Gujarat High Court
M/S Meghmani Energy Ltd vs Deputy Commissioner Of Income Tax ... on 14 September, 2016
Author: Akil Kureshi
Bench: Akil Kureshi, A.J. Shastri
C/SCA/11798/2016 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
SPECIAL CIVIL APPLICATION NO. 11798 of 2016
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MR.JUSTICE A.J. SHASTRI
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1 Whether Reporters of Local Papers may be allowed
to see the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy of
the judgment ?
4 Whether this case involves a substantial question of
law as to the interpretation of the Constitution of
India or any order made thereunder ?
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M/S MEGHMANI ENERGY LTD....Petitioner(s)
Versus
DEPUTY COMMISSIONER OF INCOME TAX CIRCLE....Respondent(s)
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Appearance:
MR B S SOPARKAR, ADVOCATE for the Petitioner(s) No. 1
MRS MAUNA M BHATT, CAVEATOR for the Respondent(s) No. 1
NOTICE SERVED for the Respondent(s) No. 1
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CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MR.JUSTICE A.J. SHASTRI
Date : 14/09/2016
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ORAL JUDGMENT
(PER : HONOURABLE MR.JUSTICE AKIL KURESHI)
1. The petitioner has challenged the notice dated 30.03.2016, under which, respondent Assessing Officer, reopened the petitioner's assessment for assessment year 201011. Brief facts are as under.
2. Petitioner is a company registered under the Companies Act and is engaged in the business of generation and distribution of power. For the assessment year 201011, the petitioner filed the return of income on 20.09.2010, declaring 'Nil' income under normal provisions of the Income Tax Act, 1961 ('the Act' for short) and book profit of Rs.4.23 crores (rounded off) under the provisions for minimum alternative tax. This return was taken in scrutiny by the Assessing Officer, who after detailed examination of various claims made by the petitioner, framed the assessment under section 143(3) of the Act on 05.03.2013 and accepted the declarations made by the petitioner in the return.
3. To reopen such assessment, the respondent issued the impugned notice. In order to do so, she had Page 2 of 15 HC-NIC Page 2 of 15 Created On Sat Sep 17 00:38:08 IST 2016 C/SCA/11798/2016 JUDGMENT recorded following reasons:
"1. In this case, the assessee Company engaged in the business of generation and distribution of energy filed its return of income for Asst. Year 201011 on 22.09.2010 declaring total income of Rs.Nil/. The return of income was processed u/s. 143(1) of the Act and subsequently the case of the assessee was picked up for scrutiny and the assessment was completed u/s. 143(3) of the Act on 05.03.2013 determining the total income at Rs. Nil.
2. On perusal of the profit and loss account for the F.Y. 200910 relevant to Asst. Year 201011, it was noticed that the assessee had arrived profit of Rs.4,23,47,912/ after considering and debiting the expenditure of Rs.1,88,41,214/ under the head exceptional items. On verification of the details under the head exceptional item, it was noticed that the assessee had debited these expenditure on account of loss of derivative transaction with ICICI bank namely mark to market loss. It is relevant to mention there that the investment in derivatives was made on 07/06/2007 with maturity date of 06/06/2014 and the loss on account of diminution in value of the derivatives was classified as Mark to Market loss amounting to Rs.1,88,41,214/ as on 31/0/2010. The loss was not an actual loss but an unascertained liability in view of explanation 1(c) of section 115JB of the Act. Such sort of liability was required to be added back to the income as per the provisions of section 1(c) of section 115JB of the Act.
