PRINCIPAL COMMISSIONER OF INCOME TAX vs. M/S AJMER VIDYUT VITRAN NIGAM LTD.

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 158/2019 Principal Commissioner Of Income Tax, Ajmer ----Appellant Versus M/s Ajmer Vidyut Vitran Nigam Ltd., Vidyut Bhawan, Panchsheel Nagar, Makarwali Road, Ajmer Pan Aacca8562 E ----Respondent Connected With D.B. Income Tax Appeal No. 159/2019 Principal Commissioner Of Income Tax, Ajmer ----Appellant Versus M/s Ajmer Vidyut Vitran Nigam Ltd., Vidyut Bhawan, Panchsheel Nagar, Makarwali Road, Ajmer Pan Aacca8562 E ----Respondent D.B. Income Tax Appeal No. 160/2019 Principal Commissioner Of Income Tax, Ajmer ----Appellant Versus M/s Ajmer Vidyut Vitran Nigam Ltd., City Power House, Jaipur Road, Ajmer Pan - Aacca 8562 E ----Respondent D.B. Income Tax Appeal No. 161/2019 Principal Commissioner Of Income Tax, Ajmer ----Appellant Versus M/s Ajmer Vidyut Vitran Nigam Limited, Vidyut Bhawan, Panchsheel Nagar, Makarwali Road, Ajmer Pan Aacca8562 E ----Respondent D.B. Income Tax Appeal No. 163/2019 Principal Commissioner Of Income Tax, Ajmer ----Appellant Versus

(2 of 9) [ITA-158/2019] M/s Ajmer Vidyut Vitran Nigam Ltd., Vidyut Bhawan, Panchsheel Nagar, Makarwali Road, Ajmer Pan Aacca8562 E ----Respondent D.B. Income Tax Appeal No. 164/2019 Principal Commissioner Of Income Tax, Ajmer ----Appellant Versus M/s Ajmer Vidyut Vitran Nigam Ltd., Vidyut Bhawan, Panchsheel Nagar, Makarwali Road, Ajmer Pan Aacca8562 E ----Respondent D.B. Income Tax Appeal No. 165/2019 Principal Commissioner Of Income Tax, Ajmer ----Appellant Versus M/s Ajmer Vidyut Vitran Nigam Limited, Vidyut Bhawan, Panchsheel Nagar, Makarwali Road, Ajmer Pan Aacca8562 E ----Respondent D.B. Income Tax Appeal No. 166/2019 Principal Commissioner Of Income Tax, Ajmer ----Appellant Versus M/s Ajmer Vidyut Vitran Nigam Limited, Vidyut Bhawan, Panchsheel Nagar, Makarwali Road, Ajmer Pan Aacca8562 E ----Respondent For Appellant(s) : Mr. Nikhil Simlote on behalf of Mr. R.B. Mathur For Respondent(s) : Mr. Gunjan Pathak with Mr. Aditya Bohra and Ms. Ishita Rawat HON'BLE THE CHIEF JUSTICE MR. AKIL KURESHI HON'BLE MS. JUSTICE REKHA BORANA Order

(3 of 9) [ITA-158/2019] 17/11/2021 These appeals are filed by the Revenue to challenge a common order passed by the Income Tax Appellate Tribunal in several appeals concerning the same assessee namely M/s Ajmer Vidyut Vitran Nigam Limited (hereinafter to be referred as ‘the assessee or the Electricity Company’). In all these appeals questions are repetitive. These questions can be briefly summarised as under:- Question No.1 raised by the Revenue pertains to disallowance of depreciation on the capital assets which according to the Revenue were not existing or available for verification. Question No.2 pertains to disallowance of prior period expenses. Question No.3 pertains to applicability of Section 115JB of Income Tax Act, 1961(for short ‘the Act’) to the assessee. It is clarified that in some of the appeals all the three questions arise whereas in some appeals two out of these questions are involved. However since these questions are based on identical facts and relate to the different assesment years concerning the assessee giving rise to different income tax appeals, we have heard the learned counsel for the parties and addressed these issues as involving in Income Tax Appeal No.158/2019 where all three questions arise. With respect to the second question noted above pertaining to disallowance of prior period expenses, it is undisputed position that the issue is covered against the department by the judgment of this Court and against which the Revenue had abandoned the appeals before the Supreme Court. In that view of the matter, this

