GUJARAT STATE ELECTRICITY CORPORATION LTD.,VADODARA vs. THE ACIT.,CIRCLE-1(1), VADODARA

Since the assessee is common, the assessment year involved is identical and certain issues are interconnected, these appeals were heard together and - 2– are being disposed of by this consolidated order for the sake of convenience and brevity.

The assessee has raised following grounds of appeal in ITA No.703/Ahd/2012 :-

0 The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in confirming the action of the Assessing Officer in transferring the 15% of the Capital Grants as Income although the disallowance made under this head has been restricted to Rs.9,75,70,800/- as against the disallowance of Rs.10,43,25,000/- made by the Assessing Officer. The learned Commissioner of Income Tax (Appeals) further erred in law and on facts in observing that the appellant did not prefer any appeal for the Asst. Year 2007-08 against the reduction of Capital Grants from the Cost of Fixed Assets. The appellant had objected to the said reduction but the issue was not adjudicated by the Commissioner (Appeals) and the issue is now pending before the Hon'ble Tribunal.

0 The learned Commissioner of Income Tax (Appeals) erred in law and on facts has confirmed the disallowance of the provision for bad advance debit & credit balances amounting to Rs.4,57,05,000/-.

0 The learned Commissioner of Income Tax (Appeals) erred in law and on facts has confirmed the additions to the extent of Rs.24,14,00,000/- treating the same as understatement of income on the basis of the comments of the C&AG in its Report on the accounts of the appellant.

0 The learned Commissioner of Income Tax (Appeals) has erred in law and facts in confirming the enhancement of Book Profit computed under section 115JB of the Income Tax Act, 1961 by Rs.13,71,000/- on account of disallowance made under section 14A of the IT Act.

0 The learned Commissioner of Income Tax (Appeals) has erred in law and facts in confirming the enhancement of Book Profit computed under section 115JB of the Income Tax Act, 1961 by Rs.4,57,05,000/- on account of disallowance of provision for bad advance debit & credit balances.”

The assessee has also raised following additional grounds:- “1. That, on facts, and in law, it be held that the provisions of section 115JB of the Act are not applicable to the appellant, as it is governed by the provisions of section 69 of The Electricity (Supply) Act, 1948. ITA Nos. 703/Ahd/2012,466 & 1118/Ahd/2015 - 3–

on That on facts and in law, it be held that the "Book appellant is not liable to be taxed Profit" u/s.115JB of the Act as per the law applicable for the year under consideration.”

1 Since the aforesaid additional grounds involve a pure question of law arising from the facts already available on record and do not require any further investigation into facts, the same are admitted for adjudication in view of the principles laid down by the Hon'ble Supreme Court in National Thermal Power Co. Ltd. vs. CIT [(1998) 229 ITR 383 (SC)].

2 At the outset, the Ld. AR submitted that the issue is squarely covered in favour of the assessee by the order of the Coordinate Bench of the Tribunal in the assessee's own case for AYs 2002-03 and 2004-05 in ITA Nos. 2841 & 2842/Ahd/2015, order dated 26.09.2024, wherein it has been held that the provisions of section 115JB are not applicable to the assessee, being an electricity company governed by the provisions of section 69 of the Electricity (Supply) Act, 1948. It was submitted that the facts and the legal position for the year under consideration remain identical and no distinguishing feature has been brought on record by the Revenue.

The Ld. DR fairly relied upon the orders of the lower authorities.

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Now, we take up the other grounds raised by the assessee. For the purpose of narration of facts, ITA No.703/Ahd/2012 is taken as the lead appeal. The decision rendered therein shall, mutatis mutandis, apply to the connected appeals, wherever the issues involved are common.

