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Facts
The Revenue appealed against the CIT(A)'s order deleting an addition of Rs. 42,56,57,616/- made on account of infirm power sale during the trial run. The assessee had also earned interest income of Rs. 2,72,38,036/-, which was treated as capital receipt and set off against pre-operative expenses. The Assessing Officer treated both these amounts as revenue receipts and added them to the income.
Held
The Tribunal held that the sale proceeds of infirm power during the trial run are revenue receipts, not capital receipts, as they are linked to the business activity of electricity generation and not directly to the construction of the plant. However, the Tribunal agreed with the CIT(A)'s deletion of this addition, finding the AO's reasoning flawed. Regarding the interest income, the Tribunal confirmed that it is taxable as income from other sources.
Key Issues
Whether the sale proceeds of infirm power generated during the trial run are capital or revenue receipts. Whether interest earned on FDRs prior to commissioning of the plant is taxable as income from other sources and its impact on book profit computation under Section 115JB.
Sections Cited
142(1), 147, 56, 115JB, 271(1)(c)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, LUCKNOW BENCH ‘B’, LUCKNOW
Before: SHRI KUL BHARAT & SHRI ANADEE NATH MISSHRA
Revenue pertaining to assessment year 2016-17 against impugned appellate order dated 14/08/2020 passed by learned Commissioner of Income Tax (Appeals) [“CIT(A)” for short]. Revenue has raised the following grounds:
“1. Under the facts and circumstances of the case, the Ld. CIT(A) has erred in law and facts in deleting the addition of Rs.42,56,57,616/- on account of infirm power sale which has been produced during the course of trial run and trial run can be made only after the plant and machinery has been completely set up which means that the process of trial run is a process subsequent to the process of setting up of plant and machinery.
Under the facts and circumstances of the case, the Ld. CIT(A) Lucknow has failed to appreciate the fact the addition made by the assessing officer on account of interest income and infirm power sale are elements of book profit which have not been included in the book profit by the assessee and the AO has power to alter the book profit as held by Hon'ble ITAT, Lucknow Bench in the case L. H. Sugar Factory Ltd., Civil Lines Pilibhit in & 418/LKW/2013, A.Y.2008-09 and 2009-10.”
(B) In this case assessment order dated 07/12/2018 was passed by the Assessing Officer whereby the loss was determined at Rs.188,44,33,242/- (rounded off to Rs.188,44,33,244/-) as against returned loss of Rs.233,73,28,994/-. Relevant portion of the assessment order is reproduced as under:
(B.1) In the aforesaid assessment order, the book profit was determined at Rs.24,89,78,030/- as against loss of Rs.20,39,17,618/- shown by the assessee in the return filed. In the aforesaid assessment order, the Assessing Officer made an addition of Rs.42,56,57,616/- on account of infirm power sale. A further addition of Rs.2,72,38,036/- was made by the on account of interest income. The assessee filed appeal against the aforesaid assessment order in the office of the learned CIT(A). Vide impugned appellate order dated 14/08/2020, the learned CIT(A) confirmed the aforesaid addition of Rs.2,72,38,036/- on account of interest income. However, the learned CIT(A) deleted the aforesaid addition of Rs.42,56,57,616/- on account of infirm power sale. As regards the book profit determined by the Assessing Officer, the learned CIT(A) held that the adjustment made by the Assessing Officer were beyond the scope and intent of section 115JB of the Act and directed the Assessing Officer to recomputed the book profit as per the provisions of section 115JB of the Act. The relevant portion of the order of the learned CIT(A) is reproduced as under:
(C) The present appeal has been filed by Revenue against the aforesaid impugned appellate order dated 14/08/2020 of the learned CIT(A). The assessee has not filed cross appeal and has accepted the order of the learned CIT(A). In the course of appellate proceedings in Income Tax Appellate Tribunal, the following particulars were filed from the assessee’s side:
(D) At the time of hearing, learned Departmental Representative placed reliance on the assessment order. The learned Counsel for the assessee placed reliance on the impugned order of learned CIT(A). He also placed reliance on the contents of the particulars filed during appellate proceedings in Income Tax Appellate Tribunal, referred to in foregoing paragraph (C) of this order.
