenditure was deductible. In the present case also, the impugned expenses were incurred for public toilet at the foot of the building in which the office of the assessee stands at Flora Fountain. The assessee is not the owner of the public toilet because it is constructed for Sulabh International and, hence, respectfully following the judgment of Hon’ble Madras High Court rendered in the case of Madras Refinery Ltd. (supra), this ground of the assessee is allowed.
Nothing contrary was brought to our knowledge by the Revenue in this regard.
13.3 After going through the rival submissions and also after going 3 through the material available on record, we find that the assessee incurred expenditure towards Sulabh International as per agreement dt. 13th Feb., 1999, which is not disputed. The said expenditure was incurred to improve the working relation with native people. In the view of the decision in the case of Great Eastern Shipping Co. (supra), it is an allowable expenditure. We hold so.
13.4 Regarding disallowance of 50 per cent expenditure incurred on borewells, schools and colleges, the AO disallowed the same in the absence of break-up of this expenditure. In this regard, the learned Authorised Representative of the assessee drew our attention to the statement of case, which is placed at p. 5 and the details at p. 2 of the paper book. The learned Authorised Representative of the assessee also drew our attention to the agreement of the assessee with Dhyan Bharati Society, which is placed at p. 14 of the paper book. The learned Authorised Representative of the assessee further submitted that in view of agreement executed between the assessee company and Dhyan Bharati Society, the Revenue authorities failed to appreciate that such expenditure was incurred in an area to provide the facilities to the people of Dahanu region where power generation project was established. The expenditure incurred was wholly and exclusively for the purpose of business. The detail of expenditure in respect of borewells, schools and colleges in question are placed at p. 2 of the paper book.
13.5 We find that the Hon’ble Karnataka High Court in the case of Mysore Kirloskar Ltd. v. CIT had held that for the purpose of business use, it should not be limited to meaning of the earning profit alone. The assessee constituted a trust with an object to provide education for children of its employees or other children. The industry of assessee was situated in an under developed city. Therefore, the educational facilities were provided to attract the technocrats and men of managerial skill. Number of outsiders students were also studying in the school and, therefore, the assessee claimed proportionate amount in respect of donation paid to the school, during the relevant year which was allowed under the provisions of Section 37(1) of the Act. In view of the above background this expenditure incurred for improving working condition of area inhabited by the employees and others is allowable expenditure. We hold so.
14. Ground No. 3 is regarding the grievance of the assessee against the order of CIT(A) as per which he has enhanced the disallowance under Section 14A from Rs. 27,877 to Rs. 82,796.
14.1 Briefly stated, the facts are that the assessee company has earned tax-free income of Rs. 165,59,302 during this year by way of dividends and interest on tax-free bonds. The AO had estimated Rs. 27,877 as pro rata interest expenses for earning this tax-free income out of total interest payment of Rs. 395.52 lacs on fixed deposits. This interest payment on fixed deposits is a part of total interest expenditure of Rs. 11,463.66 lacs. The AO had made the apportionment of interest expenses in the ratio of tax-free income of Rs. 165.59 lacs and total turnover of Rs. 2,34,942.50 lakhs. The assessee carried the matter in appeal before learned CIT(A). The CIT(A) has held that it would be reasonable if 0.5 per cent of tax-free income is considered for disallowance under Section 14A of the Act and, accordingly, directed the AO to disallow Rs. 82,796 under Section 14A. Now, the assessee is in further appeal before us.
14.2 It is submitted by the learned Authorised Representative of the assessee that there is no nexus established by the AO or by the CIT(A) between the tax-free income and interest payment or any other administrative expenses, and hence no disallowance is justified under Section 14A. In support of this contention, reliance was placed on the judgment of the Special Bench of the Tribunal rendered in the case of I\injab State Industrial Development Corporation Ltd. v. Dy. CIT (2006) 103 TTJ (Chd)(SB) 364 : (2006) 102 1TD 1 (Chd)(SB). Reliance was also placed on the judgments of Hon’ble jurisdictional High Court rendered in the case of CIT v. Central Bank of India and in the case of CIT v. General Insurance Corporation of India . As against this, learned Departmental Representative supported the orders of authorities below.