Briefly stated, the assessee is a Government company incorporated under the provisions of the Companies Act, 1956 and engaged in the business of generation of electricity. It is a wholly owned subsidiary of Gujarat Urja Vikas Nigam Limited, formerly Gujarat Electricity Board. For the year under consideration, the assessee filed its original return of income on 30.09.2008 declaring total income of Rs.194,59,83,460/- and after setting off by brought forward losses the taxable income declared at Nil. Subsequently, the assessee has revised its return on 21.09,2009 revising the total income at Rs.171,01,81,460/- and after setting off of the unabsorbed business loss of AY 2005-06, the total income shown at Nil. The assessee declared income u/s 115JB at Rs.66,70,41,000/-. The assessment was completed under section 143(3) of the Act making disallowance u/s 14A, reduction of capital grants from the cost of fixed assets, disallowance of provision for bad advances and debit/credit balances, addition on account of alleged understatement of income and consequential adjustments while computing book profit under section 115JB. The Ld. CIT(A) granted partial relief. Aggrieved by the additions/disallowances sustained by the Ld. CIT(A), the assessee is in appeal before us.

Brief facts relating to the issue are that the assessee-company is engaged in the business of generation of electricity. During the year under consideration, it earned dividend income which was claimed as exempt under the provisions of the Act. In the course of assessment proceedings, the Assessing Officer observed that the assessee had not made any disallowance u/s 14A in respect of expenditure incurred for earning the exempt income. Since the Assessing Officer was of the view that a part of the interest expenditure as well as administrative expenses was attributable to the earning of exempt income, he invoked the provisions of section 14A read with Rule 8D and determined the disallowance at Rs.1,10,52,000/-, comprising interest expenditure under Rule 8D(2)(ii) and administrative expenditure under Rule 8D(2)(iii).

1 Aggrieved by the order of the Assessing Officer on this issue, the assessee preferred an appeal before the Ld. CIT (A). The Ld. CIT(A) held that, although the provisions of section 14A r.w.s. Rule 8D were applicable, the Assessing Officer had erroneously considered the entire interest expenditure for the purpose of disallowance. Observing that a substantial portion of the interest pertained to specific term loans utilised for business purposes, the Ld. CIT(A) directed exclusion of such interest and restricted the disallowance to Rs.13,71,000/-, comprising interest disallowance of about Rs.3.45 lakh and the disallowance under Rule 8D(2)(iii), subject to verification by the Assessing Officer. The detailed findings of the Ld. CIT(A) in this regard are reproduced hereunder for the sake of reference :-

2 Before us, Ld. AR reiterated the submissions made before the lower authorities. The Ld. AR argued that the assessee had earned exempt dividend income of Rs.38,72,000/- during the year under consideration. The Ld. AR also submitted that the investments were old investments and no fresh investments had been made during the year. The Ld. AR further submitted that the assessee possessed substantial interest-free funds in the form of reserves and surplus, which were far in excess of the value of investments. Therefore, in view of the settled legal position, no disallowance of interest u/s 14A could be made. Reliance was placed on the decision of the Hon'ble Supreme Court in South Indian Bank Ltd. v. CIT [(2021) 130 taxmann.com 178 (SC)]. It was also argued that the Revenue had not established any nexus between borrowed funds and the investments yielding exempt income.

3 The Ld. DR, on the other hand, supported the orders of the lower authorities. It was submitted that the assessee maintained mixed funds and had failed to establish that the investments had been made entirely from interest- free funds. The Ld. DR accordingly submitted that Ld. CIT(A) had already granted substantial relief after excluding the interest relatable to specific term loans and no further interference was warranted.