(E) We have heard both sides. We have perused materials on record. First we take up the issue regarding addition of Rs.42,56,57,616/- on account of infirm power sale. This is the amount received by the assessee from sale of power during trial run of power plant, prior to commencement. It is not in dispute that the assessee has capitalized all the pre- commencement expenses incurred till the process of trial run, which are reflected in balance sheet included in actual cost of fixed assets. Consistent with that, the sale of power from trial run, amounting to Rs.42,56,57,616/- is treated by the assessee as capital receipt. The order of learned CIT(A) on this issue is a detailed one, which is found to be in accordance with law, having regard to the facts and circumstances of the case. Therefore, we are in agreement with the order of learned CIT(A) deleting the aforesaid addition of Rs.42,56,57,616/-.
(E.1) As regards the computation of book profit u/s 115JB of IT Act, it is useful to refer to provisions of law, which are reproduced below for the ease of reference:
Special provision for payment of tax by certain companies. 115JB. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income- tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2012, is less than eighteen and one-half per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of eighteen and one-half per cent: Provided that for the previous year relevant to the assessment year commencing on or after the 1st day of April, 2020, the provisions of this sub-section shall have effect as if for the words "eighteen and one-half per cent" occurring at both the places, the words "fifteen per cent" had been substituted. (2) Every assessee,— (a) being a company, other than a company referred to in clause (b), shall, for the purposes of this section, prepare its statement of profit and loss for the relevant previous year in accordance with the provisions of Schedule III to the Companies Act, 2013 (18 of 2013); or (b) being a company, to which the second proviso to sub-section (1) of section 129 of the Companies Act, 2013 (18 of 2013) is applicable, shall, for the purposes of this section, prepare its statement of profit and loss for the relevant previous year in accordance with the provisions of the Act governing such company: Provided that while preparing the annual accounts including statement of profit and loss,— (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including statement of profit and loss; (iii) the method and rates adopted for calculating the depreciation, shall be the same as have been adopted for the purpose of preparing such accounts including statement of profit and loss and laid before the company at its annual general meeting in accordance with the provisions of section 129 of the Companies Act, 2013 (18 of 2013) : Provided further that where the company has adopted or adopts the financial year under the Companies Act, 2013 (18 of 2013), which is different from the previous year under this Act,— (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including statement of profit and loss; (iii) the method and rates adopted for calculating the depreciation, shall correspond to the accounting policies, accounting standards and the method and rates for calculating the depreciation which have been adopted for preparing such accounts including statement of profit and loss for such financial year or part of such financial year falling within the relevant previous year.
Explanation 1.—For the purposes of this section, "book profit" means the profit as shown in the statement of profit and loss for the relevant previous year prepared under sub-section (2), as increased by— (a) the amount of income-tax paid or payable, and the provision therefor; or (b) the amounts carried to any reserves, by whatever name called, other than a reserve specified under section 33AC; or (c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or (d) the amount by way of provision for losses of subsidiary companies; or (e) the amount or amounts of dividends paid or proposed ; or (f) the amount or amounts of expenditure relatable to any income to which section 10 (other than the provisions contained in clause (38) thereof) or section 11 or section 12 apply; or (fa) the amount or amounts of expenditure relatable to income, being share of the assessee in the income of an association of persons or body of individuals, on which no income-tax is payable in accordance with the provisions of section 86; or (fb) the amount or amounts of expenditure relatable to income accruing or arising to an assessee, being a foreign company, from,— (A) the capital gains arising on transactions in securities; or (B) the interest, dividend, royalty or fees for technical services chargeable to tax at the rate or rates specified in Chapter XII, if the income-tax payable thereon in accordance with the provisions of this Act, other than the provisions of this Chapter, is at a rate less than the rate specified in sub-section (1); or (fc) the amount representing notional loss on transfer of a capital asset, being share of a special purpose vehicle, to a business trust in exchange of units allotted by the trust referred to in clause (xvii) of section 47 or the amount representing notional loss resulting from any change in carrying amount of said units or the amount of loss on transfer of units referred to in clause (xvii) of section 47; or (fd) the amount or amounts of expenditure relatable to income by way of royalty in respect of patent chargeable to tax under section 115BBF; or (g) the amount of depreciation, (h) the amount