14.3 We have considered the rival submissions and perused the materials on record, have gone through the orders of authorities below and the judgments cited by the counsel of the assessee. We find that as per para No. 8 of the assessment order, the AO has apportioned the interest expenses of Rs. 395.52 lakhs incurred on working capital to banks and on FDs as expenses to be disallowed under Section 14A in the ratio of tax-free income and total turnover, but there is nothing brought on record to show any nexus between this interest expenditure and this tax-free income. The CIT(A) has estimated the same at 0.5 per cent of tax-free income without any basis and also without bringing anything on record to show any nexus between the tax-free income and interest expenditure or any other administrative expenses. Moreover, expenses for earning dividend cannot be at a fixed percentage of dividend income even in the cases where there are such expenses. This is so because the quantum of dividend income is decided by the companies, whose shares are held by the assessee and expenses, if any, incurred for earning dividend income will not vary according to variance in rate of dividend declared in different years by these companies. In view of this, the basis adopted by the CIT(A) is not sustainable. In the present case, no nexus between tax-free income and interest expenses or any other administrative expense is brought on record by the AO or by the CIT(A). Under these facts, we are of the considered opinion that this issue is covered in favour of the assessee by the judgment of the Special Bench of the Tribunal rendered in the case of Punjab State Industrial Development Corporation Ltd. v. Dy. CIT (supra), wherein It was held in this case that when the income such as dividend is taxable under the head ‘Income from other sources’, only the expenses referred to in Section 5 can be deducted to arrive at the net income and there is no justification to deduct expenses on estimate basis or in proportion of receipts shown by the assessee from various sources. It was also held that when the AO has not placed any meterial on record to controvert or reject the contention of the assessee that no expenditure was incurred for earning dividend income, there was no justification on the part of the AO to deduct proportionate management expenses or interest or other expenses while computing dividend income for the purpose of allowing deduction under Section 80M. For the same reasons, the assessee has to succeed in the present case also because in the present case also, neither the AO nor the CIT(A) has placed any material on record to controvert or reject the contention of the assessee that no expenditure was incurred for earning the impugned tax-free income by way of dividend and interest on tax-free bonds. Under these facts, we decide this issue in favour of the assessee by respectfully following this judgment of the Special Bench of the Tribunal. This ground of the assessee is allowed.
15. As a result, the appeal of the assessee is partly allowed.
ITA No. 399/Mum/2004 (Assessee’s appeal-Asst yr. 2000-01)
16. This appeal has been filed by the assessee against the order of the CIT(A), wherein various grounds have been raised.
17. The first issue is with regard to the disallowance under the provisions of Section 14A of the IT Act, 1961. Similar issue arose in ITA No. 398/Mum/2004 in the asst. yr. 1999-2000, which has been decided in favour of the assessee vide para 9 of this order. Following the same reasoning, no disallowance is justified. Accordingly, this issue is also decided in favour of the assessee.
18: This issue is regarding disallowance of Rs. 36,50,000 being the amount payable to Amerace Corporation by treating it as contingent liability. As the time of hearing, the learned Authorised Representative of the assessee did not press the issue. So, the same is dismissed as not pressed.
19. The next issue is regarding disallowance of Rs. 38,98,651 being the expenditure incurred in respect of community development. Similar issue arose in the asst. yr. 1999-2000, which has been decided in favour of the assessee vide para 8 of this order. Facts being same, so, following the same reasoning, the issue is also decided in favour of the assessee. The AO is directed accordingly.
20. The next issue is with regard to the disallowance of deduction of Rs. 7,706 lakhs being standby charges payable by the assessee to Tata Power Company. At the time of hearing, the learned Authorised Representative of the assessee did not press this issue. So, the same is dismissed as not pressed.