We have heard the rival submissions and perused the material available on record. The undisputed facts emerging from the record are that the assessee earned exempt dividend income of Rs.38,72,000/- during the year and the investments were brought forward from the earlier years. It is also not in dispute that the assessee possessed substantial reserves and surplus, which were considerably higher than the value of investments. The Hon'ble Supreme Court in the case of South Indian Bank Ltd. (supra) has held that where an assessee has sufficient interest-free own funds to make the investments yielding exempt income, it is to be presumed that such investments were made out of - 8– those own funds; accordingly, no disallowance of interest u/s 14A can be made unless the Revenue establishes that the borrowed funds were actually utilised for making such investments. In the present case, no material has been brought on record by the Revenue to demonstrate that any part of the borrowed funds had actually been utilised for making the investments generating exempt income. On the contrary, the material placed before us indicates that the assessee had sufficient own funds far exceeding the investments. Therefore, in our considered view, no disallowance of interest under Rule 8D(2)(ii) survives. However, the disallowance towards administrative expenditure under Rule 8D(2)(iii), as applicable for the year under consideration, cannot be said to be unwarranted. We, accordingly, direct the Assessing Officer to delete the interest component of the disallowance sustained by the Ld. CIT(A). The disallowance shall remain restricted only to the amount computed under Rule 8D(2)(iii), in accordance with law. Hence, we hold that since Rule 8D(2)(iii) of the Income Tax Rules, 1962 specifies that for computing Section 14A disallowance, an amount equal to one-half percent (0.5%) of the average value of investments yielding exempt income must be disallowed as indirect administrative expenditure. The AO to recompute.

Ground No. 2 relates to the action of the Ld. CIT(A) in confirming the reduction of capital grants from the actual cost of fixed assets, though restricting the addition to Rs.9,75,70,800/- as against Rs.10,43,25,000/- made by the Assessing Officer.

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2 Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the Ld. CIT(A). The Ld. CIT(A), after considering the submissions of the assessee, held that the capital grants received by the assessee were liable to be reduced from the actual cost of the assets in terms of Explanation 10 to section 43(1). However, after verifying the computation, the Ld. CIT(A) granted partial relief and restricted the disallowance to Rs.9,75,70,800/-.

3 Aggrieved by the order of the Ld. CIT(A) on this issue, the assessee is now in appeal before the Tribunal.

Before us, the Ld. AR submitted that the observation of the ld. CIT(A) that the assessee had not challenged the issue in AY 2007-08 is factually incorrect. It was submitted that an identical issue had arisen in the assessee's own case for AY 2007-08 and the same was carried in appeal before the Tribunal. The Coordinate Bench of the Tribunal, vide order dated 13.04.2022 in ITA No.2991/Ahd/2016, restored the issue to the file of the Assessing Officer for fresh adjudication. It was, therefore, contended that since the facts involved in the year under consideration are identical, this issue also deserves to be restored to the file of the Assessing Officer in line with the order of the Coordinate Bench.

The Ld. DR, on the other hand, relied upon the orders of the authorities below.

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7 Accordingly, Ground No.2 of the assessee's appeal is allowed for statistical purposes.

This ground relates to the disallowance of Rs.4,57,05,000/- being the provision made towards bad advance debit and credit balances.

Brief facts relating to the issue are that during the course of assessment proceedings, the Assessing Officer noticed that the assessee had debited a sum of Rs.4,57,05,000/- under the head "Provision for Bad Advance Debit & Credit Balances" in its Profit and Loss Account and claimed the same as deduction while computing its income. According to the Assessing Officer, the amount represented merely a provision and not an actual write-off of irrecoverable debts. The Assessing Officer further observed that the conditions prescribed under sections 36(1)(vii) and 36(2) of the Act had not been satisfied. He, therefore, disallowed the aforesaid claim and added the same to the total income of the assessee.

2 Aggrieved by the assessment order, the assessee preferred an appeal before the Ld. CIT(A). The Ld. CIT(A) concurred with the findings of the Assessing Officer and held that the amount claimed by the assessee was only a provision created in the books of account and not an actual write-off. The Ld. CIT(A) further observed that the assessee had also failed to establish that the conditions stipulated under section 36(2) of the Act were fulfilled. Accordingly, the disallowance made by the Assessing Officer was confirmed. The observations of the Ld. CIT(A) in this regard are reproduced hereunder for the sake of ready reference:-

3 Before us, the Ld. AR invited our attention to the submissions reproduced by the Ld. CIT(A) in para 6.1 of the appellate order. It was submitted that the impugned old debit and credit balances had actually been debited to the Profit & Loss Account and, therefore, the authorities below were not justified in treating the claim as a mere provision. The Ld. AR accordingly prayed that the matter be restored to the file of the Assessing Officer for proper verification.