3. On perusal of statement of total income for the year under consideration it is noticed that the assessee had claimed deduction u/s. 80IA(4)(iv) of I.T.Act, 1961, deduction u/s. 80IA(4)(iv) is allowable to an undertaking which is setup in any part of Page 3 of 15 HC-NIC Page 3 of 15 Created On Sat Sep 17 00:38:08 IST 2016 C/SCA/11798/2016 JUDGMENT India for the generation or generation and distribution of power if it begins to generate power at any time during the period beginning on the 1st day of April, 1993and ending on the 31st day of March 2013. On verification of the details submitted it is noticed that the deduction on profit on sale of electricity and steam has been claimed. The steam generated is only a raw material which is used by the power plant to rotate the turbines. The steam which has low pressure is not able to rotate the turbines is sold by the assessee to its associate concerns Meghmani Industries Ltd and Meghmani Organics Ltd. Hence, steam generated is only an intermediate product and not a final product saleable in open market. The assessee is also not selling the same in open market, but to its associate concerns. By doing so, the assessee on one hand claiming 100% deduction u/s. 80IA on sale of steam, on the other hand its associate concerns decrease their profits by the amount of steam purchased by them from Meghmani Energy Ltd. In view of above, the deduction u/s. 80IA(4)
(iv) claimed on sale of steam was required to be disallowed. For quantification of deduction to be disallowed, the cost of electricity per unit is not available on record. Hence, on verification of assessee's associate concern records for AY 201011 it is noticed that cost per unit of electricity produced was Rs.4.67. By taking the cost per unit at Rs.4.67, the total cost for producing 2,00,07,523/ units would be Rs.9,34,35,132/. The total manufacturing cost claimed by the assessee for both electricity and power was Rs.14,39,26,376/.
Hence, after reducing the cost of electricity the manufacturing cost remained would be Rs.5,04,91,245/ which was incurred for manufacturing steam. Hence, profit on sale of steam would be Rs.5,89,17,255/ (Rs.10,94,08,500 less Rs.5,04,91,245/). In view of the above, the entire deduction u/s. 80IA was required to be disallowed.
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4. In view of the above facts, the
undersigned has reasons to believe that the income to the tune of Rs.6,30,17,888/ chargeable to tax has escaped assessment in the case of the assessee for the assessment year 201011 and is required to be reassessed as there was a failure on the part of the assessee to disclose fully and truly all material facts for Asst. Year 201011.
5. In view of the above, this is a fit case for reassessment by invoking provisions of section 147 of the Income Tax Act, 1961."
4. Upon being supplied with copy of the reasons, the petitioner, under a letter dated 14.06.2016, raised objections to the notice of reopening. These objections were however rejected by the Assessing Officer by an order dated 23.06.2013. Hence, this petition.
5. Taking us through the reasons recorded by the Assessing Officer for issuing the notice, counsel for the petitioner raised following contentions:
I. With respect to the first ground of the liability of mark to market loss of Rs.1.88 crores (rounded off), the counsel submitted that such liability was ascertained and not contingent. The Assessing Officer committed an error in invoking explanation 1(c) of Page 5 of 15 HC-NIC Page 5 of 15 Created On Sat Sep 17 00:38:08 IST 2016 C/SCA/11798/2016 JUDGMENT section 115JB of the Act. In any case, there was no failure on the part of the assessee to disclose full facts.
II. Regarding ground no.2, counsel submitted that the claim of deduction under section 80IA(4)(iv) of the Act in respect of the sale of steam was examined by the Assessing Officer in the original assessment. Being satisfied that such claim was valid, she made no addition in the order of assessment. Merely because she did not record specific reasons in the order of assessment in this respect would be of no consequence. Counsel further submitted that in any case, there was full and true disclosure concerning this claim and the Assessing Officer therefore erred in issuing the notice for reopening beyond the period of four years.
6. On the other hand, learned counsel for the Revenue opposed the petition contending that the agreement between the petitioner and ICICI bank had a tenure between 07.06.2007 to 06.06.2014 regarding hedgeing the petitioner against the foreign exchange fluctuations. Till this period is over, any liability arising at an intermediary stage, would only be in the Page 6 of 15 HC-NIC Page 6 of 15 Created On Sat Sep 17 00:38:08 IST 2016 C/SCA/11798/2016 JUDGMENT nature of conjoint liability and such amount would be added back in terms of explanation 1(c) to section 115JB of the Act. She further submitted that the petitioner was not entitled to deduction under section 80IA(4)(iv) of the Act on sale of steam which cannot be categorized as generation of power.
7. As noticed, the impugned notice has been issued beyond the period of four years from the end of relevant assessment year. One of the prime requirements to be satisfied before the Assessing Officer can claim jurisdiction to reassess the income would therefore be that the escapement of income was due to the failure on the part of the assessee to disclose truly and fully all material facts relevant for assessment. This is more than well settled through series of judgments of the Supreme Court and this Court and no reference in this respect is therefore necessary. With this aspect in mind, we may peruse the reasons recorded by the Assessing Officer more minutely.