of deferred tax and the provision therefor, (i) the amount or amounts set aside as provision for diminution in the value of any asset, (j) the amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset, (k) the amount of gain on transfer of units referred to in clause (xvii) of section 47 computed by taking into account the cost of the shares exchanged with units referred to in the said clause or the carrying amount of the shares at the time of exchange where such shares are carried at a value other than the cost through statement of profit and loss as the case may be; if any amount referred to in clauses (a) to (i) is debited to the statement of profit and loss or if any amount referred to in clause (j) is not credited to the statement of profit and loss, and as reduced by,— (i) the amount withdrawn from any reserve or provision (excluding a reserve created before the 1st day of April, 1997 otherwise than by way of a debit to the statement of profit and loss), if any such amount is credited to the statement of profit and loss: Provided that where this section is applicable to an assessee in any previous year, the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation or Explanation below the second proviso to section 115JA, as the case may be; or (ii) the amount of income to which any of the provisions of section 10 (other than the provisions contained in clause (38) thereof) or section 11 or section 12 apply, if any such amount is credited to the statement of profit and loss; or (iia) the amount of depreciation debited to the statement of profit and loss (excluding the depreciation on account of revaluation of assets); or (iib) the amount withdrawn from revaluation reserve and credited to the statement of profit and loss, to the extent it does not exceed the amount of depreciation on account of revaluation of assets referred to in clause (iia); or (iic) the amount of income, being the share of the assessee in the income of an association of persons or body of individuals, on which no income-tax is payable in accordance with the provisions of section 86, if any, such amount is credited to the statement of profit and loss; or (iid) the amount of income accruing or arising to an assessee, being a foreign company, from,— (A) the capital gains arising on transactions in securities; or (B) the interest, dividend, royalty or fees for technical services chargeable to tax at the rate or rates specified in Chapter XII, if such income is credited to the statement of profit and loss and the income-tax payable thereon in accordance with the provisions of this Act, other than the provisions of this Chapter, is at a rate less than the rate specified in sub-section (1); or (iie) the amount representing,— (A) notional gain on transfer of a capital asset, being share of a special purpose vehicle to a business trust in exchange of units allotted by that trust referred to in clause (xvii) of section 47; or (B) notional gain resulting from any change in carrying amount of said units; or (C) gain on transfer of units referred to in clause (xvii) of section 47, if any, credited to the statement of profit and loss; or (iif) the amount of loss on transfer of units referred to in clause (xvii) of section 47 computed by taking into account the cost of the shares exchanged with units referred to in the said clause or the carrying amount of the shares at the time of exchange where such shares are carried at a value other than the cost through statement of profit and loss, as the case may be; or (iig) the amount of income by way of royalty in respect of patent chargeable to tax under section 115BBF; or (iih) the aggregate amount of unabsorbed depreciation and loss brought forward in case of a— (A) company, and its subsidiary and the subsidiary of such subsidiary, where, the Tribunal, on an application moved by the Central Government under section 241 of the Companies Act, 2013 (18 of 2013) has suspended the Board of Directors of such company and has appointed new directors who are nominated by the Central Government under section 242 of the said Act; (B) company against whom an application for corporate insolvency resolution process has been admitted by the Adjudicating Authority under section 7 or section 9 or section 10 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016). Explanation.—For the purposes of this clause,— (i) "Adjudicating Authority" shall have the meaning assigned to it in clause (1) of section 5 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016); (ii) "Tribunal" shall have the meaning assigned to it in clause (90) of section 2 of the Companies Act, 2013 (18 of 2013); (iii) a company shall be a subsidiary of another company, if such other company holds more than half in the nominal value of equity share capital of the company; (iv) "loss" shall not include depreciation; or (iii) the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account in case of a company other than the company referred to in clause (iih). Explanation.—For the purposes of this clause,— (a) the loss shall not include depreciation; (b) the provisions of this clause shall not apply if the amount of loss brought forward or unabsorbed depreciation is nil; or (iv) [***] to (vi) (vii) the amount of profits of sick industrial company for the assessment year commencing on and from the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub- section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses. Explanation.—For the purposes of this clause, "net worth" shall have the meaning assigned to it in clause (ga) of sub-section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986); or (viii) the amount of deferred tax, if any such amount is credited to the statement of profit and loss. Explanation 2.