4 The Ld. DR, on the other hand, relied upon the orders of the Assessing Officer and the Ld. CIT(A).

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The fourth ground of appeal is directed against the action of the Ld. CIT(A) in confirming the addition of Rs.24,14,00,000/- on account of alleged understatement of income based on the comments contained in the Report of the Comptroller and Auditor General (C&AG).

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2 In appeal, the Ld. CIT(A), the addition of Rs.24.14 crore was concerned, the Ld. CIT(A) held that although the assessee had reduced its sales to GUVNL, the corresponding reduction in the purchase price of lignite had not crystallised during the relevant previous year, as the proposal was yet to be approved by the Board of Directors of GMDC. He, therefore, concluded that the assessee was not justified in reducing its sales during the year and accordingly confirmed the - 13– addition of Rs.24.14 crore. The relevant observations of the Ld. CIT(A) in this regard are reproduced hereunder:- “7. 2. I have considered the matter. Addition of Rs.6.49 crore on account of reconciliation of Railway claims for missing/diverted wagons is on the basis of comments of C&AG included in appellant’s Annual Report for F.Y.2007- O8. C&AG’s observation was that since reconciliation of Railway claims till December, 2006 for coal towards missing/diverted wagons in respect of Wanakbori Thermal Power Station was over in March, 2008, the differential claim valuing Rs.6.49 crore should have been credited to the relevant head of account during the year 2007-08 itself. Appellant’s reply to C&AG’s draft comments, as included in the Annual Report was that as per procedure involved, accounting entries for adjustment of missing/diverted coal wagons were passed after approval of Competent Railway Authority and since necessary approval from the authority was received during accounting year 2008-09, entries were passed during F.Y.2008-09. As per appellant, its reply was accepted by C&AG and draft comments were dropped. Since the claim towards missing wagons was decided in appellant’s favour only after approval of competent Railway authority in FY 2008—0, appellant was justified in account for Rs.6.49 crore in F.Y.2008- O9. Addition of Rs.6.49 crore to appellant’s income in A.Y.2008-09 is deleted. 7.2. 1. Addition of Rs.24.14 crore is now taken up. In a meeting held on 13.5.2008 between appellant, GUVNL and GMDC, (the supplier of lignite), cost of lignite charged from appellant by GMDC was decided to be reduced to Rs.475/— PMT subject to approval of Board of Directors of GMDC. As per minutes of the meeting dated 13.5.2008, communication to this effect was to be sent to appellant. Since Board of GMDC did not consider the matter, GMDC charged appellant company at earlier rate of Rs.780/- PMT towards fuel cost. However, GUVNL, by raising a debit note on 25.9.2008, debited appellant’s account by Rs.24.14 crore in respect of sale of power by appellant to GUVNL on account of such anticipated fuel cost reduction by GMDC. The reduction in sales to GUVNL was directly on account of reduction in fuel cost by GMDC. When appellant did not take into account proposed reduction by GMDC towards fuel cost in the accounts of F.Y.2007- 08, there was no justification to reduce sales to GUVNL correspondingly even if a debit note had been unilaterally raised by GUVNL. In view of this, addition of Rs.24.14 crore to appellant’s income for A.Y.2008-09 on account of wrong reversal of sales to GUVNL is justified. Assessing Officer has made the addition of Rs.24.14 crore on the ground that when appellant had reduced its sales, it should have also reduced cost of fuel simultaneously. However, addition of Rs.24.14 crore is required to be made on account of wrong reversal/reduction of sales to GUVNL and not due to reduction in fuel cost, which was beyond appellant’s control and not in its hands. Thus, - 14– addition of Rs.24.14 crore to appellant’s income in A.Y.2008-09 is confirmed, albeit for reasons as mentioned above.”