8. The first reason pertains to his objection to the assessee claiming deduction of a loss of Rs.1.88 Page 7 of 15 HC-NIC Page 7 of 15 Created On Sat Sep 17 00:38:08 IST 2016 C/SCA/11798/2016 JUDGMENT crores on account of diminution of value of the derivatives. From the record, it emerges that the assessee had entered into an agreement with ICICI bank concerning the investment in derivatives made on 07.06.2007 with a maturity date of 06.06.2014. During the year under consideration, the assessee claimed an expenditure of Rs.1.88 crores on account of loss due to diminution in value of derivatives which was classified as mark to market loss as on 31.03.2010. According to the Assessing Officer, since the maturity date of assessment was 06.06.2014, this figure of Rs.1.88 crores, was merely an unascertained liability. She therefore relied on clause 1(c) of explanation to section 115JB of the Act to contend that such expenditure was required to be added back to the income of the assessee for the purpose of computation of booked profit under section 115JB of the Act. Clause(c) of explanation 1 of section 115JB provides that for the purpose of the said section, booked profit would mean the net profit as shown in the profit and loss account as increased by "(c) The amount or amounts set aside to provisions made for meeting liabilities, other than ascertained Page 8 of 15 HC-NIC Page 8 of 15 Created On Sat Sep 17 00:38:08 IST 2016 C/SCA/11798/2016 JUDGMENT liabilities."
9. In this regard, as noted, the case of the petitioner is that the said sum of Rs.1.88 crores does not represent a provision made for meeting the liabilities which was not ascertained liability. Counsel argued that the liability was an ascertained liability and in any case, it was not a mere provision made. Be that as it may, we are not concerned so much as to whether in law, the petitioner raised a correct claim or not. We are far more concerned about the question whether there was full and true disclosure in respect of such a claim. The answer would be available from the reasons recorded by the Assessing Officer itself. These reasons nowhere demonstrate that the assessee had failed to disclose true and full facts. In fact, to the contrary, the reasons would establish that the Assessing Officer was referring to the material already on record to assert that the claim of expenditure of Rs.1.88 crores was not in tune with the MAT provisions contained under section 115JB of the Act and in particular, explanation 1(c) thereto. Clearly therefore, the Assessing Officer did not have any additional or new material which did not form part Page 9 of 15 HC-NIC Page 9 of 15 Created On Sat Sep 17 00:38:08 IST 2016 C/SCA/11798/2016 JUDGMENT of the original assessment proceedings to question the assessee's claim of deduction in this respect. Notice of reopening based on such ground which was issued beyond a period of four years, would therefore not be valid.
10. The second ground pressed in service by the Assessing Officer pertained to the petitioner's claim of deduction under section u/s. 80IA(4)(iv) of the Act in respect to sale of steam to its sister concern. The perusal of the reasons would show that the assessee who is engaged in generation of power, generates steam and uses bulk of such steam for its own generation of electricity through turbines. The petitioner sales a part of steam so generated to its sister concern. The petitioner claimed deduction under section 80IA(4)(iv) of the Act, both on sale of electricity generated by it, as well as on sale of steam as such. It is with respect to this later sale that the Revenue now has raised a dispute. According to the Assessing Officer, sale of steam would not qualify for deduction under section 80IA(4)(iv) of the Act which would be confined only to sale of power and steam, according to her, would not be covered within Page 10 of 15 HC-NIC Page 10 of 15 Created On Sat Sep 17 00:38:08 IST 2016 C/SCA/11798/2016 JUDGMENT such expression since the steam is only an intermediate product and not a final product salable in open market. Though in the reasons recorded, the Assessing Officer has also brought in an element of such steam being sold by the assessee to its sister concern, she has not built any case of the assessee having artificially inflated the price thereof to claim deduction otherwise not justified.
