ARAVALI POWER COMPANY PVT. LTD.,NEW DELHI vs. DCIT, CIRCLE-3(1), NEW DELHI

In addition to the above, the assessee has filed an application praying for admission of additional ground of appeal which reads as under:

Briefly stated, the facts of the case are that the assessee is a power generation and transmission company jointly owned by NTPC. The assessee electronically filed its Return of Income on 26.11.2016 declaring an income of Rs. 9,79,64,880/-. Return was selected for Page 4 of 18 completed on 23.12.2018 on the assessed income of Rs. 33,18,96,760/ under normal provision of Act and at income of Rs 929,78,75,790/- u/s 115JB. The assessee had paid taxed u/s 115JB of the Income-tax Act, 1961 [the Act, for short] and the return was accompanied by audited accounts, tax audit report.

These are five appeals pertaining to AY 2016-17 to 2020-21. The issue in all these appeals by the appellant is common that is the amount received by the Appellant on the sale of fly ash which the AO has taxed as income of the assessee.

In this regard, it is relevant to provide the background of the issue. Fly-ash is generated by various thermal power plants producing electricity by burning coal. Fly-ash was a major environmental hazard, similar to the burning of ‘parali’ in Northern States of India post harvesting.

Accordingly, a Public Interest Litigation was filed before the Hon'ble Delhi High Court. The hon’ble Delhi High Court took cognizance of the issue of disposal of fly-ash, which had become hazardous and was causing serious environmental issues, and directed the Central Government to come out with a policy on how it intended to handle the large-scale generation of fly-ash by various thermal plants. Page 6 of 18 ;4603; 4604; 2561/DEL/2024 [A.Ys 2016-17 to 2020-21] 4. Pursuant to the direction of the Hon’ble Delhi High Court, the Government of India issued notification SO 763(E) dated 14.09.1999 in exercise of its power conferred under the Environment Act 1996. The notification is placed at PB page 297 of AY 2018-19. As per this notification, directions were issued to all manufacturer of clay bricks, tiles and blocks operating within a radius of 50 kilometers, from coal or lignite-based thermal power plants to use at least 25% fly ash by weight in the manufacture of clay bricks, tiles, or blocks. Further, in order to ensure compliance with the above, the Pollution Control Board and Pollution Control Committee were empowered to cancel the permissions granted for establishing a brick kilns and mining leases. Additionally, a committee was constituted comprising representatives from thermal power plants and brick manufacturers foundation to ensure unhindered loading and transportation of fly-ash. Directions were issued to thermal power plants to make fly ash available to all such manufacturers. (Para 2(1) on PB pg. 295 of AY 2018-19).

Not being satisfied with the progress in the utilization of fly-ash and considering the environmental concerns, Hon’ble Delhi High Court passed an order dated 23.08.2002 (placed at PB Page 257 of AY 2018-19) and order dated 14.07.2003 (placed at Page 258 of AY 2018-19). Consequently, the Ministry of Environment and Forest amended the earlier notification by issuing another notification dated 27.08.2003, placed at PB Pages 298-304 of AY 2018-19, whereby applicable area, time, and block manufacturing was extended from 50 kilometers to 100 kilometers. Furthermore,

Thereafter another notification was issued on 03.11.2009, placed at PB Pages 305-314 of AY 2018-19, and the rationale for the same is stated at PB Pages 305-306. A target was fixed for achieving 100% fly-ash utilisation. In order to achieve this target directions were issued allowing thermal power plants to collect amounts from the sale of fly ash and to keep the same in a separate account to be utilized only for development, infrastructure, or facilities for the use of fly-ash until 100% fly ash utilisation is achieved. It was on the basis of this notification that the appellant company was empowered to collect the amount from the sale of fly ash and keep it in a separate account, to be utilized only for the purpose of facilitating and achieving 100% fly ash utilisation.

Thus the onus is on the appellant company to address environmental concerns arising from the generation of fly ash by its thermal plants. Therefore the amount received from the sale of fly-ash was not a source of income for Appellant. On the Page 8 of 18 ;4603; 4604; 2561/DEL/2024 [A.Ys 2016-17 to 2020-21] contrary, it was an obligation imposed on the appellant company due to the fact that it generates fly-ash, which is hazardous and pollutes the environment. The appellant company was under an obligation, as per the notification, to submit regular reports to the Ministry of environment regarding the steps taken by the company to achieve fly-ash utilization and progress of as is evident from the report placed at PB Pages 144-150 of AY 2018-19.

Accordingly, the Assessing Officer and CIT(A) have erred in not appreciating the facts of the case and assuming that assessee is earning income from the sale of fly-ash. On the contrary, the Delhi High Court and the government of India have taken cognizance of the fact that thermal power plants are dumping fly- ash generated from thermal plants which is causing grave environmental concerns. Therefore, directions were issued to facilitate the disposal of this fly-ash. The process is still ongoing and it is evident that the utilisation of fly–ash has still not reached the level committed by the Appellant company from time to time to the Ministry of Environment.

It may be relevant to point out that this issue has come up before the Hon'ble Delhi High Court in the case of its sister company NTPC Vidyut Vyapar Nigam Ltd. ITA 260/2024 whereby vide order dated 23.04.2025, Hon’ble Delhi High Court decided the case in favour of the assessee.