21. The next issue deals with the computation of profits eligible for deduction under Section 80-IA of the IT Act, 1961.
21.1 The facts, in brief, are that the assessee was initially engaged in the business of distributing electricity in the suberban district of the city of Mumbai. Its licence was to come to an end in 1991 and one of the conditions that the Government had imposed for renewing the licence was that the assessee would take adequate steps to set up a generation plant. In compliance with these directions, the assessee set up a generating station at Dahanu in the State of Maharashtra, which became operative in the previous year relevant to the asst. yr. 1994-95. Phase-II thereof became operative in the previous year relevant to the asst. yr. 1995-96. The assessee had claimed deduction under Section 80-IA of the IT Act, 1961, as it then stood, in respect of the profits derived by it from the generation of electricity. Initially, in the return of income that was filed the deduction under Section 80-IA of the Act was calculated on the basis that the profits would have to be determined having regard to the ultimate sale price of the electricity by the assessee to the consumers. However, the AO took the view that the deduction under Section 80-IA is eligible only in respect of the profits derived from the generation of electricity and not the profits from the distribution of electricity. If the sale price at which the electricity was sold to the consumer was regarded as the basis of determination of the profits, then, a part of the distribution profits would also become eligible for a deduction under Section 80-IA. Accordingly, he was of the view that in order to determine the profits from the generation activity, the tariff at which the assessee purchases the electricity from the Tata Power Company could be regarded as the basis. The assessee used to purchase electricity from the Tata Power Company as it had to make good the gap between its generating capacity and the demand from the consumers. The AO held that in determining the tariff not only was the actual charge levied by the Tata Power Company on the basis of the units actually consumed to be taken into consideration but even the standby charges levied were to be considered. This was because the standby charges were part of the tariff fixation by the Tata Power Company. The assessee had accepted the basis that, had been adopted by the AO. However, the only dispute which now arises is whether in computing the tariff one should have regard to the standby charges actually paid by the assessee or the demand for the standby charges raised by the Tata Power Company or the charges ultimately determined by the Maharashtra Electricity Regulatory Commission (in short MERC) on the arbitration of the disputes between the assessee and Tata Power Company.
21.2 In this regard, it was submitted that the AO had taken the view that as the assessee had not been allowed a deduction on account of the demand for standby charges raised because the profit derived from the unit, eligible for the deduction under Section 80- IA of the Act is to be computed without taking into consideration the standby charges demanded. On appeal, the CIT(A) held that under Section 80-1A, the profits of the eligible business have to be computed in the manner provided for under the Act. As he had taken the view that the liability for payment of the enhanced standby charges was being disputed by the assessee and the matter had been restored for reconsideration by MERC, the assessee could not contend that the higher rate should be taken into consideration. In order to appreciate the issue in its proper prospective a few relevant facts relating to the levy of the standby charges were brought to our knowledge. The assessee had entered into an agreement dt. 19th Jan., 1998 with the Tata Power Company whereunder the assessee was required to pay a standby charge of Rs. 3.5 crores per month in addition to the tariff calculated for the actual electricity that the Tata Power Company provided to the assessee. With effect from 1st Dec, 1998, the Tata Power Company raised a demand on account of standby charges at Rs. 15.125 crores per month. The matter was disputed by the assessee and the MERC, vide its order dt. 7th Dec, 2001, directed the assessee to pay a sum of Rs. 119.06 crores for the previous year relevant to the asst. yr. 2000-01. As the assessee had already paid a sum of Rs. 42 crores the differential of Rs. 77.06 crores was claimed as deduction in the course of the assessment proceedings. The assessee also contended that if the tariff charged by Tata Power Company was to be the basis for computing the profits eligible for a deduction under Section 80-IA of the Act, then this sum of Rs. 119.06 crores as opposed to the sxim of Rs. 42 crores should be considered. The AO allowed the deduction of the additional liability as finally determined by MERC in the year the assessment completed for asst. yr. 2005-06 and it is for this reason alone and with a view to avoid further dispute that the assessee has not contested disallowance of the expenditure. However, the AO whilst computing the profits eligible for a deduction under Section 80-IA for the asst. yr. 2005-06 had not included this addition amount of Rs. 77.06 crores. The learned Authorised Representative of the assessee submitted that as it is an undisputed position that the standby charges levied by the Tata Power Company are part of the tariff that the Tata Power Company charges and as tiie assessee had accepted the decision of the AO that the tariff charged by the Tata Power Company is to be the basis for determining the profits eligible for a deduction under Section 80-JA the finally determined standby charges of Rs. 91.40 crores for the relevant previous year have been considered while determining the profits for the year. If this amount is not taken into consideration in determining the profits for the year it will lead to an anomalous situation inasmuch as in the year in which the MERC has fixed the rate the profits that would be eligible for deduction would be highly overstated and would not reflect the true profits from the generation activity for the year. In fact, it is for this reason that the AO has not taken into consideration the amount so determined for the earlier previous years while determining the profits for the previous year relevant to the asst. yr. 2005-06.
