Income Tax Appellate Tribunal - Delhi
Magnum Power Generation Ltd, vs Assessee on 5 July, 2007
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH `D': NEW DELHI
BEFORE SHRI C.L.SETHI, JM & SHRI K.D. RANJAN, AM
I.T. A. No.4140/Del of 2007
Assessment Year: 2004-05
M/s Magnum Power Generation Ltd., DCIT, Circle 6(1)
48/12, Commercial Centre, vs New Delhi.
Malcha Marg, Chankya Puri,
New Delhi.
PAN : AAACM7050R
I.T. A. No.4703/Del of 2007
Assessment Year: 2004-05
DCIT, Circle 6(1), M/s Magnum Power Generation Ltd.,
New Delhi. vs 48/12, Commercial Centre,
Malcha Marg, Chankya Puri,
New Delhi.
PAN : AAACM7050R
Appellant Respondent
Assessee by: Shri Anil Bhalla, CA
Department by: Shri Devender Singh, Sr. DR
ORDER
PER C.L. SETHI, JM:
These are cross appeals filed by assessee as well by revenue against order dated 5.7.2007 passed by the CIT(A) pertaining to the Asstt. Year 2004-05.
ITA No.4703/Del/2007: - 22. We shall first take the appeal filed by the revenue.
3. The only ground raised by the revenue is as under:
"On the facts and in the circumstances of the case, the ld. CIT(A) has erred in maintaining that deduction u/s 80IA is available in respect "deemed generation" income without appreciating that the "deemed generation" income was earned by assessee company merely on account of terms and condition of the agreement entered between the assessee and Electricity Board without generating/supplying any power and therefore, the said income cannot be said to be derived from the industrial undertaking."
4. The assessee's claim of deduction u/s 80IA in respect of the income shown on account of deemed generation of power as per the agreement entered into with Haryana Power Generational Corporation Ltd. (in short 'HPGCL') for supply of electricity has been disallowed by the AO by observing that the income earned by the assessee company merely on account of terms and conditions of the agreement entered into between the assessee and HPGCL without generating or supplying any power cannot be said to be derived from the undertaking or enterprise within the meaning of Section 80IA of the Act. However, on an appeal, the learned CIT(A) allowed the assessee's claim by giving the reasons that the plant was set up for generating and selling electricity, the electricity was sold to HPGCL and 3 in case HPGCL is not in a position to buy the electricity from the assessee, the generation of electricity had to be stopped, and, therefore, in such a situation, HPGCL pays certain charges in order to compensate for the fixed costs, which are incurred even when there is no generation and are required to be incurred for keeping the plant in ready condition, and, therefore, the deemed generation income has a direct nexus with the business of industrial undertaking.
5. Hence, the Department is in appeal.
6. We have heard both the parties and carefully perused the orders of the authorities below.
7. In the course of hearing of this appeal, it was pointed out by the learned counsel for the assessee that identical issue had come up for consideration before the ITAT, Delhi Bench 'E', New Delhi where the Tribunal vide order dated 27th November, 2009 in ITA No.2289/Del/09 has upheld the order of CIT(A) in allowing the assessee's claim of deduction u/s 80IA of the Act in respect of the income from deemed generation of power, and he, therefore, submitted that the case is squarely covered by the decision of coordinate Bench.
8. The learned DR, on the other hand, supported the AO's order.
49. We have carefully gone through the aforesaid Tribunal's order dated 27th November, 2009m, and find that the identical issue has been decided by the Tribunal in assessee's favour in Asstt. Year 2005-06 by observing and holding as under:
"3. We have considered the facts of the case and submissions made before us. Sub-section (1) of section 80-IA grants deduction from the gross total income of an assessee in respect of any profits and gains derived by an industrial undertaking from the eligible business, mentioned in sub-section (4). Sub-clause (a) of clause (iv) of sub-section (4) is in respect of an undertaking which is set up in any part of India for the generation or generation and distribution of power if it begins to generate power at any time during the period beginning on 1.4.1993 and ending on 31.3.2001. From the assessment order, it is seen that the submissions of the assessee was that the assessee company commenced operations for power generation in the year 1998. Thus, the power plant was set up in India after 1.4.1993 and before 1.4.2011. Therefore, the condition mentioned in sub-clause (a) stands satisfied in this case. In any case, the AO has not raised any dispute in this matter.
3.1 Coming to the issue of income from deemed generation, the same arises when HPGCL does not take power from the power plant of the assessee. In such a situation, it is obliged to pay charges to the assessee to keep the plant in ready condition. There is stipulation to that effect in the agreement entered into between the assessee and 5 HPGCL. There is no dispute about these facts also. Thus, the only question left is whether, the aforesaid income is eligible for deduction u/s 80-IA.