The ld AR also relied on the decision of ITAT Delhi in the case of NTPC Vidyut Vyapar Nigam Ltd. bearing for AY

The ld AR argued vehemently that the amount set apart towards Fly-Ash Utilization Reserve Fund constitutes diversion of income by overriding title and thus should be excluded from its total income. The ld AR submitted that the creation of sale is by the Government and the Government has regulated the sale proceeds. The ld AR relied on the following decisions: i) CIT Vs. Salem Co-Operative Sugar Mills Limited,[1998] 229 ITR 285 (Mad) ii) CIT V New Horizon Sugar Mills Pvt. Ltd., [2000] 244 ITR 738(Mad) SLP dismissed in the case of CIT V. New Horizon Sugar Mills P. Ltd. [2004] 269 ITR 397, relying upon the dismissal of SLP in the case of CIT V. Ambur Co-op. Sugar Mills Ltd., [2004] 269 ITR 398 (SC) iii) DCM Ltd. V. CIT, (2004) 192 CTR Del 408 iv) CIT V. Pandavapura Sahakara Sakkare Karkhane Limited, [1992] 198 ITR 69(SC) v) CIT V. M/s Modipon Ltd., [2018] 400 ITR 1 (SC)

The ld AR distinguished case laws relied upon in the case of Associated Power Co. Limited V. CIT. [1996] 218 ITR 195 (SC) and SREI Infrastructure Finance Ltd V ACIT, 2015 (2) TMI 545 (Del). The AR submitted that the judgement of Supreme court in the case of Associated Power Co. Limited V. CIT, [1996] 218 ITR 195 (SC) deals with the amount credited to the contingencies reserve created under the provisions of the Electricity (Supply) Act, 1948, and the Sixth Schedule Page 10 of 18 created from existing reserves or from the revenues of the undertaking a reserve to be called 'contingencies reserve." The Supreme Court held that funds appropriated as a contingency reserve under the Electricity (Supply) Act did not qualify as "diverted" income. The Court explained that even though the company was required to set aside a portion of its revenue, these funds still reached the electricity company and remained within its control. As the Court stated, "the monies in the contingencies reserve belonged to the electricity company," meaning that the reserve was merely an appropriation of profits rather than a diversion by overriding title. The said judgement has also been distinguished in the Madras High Court in the case of CIT Vs. Salem Co-Operative Sugar Mills Limited, [1998] 229 ITR 285.

Similarly, the case of SREI Infrastructure Finance Ltd V ACIT, 2015 (2) TMI 545 deals with the amount transferred to the special reserve pursuant to the provisions of section 45-IC of the Reserve Bank of India Act, 1934, Section 45-IC mandates that - "Every non-banking financial company shall create a reserve fund and transfer therein a sum not less than twenty per cent of its net profit every year as disclosed in the profit and loss account and before any dividend is declared." The Page 11 of 18 on the basis of net profit, they represented an allocation of profit after it had been determined. Consequently, even though a fixed percentage was earmarked, the resultant funds were not "diverted" at source; they remained a part of the company's income for the purposes of computing book profit. The Court clarified that "the reserve created under Section 45-IC... is not a diversion of income at source" because it is derived from the net profit and is merely an appropriation of earnings. By contrast, in the present case the fly ash sale proceeds are not computed as a percentage of net profit but are the actual funds.

Per contra, the ld DR submitted that the assessee is free to sale the fly ash and there is no restriction upon the assessee for sale of fly ash. On the issue of claim under section 80IA(4), the ld. DR submitted that the sale of fly ashes not eligible business hence the assessee is not eligible for any deduction under section 80 IA(4). The ld. DR relied upon the decisions of Supreme Court in the case of Associated Power Co.

Furthermore, we find that initially, the government imposed restriction on thermal power plants to make available fly-ash free of Page 13 of 18 Later, the Government of India allowed thermal power plants to sell fly ash through the Gazette Notification dated 03.11.2009, issued under the Environment (Protection) Act, 1986. However, the permission to sell fly ash was not an unrestricted commercial right of the power plants-it was a conditional, government-created right subject to strict statutory controls. We therefore are inclined to agree with the submissions of the assessee that fly ash disposal and sale were entirely government- regulated activities, with both the sale and the utilization of proceeds being regulated by the central government. In view of the restrictions placed by the Government, we are of the opinion that the assessee never had absolute ownership or control over the receipts from sale of fly-ash.

We are therefore of the considered view that in the factual matrix of the instant case, there is a statutory mandate which creates an overriding title over Fly Ash Sale proceeds which divest the assessee from the absolute control and discretion over the sale proceeds of the fly-ash and when the legal obligation diverts income from the source itself, therefore such income is no longer remains taxable in the hands of the assessee.

In the facts of the present case as well, the Assessee was not free to utilize the sale proceeds of fly ash as the same was required to be used for specified purposes, which as stated above, did not result in the Assessee acquiring any asset"

As the appeal on merit has been allowed, the additional ground raised by the assessee regarding eligibility for deduction u/s 80-IA of the Act becomes infructuous and is accordingly dismissed.

The decision in the instant case for AY 2016-17 as discussed above, shall apply mutatis mutandis in the above four appeals for AY 2017-18 to 2020-21 as the facts are pari-materia in all these years.