11. In the context of the petitioner's claim of deduction under section 80IA(4)(iv) of the Act on sale of steam, there is no averment by the Assessing Officer that there was any failure to disclose true and full facts. Equally importantly, this claim was examined by the Assessing Officer during the original assessment. Under a notice dated 14.06.2012, the Assessing Officer had asked the assessee to supply various details. Multiple queries were raised, one of them, asking the assessee to justify the claim of deduction under section 80IA of the Act. In response to such query, the assessee under letter dated 01.12.2012, conveyed to the Assessing Officer as under:
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HC-NIC Page 11 of 15 Created On Sat Sep 17 00:38:08 IST 2016 C/SCA/11798/2016 JUDGMENT "10. Point No.22: Justification of claim u/s 80 IA:
(A) The company has started separate industrial undertaking for captive power project. The activity is covered by Sec.
80IA(4) clause (IV) Industrial undertaking is located at Block No.398, Village Chharodi, Taluka Sanand, Dist. Ahmedabad (B) The Company has maintained separate records and books of accounts for the said undertaking.
(C) The Company has complied with all the conditions laid down in Sec. 80IA of the act. (D) In view of Sub. Sec.2 of Sec.80IA, the company has obtained to avail the benefit U/S 80IA of the Act for the A.Y.201011."
12. It appears that while processing such reply in connection with the assessee's claim under section 80IA(4)(iv) of the Act, the Assessing Officer had further questions to raise. Though these questions are not on record, presumably since the queries were raised on an order sheet the nature of the questions become clear when one peruses the petitioner's reply to such queries under a letter dated 21.01.2013. In such letter, the petitioner had conveyed to the Assessing Officer as under:
"During the course of assessment proceedings certain other information was asked by your good selves. We submit here with the same as Page 12 of 15 HC-NIC Page 12 of 15 Created On Sat Sep 17 00:38:08 IST 2016 C/SCA/11798/2016 JUDGMENT under:
1. A write up justification of Steam sale.
Whether it is power & eligible for 80IA We refer here with a judgment of Income Tax Tribunal, Delhi Bench in case of DCIT Vs M/s SIAL SBEC BIOENERGY LTD 2008TIOL80ITATDEL which is relevant to our case also.
In the instant case, the undertaking was generating low pressure steam in addition to the generation of electricity and had claimed tax holiday under section 80IA where in Tribunal had concluded that, "The word 'power' has to be given a meaning which is common parlance means 'energy'. The energy can be of any form, be it mechanical, be it electrical, be it wind or be it thermal. The Tribunal held that the steam produced by the assessee shall be termed as power and shall qualify for the benefits available under section 80IA(4)(iv)." In view of the above decision we respectfully submit that steam produced by the us shall be termed as power and shall qualify for the benefits available under section u/s. 80IA(4)(iv)."
13. From the above reply of the petitioner, it can be seen that the issue under discussion was precisely whether the petitioner was justified in claiming deduction on sale of steam. In this respect, the petitioner relied on a decision of Delhi bench of the Tribunal and contended that the word 'power' has to be given a meaning which in common parlance means energy Page 13 of 15 HC-NIC Page 13 of 15 Created On Sat Sep 17 00:38:08 IST 2016 C/SCA/11798/2016 JUDGMENT and that therefore, steam produced by the petitioner would also be termed as power and therefore, qualify for deduction under section 80IA(4)(iv) of the Act.
13. Undisputedly, the Assessing Officer did not disturb this claim in the final order of assessment. It may be that while doing so, she did not record separate reasons in the order of assessment. This would however be of no consequence as has been held by this Court in case of Gujarat Power Corporation Limited v. Asstt. Commissioner of Income Tax, reported in 350 ITR 266.
14. Regarding the second ground also, therefore, it can be seen that there was no failure on the part of the petitioner to disclose truly and fully all material facts. In fact, the claim was examined not only in the context of the petitioner's larger deduction under section 80IA(4)(iv) of the Act but, specifically to that portion of the claim which related to the sale of steam. Such ground cannot be reagitated in exercise of power for reassessment, that too beyond the period of four years.
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15. In the result, the petition is allowed. Impugned notice dated 30.03.2016 is set aside.
(AKIL KURESHI, J.) (A.J. SHASTRI, J.) ANKIT Page 15 of 15 HC-NIC Page 15 of 15 Created On Sat Sep 17 00:38:08 IST 2016