3.2 We have already mentioned that where the gross total income of an assessee includes any profits and gains derived by an undertaking specified in sub-section (4), it is entitled to deduction under the provision. There is no dispute that an undertaking set up in any part of India for generation or generation and distribution of power is an eligible undertaking for the purpose of the aforesaid deduction, as provided in sub-section (4)(iv)(a). The words used in the aforesaid sub-clause are an undertaking which "is set up in any part of India for generation or generation and distribution of power". There is no dispute that the undertaking of the assessee is set up for generation of power. The assessee has been selling the power to HPGCL as per terms and conditions of the agreement entered into with it. This agreement has been entered into in the course of business, which is primarily of generation of power. The assessee received revenue for the power actually supplied to HPGCL. Certain income is also received when power is not drawn by HPGCL and the reason for the same is stated to be that the assessee has to keep its plant in readiness and for this purpose expenses are incurred. Therefore, the agreement between the assessee and HPGCL is in respect of sale of power, the generation of which is the main business of the assessee. But for carrying on the business of generation of power, the assessee would not have earned income either by way of actual sale of power or by way of deemed generation. In other words, the PPA is entered because the 6 assessee has set up an undertaking for generation of power. The income by way of sale of power and the income by way of deemed generation of power have proximate nexus with the business of the industrial undertaking. Both the components of income are included in the gross total income of the assessee. It can also be said that the agreement in respect of both types of revenues received or receivable by the assessee are on account of power supplied to HPGCL, representing a method to determine the sale proceeds, which has a proximate connection with the business of the assessee.
3.3 Coming to the decision in the case of Hindustan Leaver Ltd. (supra), the finding of the court was that the immediate source of profit was sale of goods. The import of palm oil was on account of earlier export of goods at a loss. In the chain of sequence the earlier export would be four degrees removed from the purchase. Therefore, it was held that the High Court was right in holding that the profits of the assessee from sale of its goods in India was not the profit derived from export sales. The Hon'ble Court mentioned that as the facts would show, deduction u/s 2(5)(i) of Finance (No. 2) Act, 1982, permitted deduction in respect of export profits and such exports entitled the assessee to import licenses for import of goods at a cheaper rates. The profit from sale of such imported goods had no proximate connection with the export of goods made earlier. Thus, the court came to the conclusion that the deduction was not available. The facts of this case are distinguishable on the simple ground that the receipt of revenue from both the streams in this case is in respect of eligible business of generation of power, for which the undertaking was set up. Both the streams of 7 revenue are directly linked with the process of sale of power generated by the assessee.
3.4 In the case of Sterling Foods (supra), the question was whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the receipt from sale of import entitlements could not be included in the income for the purpose of computing relief u/s 80HH of the Income-tax Act, 1961? The finding of the court was that the source of import entitlements was not the industrial undertaking of the assessee. The source was the export promotion scheme of the Central Government, under which the export entitlements became available. In order to say that an income is derived from a particular business, there must be a direct nexus between profits and gains and the industrial undertaking.
Thus, it was held that the assessee was not entitled to deduction u/s 80HH on import
entitlements. The facts of that case are also distinguishable. In that case, the Central Government granted some benefits by way of export promotion scheme. The Hon'ble Court came to the conclusion that these benefits were not the income derived from the eligible business because the same had no proximate connection with the eligible business, rather it was incentive granted by the Government under a scheme and such scheme was the source of income. In the instant case, the whole of power purchase agreement is in respect of power produced by the undertaking of the assessee, but for which no such agreement would have come into existence. There is no third party which is paying any money to the assessee for generation of power. Both streams of revenue are derived from the undertaking as the commercial agreement is entered into on 8 account of production of power by the undertaking. In absence of production of power, there would have been no revenue stream either on account of the power actually supplied or the deemed generation of power.
3.5 The main question in the case of Orissa State Warehousing Corporation (supra) was whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the interest received from the banks on fixed deposits was exempt u/s 10(29) of the Income-tax Act? The Hon'ble Court came to the conclusion that section 10(29) is singularly singular in its application with its scope restrictive as is evidenced from intent of Legislature and as evidenced from language used therein. Thus, it was held that interest income was not exempt as it was not the income by way of warehousing charges. The facts of this case are also distinguishable. The contention in that case was that warehousing is a composite activity and two streams of income were exempt u/s 10(29). However, the court came to the conclusion that the language employed was restrictive in nature and it did not take within its ambit the interest income received from banks. In this case, both streams of revenue are directly linked with the activity of generation of power. In case of actual supply of power, there is no dispute that deduction is available u/s 80IA. In order to keep its power plant in readiness, again there is no dispute that the expenditure has to be incurred. It is evident that such income also has a proximate connection with the business of generation of power and the PPA is in connection with purchase of power by HPGCL from the assessee. Therefore, no distinction can be made between income from actual supply 9 or from deemed generation of power as source of both the incomes is the business of the assessee and sale of power in terms of the PPA."
10. Respectfully following the aforesaid order of the coordinate bench referred in assessee's own case, we are inclined to uphold the order of CIT(A) in allowing the assessee's claim of deduction u/s 80I in respect of the income from deemed generation of power. The order of CIT(A) is, thus, upheld and the ground raised by the revenue is rejected.