21.3 It is also submitted that Sub-section (3) of Section 80-IA provides that where any goods or services held for the purpose of the eligible business are transferred to any other business carried on by the assessee and consideration, if any, for such transfer as recorded in the accounts of eligible business does not correspond to the market value of such goods as on the date of transfer, then, for the purposes of deduction under Section 80-IA of the Act, the profits and gains of such eligible business shall be computed as if the transfer had been made at the market value of such goods. Therefore, it is the market value of the electricity that is generated that has to be the basis for computing the deduction of the generation activity. The market value is to be determined by the tariff levied for the electricity that the assessee purchases for its distribution activity from the Tata Power Company. It is an admitted position that the market value would include not only the rate per unit but also the standby charges. Standby charges have to be the standby charges that are ultimately upheld, otherwise it would lead to the absurdity mentioned hereinbefore. In order to determine the market value one would have to estimate the standby charges that would be ultimately levied but in the present ease as MERC has fixed a sum of Rs. 91.40 erores and it is this figure that has to be taken into consideration.
21.4 As against this, it was submitted by the learned Departmental Representative of the Revenue that the liability on account of ‘Standby charges’ has not crystalised in this year and hence the same cannot be considered for working out. the price charged by Tata Power Company for working out the profit on production of energy to calculate deduction allowable under Section 80-IA. Orders of authorities below were supported.
21.5 We have considered the rival submissions, perused the materials on record and have gone through the orders of authorities below. We find that there as dispute regarding payment of ‘Standby charges’ by the assessee to Tata Power Company. The original demand raised by Tata Power Company was of Rs. 181.50 crores but the same was restricted to Rs. 119.06 crores by MERC vide order dt. 7th Dec, 2001, but actual payment made was of only Rs. 42 crores. For this amount, the AO has allowed deduction also and he has considered this amount of Rs. 42 crores also for working out the rate of power supplied by Tata Power Company to the assessee. The final liability determined by MERC as per order dt. 31st May, 2004 is Rs. 91.40 crores as against Rs. 119.06 crores as per earlier order dt. 7th Dec, 2001. The assessee has not pressed the ground regarding allowing of deduction on this account and it was stated that since the assessee has to get deduction in the year when the liability get crystalised, this claim for deduction in this year is not pressed. But, the claim of the assessee is that for determining the market price of power supply by Tata Power Company to the assessee, the final amount of ‘Standby charges’ as per the order of MERC dt. 31st May, 2004 has to considered in this year because the same cannot be considered in a later year although deduction for the same may be allowed in a subsequent year. We find force in this contention of the learned Counsel for the assessee. We find that for the purpose of determining profit from power generation activity of the assessee, it has been agreed that the rate charged by Tata Power Company to the assessee should be taken as the basis. We also find that this is also agreed position that ‘Standby charges’ payable by the assessee to Tata Power Company have to be included for that purpose since the AO himself has excluded only Rs. 77.06 crores, which was not paid and not debited by the assessee in this year and, hence, the amount of Rs. 42 crores already paid by the assessee and debited in P&L a/c stands included in determining the sale price of power by Tata Power Company to the assessee. The AO had only excluded the claim of the assessee for including this sum of Rs. 77.06 crores on the basis of MERC order dt. 7th Dec, 2001. We also find that deduction for this balance amount of Rs. 49.40 crores (91.40-42.00) was allowed by the AO in asst. yr. 2005-06, but this amount was not included for rate purposes in that year. This cannot be done because it will result into distorted figure in that year. The claim of the assessee was rejected by the lower authorities for the only reason that the liability has not ciystalised but since as per this order of MERC dt. 31st May, 2004, the liability was finalized at Rs. 91.40 crores and deduction for balance amount of Rs. 49.40 crores is also allowed by the AO in asst. yr. 2005-06, this amount of Rs. 49.40 crores should also be considered in this year to work out the sale price of power by Tata Power Company to the assessee and accordingly, the deduction allowable to the assessee under Section 80-IA should be recalculated. This amount has to be considered for rate purpose in this year only since it was not considered in asst. yr. 2005-06 when deduction of this amount was allowed and we are of the opinion that the same cannot be considered in that year because it will result in distorted figure of sale price of power in that year and hence we hold that it should be considered in this year and the AO should recalculate the deduction allowable to the assessee under Section 80-IA. This ground of the assessee is allowed.
