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

The assessee, M/s.Gujarat State Electricity Corporation Ltd., is engaged in the business of power generation. During the assessment proceedings for the relevant years, the AO treated interest income earned on loans and advances provided to employees as "income from other sources" under Section 56 of the Act instead of treating it as "business income." In the assessment order dated 25.02.2015, the AO treated Rs.4,56,05,000/- as "income from other sources," arguing that the assessee is not in the business of lending and the loans served only personal benefits for employees. Similarly, in the assessment order dated 28.12.2018, the AO classified Rs.8,00,35,000/- under "income from other sources" with the same rationale.

3.1. The issue travelled before the Tribunal in the first round of appeal and the Co-ordinate Bench remanded the matter to the CIT(A), observing that the order lacked a comprehensive evaluation of judicial precedents. & 1656/Ahd/2024 DCIT vs. Gujarat State Electricity Corpn Ltd. Asst. Year : 2012-13 & 2016-17 3.2. The CIT(A) allowed the appeal of the assessee in case of both A.Y. 2012- 13 and A.Y. 2016-17. The CIT(A) adjudicated both cases pursuant to directions from the Tribunal to reassess the matter in light of judicial precedents, particularly the decision of the Hon’ble Orissa High Court in Odisha Power Generation Corporation Ltd. The CIT(A) found that the activity of advancing loans was incidental to the business. The CIT(A) noted that the assessee did not engage in public lending but restricted loans to its employees. The CIT(A) relied on the judgment of the Hon’ble Orissa High Court in Odisha Power Generation Corporation Ltd., which held that interest income from staff loans and welfare activities is incidental to business and qualifies as "business income." For AY 2012-13, the CIT(A) deleted the addition of Rs.4,56,05,000/- made by the AO, holding that the interest income was rightly classified as "business income." For AY 2016-17, the CIT(A) similarly deleted the addition of Rs.8,00,35,000/-, reiterating that the loans were incidental to the assessee’s business operations.

In for A.Y. 2012-13 “i) Whether on the facts and circumstances of case and in law, the Ld.CIT(A) is justified in deleting the addition of Rs.456.05 lakh made by the AO on account of treating Interest income earned from loans to staff and other loans as “Income from other sources” without appreciating the fact that the assessee is not in the business of advancing loans to the staff? ii) The appellant craves leaves to add, modify, amend or alter any grounds of appeal at the time of, or before, the hearing of appeal.” & 1656/Ahd/2024 DCIT vs. Gujarat State Electricity Corpn Ltd. Asst. Year : 2012-13 & 2016

17. In A.Y. 2016-17 “i) Whether on the facts and circumstances of case and in law, the Ld.CIT(A) is justified in deleting the addition of Rs.800.35 lakhs made by the AO on account of treating Interest income earned from loans to staff and other loans as “Income from other sources” without appreciating the fact that the assessee is not in the business of advancing loans to the staff? ii) The appellant craves leaves to add, modify, amend or alter any grounds of appeal at the time of, or before, the hearing of appeal.”

7.1. The primary issue under consideration is whether interest income earned from staff loans and advances is incidental to the business of power generation and should be classified as “business income”, or whether it constitutes “income from other sources” as claimed by the Revenue. We note & 1656/Ahd/2024 DCIT vs. Gujarat State Electricity Corpn Ltd. Asst. Year : 2012-13 & 2016-17 that the CIT(A) relied on binding judicial precedents, particularly the decision of the Orissa High Court in Odisha Power Generation Corporation Ltd., which unequivocally held that interest income from employee loans and welfare activities is incidental to the business and qualifies as "business income." We also note the decision of the Gujarat High Court in Gujarat Urja Vikas Nigam Ltd., which upheld a similar classification of interest income arising from employee welfare loans as "business income” and dismissed the appeal of Revenue.

7.2. We also take cognizance of the findings of the Co-ordinate Bench of this Tribunal in Gujarat Urja Vikas Nigam Ltd. (ITA Nos. 166/Ahd/2022 and others), where it was observed that the Hon’ble Gujarat High Court in Tax Appeal No. 63 of 2020 upheld that interest income earned on loans and advances provided to employees is directly related to the business operations of power companies. Such income enhances operational efficiency and is incidental to the business, qualifying as ‘business income.’ 7.3. It is important to note that the loans and advances were provided solely to employees to ensure their welfare, retention, and operational efficiency, which are critical in the power sector. We also note that the loans were not made to the public at large but were restricted to eligible employees, demonstrating their integral connection to the business. Judicial precedents relied on by the assessee are binding precedents and are directly applicable to the facts of the present case and support the CIT(A)’s conclusion.

7.4. The DR sought to distinguish the facts of the present case from Odisha Power Generation Corporation Ltd. by asserting that the interest income in & 1656/Ahd/2024 DCIT vs. Gujarat State Electricity Corpn Ltd. Asst. Year : 2012-13 & 2016-17 that case had a stronger nexus to business operations as it also included charges like electricity and water collected from employees. However, we find this distinction immaterial as the primary reasoning in Odisha Power Generation Corporation Ltd. focused on the incidental nature of the income to business operations, which applies equally to the present case. We note that employee welfare measures, including loans and advances, play a vital role in retaining skilled personnel, ensuring uninterrupted business operations, and improving overall efficiency. Such measures are particularly critical in industries like power generation that demand consistent and reliable operations.

7.5. Based on the above findings, we conclude that he interest income of Rs.4,56,05,000/- (AY 2012-13) and Rs.8,00,35,000/- (AY 2016-17) earned from loans and advances provided to employees is incidental to the business of power generation and qualifies as “business income.” The AO’s classification of the income under “other sources” is erroneous and contrary to binding judicial precedents. The CIT(A) has correctly relied on the judgments of the Orissa High Court in Odisha Power Generation Corporation Ltd. 7.6. The CIT(A) appropriately appreciated the facts and provided a well- reasoned conclusion to delete the additions made by the AO. Now Hon’ble Jurisdictional High Court in the case of Gujarat Urja Vikas Nigam Ltd. also upheld that interest income earned on loans and advances provided to its employees is directly related to the business operations of Power Companies. Thus, the Revenue has failed to bring any material evidence to distinguish the facts of the present case from the judicial precedents relied upon. & 1656/Ahd/2024 DCIT vs. Gujarat State Electricity Corpn Ltd. Asst. Year : 2012-13 & 2016-17 Consequently, the grounds of appeals raised by the Revenue are devoid of merits and are rejected.