3 Before us, the Ld. AR submitted that the addition has been made merely on the basis of the observations contained in the C&AG Report without appreciating the true nature of the transaction and the accounting treatment adopted by the assessee. The Ld. AR invited our attention to the relevant ledger accounts placed at page 5 of the Paper Book, the reply furnished before the Assessing Officer at page 9 of the Paper Book, and the submissions reproduced by the Ld. CIT(A) in para 1.5 of the appellate. It was submitted that the reduction in the sales of power to GUVNL was accounted for during the year on the basis of debit notes received from GUVNL. Likewise, the reduction in the cost of purchase of lignite from GMDC was accounted for in the subsequent year pursuant to GMDC's acceptance of the revised rates. The Ld. AR further contended that the impugned addition is revenue neutral, as any addition sustained in the year under consideration would necessarily require a corresponding increase in the allowable expenditure in the subsequent year.

4 The Ld. DR supported the orders of the authorities below and submitted that the assessee had failed to establish that the impugned adjustments were allowable during the year under consideration.

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Ground Nos. 5 and 6 relate to the addition of Rs.13,71,000/- and Rs.4,57,05,000/-, respectively, while computing the book profit u/s 115JB on account of the disallowance u/s 14A and the provision for bad advance debit and credit balances.

1 We have already held, while adjudicating the additional grounds hereinabove, that the provisions of section 115JB are not applicable to the assessee for the year under consideration, following the decision of the Coordinate Bench in the assessee's own case for Assessment Years 2002-03 and 2004-05. Once it is held that section 115JB itself has no application, the question of making any adjustment to the book profit thereunder does not survive. Consequently, the grievances raised by the assessee in Ground Nos. 5 and 6 have become purely academic and require no separate adjudication.

In the result, the appeal of the assessee in ITA No.703/Ahd/2012 is partly allowed for statistical purposes, in the terms indicated hereinabove.

By this appeal, the assessee has challenged the confirmation of penalty levied u/s 271(1)(c) of the Act in respect of certain additions sustained in the quantum proceedings.

1 The Ld. AR submitted that the penalty is consequential to the quantum addition, which has been restored by us to the file of the Juri ictional Assessing - 16– Officer in ITA No.703/Ahd/2012. It was, therefore, contended that the penalty cannot survive at this stage. The Ld. DR relied upon the orders of the lower authorities.

2 We have considered the rival submissions and perused the material available on record. Since the quantum addition has been restored to the file of the Assessing Officer, the impugned penalty cannot be sustained at this stage. We, therefore, set aside the impugned order of the Ld. CIT(A) and restore the matter to the file of the Juri ictional Assessing Officer to reconsider the levy of penalty, after the quantum proceedings attain finality, in accordance with law.

3 Accordingly, the appeal of the assessee is allowed for statistical purposes.

By this appeal, which is arising from reassessment proceedings u/s 143(3) r.w.s. 147 of the Act, the assessee has challenged the directions of the Ld. CIT(A) regarding disallowance u/s 40(a)(ia) of the Act, confirmation of addition on account of provision for loss arising from disputed sales and levy of consequential interest.

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2 Since the allowability of the claim depends upon verification of the payment of tax deducted at source, we find no infirmity in the directions issued by the Ld. CIT(A).

This ground relates to the disallowance of Rs.16,87,67,000/- claimed as "Loss on Dispute".

1 The Ld. AR submitted that the authorities below erred in treating the claim as a mere provision without examining the nature of the liability and the supporting evidence. The Ld. DR, on the other hand, relied upon the orders of the lower authorities.

2 We have considered the rival submissions and perused the material available on record. Since the issue of loss attained finality, the decision of the Assessing Officer cannot be upheld. Ground No.2 is accordingly allowed

This ground is consequential in nature.

In the result, ITA No.1118/Ahd/2015 is partly allowed for statistical purposes.

In the combined result: