DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 1(1)(1), VADODARA, VADODARA vs. GUJARAT STATE ELECTRICITY CORPORATION LIMITED, VADODARA

The CIT(A) allowed the appeal of the assessee in case of both A.Y. 2012-\n13 and A.Y. 2016-17. The CIT(A) adjudicated both cases pursuant to\ndirections from the Tribunal to reassess the matter in light of judicial\nprecedents, particularly the decision of the Hon'ble Orissa High Court in\nOdisha Power Generation Corporation Ltd. The CIT(A) found that the\nactivity of advancing loans was incidental to the business. The CIT(A) noted\nthat the assessee did not engage in public lending but restricted loans to its\nemployees. The CIT(A) relied on the judgment of the Hon'ble Orissa\nHigh Court in Odisha Power Generation Corporation Ltd., which held that\ninterest income from staff loans and welfare activities is incidental to business\nand qualifies as \"business income.\" For AY 2012-13, the CIT(A) deleted the\naddition of Rs.4,56,05,000/- made by the AO, holding that the interest income\nwas rightly classified as \"business income.\" For AY 2016-17, the CIT(A)\nsimilarly deleted the addition of Rs.8,00,35,000/-, reiterating that the loans\nwere incidental to the assessee's business operations.\n4.\nAggrieved by the orders of CIT(A), the Revenue is in appeal(s) before\nus with the following grounds of appeal(s):\nIn A.Y. 2012-13\n\"i)\nWhether on the facts and circumstances of case and in law, the Ld.CIT(A) is justified\nin deleting the addition of Rs.456.05 lakh made by the AO on account of treating\nInterest income earned from loans to staff and other loans as “Income from other\nsources” without appreciating the fact that the assessee is not in the business of\nadvancing loans to the staff?\nii)\nThe appellant craves leaves to add, modify, amend or alter any grounds of appeal at\nthe time of, or before, the hearing of appeal.”\nIn for A.Y. 2016-17\n\"i)\nWhether on the facts and circumstances of case and in law, the Ld.CIT(A) is justified\nin deleting the addition of Rs.800.35 lakhs made by the AO on account of treating\nInterest income earned from loans to staff and other loans as “Income from other\nsources” without appreciating the fact that the assessee is not in the business of\nadvancing loans to the staff?\nii)\nThe appellant craves leaves to add, modify, amend or alter any grounds of appeal at\nthe time of, or before, the hearing of appeal.”\n5.\nDuring the course of hearing before us, the Authorized Representative\n(AR) of the assessee argued that the interest income from staff loans and\nadvances was incidental to the business of power generation and should be\nclassified as \"business income.\" The AR relied on the order of CIT(A) where\nthe reliance was placed on the judgement of Hon'ble High Court of Orissa in\ncase of Odisha Power Generation Corporation Ltd. The AR also pointed out\nthat the Hon'ble Jurisdictional High Court in case of Gujarat Urja Vikas\nNigam Ltd. dismissed the appeal of Revenue on the similar issue. The AR\nfurther placed reliance on the Co-ordinate Bench decision dated\n08/08/2024in case of Gujarat Urja Vikas Nigam Ltd. (ITA Nos.\n166/Ahd/2022, 231/Ahd/2024, 223/Ahd/2022 and 293/Ahd/2024).\n6.\nThe Departmental Representative (DR) argued that the primary\nbusiness of the assessee is power generation, not lending or earning interest\nincome. Interest income earned from staff loans and advances was thus\nunrelated to the core business activity and should be classified as \"income\nfrom other sources.\" The DR contended that the loans provided to employees\nwere for their personal benefit and lacked a direct connection to the business\noperations of the assessee. The DR sought to distinguish the facts of the\npresent case from those in Odisha Power Generation Corporation Ltd. by\nasserting that the interest income in that case had a stronger nexus to business\noperations as it also included charges like electricity and water collected from\nthe employees staying in the township. The DR emphasized that interest income\nis generally taxable under the head \"income from other sources\" unless it can\nbe conclusively established that it is derived directly from business\noperations.\n7.\nWe have heard the contentions of both the parties and have carefully\nperused the material on record, including the assessment orders, the orders\nof the CIT(A), and the judicial precedents relied upon by the parties. The AR\ncontended that the interest income from loans and advances provided to\nemployees is incidental to the business of power generation and should be\nclassified as \"business income.\" The AR relied on the findings of the CIT(A)\nand judicial precedents, particularly the decisions of the Hon'ble Orissa\nHigh Court in Odisha Power Generation Corporation Ltd. and the Hon'ble\nGujarat High Court in Gujarat Urja Vikas Nigam Ltd., which support the\nassessee's position. The DR, on the other hand, argued that the interest\nincome is not connected to the core business operations of power generation\nand should rightly be classified as \"income from other sources.\" The DR\nsought to distinguish the present facts from the precedents relied upon by the\nassessee and defended the classification made by the AO.\n7.

The DR sought to distinguish the facts of the present case from Odisha\nPower Generation Corporation Ltd. by asserting that the interest income in\nthat case had a stronger nexus to business operations as it also included\ncharges like electricity and water collected from employees. However, we\nfind this distinction immaterial as the primary reasoning in Odisha Power\nGeneration Corporation Ltd. focused on the incidental nature of the income\nto business operations, which applies equally to the present case. We note\nthat employee welfare measures, including loans and advances, play a vital\nrole in retaining skilled personnel, ensuring uninterrupted business\noperations, and improving overall efficiency. Such measures are particularly\ncritical in industries like power generation that demand consistent and\nreliable operations.\n7.

Based on the above findings, we conclude that he interest income of\nRs.4,56,05,000/- (AY 2012-13) and Rs.8,00,35,000/- (AY 2016-17) earned from\nloans and advances provided to employees is incidental to the business of\npower generation and qualifies as “business income.” The AO's classification\nof the income under “other sources” is erroneous and contrary to binding\njudicial precedents. The CIT(A) has correctly relied on the judgments of the\nOrissa High Court in Odisha Power Generation Corporation Ltd.\n7.

The CIT(A) appropriately appreciated the facts and provided a well-\nreasoned conclusion to delete the additions made by the AO. Now Hon'ble\nJurisdictional High Court in the case of Gujarat Urja Vikas Nigam Ltd. also\nupheld that interest income earned on loans and advances provided to its\nemployees is directly related to the business operations of Power Companies.\nThus, the Revenue has failed to bring any material evidence to distinguish\nthe facts of the present case from the judicial precedents relied upon.\nConsequently, the grounds of appeals raised by the Revenue are devoid of\nmerits and are rejected.\n8. In the result, both the appeals of the Revenue are dismissed.\nOrder pronounced in the Open Court on 20th January,2025 at Ahmedabad.\nSd/-\n(T.R. SENTHIL KUMAR)\nJUDICIAL MEMBER\nSd/-\n(MAKARAND V. MAHADEOKAR)\nACCOUNTANT MEMBER\nअहमदाबाद/Ahmedabad, दिनांक/Dated 20/01/2025\nटी.सी. नायर, व.नि. स. / T.C. NAIR, Sr. PS\nआदेश की प्रतिलिपि अग्रेषित/