(4 of 9) [ITA-158/2019] question is not entertained without recording independent reasons. Coming to the question of disallowance of depreciation, record would suggest that in the previous round of litigation, the High Court had remanded the question back to the ITAT. While doing so, the opportunity was also given to the Assessing Officer to verify the existence of the assets on which the assessee was claiming depreciation. Learned counsel for the assessee stated that the Assessing Officer opined that assets are spread over across the vast areas in the State and it is not possible for him to make physical verification of all the assets. Be that as it may, the Tribunal proceeded to decide the question of law on the basis of material available on record. Before the Tribunal on behalf of the assessee it was contended that the assessee had fixed assets valued at Rs.115.21 crores received through transfer upon financial restructuring plan. It was pointed out that even the statutory auditor for the Financial Year 2002-03 (Assessment Year 2003-04) of the company in the statutory audit report filed along with return of income tax had specified that the fixed assets of Rs.115.21 crores transferred through FDR was physically not available at the Head office station. It was contended that only on such basis the depreciation could not have been disallowed. It was pointed out that the assessee is a Government owned company and the existence of the assets cannot be doubted. The Tribunal while accepting the contentions of the assessee noted that at the time of conversion of the Rajasthan State Electricity Board into five distribution companies including the assessee, some of its fixed assets had been vested in the assessee company. The written down value of the assets was reflected in

(5 of 9) [ITA-158/2019] the block of assets and corresponding shares were issued by the company and the assets of Rs.115.21 crores were transferred through the financial restructure plan. Thus these assets were acquired by the assessee in the process of division and transfer of assets and liability of the erstwhile Rajasthan Electricity Board between five distribution companies and therefore such claim cannot not be stated to be a bogus claim. The Tribunal referred to the 5th proviso to Section 32(1) of the Act and stated that depreciation could be disallowed only subject to the restrictions provided therein. Having heard learned counsel for the parties and having perused the documents on record, we do not see any error in the view taken by the Tribunal. The facts on record clearly establish that the assessee company came into existence upon the conversion of the State Electricity Board into five electricity distribution companies. The assets and liabilities were distributed amongst these five companies and in the process the assessee received certain assets. The cost of acquisition of the transferer company as well as the written down value were reflected in the books of accounts required to be statutorily maintained and audited. As pointed out by the counsel for the assessee, such assets would include machinery and other hardware even inspection of which would not be easy for the Assessing Officer. However only on the ground that such assets were not immediately available for physical verification the claim of depreciation could not have been disallowed. No question of law arises. This question is therefore not entertained. Coming to the last question of applicability of Section 115JB of the Act, we notice that other High Courts have under similar

(6 of 9) [ITA-158/2019] circumstances come to the conclusion that the said provisions prior to its amendment in the year 2012, would not cover the electricity company. The Kerela High Court in case of Kerela State Electricity Board Vs. Deputy Commissioner of Income Tax reported in (2010) 329 ITR 0091 had taken such a view in similar circumstances. It was observed as under “It can be seen from the above that the legislature took note of the fact that a number of Companies paying marginal tax and also zero-tax has grown. Such Companies earned substantial book profits and paid handsome dividends to the share holders without paying any tax to the exchequer. Such a result was achieved by such Companies by taking advantage of the then existing legal position which permitted the adoption of dual accounting policies and practices, one for the purpose of computation of income tax and another for the purpose of determining the book profits for the purpose of payment of dividends. Therefore, the amendment was made to plug the loophole in the law. However, the CBDT understood that Companies engaged in the business of generation and distribution of electricity and Enterprises engaged in developing, maintaining and operating infrastructure facilities, as a matter of policy, are not brought within the purview of the amendment (Section 115JA) for the reason that such a policy would promote the infrastructural development of the country. Such an understanding of the CBDT is binding on the department.

(7 of 9) [ITA-158/2019] against the appellant while making the assessment of the tax payable under the Income Tax Act.” In case of Commissioner of Income Tax and Ors. Vs. Union Bank of India and Ors. reported in (2019) 308 CTR 0797 (BOM), a Division Bench of Bombay High Court was considering the question whether the unamended provision of Section 115JB of the Act would apply to a banking company. Referring to and relying upon the Kerela High Court judgment in Kerela State Electricity Board (supra) in the context of a banking company, it was held and observed as under:- “9. In terms of sub-section (1) of Section 115JB of the Act thus notwithstanding anything contained in any of the provisions of the Act in case of an assessee being a company where the income tax payable on the total income as computed under the Act, is less than prescribed percentage of its book profit, such book profit shall be deemed to be the total income of the assessee. In so far as the language used under sub- section (1) of Section 115JB is concerned, the same pauses no challenge. Subsection (1) of Section 115JB takes within its swip all companies with no further bifurcation or distinction between companies. However, the question that calls for our consideration is whether the machinery provision provided under sub-section (2) of Section 115 JB of the Act is workable when it comes to the banking companies and such other special companies governed by the respective Acts. In the context, the question would also be of the legislative intent to cover such companies within the swip of Section 115JB of the Act. These questions arise because of the language used in sub-section (2) of Section 115JB. These provisions we may peruse more minutely. As per sub-section (2) of Section 115JB, every assessee being a company would for the purposes of the said section prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI of the Companies Act, 1956. It is undisputed that the respondent-a banking company is not required to prepare its accounts in accordance with the provisions of Parts II and III of Schedule VI of the Companies Act, 1956. The accounts of the banking company are prepared as per the provisions contained in Banking Regulation Act, 1949. The counsel for the revenue may still argue that irrespective of such requirements, for the purposes of the said Act and special requirements of Section 115JB

(8 of 9) [ITA-158/2019] of the Act, a banking company is obliged to prepare its profit and loss account as per the provisions of the Companies Act, as mandated by sub-section (2) of Section 115JB of the Act. His contention would be that such legislative mandate is not impermissible. 10. At the first blush, this argument seems attractive. However, when we read sub-section (2) further, certain complications arise in this line of argument. The first proviso to sub-section (2) of Section 115JB provides that while preparing annual accounts including profit and loss account the accounting policies and accounting standards adopted for preparing the account and the method and rules adopted in calculating the depreciation shall be the same as have been adopted for the purpose of preparing such accounts and laid before the company at its Annual General Meeting in accordance with provisions of Section 210 of the Companies Act, 1956. There is no dispute that the respondent-bank in terms of Section 210 of the Companies Act, 1956 is also required to lay its accounts before the Annual General Meeting. However, such accounts would necessarily be prepared in accordance with the provisions of Banking Regulation Act, 1949 and never be those which even had it been possible to be prepared, in accordance with Parts II and III of Schedule VI of the Companies Act, 1956. The applicability of this proviso therefore, in case of a banking company would

immediately create complications. On one hand, in terms of Section 210 of the Companies Act, 1956, the bank would be under an obligation to lay before Annual General Meeting its annual accounts including the profit and loss account. These accounts would be prepared in terms provisions contained in Banking Regulation Act, 1949. Sub-section (2) requires preparation of the accounts in terms of the Companies Act. Proviso to sub-section (2) would require maintaining the same parameters in relation to the accounting policies, accounting standards and method and rate of depreciation as adopted for the purpose of preparing the accounts, which would ultimately be laid before the Annual General Meeting. A Banking company in terms of sub-section (2) of Section 115JB can prepare additional accounts as per provisions of Parts II and III of Schedule VI of the Companies Act or fulfill the requirements of the proviso to sub-section (2) but cannot fulfill both the conditions. 11. This legal dichotomy emerging from the provisions of sub-section (2) of Section 115JB particularly having regard to the first proviso contained therein in case of a banking company, would convince us that machinery provision provided in subsection (2) of section 115JB of the Act, would be rendered wholly unworkable in such a situation. In a well known judgment the Supreme court in case of Commissioner of Income-Tax, Bangalore Vs. B.C.

Shrinivasa

Setty

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MANU/SC/0285/

(9 of 9) [ITA-158/2019] 1981MANU/SC/0285/ 1981 : 128 ITR 294 had observed that in the Income Tax Act, a charing section and the computing provisions together constitute an integrated code. In a case where the computation provision can not apply, it would be evident that such a case was not intended to fall within the charging section. It was a case of charging a partnership firm for transfer of a capital asset in the nature of goodwill. The Supreme Court was of the opinion that it would not be possible to envisage a cost of acquisition of goodwill. Since computation of capital gain cannot be done without ascertaining the cost of acquisition, it was held that no capital gain tax can be levied. 12. For the completeness of the discussion, we may note that section 211 of the Companies Act, 1956 pertains to form of contents of balance-sheet and profit and loss account, sub-section (1) of Section 211 provided that every balance sheet of a company shall give true and fair view on the state of affairs of the company at the end of the financial year and would be subject to the provisions of the said section and be in the form set out in the Forms 1 and 2 of schedule VI. This sub-section contained a proviso providing that nothing contained in said sub-section would apply to a banking company or any company engaged in generation or supply of electricity or to any other class of company for which a form of balance sheet shall be specified in or under the Act governing such company. Thus, Companies Act, 1956 excluded the insurance or banking companies, companies engaged in generation or supply of electricity or companies for which balance- sheet was specified in the governing Act, from the purview of sub-section (1) of Section 211 of the Companies Act, 1956 and as a consequence from the purview of Section 115JB of the Act. 21. In the result, we hold that sub-section 115JB as it stood prior to its amendment by virtue of Finance Act, 2012, would not be applicable to a banking company. We answer the question No. 2 in favour of the assessee and against the revenue. In view of this, question of correctness of the order of rectification passed by the Assessing Officer becomes unimportant. Question No. 1 is therefore not answered. All the appeals are dismissed.” In view of such legal position, question No.3 is also not entertained. In the result, all the appeals are dismissed. (REKHA BORANA),J (AKIL KURESHI),CJ KAMLESH KUMAR/N.Gandhi/S-81-88