22. The next issue is with regard to the disallowance of claim of deduction of income on account of excess billing amounting to Rs. 12,79,53,107. At the time of hearing, the learned Authorised Representative of the assessee did not press this issue also. So, the same is dismissed as not pressed.
23. AS a result, the appeal of the assessee is also partly allowed.
ITA Nos. 397 & 435/Mum/2004 (Asst. yr. 1998 99)
24. These cross-appeals, one by the Revenue in ITA No. 397/Mum/2004 and the other by the assessee in ITA No. 435/Mum/’2004, are against the orders of the C1T(A) for the asst. yr. 1998-99. In order to appreciate the issues that arise in the present appeals, it is necessary to set out in brief a few relevant facts.
25. The assessee had paid self-assessment tax on 29th June, 1998 of Rs. 24 crores for the asst. yr. 1998-99. It had filed its return of income for the said asst. yr. on 30th Nov., 1998 in which return a total income of Rs. 21,10,15,737 was declared under Section 115JA of the IT Act, 1961, as normal computation of income was ‘NIL’ after set off of past losses. After adjusting the advance tax of Rs. 8,50,00,000, the tax deducted at source of Rs. 3,89,32,198, the MAT credit available of Rs. 16,39,71,750 as well as the self-assessment tax of Rs. 24,00,00,000 paid, the assessee had claimed a refund of Rs. 29,01,09,085. The AO completed the assessment for the asst. yr. 1998-99 by an order dt. 16th Feb., 2001. He assessed the assessee to an income of Rs. 46,69,00,000 under Section 115JA.
26. Being aggrieved by the said order, the assessee had preferred an appeal before the CIT(A), which appeal was disposed of by an order dt. 9th April, 2002. The AO gave effect to the said order and determined the total income of the assessee at Rs. 63,26,36,008. After giving credit for the pre-paid tax as well as the self-assessment tax and tax paid as per regular assessment, the AO determined a refund of Rs. 34,02,14,243. He also granted interest under Section 244A of the IT Act, 1961, in a sum of Rs. 2,10,34,320 on that portion of the refund that was attributable to the advance tax and tax deducted at source and tax paid on regular assessment. However, in respect of that portion of the refund, which was attributable to the self-assessment tax paid, the AO did not grant any interest. Accordingly, the assessee had preferred an appeal to the CIT(A) challenging the denial by the AO of interest on the self-assessment tax paid which was found to be in excess and, accordingly, a claim for interest was made on the said sum of Rs. 24 crores from 1st July, 1998 to 31st Jan., 2003. The CIT(A), by his order dt. 6th Oct., 2003, held that the assessee was entitled to interest under Section 244A of the Act, but curtailed the period for which interest was to be allowed. According to the C1T(A), interest under Section 244A was to be allowed to the assessee not from the date of payment of the self-assessment tax but from the date of the original assessment order. He also observed that the appeal filed by the assessee was maintainable.
27. Being aggrieved by the order of CIT(A), both the assessee as well as the Revenue have preferred appeals to the Tribunal. The Department has not disputed the finding of the CIT(A) that the assessee was entitled to interest under Section 244A in respect of the self-assessment tax paid thereby accepting that the AO was not justified in denying the assessee the interest when he framed the order giving effect to the order of CIT(A). The only issue raised in the Revenue’s appeal is that the appeal by the assessee-before the CIT(A) was not maintainable.
28. In view of the above background, it was submitted that the appeal preferred by the assessee could be sustained either under Section 246A(1)(a) or under Section 246A(1)(c) of the IT Act, 1961. The order dt. 8th Nov., 2002, does not spell out as to under what section it had been passed. If it is treated as an order under Section 154 on the footing that the AO is rectifying his original order to bring it in the line with the directions given by the CIT(A), then the appeal would be maintainable under Clause (c) as it has the effect of reducing the refund that the assessee was entitled to. On the other hand, if the order is treated as one passed under Section 143(3) of the Act, then the same would be appealable under Clause (a) as the assessee would be regarded as challenging the determination of the tax (which includes the interest). In this connection, reliance was placed on the decision of Hon’ble Anclhra Pradesh High Court in the case of Bakelite
Hylam Ltd v. CIT , wherein it has been held that the assessee had a right of appeal against an order giving effect to the order of an appellate authority as if such order was an assessment order itself and if in such an order there was a denial of liability on the part of the Revenue to pay interest on the refund, an appeal would lie to the CIT(A). In arriving at this conclusion, the Hon’ble Andhra Pradesh High Court relied upon the principle laid down in the decision of the Hon’ble Supreme Court in the case of Central Provinces Manganese Ore Co. Ltd. v. CIT , wherein it has been held that if an assessee denied his liability to pay interest, the appeal was maintainable. The Hon’ble Bombay High Court in the case of Caltex Oil Refining (India) Ltd. v. CIT , has also held that an appeal against an order denying interest under Section 214 was maintainable. Reliance also was placed on the decision of the Tribunal in the case of MMTC Ltd. v. Dy. CIT (2007) 110 TTJ (Del) 600 : Taxman 7 (Mg), a copy whereof is enclosed. It is, therefore, pleaded that the appeal of the Revenue challenging the right of the assessee to prefer an appeal before the CIT(A) be dismissed.
29. lt is submitted by the learned Departmental Representative of the Revenue that the issue of allowing of interest under Section 244A is not appealable as per Section 246A. It was submitted by him that there is no mention of Section 244A in Section 246A.
30. We have considered the rival submissions and have perused the materials on record and have gone through the relevant provisions. We find that the issue involved in the appeal of the assessee before learned CIT(A) was as to whether the Department has to pay interest, under Section 244A on account, of excess payment of self-assessment tax. No interest was peiid by the AC) with regard to excess payment of self-assessment tax. We find that it is settled legal position that if the dispute is regarding denial by the assessee of the liability to interest, the same is appealable. By the same yardstick, in the case where the Department denies the liability to pay interest, the same is also appealable. We also find force in the submissions of learned Counsel of the assessee that the in the order dt. 8th Nov., 2002, it is not spelt out as to under which section, this order was passed but appeal lies against this order even if this order is treated as order under Section 154 and in that case, appeal lies as per Section 246A(1)(c). If the order is treated as order under Section 143(3), the appeal lies as per Section 246A(1)(a). As per the judgment of Hon’ble Andhra Pradesh High Court rendered in the case of Bakelite Hylam v. CIT (supra), it was held that the assessee has a right of appeal against an order giving effect to the order of an appellate authority as if such order was an assessment order itself. In the same case, it was also held that if there is total denial of the liability by the Revenue to pay interest on belated refund, an appeal lies against such total denial. In the present case also, there is total denial by the Revenue to pay interest on self-assessment tax paid by the assessee. We are of the considered opinion that the facts in the present case are similar to the facts in that case and hence, this judgment covers this issue against the Revenue. Respectfully following this judgment, this issue is decided in favour of the assessee and this ground of the Revenue is rejected.