—For the purposes of clause (a) of Explanation 1, the amount of income-tax shall include— (i) any tax on distributed profits under section 115-O or on distributed income under section 115R; (ii) any interest charged under this Act; (iii) surcharge, if any, as levied by the Central Acts from time to time; (iv) Education Cess on income-tax, if any, as levied by the Central Acts from time to time; and (v) Secondary and Higher Education Cess on income-tax, if any, as levied by the Central Acts from time to time. Explanation 3.—For the removal of doubts, it is hereby clarified that for the purposes of this section, the assessee, being a company to which the second proviso to sub-section (1) of section 129 of the Companies Act, 2013 (18 of 2013) is applicable, has, for an assessment year commencing on or before the 1st day of April, 2012, an option to prepare its statement of profit and loss for the relevant previous year either in accordance with the provisions of Schedule III to the Companies Act, 2013 (18 of 2013) or in accordance with the provisions of the Act governing such company. Explanation 4.—For the removal of doubts, it is hereby clarified that the provisions of this section shall not be applicable and shall be deemed never to have been applicable to an assessee, being a foreign company, if— (i) the assessee is a resident of a country or a specified territory with which India has an agreement referred to in sub-section (1) of section 90 or the Central Government has adopted any agreement under sub-section (1) of section 90A and the assessee does not have a permanent establishment in India in accordance with the provisions of such agreement; or (ii) the assessee is a resident of a country with which India does not have an agreement of the nature referred to in clause (i) and the assessee is not required to seek registration under any law for the time being in force relating to companies. Explanation 4A.—For the removal of doubts, it is hereby clarified that the provisions of this section shall not be applicable and shall be deemed never to have been applicable to an assessee, being a foreign company, where its total income comprises solely of profits and gains from business referred to in section 44B or section 44BB or section 44BBA or section 44BBB and such income has been offered to tax at the rates specified in those sections. Explanation 5.—For the purposes of sub-section (2), the expression "securities" shall have the same meaning as assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956). (2A) For a company whose financial statements are drawn up in compliance to the Indian Accounting Standards specified in Annexure to the Companies (Indian Accounting Standards) Rules, 2015, the book profit as computed in accordance with Explanation 1 to sub-section (2) shall be further— (a) increased by all amounts credited to other comprehensive income in the statement of profit and loss under the head "Items that will not be re- classified to profit or loss"; (b) decreased by all amounts debited to other comprehensive income in the statement of profit and loss under the head "Items that will not be re- classified to profit or loss"; (c) increased by amounts or aggregate of the amounts debited to the statement of profit and loss on distribution of non-cash assets to shareholders in a demerger in accordance with Appendix A of the Indian Accounting Standards 10; (d) decreased by all amounts or aggregate of the amounts credited to the statement of profit and loss on distribution of non-cash assets to shareholders in a demerger in accordance with Appendix A of the Indian Accounting Standards 10: Provided that nothing contained in clause (a) or clause (b) shall apply to the amount credited or debited to other comprehensive income under the head "Items that will not be re-classified to profit or loss" in respect of— (i) revaluation surplus for assets in accordance with the Indian Accounting Standards 16 and Indian Accounting Standards 38; or (ii) gains or losses from investments in equity instruments designated at fair value through other comprehensive income in accordance with the Indian Accounting Standards 109:
Provided further that the book profit of the previous year in which the asset or investment referred to in the first proviso is retired, disposed, realised or otherwise transferred shall be increased or decreased, as the case may be, by the amount or the aggregate of the amounts referred to in the first proviso for the previous year or any of the preceding previous years and relatable to such asset or investment. (2B) In the case of a resulting company, where the property and the liabilities of the undertaking or undertakings being received by it are recorded at values different from values appearing in the books of account of the demerged company immediately before the demerger, any change in such value shall be ignored for the purpose of computation of book profit of the resulting company under this section. (2C) For a company referred to in sub-section (2A), the book profit of the year of convergence and each of the following four previous years, shall be further increased or decreased, as the case may be, by one-fifth of the transition amount: Provided that the book profit of the previous year in which the asset or investment referred to in sub-clauses (B) to (E) of clause (iii) of the Explanation is retired, disposed, realised or otherwise transferred, shall be increased or decreased, as the case may be, by the amount or the aggregate of the amounts referred to in the said sub-clauses relatable to such asset or investment: Provided further that the book profit of the previous year in which the foreign operation referred to in sub-clause (F) of clause (iii) of the Explanation is disposed or otherwise transferred, shall be increased or decreased, as the case may be, by the amount or the aggregate of the amounts referred to in the said sub-clause relatable to such foreign operations. Explanation.