ITA No.4140/Del/2007:11. Now, we shall come to the appeal filed by the assessee. Ground No.1 raised by the assessee is as under:
"1. The ld. CIT(A) has erred both on facts and in law in upholding the action of the ld. AO in excluding sale of scrap (Rs.4,17,973/-) and credit balances written back (Rs.8.\,03,842/-) aggregating to Rs.12,21,635/- from the profits and gains of business for the purpose of computing the allowable deduction u/s 80IB of the Income-tax Act."
12. We have heard both the parties and have carefully gone through the orders of the authorities below. In this case, the assessee's claim of deduction in respect of the receipt by way of sale of scrap and the credit balances written back has been disallowed by the AO by observing that this income cannot said to have been derived from business of generation of 10 power. The AO further observed that credit balances written back is the amount of expenses incurred in some earlier years, which have been shown as income in the year and it has no connection with this year's income. On an appeal, CIT(A) confirmed the AO's action by observing that the expression used in Section 80IB is "derived from" instead of "attributable to", and, therefore, the balances written off and the income by way of sale of scrap cannot be said to be derived from industrial undertaking.
13. Still aggrieved, the assessee is in appeal before us.
14. We have heard both the parties and have carefully gone through the orders of the authorities below. On perusal of AO as well as CIT(A)'s order, we find that each and every item of credit balances written back and the sale of scrap has not been examined to ascertain as to whether these items have any direct link with the business operation of the assessee's industrial undertaking. In the course of hearing, the assessee has submitted the details of amount of credit balance written back, and about the miscellaneous income. However, from the details, it is not clear as to whether these credit balances since written back are directly connected to the business activity of the industrial undertaking or whether these credit balances were claimed as revenue expenditure against the profit of the industrial undertaking, which is eligible for deduction u/s 80IA/80IB of the Act. From the details, it appears 11 that certain credit balances were in respect of some capital investment made by the assessee. For example, the credit balances of Rs.4500/-, Rs.2195/-, Rs.37,055/-, Rs.4,79,390/-, Rs.18,143/- were on account of supply of material for earthing purpose and brick work around tank area, civil work at tank farm area, separator room work, bricks etc., supply of boiler and its components, foundation bolt etc. and work done on boiler respectively. It is not clear when and on what account these expenses were debited in the books of accounts and credited to the creditor's account or the same were claimed and allowed as revenue expenditure or not. Similarly, there is no evidence on record to say that the other items, which has now been written off, are connected to the assessee's business activity of the undertaking itself. With regard to the miscellaneous income, it is also not clear whether the scrap is generated from the operational activity of the industrial undertaking, or whether they are merely incidental to the assessee's business as a whole. We, therefore, restore this matter back to the file of AO for his fresh adjudication after examining all the details thereof. The assessee shall be under obligation to produce and furnish all evidences and materials in support of assessee's claim that the items claimed under the head "Credit balances written back" and "sale of scrap' are directly connected to the operational activity of the business of the assessee's undertaking or that the 12 credit balances appeared in the books were earlier allowed as deduction while computing the income from the industrial undertaking, which is eligible for deduction u/s 80IA/80IB of the Act. In absence of the relevant or adequate evidences, being furnished by the assessee, the AO shall decide the matter on the basis of material available on record and as per law.
15. Ground No.2 raised by the assessee is as under:
"The ld. CIT(A) has erred both on facts and in law in upholding the action of the ld. AO in making adjustment to the declared 'book profit' pm account of provision for bad debts amounting to Rs.3,15,56,383/- allegedly on the ground that the same represents creation of a reserve and therefore falls within the ambit of clause (b) of the Explanation below 2nd proviso to sub-section (2) of Section 115JB of the Income-tax Act,1961."
16. The question whether provision of bad debt debited in the Profit & Loss account is to be added back to the net profit shown in the Profit and Loss account for the purpose of book profit to be computed u/s 115JB of the Act is no more a matter of controversy in the light of the amendment made by the Finance No.2 Act of 2009 in Section115JB whereby Item (i) reading as "the amount or amounts set aside as provision for diminution in the value of any asset" has been inserted in Explanation 1 to Section 115JB of the Act meaning thereby that the amount or amounts set aside as provision for diminution in value of assets shall be added back to the net profit if the same 13 is debited to the Profit and Loss Account, for the purpose of determining the book profit u/s 115JB of the Act. It is now well settled that provision for bad debt is amounted to a provision for diminution in the value of any asset.
Therefore, the provision for bad debts debited to the Profit & Loss account is covered by Item (i) of Explanation 1 to Section 115JB, which has been inserted by the Finance (No.2) Act, 2009 with retrospective effect from 1.4.2001, and, therefore, the same shall be added back to the net profit for determining book profit. The order of the CIT(A) in confirming the AO's order in making adjustment to the net profit by adding back the provisions of bad debts debited to the Profit & Loss Account is upheld. This ground raised by the assessee is rejected.
17. In the result, the appeal filed by the revenue is dismissed and that of the assessee is partly allowed for a statistical purpose.
18. This decision was pronounced in the Open Court on 28th May, 2010 (K.D. RANJAN) (C.L. SETHI) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 28th May, 2010 Vijay 14 Copy to:
1. Appellant.
2. Respondent.
3. CIT
4. CIT(A)-IX, New Delhi
5. DR Assistant Registrar