31. The sole issue that arises in the assessee’s appeal is whether the CIT(A) was justified in restricting the grant of interest only from the date the original assessment, was framed i.e. 14th Feb., 2001 and not from 29th June, 1998 i.e. the date on which self-assessment tax was paid. Section 244A of the Act was inserted by the Direct Tax Laws (Amendment) Act, 1989, which provides that where refund of any amount becomes due to an assessee under the Act, the assessee shall be entitled to receive in addition to the said amount, simple interest at the rate mentioned therein. Clause (a) of Sub-section (1) covers a case where the refund is out of any advance tax paid or tax deducted at source or tax collected at source. Insofar as the present proceedings are concerned, it is an admitted position that the assessee is entitled to interest on the excess advance tax paid by it. Clause (b) provides that in any other case, i.e. a case which does not fall within Clause (a), such interest has to be granted from the date, as the case may be, dates of payments of the tax or penalty to the date on which the refund is granted. The Explanation below in Clause (b) to provide that “date of payment of tax or penalty” means the date on and from which the amount of tax or penalty specified in the notice of demand issued under Section 156 of the Act is paid in excess of such demand. The CIT(A) has taken the view that by virtue of the Explanation and by virtue of the judgment of the Hon’ble Supreme Court in the case of Modi Industries Ltd. v. CIT , held that interest on the self-assessment tax paid would be available only from the date the self-assessment tax is adjusted against the tax liability pursuant to the assessment framed. It was submitted that this conclusion of the CIT(A) is not justified in law. The substantive part of Clause (b) makes it amply clear that interest is to be allowed from the date of payment of the tax to the date on which the refund was granted. There is no dispute that the self-assessment tax was paid on 29th June, 1998. If that be so, one need not go to the definition of the said term in the Explanation below Clause (b). The Explanation can in no manner curtail or restrict the provisions of the section. In this regard, reliance was placed on the judgment of the Hon’ble Supreme Court in the case of S. Sundaram Pillai v. V.R. Patlabiraman , wherein it has been held that the Explanations are meant to clarify ambiguities, which may have arisen in the main statutory provisions, and not to limit the applicability of the said provisions. The fact that an assessee would be entitled to interest for the period from which it paid the self-assessment tax is also borne out by the legislative history. Prior of the insertion of Section 244A of the Act, interest was allowed to an assessee cither under Section 214 of the Act. Section 243 of the Act or Section 244 of the Act dealt with interest on excess advance tax paid. Section 243 dealt with the grant of interest on a delayed payment of a refund and Section 244. inter alia, dealt with the interest of the amounts paid pursuant to an order of the assessment and penalty. The Hon’ble Supreme Court in the case of Modi Industries (supra) had held that on a construction of Section 244(1A) of the Act an assessee would be entitled to interest on a refund determined pursuant to an order to grant effect to an appellate order and that an assessee would be entitled to such interest from the date of the assessment order, as it was on that date that the advance tax paid, tax deducted at source or self-assessment tax was appropriated against tax demand in terms of Sections 219, 198 and 140A(3), respectively of the Act. Thus, there was a lacuna inasmuch as an assessee was not entitled to interest in respect of a refund arising out of the tax deducted at source or the self-assessment tax for the period commencing from the day of the assessment year or the date of payment upto the date of the assessment order is framed. It was to cure this lacuna that the provisions of grant of interest were centralized in Section 244A of the Act. This is borne out by the Circular No. 549, dt. 31st Oct., 1989 [(1990) 82 CTR (St) 1 : (1990) 182 ITR (St) 1], which explains the provisions of the Direct Tax Laws (Amendment) Act. In para 11 thereof it is stated that “these provisions, apart from being complicated, left certain gaps for which interest was not paid by the Department to the assessee for money remaining with the Government. To remove this inequity as also to simplify the provisions in this regard, the Amending Act, 1987 has inserted new Section 244A of the IT Act, 1961, applicable from the asst. yr. 1989-90 onwards which contains all the provisions for payment of interest by the Department and delay in the grant of refunds”. The legislative intent thereby is to compensate an assessee, if the Government has had the use of the funds. As in the present case, the Revenue has had use of the self-assessment tax of Rs. 24 crores right from 29th\June, 1998. It is but equitable that the assessee should be entitled to interest from that date. The assessee’s contentions are supported by the decisions of the Mumbai Benches of the Tribunal in the case of Asstt. CIT v. National Organic Chemicals Ltd. in ITA No. 7464/Mum/1997 and in the case of Addl. CIT v. Grindwell Norton Ltd. (2006) 102 TTJ (Mum) 265 : (2006) 100 ITD 245. In both these cases as refund was determined pursuant to an intimation under Section 143(1)(a) of the IT Act, 1961, the assessee was entitled to interest on the refunds so determined in respect of the excess self-assessment tax paid under Section 244A of the Act. In such eventuality, the question of applying the Explanation below clause could have never arisen. Nevertheless, the Tribunal had directed the AO to grant to the assessee therein interest from the date of payment of self-assessment tax. On a parity of reasoning, the assessee in the present appeal should also be entitled to interest from 29th June, 1998 upto the date of the refund and not from the date of the assessment order to the date of refund as has been directed by the CIT(A). This issue is decided in favour at the assessee.
32. As a result, the appeal of the Revenue stands dismissed and the appeal of the assessee stands allowed.