—For the purposes of this sub-section, the expression— (i) "year of convergence" means the previous year within which the convergence date falls; (ii) "convergence date" means the first day of the first Indian Accounting Standards reporting period as defined in the Indian Accounting Standards 101; (iii) "transition amount" means the amount or the aggregate of the amounts adjusted in the other equity (excluding capital reserve and securities premium reserve) on the convergence date but not including the following:— (A) amount or aggregate of the amounts adjusted in the other comprehensive income on the convergence date which shall be subsequently re-classified to the profit or loss; (B) revaluation surplus for assets in accordance with the Indian Accounting Standards 16 and Indian Accounting Standards 38 adjusted on the convergence date; (C) gains or losses from investments in equity instruments designated at fair value through other comprehensive income in accordance with the Indian Accounting Standards 109 adjusted on the convergence date; (D) adjustments relating to items of property, plant and equipment and intangible assets recorded at fair value as deemed cost in accordance with paragraphs D5 and D7 of the Indian Accounting Standards 101 on the convergence date; (E) adjustments relating to investments in subsidiaries, joint ventures and associates recorded at fair value as deemed cost in accordance with paragraph D15 of the Indian Accounting Standards 101 on the convergence date; and (F) adjustments relating to cumulative translation differences of a foreign operation in accordance with paragraph D13 of the Indian Accounting Standards 101 on the convergence date. (2D) In the case of an assessee being a company, where there is an increase in book profit of the previous year due to income of past year or years included in the book profit on account of an advance pricing agreement entered into by the assessee under section 92CC or on account of secondary adjustment required to be made under section 92CE, the Assessing Officer shall, on an application made to him in this behalf by the assessee, recomputed the book profit of the past year or years and tax payable, if any, by the assessee during the previous year under sub-section (1), in such manner as may be prescribed and the provisions of section 154 shall, so far as may be, apply and the period of four years specified in sub-section (7) of that section shall be reckoned from the end of the financial year in which the said application is received by the Assessing Officer: Provided that the provisions of this sub-section shall apply only if the assessee has not utilised the credit of tax paid under this section in any subsequent assessment year under section 115JAA: Provided further that the provisions of this sub-section shall also apply to an assessment year beginning on or before the 1st day of April, 2020 and notwithstanding anything contained in any other provisions of this Act, no interest shall be payable to such assessee on the refund arising on account of the provisions of this sub-section.
(E.2) Careful reading of the aforesaid provisions of law show that under section 115JB(2) of the Act, the assessee is required to prepare the statement of profit & loss in accordance with the provisions of Schedule-III to the Companies Act. Further, there is nothing in law, either in Income Tax Act or in Companies Act, to suggest that there is any mandate to prepare Statement of Profit and Loss (under Companies Act) without taking correct amount of income in the Statement of Profit & Loss, for the purpose of section 115JB of the I.T. Act. Under Schedule-III of the Companies Act, the assessee is required not to show the incorrect amount of income in the Statement of Profit and Loss. In the present case before us, the assessee has accepted the addition of aforesaid amount of Rs.2,72,38,036/- on account of interest. In the present case, in order to prepare Statement of Profit and Loss, as per Companies Act; the correct amount of interest income is to be considered, which can only be achieved by including the aforesaid amount of Rs.2,72,38,036/-, and; it is the Statement of Profit and Loss prepared with correct amount of interest income that is to be taken into consideration for the purpose of section 115JB of the Act; and not the income as originally shown incorrectly by the assessee in Statement of Profit and Loss without including the aforesaid amount of Rs.2,72,38,036/- on account of interest. As the assessee has accepted the aforesaid addition of Rs.2,72,38,036/- to the interest income; and has not filed appeal on this issue, the matter has reached finality. The Assessing Officer is therefore, directed to compute book profit u/s 115JB of the Act by taking into consideration the aforesaid amount of Rs.2,72,38,036/- as income of the assessee in addition to the income shown originally by the assessee in statement of profit & loss account.
(F) In the result, ground no. 1 of appeal is dismissed and ground no. 2 is partly allowed.
(Order pronounced in the open court on 15/10/2025)